Themes From Environmental Industry Summit 2016

Despite political uncertainty and challenges facing oil and gas companies, environmental services executives are confident about the industry’s growth prospects as sustainability trends continue to strengthen.

Wednesday, March 23, 2016

At the 2016 Environmental Industry Summit, held March 9-11 in San Diego, executives from across the environmental services industry met to discuss some of the most important topics facing the industry today. Key themes affecting the industry’s outlook for growth and profitability were topics of conversation in both the sponsored events and the halls. Not surprisingly, focus areas included continued growth opportunities, the political climate, the 2016 election cycle, end-market dynamics, the importance of culture within a company, and merger-and-acquisition opportunities, themes, and decision making.

Despite uncertainties, participants were positive about the environmental services industry’s outlook and growth prospects over the next several years. Based on the panel discussions we attended and numerous conversations we had with executives from leading environmental services firms, we provide an overview of the most important themes from this year’s Environmental Industry Summit.

Companies anticipate continued growth: Executives from environmental consulting and engineering firms at the conference were optimistic about the industry’s growth prospects. Executives’ confidence is based on their companies’ strong internal performance and continued positive outlook. According to a survey by conference host Environmental Business International Inc. (EBI), publisher of Environmental Business Journal, the environmental industry grew 5.1% in 2015, more than double GDP growth of 2.5%. This impressive growth is expected to continue; the EBI survey anticipates 2016 industry growth between 4% and 5%, compared with GDP growth 2.4% to 2.6% over the next three years. Corporations’ and consumers’ increased focus on sustainability is contributing to this growth.

Environmental Industry Growth

Corporations are increasing their spending on environmental services because of an evolving regulatory landscape and changing attitudes toward sustainability. There are several key drivers of this trend: i) companies are recognizing higher penalties than in the past for environmental non-compliance; ii) companies are actively mitigating risk to their brand from environmental liability; iii) companies are looking to show regulators, customers, and peers that they are leaders in sustainability; and iv) the patchwork of environmental compliance between federal, state, and local regulation is increasingly complex and companies are acknowledging that compliance is not a core competency; thus, companies are increasingly looking to outsource compliance to dedicated specialists.

Political uncertainty will not undermine long-term sustainability trends: The environmental industry is directly affected by federal regulations and budgetary decisions. The unpredictable and polarized political climate of 2016 creates a degree of uncertainty throughout the environmental industry. Firms need to manage through this near-term uncertainty, but it does not pose a major threat to long-term trends related to sustainability and environmental protection. Regardless of who is elected president or which party controls Congress after November’s elections, it is highly unlikely that major existing environmental laws and regulations will be legislated away. For example, the EPA is not at risk of elimination, despite what candidates may claim on the campaign trail.

EBI board member Andy Paterson highlighted a view of the political climate as “red states, blue cities…and purple solutions.” Meaning that regardless of political differences, there are middle-ground solutions that can be agreed upon.

Bullish views on infrastructure spending and end-market growth: Executives’ confidence in the industry’s growth prospects stems largely from the attractiveness of end-markets and dynamics facing the industry. Increases in federal infrastructure spending are likely to occur, a dynamic that is highlighted by the American Society of Civil Engineers’ (ASCE) most recent Report Card for America’s Infrastructure. In the report, the ASCE graded the country’s infrastructure as a D+ and estimated that $3.6 trillion in investment will be needed by 2020 to “maintain a state of good repair.” The water crisis in Flint, Michigan, which one industry executive defined as “the tip of the iceberg,” is a prime example of failing infrastructure. Spending, however, is catching up to the need, as evidenced by the $305 billion highway bill signed into law in December 2015.

U.S. Infrastructure Investment Needs (2013-2020)

The decline in oil prices that began in 2014 has created stress in the energy industry. Despite challenges facing the energy industry, oil and gas companies will remain major consumers of environmental services, particularly in the areas of midstream and downstream. As oil prices gradually recover, upstream spending will increase, driving a third leg of demand for environmental services. According to a survey by EBI, specific service categories within environmental services include water recycling/reuse and IT/EMIS software.

Culture and the appropriate team are essential to success: One theme that we heard from numerous executives across panel discussions and private conversations was the importance of culture and human capital in building a successful company. Industry executives highlighted the need to create a culture that empowers employees to deliver outstanding work. This means that companies need to devote time, energy, and money to hiring the right people, giving them the tools and training they need to be successful, and then staying out of the way. One executive went as far as to say, “We do not hire skills; we can teach that. We hire great people.”

Acquisitions remain a central focus of buyers and sellers: Two conference sessions focused on acquisition trends in environmental services. Buyers are appropriately focused on leveraging acquisitions to expand media categories, service categories, geographic reach, and management depth. Sellers are equally focused on finding the right long-term partner for their business and employees. One theme that all agreed on was the need for integration and the need to approach integration early in the acquisition process to ensure that important questions are addressed and topics discussed.

Before topics of a buyer’s integration can be addressed, sellers need to identify the themes that are central to their business and be prepared to address the themes with potential buyers in detail. An integral part of getting ready for this process is assembling the appropriate team of financial, accounting, and legal advisors and relying on them for advice and guidance. Building this team is similar to building the team that was discussed above.

William Blair is a leading investment bank with an established M&A practice and deep experience in environmental services; the team has completed eight sector transactions since 2014 across M&A and capital markets. Having guided similar companies through successful transactions, William Blair knows that the importance of planning cannot be understated. These issues need to be addressed early in the M&A process to help ensure the greatest possible success from the transaction.

To learn more about these and other trends that are affecting M&A activity in environmental services, please do not hesitate to contact us.

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