A new strategic phase: Focus on innovation
In 2020, three years after completing the then Shanks Group’s merger with van Gansewinkel, Renewi presented its next strategic phase to investors, with a three-to-five-year time horizon. The COVID-19 pandemic has had no subsequent impact on this strategy. In brief, the three primary workstreams – each targeting c €20m EBIT uplifts – are:
■
Renewi 2.0 – improving business efficiency/digitalisation,
■
ATM – returning to historical levels of activity and
■
Mission 75 – increasing the proportion of waste recycled to 75% of all waste processed
Renewi’s October capital markets event focused on its innovation pipeline, which addresses the third of these workstreams, higher recycling targets, both quantitatively and qualitatively. In other words, the company is targeting investment in technical innovation to increase both the volume of waste recycled and the value of that processed waste by improving its quality and purity.
Background: at time of setting the Mission 75 recycling target, c 65% of waste handled by the group was recycled. However, only c 16% or group revenues were generated from the sale of processed waste as a secondary material (see Exhibit 5, ‘Outbound’ lower panel). We believe that waste derived fuel accounted for a significant proportion of this in Commercial and Specialities.
Exhibit 5: Divisional splits – post processing waste outcome & revenue by source
FY21 data |
Commercial |
Mineralz & Water |
Specialities |
Total |
Outcome % of waste taken in (by volume) |
|
|
|
|
Recycled |
61% |
82% |
63% |
66% |
Waste derived fuel |
11% |
N/A |
26% |
10% |
Energy from waste incineration |
23% |
1% |
3% |
16% |
Landfill/disposal |
5% |
17% |
7% |
8% |
% of revenue |
|
|
|
|
Inbound |
83% |
75% |
70% |
80% |
Outbound |
11% |
25% |
30% |
16% |
On-Site |
3% |
N/A |
N/A |
2% |
Other |
3% |
N/A |
N/M |
2% |
Source: Renewi published sources, re-presented by Edison Investment Research
Business model: As a reminder, in crude terms, Renewi generates profit from collection and gate fee income less waste sorting/processing costs and, at the end of the process, either plus net proceeds from selling secondary materials or less additional disposal costs (such as incineration or external landfill). All of the waste taken in generates revenue (through inbound collection and gate fees) but the processed waste can represent a secondary revenue stream or cost. A couple of examples:
■
Coolrec (Specialities) receives gate fees for the intake of end of life refrigerators and separates valuable materials (such as plastics and metals), which are recycled and re-sold after secondary processing. In this case, profit is generated from combined gate fee and secondary materials receipts less primary/secondary processing and other disposal costs.
■
ATM (Mineralz & Water) recognises revenues when soil intake is processed but up until recently, placing thermally treated soil offtake for re-use has been a business cost. Hence, initial gate fees must cover both processing and disposal costs plus a margin to be profitable.
Clearly, not all waste generates a secondary income stream; as well as some disposal costs, Renewi consumes some of the energy/fuel generated on its own account (and actually in all three divisions). Consequently, the top panel of Exhibit 5 does not map directly onto the lower panel.
As Exhibit 5 showed, outbound (or secondary) revenues accounted for c 16% of the group total in FY21. The equivalent values (before inter divisional adjustments) along with some of the higher volume waste streams are shown in Exhibit 6 (This list is not exhaustive; organic compost, electricity/energy and building materials are examples of other outbound revenue generators.)
Exhibit 6: FY21 Divisional outbound revenues and volume driver examples
|
Commercial |
Mineralz & Water |
Specialities |
Group total |
Outbound revenues (€m) |
136 |
46 |
90 |
272 |
|
|
|
|
|
|
Volume (k tonne) |
Netherlands |
Belgium |
|
|
|
Paper |
310 |
145 |
|
20 |
475 |
Metals |
110 |
37 |
45 |
18 |
210 |
Plastics |
41 |
26 |
|
36 |
103 |
Wood |
580 |
264 |
|
|
844 |
Source: Renewi FY21 results presentation, pages 53–57
Each category above is a generic aggregation, which, in reality, is comprised of a number of different material grades or metal types. It should be noted that Renewi is not fully exposed to market pricing for secondary materials as it uses a dynamic pricing mechanism in many cases, which inversely links inbound fees to indexed prices, which tempers the effect of significant fluctuations. We estimate that residual exposure is in the 40–50% range.
It is clear the Commercial division collects and processes the broadest range and largest volumes and consequently it is where the highest number of potential innovation projects exist. Exhibit 7 shows the disclosed list of opportunities from when the new strategy was launched, updated for the recent capital markets day (CMD).
Exhibit 7: Renewi’s innovation pipeline
Project |
|
Investment |
Partner |
June 2020* |
Oct 2021* |
Commercial |
|
|
|
|
|
Advanced residual waste sorting |
BE |
€60m |
Stand-alone |
N/A |
€€€€€ |
Expansion in bio-gas production*** |
NL - organics |
€21m |
Stand-alone |
€ |
unchanged |
Transition bio-gas from electricity to bio-LNG*** |
NL - organics |
|
SHELL |
€€ |
unchanged |
Upgraded feedstock for chemical recycling of plastics |
BE - plastics |
|
Multiple |
€€ - €€€€€ |
€ - €€€ |
Polyurethane recycling |
BE - plastics |
€10m |
Chemical recycler |
€ - €€€ |
unchanged |
Expansion of plastic recycling |
BE - plastics |
|
Stand-alone |
N/A |
€€ |
Expansion of mattress recycling |
NL (in JV) |
< €5m |
IKEA |
€€€ |
unchanged |
Upgraded wood flake supply for low-carbon steel |
NL |
N/A |
ArcelorMittal |
€€ - €€€€ |
unchanged |
Cellulose from diapers and incontinence products |
NL |
N/A |
FMCG major |
€ - €€€ |
** |
Mineralz & Waste |
|
|
|
|
|
Sand, gravel & filler at ATM for construction materials |
Build. materials |
€17m |
Stand-alone |
€€€€€ |
€€€ |
Next generation bottom ash conversion to construction materials |
Build. materials |
€2m |
Energy-from-waste major |
€€€ |
** |
Source: Renewi, capital markets event. Note: *Indicative EBIT returns where each € symbol represents €2m. **These two projects have been returned to an earlier stage. ***Inter-linked projects.
We discuss some of the above projects that were showcased at the CMD shortly but make a few general observations ahead of that. Firstly, Renewi’s innovation focus is a dynamic and embedded process underpinned by a stage gate approach overseen by dedicated management that co-ordinates and aligns divisional with group development. The pipeline composition is subject to change; compared to June 2020 for example Exhibit 7 includes two new projects (ie advanced residual waste sorting and expansion of plastic recycling) while two others have returned to earlier stages of approval (ie cellulose recycling and next generation bottom ash conversion) and expected returns are also subject to revision.
We note also that the pipeline is a mix of Renewi stand-alone projects and those in conjunction with a development partner that typically but not exclusively represents an offtake customer. In the former case the development know-how is fully retained by Renewi – and could in principle be transferred to other sites – while joint partnerships could provide opportunities to expand with international customers. Exhibit 6 provides indicative expected investment and returns for each project and we will re-visit the financial considerations later.
Innovation pipeline case studies
Background: there are both environmental and financial drivers that support Renewi’s increased focus on process innovation. Within the framework of the UN Paris Agreement the EU is committed to a target of achieving carbon neutrality by 2050 and, as part of this pathway, to reducing greenhouse gas emissions by 40% (between 1990 and 2030). The migration from fossil fuels to renewable energy generation forms a significant part of this as does energy efficiency in general. The implications are however economy-wide and the management of waste forms an integral part. Given that Renewi is a leading player in its markets and its facilities process large volumes of waste annually, the company is ideally positioned to facilitate a further increase in the proportion of recycled waste for re-use at the expense of less environmentally-friendly alternatives (ie incineration and/or disposal via landfill).
In Renewi’s primary markets, the Netherlands and Belgium are among Europe’s most advanced countries with regards to environmental standards. The UK is also relatively advanced but less so that the other two nations currently. State mechanisms to encourage positive environmental behaviours and discourage negative ones include legislation, regulation, taxation and permit controls. Ultimately, the aim is to achieve a circular economy in which materials have multiple uses through several waste cycles in order to reduce the demand for new primary resources.
The following sections highlight projects that are well advanced in Renewi’s innovation pipeline:
■
Advanced waste sorting (Commercial – Belgium)
■
Biogases & energy generation (Commercial – Netherlands)
■
Plastics recycling (Commercial – Netherlands)
■
Secondary building materials (Mineralz & Waste – ATM)
We then go on to discuss the financial ramifications of this to Renewi in both investment and expected returns terms as well as highlighting how the company is itself taking steps to improve/reduce its own carbon footprint.
Higher quality plastics: Plastics recycling
Renewi has stated that only c 29% of plastics consumed in the EU are subsequently recycled (and possibly only half of this is re-used) based on EU data. Moreover, with plastic consumption expected to continue to grow, in the absence of increased recycling activity the volume of plastic waste would also grow unabated. The EU Circular Economy Action Plan 2020 identifies plastics and packaging as some of its key focus product value chains and the direction of travel – increasing re-use (reducing incineration, landfill and exports), raising the proportion of recycled materials in products and driving demand for higher-quality recycled materials – is clear. Momentum for this is being created by a combination of consumer demand pull, brand owners and government and supply chain initiatives and mandatory requirements for recycled plastics content are anticipated.
Renewi’s Commercial and specialist waste businesses currently collect and process 100,000 tonnes of rigid plastics annually making it a leader in its core Netherlands and Belgian markets. Hence, with substantial control over waste flows – typically in mixed form – these companies are ideally placed to refine sorting processes to extract different grades of plastics more precisely and supply recycled materials to industrial users who are likely to have an increased requirement for them. Consequently, investment in advanced plastics recycling capacity has been made already with a further, larger one to come, as follows:
■
Ghent (Commercial, Belgium) – a new building and plastics sorting, grinding and washing plant was installed in FY21 to produce higher purity polyethylene and polypropylene regrinds,
■
Waalwijk (Coolrec, Netherlands) – in June 2021 a new electrostatic separator came onstream for mixed plastic waste streams to produce other higher purity polymer grades,
■
Acht (Commercial, Netherlands) – a new hard plastics sorting facility is under development and expected to open early 2023.
A total investment of €10m has been flagged for these facilities, Acht being the largest and still to come. Renewi’s broad network provides access to waste flows in the first instance but also permits pre-sorting (ie plastics from non-plastics) and the direction of narrower waste streams to specialised processing locations. We would expect higher purity plastics grades to attract higher customer pricing, a clear illustration of adding and retaining value within Renewi through investment. The development of the recycled plastics market is underway and while it will take time to become embedded – through EU initiatives, manufacturer product development and supply chain capabilities –Renewi is clearly already aligned with this trend and investing ahead of it.
Transformational process: Secondary building materials
Heightened ESG and sustainable business strategies are driving companies to record, report on and track greenhouse gas emissions and their carbon footprint. This not only applies to controllable factors (such as operational emissions and third-party energy provision, classified as scope 1 and scope 2 respectively) but also emissions generated by their supply chain (scope 3). These factors are now also integral to the development of building regulations and planning approvals. Consequently, developers and contractors are reflecting this back down their materials supply chain to be able to report these footprint metrics at project level (for both the build and lifecycle phases). Materials such as sand and gravel – used in their primary, intermediate or in finished product forms – are ubiquitous in the industry and can be carbon intensive in extraction and manufacturing.
Mineralz has an existing presence in the building and construction sector through its processing of incinerator bottom ash from which it first recovers any metals present and then produces enhanced intermediate building materials from the residue. These can be used in a number of applications – such as concrete products, foundations and as a substrate – typically as a partial substitute for sand and gravel applications, variously marketed under the FORZ brand. Its sister Mineralz & Waste company ATM has traditionally supplied cleaned soils used in groundworks but has been developing secondary processing capability to separate treated soil intake into graded building material components gravel, sand and filler. The €10m initial investment for this has substantially occurred already through the installation of in-line graduated sieving processes and storage silos for the lighter filler materials. While there are additional processing costs involved, the crucial point to note is that this potentially transforms the business model by replacing a business cost (ie soil placement) with an income stream from materials sales from substantially the same inputs.
In order to sell these graded materials, they must be certified for use; to generalise somewhat, applications requiring more demanding performance characteristics (such as strength, durability or structural integrity) are likely to have a more stringent test and approval threshold but also be where higher pricing can be achieved. Consequently, we expect a rolling application/approval process by which higher value added markets become accessible and achieved unit prices – and the spread over processing costs – grow over time. (Other factors such as the ease of substitution, the price of alternative materials and prescribed minimum/maximum levels are also likely to influence levels of demand.) We understand that gravel produced at ATM already has some certifications and initial sales have taken place. When operating at full capacity, ATM’s 1m tonne processing capability is expected to produce gravel, sand and filler in the ratio of 40:50:10. Note that this is a secondary process and additive to ATM’s traditional soil treatment activity and the revenue and earnings generated from it, notwithstanding the uneven market conditions that it is seeing currently. Renewi’s investment plans include provision for a further c €7m spend spread over FY23 and FY24, which we imagine is subject to gaining market traction for secondary materials such that additional processing capability is required.
Innovation programme: Financial summary
We now summarise the committed investment programme relating to the innovation projects described above and the phasing of that spend together with management’s expected returns.
The programme was first presented to the investment community with the FY20 results and some €19m was spent during the FY21 year, the largest component of which related to additional processing and storage capability at ATM as described above. Spend in the current year will include an advanced sorting line in Flanders and the bio-LNG facility near Amsterdam, which is now operational as stated earlier. Further advanced sorting capacity investment will be the primary driver behind an expected growth capex peak for the current programme in FY24.
Exhibit 8: Renewi – committed investments & returns
Investments |
Total €m |
FY21 |
FY22 |
FY23 |
FY24 |
FY25 |
FY26 |
Organics |
21 |
6 |
8 |
|
|
7 |
|
Building materials |
17 |
10 |
|
3 |
4 |
|
|
Plastics |
10 |
3 |
|
7 |
|
|
|
Advanced sorting |
60 |
|
13 |
32 |
15 |
|
|
Other |
2 |
|
2 |
|
|
|
|
|
110 |
19 |
23 |
42 |
19 |
7 |
|
|
|
|
|
|
|
|
|
Expected EBIT |
>20 |
-4 |
-2 |
2 |
9 |
19 |
>20 |
Source: Renewi. Note that FY26 is included in Exhibit 8 to show when the target EBIT run rate is expected to be achieved. The investment column is left intentionally blank as the capex programme for these projects will have completed by then, but we would expect new projects/further growth capex plans to be feeding in by that time.
Total expected programme spend amounts to €110m and Renewi has an expectation that this will yield incremental EBIT of at least €20m EBIT on an annualised basis – accelerating from FY24 and particularly into FY25 – with a flagged pre-tax return on investment in the 16–20% range. As explained earlier, the projects are spread across Commercial (in both the Netherlands and Belgium), Mineralz & Water (chiefly ATM) and Specialities (ie Coolrec) but we expect the majority of it to accrue in the former division.
In context, the base year being used to measure this increment and other (see below) is FY20 when the group delivered EBIT of €75.5m for continuing businesses, excluding Reym, which was sold during that year.