Taking on giants

When David went to confront Goliath, the boy carried five stones with him. According to many interpretations, this is because Goliath had four relatives who might seek revenge for his death.

In the case of Balcones Resources, headquartered in Austin, Texas, the company also brings five “stones” to its daily fight against larger companies and the forces at play in the recycling industry, Kerry Getter, CEO of the company, says. These five stones—employees, customers, environment, share and wow—form the foundation of Balcones Resources’ philosophy.

Kerry says, when it comes to employees, the company seeks to “hire the best,” having them work with Balcones rather than for it. This, he says, ensures Balcones’ employees “take care of our customers,” with whom the company strives to be transparent and proactive.

Kerry says, together, Balcones’ employees and its customers “can develop best practices to take care of the environment,” building and operating recycling programs that produce “measurable environmental and financial results that withstand the test of time and changing market conditions,” with the company sharing the financial risks and rewards associated with recycling with its customers.

The “wow” stone takes the form of innovation, such as robotic sorting, patents, trademarks and programs that are unique in the industry, he says.

These principles, combined with a willingness to abandon what isn’t working for the company, have helped Balcones weather market downturns throughout the years.

GETTING ESTABLISHED

Kerry and his wife, Becky, established Balcones Resources in 1994. While the company was new, Kerry had previous experience in the recycling industry.

His father, Richard, and brother, Rusty, owned All Waste Paper Recycling Inc., Dallas, where Kerry served as vice president of administration from 1986 to 1990. (Prior to that, he was a founding partner and director of Karolyi Gymnastics in Houston. Yes, that Karolyi. See “From Baseball to Recycling”.) While with All Waste, Kerry developed what he says was the first commercial single-stream recycling program in the state of Texas, which had the trademarked name Anything That Tears.

When Waste Management acquired All Waste Paper Recycling in 1990, Kerry worked as a regional recycling manager for that company until 1993 before parting ways and eventually establishing Balcones.

The company set up operations on East 6th Street in Austin and by the mid-1990s had created 31 jobs that were filled by low- and moderate-income residents of East Austin, Kerry says.

Just five years after opening, in 1999, Balcones began searching for a new corporate headquarters. “At that time,” he says, “the city of Austin and the Austin Revitalization Authority had begun an intensive effort to revitalize the East 11th and 12th Street corridors, an area which had experienced over 40 years of deterioration.”

Kerry continues, “Balcones made a financial commitment to become the first company to make a significant investment on East 11th Street,” sparking further reinvestment in the neighborhood.

GROWTH SPURTS

Balcones opened its newest material recovery facility (MRF) in Austin in 2012. The facility processes residential and commercial single-stream recyclables. “The $25 million, 100,000-square-foot facility is the largest investment in recycling technology by a private company in the Southwest U.S.,” Kerry says.

The Austin MRF features a single-stream processing system supplied by Bulk Handling Systems, Eugene, Oregon, which he says has the ability to capture more than 95 percent of the incoming recyclables.

“In Austin,” Kerry says, “we handle 60 percent of the city of Austin’s residential recycling program that is delivered to our facility and residential single stream for third-party hauling companies and 16 central Texas communities.”

In addition to its Austin headquarters and MRF, Balcones operates facilities in Dallas and in Little Rock, Arkansas, serving the I-35 corridor from Dallas to San Antonio and Arkansas. Balcones Resources also owns and operates Balcones Shred, which provides on-site and off-site product and document destruction services, with locations in Austin, Dallas and Little Rock.

MATERIAL MATTERS

Balcones processes 17,000 tons of recyclables per month across all of its facilities, with Kerry noting that paper and OCC (old corrugated containers) account for the majority of that material at 14,000 tons. The company processes and sells approximately 1,000 tons of plastics, 1,300 tons of glass and 300 tons of metals per month.

“The majority of our paper focus in on the high-grade material to supply tissue mills and OCC for board mills,” Kerry says. “We have significant supply contracts—KC (Kimberly Clark) Mexico for their tissue operations and IP (International Paper) for their corrugated operations in Louisiana and Oklahoma.”

Balcones’ recovered glass is shipped to Strategic Materials.

“We sell about 60 percent of our products domestically and export the balance primarily to Mexico, Latin America and the Far East,” Kerry says, adding that Balcones favors the Latin American market, particularly Mexico, over the Chinese market.

“We have a bilingual administrative and accounting staff,” he says. “Our material marketing folks speak fluent Spanish.”

Balcones has long-term supply contracts with mills in Mexico, Kerry continues, but sells its recovered paper largely on a spot-market basis to buyers in China.

Other consumers of Balcones’ recovered paper include America Chung Nam, SCA, Pratt Industries, Smurfit-Kappa and Bio Pappel.

Kerry says about 50 percent of the company’s plastics are brokered, while 50 percent are sold directly to companies that include Envision Plastics, CarbonLite, QRS and America Chung Nam.

“Regional market conditions have been poor the last 30 months; however, we continue to turn over our inventory an average of 3.5 times per month,” Kerry says. As of early May, he adds, the company was seeing modest improvements in pricing and in the speed of its inventory turns.

LESSONS LEARNED

Shortly after establishing Balcones (which means balcony or vantage point in Spanish and also is the name of a fault that runs from San Antonio to Fort Worth, Texas) the paper market collapsed.

“I think we learned a lot of lessons in the mid-1990s,” Kerry says. “We made a lot of money very quickly, and we lost a lot of money very quickly when the market crashed.”

As a result of this crash, Balcones worked to diversify its business, adding secure product and document destruction services. Kerry says diversification can act like an insurance policy in bad markets.

In addition to diversification, Balcones established fee-based processing, sharing the risks and rewards with its clients; reinvested in employees and operations; developed a coherent strategic plan; contracted sales for a percentage of materials each month; managed margins in a manner similar to how banks manage their net interest margins; and introduced the company’s pricing calculator. Balcones adheres to these practices to this day, Kerry says.

Balcones’ pricing calculator is a spreadsheet that includes income and expense variables affecting buying, selling and processing of material. The tool, which the company’s Chief Financial Officer Adam Vehik developed and maintains, ensures the company’s contract pricing reflects its actual expenses, Kerry says.

“We maintain strict adherence to those guidelines when pricing business,” he says. “It helps us maintain a margin, even in bad markets.”

Despite the challenges presented by the market in 2015 and so far in 2016, Kerry says, “We made money last year, and we are making money this year.”

To be able to understand its costs, Balcones must understand its incoming material, which is why the company has vigorously embraced audits of incoming loads. If incoming material deviates from what has been spelled out in that customer’s contract, Balcones adjusts its payment, he says, adding that it only takes 10 minutes for this information to get from the tipping floor to the hauler or generator.

“We pay aggressively for material and want to get conforming items in our facility,” Kerry says. “If I am paying for material, I need to be able to sell it.”

Running residential single-stream material in Austin has made auditing more necessary, he adds, noting the residue rate tends to be in the 12 to 15 percent range.

However, the residue rate tends to be much lower for the commercial material Balcones processes, averaging 5 percent.

INDUSTRY ISSUES

The depressed commodity markets that Balcones faced in the mid-1990s are again plaguing the industry.

After the boom times of the early 2000s, Kerry says some recycling companies appear to lack clear strategic direction and fail to understand their real costs or to practice restraint when markets are robust. Some companies and facilities also have clung to unrealistic financial models.

He says he also believes it’s difficult for companies to take advantage of economies of scale in light of the capital-intensive nature of the industry.

“We believe there needs to be further consolidation in the industry to realize measurable economies of scale,” Kerry says. “As part of our strategic plan, we are in search of companies who want to become part of the Balcones vision and family. We’re focused on Austin, Dallas and Little Rock.”

A recent example of such a move is Natural State Recycling, Balcones’ joint venture with Goldman Recycling in Little Rock, formed in the spring of 2015. Kerry says many recycling facilities operate in the city, though it’s a small market. By forming Natural State Recycling, the partners create economies of scale they would not be able to achieve individually, he says. Balcones is managing partner of the venture.

Despite joining forces with Goldman Recycling, Kerry says Balcones’ Little Rock facility, which processes recyclables for commercial customers, still operates at 50 percent of capacity. In fact, Balcones has excess capacity across all three of its plants.

However, Kerry says, it’s difficult to build economies of scale one customer at a time, which is why the company’s board supports acquiring local competitors.

“Over the years, we’ve been fortunate to operate under the guidance of a very sophisticated board of directors who have taken a long-term view of our industry.”

Kerry says Balcones has a list of companies it is interested in and has started talking with a few.

“We believe we are buyers and not sellers right now,” he says, adding that Balcones is on a mission to pursue acquisitions. “Fortunately, we are in good enough shape financially to have a variety of options in that regard.”

The author is managing editor of Recycling Today and can be contacted via email at dtoto@gie.net.