Prachi Wagner is Waste and Environmental Industry Manager for Truist. She combines 17 years of financial experience with the power of Truist's Business Lifecycle Advisory approach to help waste management companies anticipate challenges and seize opportunities at each stage of the business's lifecycle.
While many industries are struggling to navigate the complexities of today’s business environment—rising interest rates, protracted labor shortages, global supply chain disruptions, and inflation at levels unseen for 40 years—these challenges have had an especially strong impact on the waste and recycling sector.
Some, like the dearth of skilled drivers, are not new issues, although the shortage has become far more problematic over the past few years. What is new is the difficulty of securing trucks and other capital equipment that are critical to waste and environmental operations.
The buying environment: A rough road
It has been a challenging time to obtain a new truck or dumpster. Manufacturers are struggling to get parts and materials, and building the specialized chassis and containers needed in the waste space is often a low priority for producers. The worldwide semiconductor shortage has contributed to the problem, as well as a lack of skilled labor for production and delivery. There is also a long list of would-be buyers in line when new equipment does become available. Smaller operators might be pushed down the waitlist due to manufacturers’ existing obligations for contracted, large-scale buyers.
It can take a year or more to fill an order unless buyers are willing to pay marked-up prices. Hot rolled steel, the main input for vehicle chassis, rose over 300% in a single year ending September 2021. While prices have moderated since then, higher costs for steel and parts remain, and supply chain and availability issues have only exacerbated the problem.
Industry forecasters predict a continued drop in steel prices for 2023 and improved availability of parts and equipment. Tight labor markets are expected to ease, which should help untangle supply line snarls. However, do not look for a significant drop in overall costs or an improvement in levels of available inventory—it will take time for manufacturers to meet the backlog of orders and pent-up demand from operators that have opted (or been forced) to delay replacing trucks at their usual pace. Order books for new trucks are filled well into the second quarter of 2023.
Buy new, buy used, rent, or lease?
Prices may be coming down for steel and fuel, but sharply rising inflation and interest rates limit options for managing capital equipment needs, particularly for smaller operators. What do you do when your cash flow buys only half the trucks it did three years ago, but you still need a bigger fleet?
Renting is one option. New equipment is frequently available for lease, including lease-to-buy, much sooner than for an outright purchase. Leasing also reduces the capital outlay demands—companies often prefer a rent-to-buy approach early in their growth cycle to ease the financial strain of capital purchases as they ramp up fleet size and build equity to enable future borrowing.
A leased fleet typically carries lower maintenance costs as well. Additionally, while prices are rising in the leased equipment market, scrutinizing the lease structure could pay off with additional savings opportunities. If unbundling of the lease is possible, companies can choose lower-cost providers for parts and maintenance.
Buying used vehicles is another way to beat soaring prices and low availability. Here again, prices have risen sharply over the past two years. Even at today’s prices, buying used trucks yields more—allowing you to service existing contracts or expand with new ones. With proper maintenance, a garbage truck can perform for up to 15 years. Upgrading a fleet with quality used (or pre-leased) equipment can lower fuel, labor, and maintenance costs and boost driver retention almost as well as buying new.
Financing options for buyers
The financing environment plays a role in shaping buyers’ options and affects the total costs of their purchase. How does financing work when interest rates—and purchase prices—may increase drastically between the time of order placement and delivery?
Long waits for order fulfilment on new trucks have led to new options for borrowers, such as the ability to take a three-year drawdown on capital expenditure credit lines. A capital expenditure line of credit with a private lender can offer significant advantages over manufacturer financing—notably, borrowers can potentially use rate locks to buffer against future interest rate increases while they await delivery of their new equipment. Having this kind of committed capital in place offers flexibility that is especially welcome in an environment where costs, availability, and even equipment needs may be relatively uncertain.
Regional companies with more than one hundred trucks in their fleets may want to consider incorporating rolling stock into a single, asset-based revolving credit facility, eliminating disparate equipment credit lines. This master facility can represent up to 80% or 85% of appraised value of unencumbered assets and provides a consolidated option with a single set of covenants, offering economies of scale as well as cashflow benefits. Truist’s asset-based lending (ABL) program offers a flexible amortization calendar without fixed monthly payments for principal.
Rent or buy? How to finance? These are difficult choices without clear, one-size-fits-all answers and may be affected by continued economic pressures. It can be even harder for smaller operators that cannot easily manage rising costs for maintenance and repairs on older trucks, much less the steep prices of the latest equipment with all its bells and whistles.
New equipment choices
With higher and less predictable prices for fuel and labor than normal, does it make sense to invest in vehicles that use alternative fuels or offer enhanced automation?
Automated selection capabilities and other innovations in waste-handling automation can allow fewer workers to do the same job and, in some cases, do it faster. Savings in wages, benefits, training, and recruitment costs can partially or fully offset the added costs for automated equipment, and larger waste companies are quickly transitioning to more automation in their fleets.
The industry’s move towards electric vehicles (EV) has been measured. That is partly a matter of efficiency—a fully loaded garbage truck is so heavy that current EV technology simply cannot do the job effectively even on short routes, and few EVs have adequate charge capacity for hauling waste long distances. An EV fleet also requires a charging infrastructure that is not fully developed across much of the country and may require operators to invest in dedicated, specialized charging stations. There is more penetration in certain markets, such as California with its strict environmental regulations and more established charging networks. Currently, EV adoption is limited to large waste and recycling businesses.
Compressed natural gas (CNG) and renewable diesel fuels are alternative fuels that continue to get increased attention by companies of all sizes. They too, require specialized fueling, and adoption may be limited based on weather conditions and availability in some markets.
Alternative fuel trucks may offer lower fuel costs or reduced emissions for the communities they serve, and select local governments are encouraging the shift to alternative fuels in the waste space by offering financial incentives or competitive advantage in awarding contracts to operators willing to make the switch to these types of trucks.
Newer trucks can deliver a host of advantages even to companies that stick with human workers and traditional fuels. Besides the reduction in maintenance costs associated with new equipment, today’s trucks are often 10%–15% more fuel efficient than those built just a few years ago. And many new vehicles come with advanced safety features, like predictive braking capabilities. The improved safety profile presents the opportunity for financial breaks from insurance companies and may help attract and retain qualified drivers in a tough labor market.
Mapping the best path forward
Alternative fuels, automation, and the latest safety technologies all raise the initial cost of a new vehicle—dramatically, in some cases. While they offer meaningful full-lifecycle cost savings, this path may not be possible for smaller companies and is not always the most appropriate option for mid-sized waste and recycling operators. How can you make the right choice?
With today’s volatile economic conditions, finding the optimal route can be difficult. There is no single solution that is right for every company, and the best strategy varies with your individual business, its place in the business lifecycle, its cashflow situation, and other factors.
What is certain is that higher costs for trucks and maintenance mean capital expenditures are increasing relative to sales. Waste and recycling companies need to be more forward-looking in this inflationary environment than in the past. Decisions around capital equipment should also balance the total cost of ownership with practical concerns about what is available in the marketplace as well as what is financially feasible for your company.