Going Public

Back in 1969, I helped lead the waste industry into the public equity market with one of the industry’s first public offerings. In the ensuing years, many of my customers and peers came to realize the benefits of being public, which set off a wave of public offerings throughout the industry. It was clear to this group that the public equity market provided a favorable venue for companies wanting to raise capital for growth.

The players that went public took advantage of their access to capital to become consolidators in the industry, acquiring smaller, local mom-and-pop operators who did not have sufficient resources to expand.

INSIDE THE SCRAP INDUSTRY
Today we are seeing the exact same dynamic in the scrap metal recycling industry. Like waste hauling, our industry is populated by thousands of small, family-owned businesses that are strong in their local markets but that lack the capital to purchase the machinery and equipment they need to take their businesses to the next level.

Today if you want to upgrade the quality of your scrap, capture additional profit margin or increase your annual tonnage, you need significant capital. In addition, in light of rising commodity prices, scrap recyclers need an increasing amount of working capital to fund day-to-day operations. Where better to access this needed capital than through the public equity market?

Only a handful of publicly traded scrap recyclers are in operation today. Chicago-based Sims Metal Management; Portland, Ore.-based Schnitzer Steel Industries; Cranford, N.J.-based Metalico; and Louisville, Ky.-based Industrial Services of America (iSA) are the four with significant scrap recycling operations. Of these, ISA is the only pure-play scrap recycler. Each of the others has business interests in other areas, including steel mills, auto parts yards and other operations with different financial profiles from commodity-based businesses.

As a pure-play scrap recycler, ISA is committed to organic growth in the commodities business. For example, in January 2009 we entered stainless steel and high-temperature alloys recycling by acquiring the inventory of Venture Metals. By expanding into a new commodity, we tripled the size of our company in two years while staying focused on scrap recycling.

At ISA we continuously seek partnerships with other recyclers in our general geography that can become our trading partners and increase the annual volume of metals we buy and sell. That kind of scale lends itself to more operating efficiencies and to higher profit margins.

LIQUID CURRENCY
The public equity market is an excellent venue because, in addition to providing access to capital, it provides liquid “currency” that companies can use to form strategic partnerships, make acquisitions and compensate employees, as well as for other purposes. It also allows founding shareholders flexibility with respect to estate planning.

At ISA we use shares as long-term compensation for employees. We also used shares to acquire our stainless business from Venture Metals.

Making stock part of employees’ compensation gets our organization focused on maximizing profit margins and earnings per share. The stock has increased in value significantly as a result of growth of the stainless business, so the sellers of that business, who now work for ISA, continue to benefit through their ownership of ISA shares.

Participation in the public equity market also enhances the visibility of our industry, which is good for all of us, whether public or privately held.

INVESTOR EDUCATION
However, we need to educate public investors that they shouldn’t look at quarter-to-quarter results from public scrap companies. Metals prices are volatile and shipments can be lumpy, both of which cause choppy short-term earnings for processors. Instead, investors should find public scrap companies that are operationally sound and buy them for their long-term prospects.

If you believe in the long-term growth of world economies and that natural resources are finite, then recycling makes sense. We are very confident that the long-term growth and earnings trend in our business is upward.

If more scrap recyclers come into the public market, we can educate investors about our industry. They will see that they can make a lot of money by owning a piece of our companies, just as we have over the years. But they have to be patient and stay focused on annual performance in order to benefit from the global commodities shortage.

The public market is not for everyone. Just as the visibility into the business can improve access to capital and provide liquidity, it also demands close scrutiny of operations. Many family-owned businesses prefer to protect their privacy. That may be a preferred path for companies that don’t need additional capital for growth.

However, if you want capital for growth, the ability to reward your employees with ownership in the company and a mechanism for long-term wealth creation, then being a public company may be an attractive option.

Harry Kletter is founder, CEO and chairman of the board of Industrial Services of America (ISA), based in Louisville, Ky. More information on the company is available at www.isa-inc.com.