Green auto recycling not for faint of heart: AADCO Automotive's ambitious plans have outstripped its resources

National Post
Tue 17 Feb 2004
Page: FP08
Section: Financial Post: Canada
Byline: Paul Brent
Source: Financial Post
Glenn Lowson, National Post

Charles Hodgkinson went from being an investor to running AADCO Automotive after leading a group that invested $2- million in the firm.

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It truly is not easy being green. Just ask Charles Hodgkinson, who led a group of investors that put $2- million behind auto recycler AADCO Automotive Inc. a year and a half ago, only to find himself running the company a few months later and engaging in a corporate cleanup.

“Job one for me, unfortunately, was I had to downsize the company rather quickly to get it to cash flowneutral,” said the former media executive. “That resulted in eliminating 47 positions and closing one [of two] plants.”

Canada’s only “green” auto recycler — nothing goes into landfills or leeches into the soil — the company last year suffered from ambitious plans that outstripped its financial resources. “Unfortunately for those who launched the firm, they were a little ahead of their time in some respects,” said Mr. Hodgkinson. “They built a terrific infrastructure but built it on a debt basis and therefore got themselves in trouble with the marketplace. Revenue did not materialize in the timeline they afforded.”

AADCO is unique in the “mom and pop” business of stripping wrecked cars in that it operates a dismantling line process, an assembly line in reverse. Unlike traditional yards, all dismantling and auto parts storage is done indoors, resulting in superior-quality parts and reduced risk of environmental contamination.

Just five years old, publicly traded AADCO has encountered other hurdles. It has been storing hundreds of tons of automobile plastics — everything from dashboards to hoses — which it has been expensively storing at its main facility. Faced with a $100,000 bill to discard stuff nobody in North America can handle, the company has found a recycler in China that will take the material free of charge. Eventually AADCO might even get a few pennies a pound for its currently unrecyclable scrap.

The real money for AADCO and traditional junkyards comes from almost new parts from vehicles that have met an untimely end out on the highways and byways. “Most of these cars that we disassemble are perfectly good cars that were unfortunately driving down the road one day and encountered an unfortunate, untimely end,” said Mr. Hodgkinson. AADCO does not resell items such as brake calipers and shock absorbers but is in the business of giving new life to engines, transmission, trim parts such as grilles and lights, and doors and windows.

“We want to become not only the largest supplier of [like, kind and quality] parts in the business but also to do it in a fashion where we are not damaging the environment or sending anything to landfill,” Mr. Hodgkinson said.

The company, which had $4.1-million in revenue in fiscal 2002 and disassembles about 100 cars a month, could handle and is aiming to disassemble 10,000 cars at three shifts a day. AADCO’s downsizing hit its bottom line, resulting in a loss of $7.5-million, or 42 cents a share, for the year ended June 30, 2003, up from a year-earlier loss of $3.4-million (39 cents). (In its first quarter, it reported a break-even performance versus a year-earlier loss of $966,072, or 10 cents a share.

AADCO said it is likely to benefit from a new environment awareness in Ontario. The new provincial government has begun inspecting yards for the first time in decades and a number of municipalities are looking for guarantees that materials such as lead and mercury are not leaking from rusting autos.

“I suspect that what we are going to see is a lessening of yards out there,” said Mr. Hodgkinson. “Let’s face it, most yards have originally started out in [rural areas] and then the cities grew around them.”

Canada and the United States are light years behind places such as Europe and Japan, where strict end-of-life laws make automakers responsible for their products after they pull off the road for the last time. Japan, which aims to be the leading auto-recycling nation, continues to implement stricter requirements. Its current goal is to make all vehicles 95% recyclable in terms of weight from the current 80% requirement. When Japan’s tough Law on Recycling of End-of-Life Vehicles (ELVs) is fully implemented in January, 2005, automakers and auto importers will be required to collect three items notorious for being poorly recycled: CFCs, air bags and shredder dust. Owners of the ELVs will be slapped with the disposal costs.

“There’s tremendous upside potential as the environmental issues related to end-of-life of vehicles become increasingly important. Getting there is the problem,” said auto industry consultant Dennis DesRosiers. “There doesn’t appear to be anywhere on the horizon end-of-use legislation to force the proper handling of vehicles at the end of their life.”

With growth in the parts business outstripping the recycling segment, AADCO is leading a push to get body shops to use more LKQ used parts in the repair process, which also will likely find an ally in provincial governments’ new focus on keeping soaring insurance costs under control.

Insurance companies are looking at such things as the number of days a customer is put in a rental car while a vehicle is undergoing repairs to the use of LKQ parts.

AADCO, which mainly strips down cars that are three to eight years old, has 120,000 parts in stock. It sees a market made up of insurers eager to use cheaper parts for repairing smashed cars, auto body shops and do-it-yourselfers who want an easier way to find quality parts.

Illustration: Black & White Photo: Glenn Lowson, National Post / Charles Hodgkinson went from being an investor to running AADCO Automotive after leading a group that invested $2-million in the firm.