In the last year, Austin, Texas-based Balcones Resources Inc., Lakeshore Recycling Systems (LRS), based in Morton Grove, Illinois, and Eureka Recycling, Minneapolis, have made investments in their recycling operations to survive and thrive in the recycling marketplace today.
During the Driving Investments in Recycling session at the Paper & Plastics Recycling Conference Oct. 23-25 in Chicago, Kerry Getter, chief executive officer of Balcones, Alan Handley, CEO of LRS, and Miriam Holsinger, vice president of business intelligence and operations at Eureka, discussed retrofits they’ve made at their facilities and the different financing options available to make the necessary capital investments in their business.
Three months ago, Balcones invested in San Diego-based CP Group’s optical sorters and Colorado-based AMP Robotics' robotic sorters to reduce operating costs and upgrade material, Getter said. As a result, the company was able to eliminate 15 hand pickers from the sorting line.
“Despite what happens in the marketplace, we’re going to get a modest return on investment there,” Getter said. “In the last 90 days, I’ve become an even bigger believer in technology. Going forward, it’s our intent to make what investments we can to reduce our fixed costs.”
After two years of planning, Eureka completed a retrofit in the spring, which not only improved the quality and value of material but increased the facility’s processing capacity without increasing labor costs. Proving a return on investment helped Eureka get the capital for the project.
“That’s really how we justified the expense,” Holsinger said. “In this market where the margins are so thin, the more material you can process, the better it’s going to be.”
On the other hand, Handley said LRS didn’t have much time to plan the investments at its material recovery facility (MRF). When mixed paper dropped from $90 per ton to $30, LRS responded immediately by installing an optical sorter and robotic sorter from Plessisville, Quebec-based Machinex.
“Because of that, we were able to mitigate what would have been a recycling disaster for us," Handley said.
After the robotic and optical sorters were installed, LRS was able to remove 16 hand pickers from its paper line.
“We’re continually looking for ways to displace the human element out of recycling, at least on the MRF side,” Handley said. “I envision in the next two to three years that we’ll get rid of almost all the humans on our sort lines except for presort. We have to eliminate that to be profitable.”
The presenters shared different ways they raised capital for the investments, including co-financing, social impact funds and relying on off-take agreements and long-term relationships in the industry.
To cover the costs of LRS’ MRF retrofit, Handley said he worked with Comerica, the company’s senior lender, to cover the costs and New York-based investment firm Closed Loop Partners to purchase the Machinex equipment. Co-financing “was creative and worked out well in our situation,” he said.
Co-financing is also a good option for newcomers in the recycling sector, said Michael Gajewski, managing director of Closed Loop Partners, who moderated the session. He said receiving some initial financing from Closed Loop or other investors in the recycling space can help newer companies build credibility with larger lenders.
Holsinger said long-term relationships, transparency and end market financing went a long way when financing Eureka’s investment. The nonprofit worked with its longtime lender of five years on the upgrade.
“They helped us transition to single-stream in 2015,” Holsinger said. “That’s great because they know we’ve been around for 15 years as a profitable company.”
Educating the lender on the company, changing market conditions and associated costs of the project is also important when working with a lender, she added.
“It can be really difficult to explain there are equipment costs, but that’s only half of what you need any time you’re doing an upgrade,” Holsinger said. “There’s education you have to do with the lenders around getting to know who you are, if you’re reliable and are you going to be able to do what you say you can do.”
Eureka also relied on financing from off-take agreements to complete its upgrade, including a long-term agreement with Atlanta-based WestRock.
“For us, quality is so important, so they know if quality does decrease, we’ll respond immediately," Holsinger said. "It’s not only a guarantee of tons, but really a responsiveness to the marketplace and that you’ll be there through thick and thin.”
She added, “The beauty of long-term agreements is with these ups and downs, sometimes the benefit is in their favor and sometimes it’s in our favor. When you have an end market that you’ve worked with for a long time, they know that and they’re willing to work through that with you.”
Establishing a relationship with lenders and investors and being transparent about down markets is critically important, Getter said.
“It’s not really the bank, it’s the banker,” Getter said. “You better establish a relationship with the people who are loaning you the money.”
Balcones has had a relationship with its lending institution for the last 20 years and hadn’t used a private equity fund up until Closed Loop Partners’ recent acquisition of a majority stake in Balcones, Getter said. Over the years, Balcones has built credibility with its lender by creating accurate and timely financial statements and conducting an annual audit.
“Borrowing and the banking is really about the removal of doubt,” Getter explained. “If you can establish credibility with that group of lenders, your chances of borrowing money are greatly enhanced.”
Sharing the good news and the bad news of the commodity market also goes a long way. Getter writes a monthly letter to Balcones’ lender and board of directors that highlights the good and the bad, he said. Collecting and reporting data on operating costs and the business also helps communicate the message and helps lenders understand the business as well.
“Honestly, we haven’t had a whole lot of good news to share lately,” Getter said. “It may be difficult at times to share the bad news, but it’s vitally important and lets the lenders and investors know you’re on top of what’s going on.”
Getter added, “I think it helps your profile with the lender. It makes them more informed when they’re going in front of a loan committee.”