Focusing on increased value creation from waste
Summary: Renewi has entered its next phase of business development encompassing both internal and external programmes. The key components are internal business process improvement (under Renewi 2.0), accelerating revenue and profit generation from secondary materials, and delivering and enhancing the recovery of profitability at ATM as it resumes shipments of thermally treated soil.
This is not a revolutionary strategy, building as it does on Renewi’s market-leading waste to products platform. It is an extension of the existing approach, with greater emphasis on creating more value from waste streams handled with increased organisational efficiency and doing so in a sustainable way.
Renewi has attached €20m EBIT targets to each of its three initiatives – with scope for some overlap here – to feed in progressively, especially from FY23 onwards. After a COVID-19 affected FY21 trading performance, our estimates (see Exhibit 11, Financial summary) show a c €57m group EBIT improvement by FY23. Specifically, for the new reporting divisions between FY21 and FY23, we expect EBIT uplifts from Commercial Waste of c €42m (to c €90m) and Mineralz & Water – incorporating ATM – by c €15m (to c €23m). Clearly, some of these improvements will arise naturally from the post-COVID-19 recovery phase, but the strategic improvements represent a substantial supplement if delivered in full. While our estimates show a very significant increase from the FY21 base year, the path by which they can be realised has been explicitly mapped out by management.
Background: The end of February 2020 marked the third anniversary of the creation of Renewi when the then Shanks Group merger with Van Gansewinkel (VGG) combined their commercial waste collection and processing networks to create the clear market leader in the core Netherlands and Belgian markets. Each party also brought specialist waste businesses into the enlarged group. On completion, the primary post-merger financial objective was to generate €40m of cost savings and synergies (with an expected cash cost of €50m) on a pro forma group EBIT base of c €63m in FY17.
The group composition has changed and been challenged during the three years post-merger, most obviously through the disposal of non-core operations (ie Reym and Canada Municipal, both in FY20). In addition, two business areas have faced particular headwinds, with ATM affected by industry permitting restrictions while UK Municipal has experienced contractual setbacks, which have given rise to material lifecycle onerous contract provisions. Given these effects and the change in group composition, it is difficult to ascertain true like-for-like progress. As evidence that the expected merger benefits have indeed been delivered, we note the following Commercial Waste progress (from pro forma FY17 levels to FY20, all EBIT and margin figures quoted are on an IAS 17 basis):
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Revenue has risen by c 10% (CAGR 3.2%), above domestic GDP growth in both the Netherlands and Belgium (+2.3% and + c 1.5% CAGRs respectively).
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EBIT has grown by €33m (from c €55m to c €88m).
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EBIT margin has increased by 230p to 7.2% (including the Netherlands +300bp to 6.9%, and Belgium +110bp to 7.6%).
One should also bear in mind that FY20 profitability was hindered by a number of exogenous factors including COVID-19 related lockdowns at the year-end (most of the €4m group hit was in Commercial Waste) and construction waste flows were interrupted by prospective industry regulation changes relating to certain chemicals. Moreover, secondary waste prices such as paper and plastics were towards their five-year low points.
Modest merger benefits have been cited in other divisions (eg Hazardous €2m, Monostreams €1m). We also note that central costs (at €26m) were similar to the initial merger pro forma level; other factors have a bearing but a stable outcome is probably the net effect of some underlying inflation and cost synergy actions, although we are unable to quantify this.
Taken together, we agree with the company that the phase one/post-merger synergy benefits have been delivered, particularly via the crucial Commercial Waste divisional development. That group profitability has not fully reflected this progress is more to do with discrete issues elsewhere in the portfolio, which could not have been foreseen at the time of the merger and have been substantially dealt with by management now.
Reinforcing and monetising competitive advantage
Having created a market-leading business platform through the merger and integration of two leading waste collection and processing companies, Renewi has entered its next phase of development led by CEO Otto De Bont (in post from April 2019, having previously been divisional MD of Commercial Waste in the Netherlands).
The updated strategy brings increased intensity to the generation of greater value from Renewi’s market position based on core sustainability objectives around developing the circular economy, reducing waste and carbon emissions, and making positive community impacts. Management has mapped out a three-year business transformation strategy with the following key elements:
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Renewi 2.0 – a business simplification and enabling strategy to improve efficiency through leaner structures and greater digitalisation.
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Innovation – targeting increased value generated from secondary materials through formalised, multi-pronged development processes backed by investment.
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ATM – managed return to the re-opened thermally treated soil market, adding value by converting disposal costs into secondary revenue streams.
We now look at each of these elements in turn:
Renewi 2.0 targets a €20m reduction in SG&A costs over a three-year period, with pooled expertise improving and standardising common best practice processes and a central administrative shared service centre function, all informed by better organisational data availability and accessibility. This could be viewed as adapting and modernising group and divisional infrastructure to both reduce costs and provide a scalable business platform for future growth. Management has set out an explicit timeline of expected costs and benefits to implement this strategy. Exhibit 1 shows that the full annualised benefits of this programme are targeted for FY24 based on establishing this run rate by the end of FY23.
Exhibit 1: Renewi 2.0 – expected costs and benefits
€m |
FY21 |
FY22 |
FY23 |
FY24 |
Net benefit |
1 |
5 |
12 |
20 |
|
|
|
|
|
Exceptional costs |
(14) |
(10) |
(6) |
|
Capex |
(1) |
(4) |
(2) |
|
|
|
|
|
|
Net cash flow |
(14) |
(9) |
4 |
20 |
Understandably, the fine detail of prospective changes in business structure has yet to be disclosed but will become apparent during the three-year implementation period. Some of the stated initiatives include increased digital data capture and usage at operational level (eg in collection vehicles and at depots), investment to reduce carbon emissions and more harmonised systems, implicitly with greater IT integration.
Innovation is the second prong of Renewi’s business improvement strategy focused on adding value to sorted waste streams through investment in secondary processes to produce better quality saleable materials and generate additional revenue. This approach is also targeting an incremental €20m EBIT creation, with a slightly longer timeline, by FY25.
The FY20 results presentation contained an established pipeline of individual projects at varying stages of development. Some examples, where investment has already taken place, include:
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ATM (see below) – additional sieving equipment and storage capability, separating soil intake into constituent gravel, sand and dust/filler components to be sold and re-used as building products rather than a mixed bulk material with a disposal cost. Momentum with prospective customers following trials appears to be gathering.
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RetourMatras – Renewi co-invested in this mattress recycling specialist alongside an IKEA franchisee to take a 32% business stake. This company’s process recycles 90% of discarded mattresses and the Commercial Waste division’s collection network is able to source and supply the required inputs.
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Bio-LNG – having listed a transition from generating electricity from organic waste to creating bio-LNG (a low carbon fuel) as a potential subsector, Renewi’s Q121 trading update announced an agreement with Shell and Nordsol in this area. No specific details of the agreement were included. Again, Renewi’s Commercial Waste division (now including Orgaworld) already has access to the feedstock required.
In addition to the above, there are also other projects at earlier stages of development. Renewi’s scale network position at the centre of waste flows in its markets is an obvious competitive advantage. Taking actions to further exploit latent value inherent in the streams represents an additional differentiator consistent with moving further up the waste hierarchy and the increasing onus on recycling.
At the headline, physical level, c 65% of the c 14 million tonnes of waste currently processed by Renewi is recycled and the aim is to increase this to 90% over the next five years. This has the obvious benefit of reducing incineration and landfill volumes, but also reduces any potential impact from rising regulatory costs associated with these forms of waste disposal. Compliance with industry standards (eg in consumer safety and building regulations) represents a market challenge to accepting new materials and trial phases will be good markers of progress here.
Identifying applications for secondary materials, evaluating additional process requirements and establishing market partnerships (inbound waste and outbound material) are all part of the innovation process. Momentum in this area will be dictated by the attractiveness of returns that can be generated across individual, discrete investment projects, factoring risks associated with end market volumes and pricing.
ATM: The third leg of Renewi’s business transformation strategy is the recovery of annual profitability at ATM to or in excess of €20m with a likely timescale of three or more years to achieve it. An industry halt on permitting the use of thermally treated soil (TGG) has been well documented. In December 2019, after a two-year hiatus, Renewi stated that the market for shipment of TGG had re-opened, subject to local application permits being granted.
While ATM has other revenue streams, closure of the TGG market had a severe impact on profitability, reducing it to a small underlying loss-making position in FY20. At the end of that year, ATM – which has process capacity of c 1m tonnes of treated – had c 2m tonnes of soil inventory on hand, split broadly 20% untreated, 80% treated/in process. With site storage capacity full, over 1m tonnes of the treated soil was being held at third-party facilities (annualised cost c €3m). Business profitability represents the delta between inbound gate fees received and the costs of treatment and disposal of soil materials received. The envisaged recovery phases include the following:
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Resumption of TGG soil offtake/placement, reducing offsite storage costs and creating space at ATM’s facility to receive new soil volumes for treatment.
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Further net reductions in TGG inventory to gradually eliminate third-party storage costs.
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Improving offtake mix in favour of revenue-generating secondary materials in place of the traditional cost to dispose model.
An illustrative progression through these phases was provided in Renewi’s FY20 results presentation and we reproduce it here.
Exhibit 2: ATM outlets FY17–23e
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Source: Renewi, p56 FY20 results presentation
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Moving to the right, as the mix scenario evolves, the business model is transformed as treated soil moves from being a disposal cost to a revenue generator. This of course requires a growing market acceptance and penetration of secondary sorted materials (sand, gravel, dust).
We believe that ATM generated EBIT approaching €20m prior to the halt in TGG soil shipments. Market conditions (and TGG disposal costs) may have changed since then but, in principle, full capacity processing under the old business model could be capable of regaining this profit level. Management’s aspiration is to meet and ultimately exceed this by a different route. There is some overlap here with the innovation strategy outlined above as building profitable secondary materials revenues is its objective also. We would suggest that the more successful ATM is in migrating its output volumes across in this way, the greater a contributor it becomes to the innovation financial target. There is, however, some incremental profit opportunity within ATM from simply restoring some or all of its previous operations.