ISRI2023: Navigating equipment financing in an evolving economic landscape

Equipment financing and maintaining profitability have become more challenging in the last several years with the supply chain issues brought on by the coronavirus pandemic and increasing operating costs, and the recycling industry comes with its own challenges as a result of volatile commodity markets and supply and demand fluctuations.

During a session titled Profitability and Asset Management: Through the Finance Lens April 19 at the Institute of Scrap Recycling Industries (ISRI) 2023 Convention & Exposition in Nashville, panelists had much to discuss when it comes to the “balancing act” of having access to cash while managing large assets.

“Sometimes, recycling companies’ month-to-month P&L [profit and loss sheet] can look a lot like an EKG meter,” said session moderator Paula Summers, senior vice president, sales and strategic partnerships, at VFG Leasing & Finance.

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Other panelists included Sandy Brooks, vice president of finance at Orange, California-based SA Recycling LLC; Brandon Roznovsky, chief financial officer at Brenham, Texas-based Premier Metal Buyers; and Becky Proler, president of Houston-based Southern Core Recycling.

“It’s due to the price volatility and the ever-changing commodity prices, but also the supply and demand elements that come with that,” Brooks said of the complicated financial aspects of the recycling industry. “What goes into the pricing and the market might have other causes—geopolitical or just general economic causes.

“One thing we know is that if it goes up, it’s going to go down.”

Brooks said supply and demand play a big role in the profit and loss sheets, too, particularly when certain commodities are at the bottom of the market because in those instances, suppliers often aren’t coming in because it’s not worth their time to collect recycled material. “You might have a combination of low market prices and low volume at that point in time,” she said.

“At the top of the market, a lot of companies in our industry like to play the market and hold off on selling in hopes it’s going to go even higher,” Brooks added.

Roznovsky said evaluating the financing direction a company wants to go in can be deal-specific—making it difficult to determine a specific window or timeframe to make a move—and stressed that having a good relationship with your financing partner is important as it can be the difference in securing a deal. He noted that Premier Metal Buyers has used a combination of banks, captive financing and independent financing.

“We’ve been blessed in our area to have some strong community banks who probably believed in us more so than they actually believed in the asset or the collateral being pledged,” he said. “That was really something that helped jumpstart us.”

As companies outgrow their smaller, community financing partners, Roznovsky said that when branching out and building new relationships, finding partners who understand the industry and the volatility that comes with it makes those transactions easier and more efficient.

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“Understanding the volatility of the P&L sheet or even the balance sheet that could be swelling in an elevated price environment [is important], and also understanding the type of equipment that we need and not having to explain the story over and over—because that can get a little tiring,” he said. “They’re going to be more efficient and doing the deals because, as we know, this industry changes really quickly and sometimes you don’t have time to tell the whole story and let things drag out.

“Somebody who can make a quick decision and understands equipment makes life a lot easier.”

It can be difficult, however, to find a financing partner who truly understands the nuances of the recycling industry, and Southern Core Recycling President Becky Proler said the need for a lot of cash flow to purchase large assets makes it a unique situation.

“Financing is an integral part of our business because you have to have your cash flow, you have to keep your cash in order to pay for your material, and sometimes that stretches long and short,” she said.

Proler describes instances during her early years in the industry of having a volume surplus and not wanting to sell it for fear of losing money because of the market conditions, or having to explain to creditors why her business should be able to maintain an open credit line despite not having used it.

Surviving through the hard times, she said, is the nature of the business.

“If you don’t have that appetite and you can’t survive during the hard times, you’ve got to be able to thrive during the good ones,” Proler said. “Financing was that link to growing and maintaining our cash flow.”

One of the most important questions recyclers often are confronted with is when to continue to maintain and repair a piece of equipment or when to replace it. Previously, Roznovsky said, there used to be more of an expected asset life, but that has become increasingly difficult to determine with current equipment availability and leads times.

“That does definitely throw a wrench into the normal plan of when we may want to retire an asset,” he said.

“Another piece of the equation is the cost of equipment has gotten so expensive so quickly. I think the cost of a roll-off truck is probably up 50 percent the last few years. … We used to try to get rid of [a piece of equipment] every three or four years, and now we’re making the more difficult decision of trying to stretch it out a little bit.”

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Scalability also has become a factor when considering major financial transactions.

Brooks said SA Recycling tires to look at each asset acquisition on its own and justify it based on its own situation at each individual scrap yard, but with lead times being as long as they’ve been over the last year, decisions have been made to acquire more than what’s immediately needed knowing eventually the equipment will be placed somewhere.

Proler added that scalability is crucial in the recycling industry and uses the example of excavators versus material handlers.

“I love those material handlers,” she said. “The cab goes up and they’re beautiful and they have long sticks—and they’re $400,000. The reality is, I can buy two excavators for the price of one material handler, and when one of my excavators goes down, I’ve got another one. When that material handler goes down, I don’t have anything except waiting for somebody to come and fix it.”

She advised looking at form and function as well as the price of a piece of equipment when determining which makes most sense for your business.

“I’ve learned the hard way,” Proler said.

Modeling for specific projects also has become difficult as operating costs have continued to rise. “Some of the assumptions that we’ve had as far as what labor runs, what some of the repair and maintenance costs and fuel, all that stuff has gotten a little dated for us,” Roznovsky said. “We’ve had to really ratchet up the operating expenses to try to truly model and understand what the cost of that project would be.

“For us, sometimes it’s a reality that capital is limited, and so we ask is this the best use of our capital for this project or is there something else that will provide some additional opportunity for the business.”

Summers posed the question of how important it is to have access to cash in your business, especially when considering whether to pay cash for an asset or finance, to which Brooks said, “Cash is king.”

“It’s really important to have a reserve of cash or a line of credit available,” she said. “Working capital can be really expensive and in high markets is even more expensive because you’ve got higher inventory prices and levels.”

Proler described having cash on hand versus reducing debt as a balancing act.

“You can’t go broke if you don’t owe anybody anything, but you can’t go broke if you don’t have enough equipment to do the job,” she said.

“What you have to realize is you have a depreciating asset … and there are different ways to handle that. When you buy that asset, is it something that will help make [your] business?”

With ongoing labor shortages, one of the biggest considerations Proler said she is making with her business is if a piece of equipment can replace what would have been done by people.

“When we can have an asset that can help replace labor, especially labor that’s difficult to find, we’re going to do that. What’s the ROI [return on investment] on that? I have no idea, but I can tell you, if I can’t find [labor] I’ve got no business, so that’s the kind of equipment we’re looking for—shears, things like that that will help upgrade your material and replace some of your labor.”

Safety and sustainability factors also should play a part in purchasing equipment, Brooks added.

“If there’s a safety concern, the ROI calculation isn’t nearly as important,” she said.

“I think more and more we need to talk about the intangible aspects, not just the financial. We do so much for the environment simply by what we do on a day-to-day basis, but some of these other ESG [environmental, social and governance] metrics are going to be important in the future.”