Republic Services executives discuss M&A activity, recycling contracts and more

Republic Services of Phoenix announced its second-quarter financial earnings July 25, reporting revenue of $251.5 million for the three months ended June 30.

More second-quarter highlights include:

• On an adjusted basis, net income for the three months ended June 30 was $254.1 million, or 79 cents per diluted share, versus $239.6 million, or 73 cents per diluted share, for the comparable 2018 period.
• Cash provided by operating activities was $582 million and adjusted free cash flow, a non-GAAP (generally accepted accounting principles) measure, was $272 million.
• Earnings per share (EPS) was 78 cents per share. Adjusted EPS, a non-GAAP measure, was 79 cents per share and included a 4-cent benefit from a lower than expected effective tax rate, which was partially offset by a 3-cent noncash tax-related charge.
• Core price increased revenue by 4.6 percent. Core price consisted of 5.5 percent in the open market and 3.1 percent in the restricted portion of the business.
• Average yield was 2.8 percent.
• Selling, general and administrative (SG&A) expenses were 10.1 percent of revenue.

Don Slager, Republic CEO; Jon Vander Ark, company president; and Chuck Serianni, Republic chief financial officer, hosted a conference call July 25 to discuss the earnings. Here are the highlights:

Slager on the quarter overall:

"We are extremely pleased with our second-quarter results, which clearly demonstrate the underlying strength of our business.  … We expect the strong momentum in the first half of the year to continue."

Vander Ark on pricing:

"The pricing environment in the second quarter remained strong. ... Our pricing continues to benefit from the use of our tablet-based pricing tool. Through this tool we are monitoring price elasticity and adjusting accordingly. …

"We continue to successfully convert customers from Consumer Price Index- (CPI-) based pricing to a waste-related index or a fixed-rate increase of 3 percent or greater. These waste indices are more closely aligned with our cost structure and continue to run higher than CPI. We have now converted $715 million, or 29 percent, of our $2.5 billion CPI-based book of business."

Slager on commodities:

"During the second quarter, commodity markets continued to be challenged. We overcame these headwinds by focusing our efforts on things we can control, in particular, transitioning to a more durable, economically sustainable recycling business model."

Vander Ark on commodity recycling:

"We are proactively renegotiating our municipal recycling collection contracts. We are ensuring they reflect the true costs of recycling and include a more equitable risk-sharing arrangement. We've now secured price increases from approximately 29 percent of our municipal recycling customers, up from 21 percent in the first quarter. And finally, we're increasing our customer's willingness to pay by providing superior service and leveraging technology to make it easier for them to do business with us. …

"During the quarter, recycled commodity prices continue to decline. Our average price per ton decreased 14 percent to $78 versus $91 in the prior year. This resulted in an approximately $8 million ... headwind versus the prior year. We offset the impact of lower commodity prices through additional pricing and increased recycling revenue in the second quarter by 6 percent versus the prior year. Our ability to increase revenue and overcome these headwinds demonstrates that we are transforming the recycling business into a more durable economically sustainable business model.

"In our recycling processing business, we have now secured price increases on approximately 55 percent of our contracted volumes, up from 34 percent in the first quarter. In our collections business, as I mentioned earlier, we continue to proactively secure price increases and renegotiate our municipal contracts. Additionally, in the collection open market, our recycling processing charge is enabling us to recover our processing costs and minimize volatility from changes in recycle commodity prices.

"This charge contributed an additional 40 basis points of pricing not reflected in average yield. If included, average yield would have been 3.2 percent. These results demonstrate that our customers do value recycling and are willing to pay for the service." 

Slager on acquisition activity:

"In the second quarter, we invested $129 million in acquisitions to further enhance our leading market position and drive growth in free cash flow. Our currency pipeline continues to be strong. As a result, we now expect to invest approximately $550 million in acquisitions this year. We estimate these acquisitions net of divestitures will provide 125 to 150 basis points of top-line revenue growth in 2019."

Vander Ark on landfills and volume:

"We regularly reassess our landfill pricing to ensure we are covering the total lifetime cost of managing the ways to accept. …

"Total volume in the second quarter increased 10 basis points versus the prior year. Underlying volume growth was 80 basis points after normalizing the impact of intentionally shutting certain volumes. This included work performed on behalf of brokers and non-regrettable contract losses in residential collection business."

Slager on recent accomplishments:

"Most recently, Republic Services was named to Forbes List of Best Employers for Women. I'd like to thank our team for their relentless efforts to create a more inclusive culture and an environment in which all individuals feel welcomed and valued."

Vander Ark on expenses:

"Labor expenses [are] benefiting from our focus on process and running efficiencies as well as our efforts to increase employee engagement; turnover decreased versus the prior year for the second quarter in a row. Maintenance expense continues to benefit from our One Fleet standardized maintenance program."