The Economics of Recycling with ReCommunity Recycling’s James Devlin

July 31, 2015

John Shegerian: Welcome to another edition of Green Is Good. This is the Houlihan-Lokey edition of Green Is Good, and we’re here in beautiful New York City, New York, and we’re so honored to have with us today James Devlin. He is the CEO of ReCommunity Recycling. Welcome to Green Is Good, James.

James Devlin: Thank you. Pleasure to be here, and I look forward to a lively conversation.

John Shegerian: Yeah. And we’re going to be talking about our favorite subject – recycling – but before we get talking about recycling, I want you to share with our audience the James Devlin story. How did you get here, and how did you become the CEO of one of the largest recycling companies in America?

James Devlin: I often wonder how I got here. But thanks for asking. I’ve been the CEO for ReCommunity for the last couple of years. Prior to that, I was the CEO of a company called “Thermo Fluids,” which was the third largest collector and processor of waste oil – so again in the environmental services space. I really enjoyed that business, and ultimately, we sold that one and that has enabled me to come and work for ReCommunity. And before that, about roughly 20-plus years in the environmental services businesses from [inaudible] industries to Waste Management so I’ve always had my fingers in that sustainability and recycling pie so to speak, and obviously, I’m just thrilled to be able to continue to pursue that in the current day.

John Shegerian: And for our audience members out there – ReCommunity – to find James’s great company, you can go to www.recommunity.com. What does ReCommunity Recycling do when you come to a city or to a municipality?

James Devlin: OK. Great question. What we do is we are the largest independent processor of the curbside generated municipal material – recyclables.

John Shegerian: Wow.

James Devlin: The third largest in their space. Basically, what we do is we’ve got 31 facilities in 14 states.

John Shegerian: Wow.

James Devlin: We don’t collect it, we don’t dispose of anything. Our sole mission in life is value extraction from the commodity stream, and we’ll process about 12 different commodities and then ultimately we go from industrial processing, if you will….

John Shegerian: Right.

James Devlin: To worldwide marketer of commodities all over the world. In terms of volume, we’ll sell to China, some goods to Europe. Obviously, a lot stays here domestically as well. Our company employs 1,500 dedicated employees that their sole mission in life is obviously to be safe and environmentally compliant. Everyone likes their role in life, because they are doing something that is important in terms of sustainability. They love what they do.

John Shegerian: Your company every day makes the world a better place.

James Devlin: I believe so. That’s our mission.

John Shegerian: That’s right. So what today – given we’re in 2015 and we have competing trends out there right now, James. The sustainability revolution is on fire in many ways here in America, especially with Millennials and the next generation. But we’re facing this world where commodities have taken a dip for a while. Talk a little bit about both the challenges and the great opportunities that are in front of your company ReCommunity?

James Devlin: Absolutely. First if you think about it – our industry – it’s a $25-billion industry, employs millions. I think the payroll in our industry is over $20 billion. It’s amazing. It’s 2 percent of GDP, so it’s a massive-sized industry that we’re in, and that’s the good news, and there a lot of sustainable jobs that can be developed. Right now, if you look at the waste stream, only about a third of it is currently being diverted today. And I think the real opportunity into the future as these programs continue to mature, technologies continue to evolve and just as importantly markets for these commodities continue to develop, more and more materials will be diverted from the stream, which represents a significant amount of growth for ReCommunity but also our municipal partners as they think about their mandates and in terms of environmental sustainability. Now you talked about the decline in commodity pricing.

John Shegerian: Yeah.

James Devlin: If you look at this snapshot in time, you’ve got what we call a “perfect storm,” and others call it something a bit more graphic. But if you think about it, you’ve got a decline in commodity pricing. You’ve got rising labor costs, because the economy is getting better and also there are a lot of wage requirements by states and continue to drive our single largest cost component. Then you’ve got increasing costs as it relates to processing this material from a maintenance standpoint and a processing standpoint. Then, lastly, I think you talked a little bit – and maybe you’re leading up to it – the composition change in the waste stream, in the value stream that we’re looking at. And our biggest concern is inbound quality. It’s not necessarily that ONP – old newspapers – as a percentage is dropping and OCC is increasing. Our biggest concern and our biggest challenge today is MSW and contamination in our inbound stream, which obviously it’s a safety issue for our people. It’s an economic issue if you think about we go through all this effort to process this material, and roughly 15 to 20 percent of what we process ends up going back to the landfill. It’s incredibly inefficient to do that. And then obviously it’s an opportunity cost at our MRFs – or material recovery facilities – because they compete with our technologies for separation and diversion. They bind screens. They make it much more difficult to separate out these high value commodities and return them to market. And then our most important concern is obviously the safety of our people.

John Shegerian: Right.

James Devlin: It exposes our people to materials.

John Shegerian: Share what you mean, though, about contamination, because our audience should hear this. This is a very important message that’s not discussed well enough by experts like you on a regular basis. Share what you mean by “contaminated waste streams.”

James Devlin: Yeah. If you think about where it’s generated, you always have to go back and you go back to the consumer, right?

John Shegerian: Right.

James Devlin: And so many times – and I even see it with my own family as I continue to kind of crawl through our recycling bin like a raccoon sometimes – but when I see what’s going in there – and people refer to this as “wishful recycling” that’s just “when in doubt, put this in the bin because there’s an outside chance they might be able to recycle it.” So you see Styrofoam. You see PVC. You see batteries and those types of things. You’ll see hoses – “Well, that’s rubber they can process hoses” – or plastic or low-density polyethylene bags that actually get in the screens and make it very, very difficult to extract, and it blinds our screens to extract the true commodities that are there.

John Shegerian: Wow.

James Devlin: So that is our single largest challenge today. And our municipal partners are concerned about it, we are concerned about it and we’ve got to work collaboratively to solve it. It’s education. It’s some of the things that we’re doing. We’ve got this co-project IQ, which are at four of our facilities we’ve dedicated personnel that do nothing but take digital pictures of the material coming in. We get truck numbers by day and our municipal partners work really well with us to clean up the stream. In fact, I’ll give you a plug for the City of Philadelphia.

John Shegerian: Sure.

James Devlin: They’re very progressive. There was always this history of their stream not being as clean as they’d like. They worked hand-in-hand with us and were able to identify the routes that generated the contamination and they moved very aggressively to clean up the stream because it’s in their best interests, it’s in ours, it’s in the consumers’ best interests ultimately if we can keep our costs down and again our overarching issue is the safety of our personnel.

John Shegerian: Sure. Safety first.

James Devlin: Absolutely. Absolutely.

John Shegerian: Got it. So we’ve been talking about contamination. Talk a little bit about separation. Why in America, James, from a social perspective and, of course, a business perspective that affects your business and industry so much, how come we’re not able to separate better and label better when we’re tossing stuff out so cans don’t have a dirty diaper in there.

James Devlin: Right.

John Shegerian: And people are taught how to clean out a pizza box before they send it in to you and things of that such.

James Devlin: Right. Obviously, there are evolutions in consumer preferences and you’ve got packaging as a tribute to that where you’ve got – historically – you might have a packaging product that was all polypropylene. Today it may be mixed with other – technically – commodities that are subject to being able to recycle but not cost-effectively, and there are not markets that exist for them today. So you see this confluence of what was formerly recyclable material being mixed with other materials that make it commercially unviable to remove the product. And it’s going to be constant education. I think so many times our municipal partners – and we all work together and it’s not a one and done and we have education rooms at every one of our facilities that if you grabbed somebody in the second or third grade and you develop those habits at that age.

John Shegerian: Right.

James Devlin: You’ll begin to see that over time and it pays dividends. But the thing that’s really more important than that – or just as important – is that in order for us to be environmentally sustainable, recycling has to be economically sustainable. I think the thing that we’re working with – our municipal partners – is processors like ReCommunity and others need to make a fair rate of return on the investments because these plants are $15 million and they’re 20-year contracts with our municipal partners, so they have to make a fair-rate return regardless if commodity pricing is at $150 a blended rate per ton or $2 rate per ton. We’re an environmental infrastructure for our cities and municipal partners, and we have to be in a position where we’re making a fair rate of return in order to continue to invest and recapitalize on some of the new technologies that are available out there to make our programs even better.

John Shegerian: And for our audience members that just joined us, we’ve got James Devlin. He is the CEO of ReCommunity Recycling. You can find his great company at www.recommunity.com. It is the leading recycling company in the United States right now. James, you gave a shout-out to Philadelphia a little while ago. Can you give a couple other great example of ReCommunity going to work with a city or municipality, and what a great public/private partnership with a city could really look like, and talk about some of your success stories you’ve had in ReCommunity, please?

James Devlin: Yeah. And I’ll be glad to do that. I think what we want to do is work collaboratively with our cities and identify where the problems are, pinpoint them and work together so I don’t want to necessarily single out other cities.

John Shegerian: Yeah.

James Devlin: We’ve got another large municipal partner – let’s just say – in the west that we’re working with.

John Shegerian: Yeah. Sure.

James Devlin: They’re very interested in cleaning up the stream. They’ve got 21 inspectors on the street.

John Shegerian: Wow.

James Devlin: So if we can develop the right process and work collaboratively with them to identify trucks by day, they can go out and affect really significant change. We’re finishing out an education room at this particular facility with this partner, so that’s an example where we’re working on multi-layers that are incredibly active in social media.

John Shegerian: Wow.

James Devlin: And you mentioned the Millennials and how interested they are in recycling, and they’re innovative in the way that they reach out to these partners. So, I mean, that’s an example. It’s multi-layered, it’s generators, it’s our municipal partners, meaning the cities and the various governmental agencies that we work with, and ultimately ReCommunity making sure that we get the right materials and we can access the right markets and have a sustainable outcome for everybody. Everybody should win in this situation, and I think the paradigm shift is that there is a social need for recycling, and it simply has to be economically sustainable for this to work in these low commodity markets that you mentioned now that exist today.

John Shegerian: Yeah.

James Devlin: But [inaudible] at some point, but you just need a capital structure and a relationship with our cities that enable these types of movements in commodity.

John Shegerian: You know, James, great CEOs like you don’t wake up thinking, “Oh. I have the leading brand; we’re No. 1.” You wake up thinking how to make the company better.

James Devlin: Absolutely.

John Shegerian: And also how to grow the company. What does the growth look like in the coming years ahead for ReCommunity? How big can this grow, and how many more communities and states and cities can you be serving?

James Devlin: It’s unlimited. If you look at the possibility for growth for our company – first of all, if you take a look at the number of programs out there that are still dual stream that could covert to single stream. That’s basically – for everyone’s edification – the dual stream would be separating at the curbside. Free buckets for fiber and cans and bottles, very difficult and clumsy for generators to use.

John Shegerian: Right.

James Devlin: To single stream where it’s one 65- or 95-gallon container. They put it all together. When we see programs that convert, we’ll usually see volume increases of 20-50 percent. So that is one opportunity to grow in terms of being unlimited. You’ve still got small markets that are underserved, and we’re looking at developing a solution for these smaller municipalities and cities that – say – are 100,000 and less that don’t have access and have to ship it to distant processing plants, which is not necessarily cost-effective. And they may have a high disposal rate, so diversion is very important to them, because they want to look at it economically as well as environmentally what can they get accomplished. Also, we’re looking at different ways to deal with one of the biggest challenges within our industry space and that’s dealing with glass. It’s a problem, but also we’re thinking hard about solutions and the best method by which we can process the glass, find markets. And we spent, probably in R&D and research, probably in the last two or three years, and we think we’re getting close to a solution that we’re really excited about that really takes a significant problem that exists today – because glass is roughly 20-25 percent of what is being collected and processed, however, a relatively small percentage of it is being returned to markets because it is so difficult to process. It’s so heavily contaminated with organics, other fiber material and those types of things. Also, it has got to be sorted by color. I can go through this whole thing.

John Shegerian: Right.

James Devlin: But again the way we look at it, it’s a solution. It’s a problem today, but we think we’re closing in on some solutions that could really be innovative and interesting for our municipal partners, and the key is can we set this up of which it is economically sustainable for investors to continue to capitalize in these types of profits.

John Shegerian: So you continue to do R&D and innovate at your company.

James Devlin: We must.

John Shegerian: Wow.

James Devlin: We must. Just from optical sortations to new optical sorters to try to get greater value extraction from the streams, we’re looking at screens that try to deal with this significant contamination that we see today that effectively somewhat clean themselves – so to speak – so we don’t have this constant winding of our screens, losing high value commodities because we’ve got bags and wire and hoses that wrap around these screens that prevent people from doing their job.

John Shegerian: How has the Chinese Green Fence affected your company, James?

James Devlin: I’ll say it’s an industry impact.

John Shegerian: Yes. Right.

James Devlin: I don’t think it’s specific to us.

John Shegerian: No.

James Devlin: Yeah. Because the good news is, I think, by any measure ReCommunity has the highest outbound quality.

John Shegerian: Commodities.

James Devlin: In respect to commodities, we’re considered to be some of the best processors out there, and we generate really wonderful commodities. So when we’re selling to China, in particular, right now they’re trying to enforce a specification of 2-3 percent contamination.

John Shegerian: Right.

James Devlin: So the impact on the industry is that there are greater processing costs to meet that specification. There is greater residue generation associated with it. Fortunately, we don’t see a lot of commodities being rejected in China, but if you take a load of fiber, send it to China and it is rejected there on the docks it’s an extremely expensive proposition to deal with. It is driving up costs for our peers within this industry too. So I think the whole key is what can be done to find markets that are here in the United States that can meet the quality specifications that can make a lot of these commodities commercially viable. But again those are some of the impacts of Green Fence. We understand why they are there. Certainly, we’re going to cooperate with the purchasers and buyers of our material. We have great relationships with them. But the long and short of it is it’s going to have a direct impact on commodity markets, and it’s going to ripple through. So if there is a cost borne by ReCommunity, ultimately it’s going to ripple back to the generators and our municipal partners as we enter into these types of projects.

John Shegerian: Makes sense. We’re down to the last minute or so, James. For our young entrepreneurs and ecopreneurs out there in the United States and around the world who want to grow up to be the next James Devlin to make the world a better place, what tips and advice can you give them on the path forward?

James Devlin: Yeah. If you can go out there and take problems today and find solutions for them, people want to recycle, people want to divert. I can’t think of ever taking a poll where somebody says, “I don’t want to be sustainable. I think the environment is not important and let’s keep doing what we’re doing.” Finding solutions to really difficult problems and working collaboratively to make sure that they’re as economically sustainable as they are environmentally sustainable.

John Shegerian: That’s wonderful. Thank you again, James. We’re going to have you back on another time to continue the journey and the story of ReCommunity. For our listeners and audience out there, please go check out James’s company. It’s www.recommunity.com. James Devlin, you are not only a recycling rockstar, but you are an inspiring innovator and you make the world a better place every day and thank you for being on Green Is Good.

James Devlin: Yeah, I’d love to take credit. It’s all the 1,500 employees that do all the work, and I try to go out there and steal credit when I can, but we’ve got a great team of dedicated professionals that do it every single day.

John Shegerian: Well, that’s what makes you a great CEO. Thank you so much.

James Devlin: Thank you. I appreciate it.

John Shegerian: Take care. Bye bye.