KTI, Inc. Builds Success Through Vertical Integration

The headline "KTI to Acquire FCR, Inc., A National Waste Processing Firm With 26 plants in 14 States," foretold a continuing success story in the integrated waste management/recycling industries. The acquisition was only the most recent announcement for a company that, until slightly more than a year ago, was flying below radar in the paper recycling industry.

KTI, Inc. headquartered in Guttenberg, N.J., established its reputation in the waste-to-energy sector. The company has long believed that waste must be "reverse" manufactured into usable products. Among its holdings are waste-to-energy facilities in Maine, a biomass-to-energy plant in Florida, three bio-mass plants in Virginia and waste wood processing operations in Maine and Georgia.

Having already established unique business niches in the waste-to-energy and incineration industries, what has piqued the interest of the recycling industry as well as the investment community has been KTI's systematic assembling of paper recycling operations throughout the United States.

The starting off point was the acquisition of paper recycling plants from Prins Recycling in Newark, N.J., Boston and Chicago. The acquisition was made in bankruptcy court, and made a splash in the paper recycling industry. The acquisition was even more notable due to the significant impact the Prins bankruptcy had on the industry. The problems with Prins Recycling were, according to a host of critics, further proof that recycling was not a viable economic model.

What many of the critics failed to notice, however, was that the difficulties faced by Prins set the stage for greater opportunities for other companies. Furthermore, many of the problems with Prins were self-inflicted, including a controversial fixed-price structure for collected material that came in 1995 at the crest of the last surge in paper stock markets.

The landscape now is far different from those tumultuous days. Prices, although showing some spikes, have been moving in much smaller cycles. Many of the companies whose practices helped exacerbate price spikes several years ago have sputtered, leaving the firms still in the business more cautious about their operations, and more focused on the commodity risk inherent in the industry.

This more cautious period has kept the paper recycling industry in a more tranquil mood. Within this context, KTI has found and created new opportunities. After picking up Prins’ three plants, the company began a spree of purchases, which would be the talk of the paper recycling industry.

In rapid succession the company purchased I. Zaitlin & Sons, a Maine paper and metal recycling company; K-C International, one of the country’s largest paper stock brokerage operations, based in Portland, Ore.; Vel-A-Tran Recycling, which handles high grade fiber in New England; FCR, which operates 18 MRFs in 10 states; Atlantic Coast Fibres and Gaccione Brothers, both located in New Jersey; and First State Recycling, a Wilmington, Del., plastics recycler.

Along with the acquisition of these operations, FCR has acquired RRS, an owner and operator of eight material recovery facilities. Further, the company has been growing through acquisitions in the plastics recycling, waste-to-energy and ash recycling operations.

While KTI is most commonly seen now as a consolidator of recycling companies, the company actually got its start in the development of waste-to-energy facilities in the Northeast. In addition to handling well over one million tons of recyclables, the company currently processes more than one million tons of biomass waste, municipal solid waste, non-hazardous industrial waste and specialty waste.

The Maine Energy Recovery Company, LP is a 1,000 ton per day waste-to-energy facility that serves more than 50 municipalities in southern Maine. It produces 22 megawatts of electricity per hour and has as its sole power customer Central Maine Power Co. The plant has been operating since 1987.

Penobscot Energy Recovery Company, LP (PERC) is another 1,000-ton per day waste-to-energy plant and serves more than 200 communities in central Maine. The plant, which has been in operation since 1988, produces 25 megawatts of electricity per hour. KTI is PERC’s managing general partner and owns more than 71 percent of the facility. Its sole power customer is Bangor Hydro Electric, a public utility.

KTI owns and operates additional waste-to-energy facilities in Virginia and Florida and holds a majority interest in this country’s only commercially operational municipal waste ash recycling facility located in Nashville, Tenn. The company converts commercial and municipal waste into electricity or steam through its environmental award winning waste processing and combustion technology. After combustion, the remaining ash, which is dramatically reduced in volume, is recycled to recover scrap metals. The remaining ash is treated and then used in commercial construction, asphalt, concrete and roadbed applications. In Maine, KTI disposes of more than 60 percent of the state’s garbage at its facilities.

While handling waste has allowed the company to steadily grow its volumes, the aggressive move into the recycling field has opened up a significant amount of additional business as well.

"The acquisition [of the three former Prins plants] is part of our strategy of vertical integration by adding municipal and commercial recycling programs to our comprehensive solid waste disposal menu," said KTI President Martin J. Sergi. "We expect this new operation will be a valuable contributor to KTI’s financial results."

But perhaps no other purchase in recent years has been as important to KTI as FCR, Inc. At the time of the purchase Sergi said, "The acquisition of FCR expands KTI’s geographic reach and diversification and builds on its integration objectives. This nearly doubles the size of our company and also adds significant recycling assets.

"Through its U.S. Fiber and FCR Plastics divisions, FCR provides further downside protection against price volatility often associated with recycled materials," Sergi said. FCR, therefore, also gave KTI a viable end market for the material it collects from many of its contracts.

FCR, a national waste processing firm with 27 plants in 14 states is based in Charlotte, N.C. FCR’s operations fall into three main areas: material recovery facilities (MRFs), cellulose insulation and plastic recycling plants. FCR’s revenues are anticipated to run at an annual rate of $100 million.

Today, KTI’s operations can be divided into waste-to-energy facilities, KTI recycled paper, metal and plastic marketing services, KTI commercial and residential recycling facilities, KTI wood waste processing operations and specialty waste services.

It was shortly after the purchase of FCR, that the editors of Recycling Today met in Chicago with key members of KTI’s management team. These individuals included Sergi, Paul A. Garrett, chief executive officer of FCR, and William F. Kaiser, executive vice president and treasurer of KTI.

Garrett notes that KTI and FCR have a similar approach to recycling. "Our calling has been to figure out how to process recyclables in the most efficient manner possible," said Garrett. "We’ve had to figure that out in order to compete for municipal contracts against the giants."

For FCR, the recycling business was big. By 1996 the company had grown to eight facilities and was processing more than 137,000 tons of recyclables, primarily paper stock. In 1996, as paper prices fell through the floor, FCR sought to vertically integrate the company while remaining in the recycling business. The goal was to bring stability to FCR’s earnings and add value to its recyclables.

In 1998 FCR’s recycling division alone is expected to process more than 600,000 tons of recyclables. This, in addition to the 500,000 tons of comparable recyclables handled at existing KTI recycling plants and another 400,000 tons of brokered material through K-C International.

The strategy, according to Garrett, has led FCR into the cellulose insulation business. It seemed a natural thing to do given that newsprint is the main raw material of cellulose insulation.

The big plus for FCR was the low cost of newsprint generated at its MRFs, which in turn resulted in higher margins at its cellulose plants. This contrasts with lower margins in the recycling industry, particularly when newsprint prices are low. The FCR fit also is turning out to be ideal with KTI already handling a significant amount of old news through a number of municipal contracts.

Sergi points out that their approach to recycling is far different from other companies. Instead of strictly viewing the material as a commodity that rises and falls, depending on a variety of market conditions, their approach is to operate the recycling facilities more like a utility.

"Not only do we "reverse" manufacture recyclables into useable raw materials, but we also "remanufacture" in value added products such as cellulose, plastic products and glass items," Sergi said.

FCR now owns and operates cellulose insulation plants in Florida, North Carolina, Arizona, Oregon and Ohio, and a new facility is under construction in Texas.

"We are a major provider of cellulose insulation to the manufactured home industry and we are growing market share by providing cellulose insulation to new single family insulation contractors," said Garrett. "We think cellulose has a great opportunity to take market share away from traditional fiberglass insulation."

Indicative of the growth pattern KTI has set, its FCR subsidiary recently acquired RRS, a regional MRF operator with seven facilities. The acquisition will add to the overall amount of material the company will be processing.

With the FCR acquisition, KTI has assembled not only a group of companies that are processing and marketing more material, but a group of companies that carry a strong and favorable reputation in the industry. For example, K-C International has long been considered not only one of the largest, but also one of the most successful brokers for recovered fiber in the country.

The advantage of having a well-connected brokerage office is the ability to move the tonnage processed by KTI’s various operations to both domestic and overseas markets and to gain further stability as a result of long term relationships with paper mills throughout the world.

Zaitlin, along with a document destruction company it operates, has built up a sizeable business in the upper Northeast, spilling into much of eastern Canada as well. Atlantic Coast Fibres and Gaccione Brothers, the most recent acquisitions, when combined, will be one of the largest independent paper stock operations in the New York/New Jersey area. The company will play a significant role in the collection of many high grades of secondary fiber.

With its cellulose insulation business running smoothly, FCR next turned to plastics. Last September it acquired a company that grinds, washes and pelletizes residential high density polyethylene (HDPE) and polyethylene terephthalate. The material – either a natural or pigmented pellet – is then sold back to the end plastic manufacturer for use in making new products.

FCR Plastics has three plants processing more than 50 million pounds of recycled plastics a year. Currently, KTI operates a plastics trading and brokerage operation in Annapolis, Md., which handles more than 40 million pounds of recycled plastics each year.

Highlighting their continued interest in plastics recycling, at press time the company announced it acquired First State Recycling, a plastics recycling company in Wilmington, Del. which processes more than 15 million pounds per year. The acquisition, made for cash and stock, is expected to fit in with FCR’s existing plastics recycling operation and benefit from Manner Resins’ marketing capabilities.

"The key," said Garrett, "is a dual focus on the recycling side. The first is to be the lowest cost processor available, so if you are a municipal customer or a commercial customer, you’re going to gravitate to KTI because the economics for you are going to be superior."

The second key on the recycling side is taking the "commodity risk" out of the equation, notes Garrett. The goal here is to create a long-term sustainable business rather than a short-term cyclical opportunity.

Bill Kaiser, executive vice president and treasurer for KTI, said "in the past KTI has competitively bumped up against FCR as a provider of post-consumer recycling services. Now with the addition and consolidation of Altantic Coast, Gaccione Brothers and the former Prins facilities, the fit of KTI and FCR is a natural one and a very strong positive for all concerned."

In another example of a value added acquisition for KTI, Kaiser noted that Total Waste Management, a special waste processor in Newington, N.H., was acquired early this year to "enhance margins for our waste-to-energy plants in New England. This provides us with some great new opportunities."

With the push in the recycling business toward consolidation, is there a concern that the federal government will wield its regulatory hammer? Sergi doesn’t think so.

"The beauty of the trash business and the recycling business is that it’s a local business," said Sergi. "It’s not telecommunications."

Sergi believes it’s a long ways off before the government begins to challenge consolidation in the recycling industry. For now, recyclers’ interactions with government frequently get down to the level of coordinating with a town’s mayor and school officials not to schedule pick-up runs when school lets out.

KTI’s focus on the lowest cost of service available in each community it serves will allow the company to integrate further additional value added waste processing methods without growing simply through acquisitions. This will allow margins to expand while providing enhanced capacity to its municipal and commercial customers.

KTI continues to enjoy the confidence of Wall Street. The company has made the right moves in the acquisition arena, while others have faltered. So, is there anything, the Asian crisis for example, that could rain on the com-pany’s parade?

Sergi acknowledges that the long shadow of the Asian crisis cannot be ignored. "The turmoil running through Asia clearly has depressed commodity prices," he said.

Bob Feigenbaum and Daniel Sandoval are former editor and senior editor, respectively, of Recycling Today.

Sidebar

UNDER THE KTI UMBRELLA

I. Zaitlin & Sons – Headquartered in Biddeford, Maine. The recycling company has two operations in Maine. In addition, the company operated two recycling offices in Massachusetts. The company also acquired a document destruction firm. The Massachusetts operations have been merged with KTI’s Charlestown (Boston) plant. (August 1997)

K-C International – One of the largest paper stock brokerage firms in the United States. Headquartered in Portland, Ore., the company has locations in Connecticut and New Jersey. They are involved in marketing a large percentage of the recovered fiber collected through KTI’s plants. (September 1997)

FCR – A processor and consumer of recovered fiber, especially old news. The company has 27 facilities in 14 states. FCR is divided into three divisions: U.S. Fiber, Inc., which recycles ONP into cellulose insulation; FCR Recycling operates MRFs that process post-consumer fiber and commingled material; and FCR Plastics Inc., which converts recovered plastics into new products. This year, FCR expects to process at its MRFs more than 600,000 tons of recyclables, produce more than nine million bags of cellulose and process more than 50 million pounds of recycled plastic. (May 1998)

Resource Recovery Systems – Acquired by FCR, the company operates eight material recovery facilities that process post-consumer fiber and commingled material in the eastern U.S. (June 1998)

Vel-A-Tran Recycling – Originally located in Billerica, Mass. The company specializes in the collection and marketing of high-grade fiber. It also has merged into the company’s Charlestown plant. (January 1998)

Prins Recycling – A once high-flying publicly traded recycling company. After falling into bankruptcy protection, KTI purchased their recycling plants in Newark, N.J., Charlestown, Mass. and Chicago. The recycling plants can handle in excess of 50,000 tons of recyclables each month. (November 1997)

Atlantic Coast Fibres – A large independent paper stock operation located in Passaic, N.J. The company has a strong export business and is heavily involved in the collection and processing of high grade recovered fiber. (June 1998)

Gaccione Brothers – A marketer of recovered fiber, primarily high grades, also located in Clifton, N.J. The last two companies will be merged to create a large high-grade paper stock operation handling over 250,000 tons of recovered fiber per year. (June 1998)

First State Recycling – A plastics processor based in Wilmington, Del. The operations will be integrated with Manner Resins and FCR’s plastics processing unit to create an operating entity for sourcing, transporting and processing recycled plastics. (August 1998)