Republic Services, Inc. (RSG) Earnings Call Transcript & Summary

So I'm happy to have with us today, Republic Services and representing them are Don Slager, the CEO; and Jon Vander Ark, the President.

And why don't we jump right in, if we can. So of course, everybody wants to talk about pandemics and pros and cons. I think of this as having kind of 3 phases, if you will. There was a, before, during and an after. And can we sort of frame what the state of business looked like before all this was happening? And then talk a little bit about the during and then what are we seeing in the after at this point?

Sure. I'll start out. Michael, this is Don. So we had a great finish to 2019, strong end of the year. We always talk about finishing turn forward exit speed. Q1 started out great. And we were on track to have, frankly, our best year in the history of the company in 2020. And then COVID-19 came out of nowhere. We found, sort of, the trough in April, if you will, as things changed within the business. And then we've since seen the rebound beginning in April and into May. And so we've tried to tell people through this is, remember, the hallmark of our business being stability and predictability. We had tried to highlight that when we spoke about what we thought our cash flow would be for the year on the Q1 call. And we still feel that today. And so we're now in recovery mode. When we got into this, we felt like we needed to keep the people stabilized, help them deal with the uncertainty of, sort of, life in general, get them through April and then start rebuilding in May, and that's exactly where we're at today. And we feel really good about the trajectory for the remainder of the year.

And when you think about the operating momentum, if you will, that month that during -- I'm assuming there's a big difference today and the after of sort of what that operating momentum feels like that there's more of a sense of normalcy today versus that the intensity that was needed for that 3- to 4-week period.

Yes. I would say this. Look, going into an unknown, I mean, we've lived through many disasters in our time, leading the business, hurricanes, tornadoes, forest fires, floods, pandemic is something you see in the movies, right? So we -- while we had a pandemic plan within our emergency preparedness plan, we've never really gone into it anything like we saw. So facing the unknown was a little bit difficult, and it took a certain amount of mind share away from our people. But our folks showed up, and that's the one thing about being a part of an essential business, essential services. Again, it adds that stability, that job security, if you will, for our frontline people, but also means you have to show up every day. So once we got things stabilized, we came to play every day. We had all the right safety equipment, the masks, everything we needed. We put on a great deal of sort of extra benevolent care with our frontline people. You've probably heard about the fact that we've brought a couple of meals a week out for our frontline people and their families. We had, if you will, some appreciation pay that we added with gift cards. We did a $20 million committed-to-serve program, which we can get into. Jon can talk about the details of that. But it really brought everybody sort of at the center, if you will, that kind of a great big huddle of, "Hey, we're going to get through this together". And then as things started to rebound, we saw the bottom. To your point, Michael, as we're coming out of this thing, people are frankly in a better mood, right? I mean, there's a little more stability. Overtime is coming back, a little at a time, a week at a time. And as States turn on, construction turns out, et cetera, just -- our frontline people just feel better. And what we saw, again, was when I talked about the power of the portfolio, 42 States, 230 whatever markets we're in, while things might be a little more shut down in some areas, things were still moving along pretty well and we're still seeing that today. But slowly, but surely, the country is turning back on, and we're well positioned to take full advantage, and that's what we'll do.

And when we think about the restart -- so a couple of things, I think, would be interesting to intend to learn or know. So commercial business starts back, decides to open, they got to turn the garbage business back on. So that's the good news is the service center comes back on. Were they coming on at prior levels? And then, I'm curious as you watched a pattern since the end of April to this first full week of June, what's been that weekly progression of data? What's it telling you?

Yes, Jon, you want to take that?

Yes, I'll jump in. Yes. First of all, I think it's important to know, most people didn't turn us off, right? So I think one of the surprises of this pandemic was that the floor was very, very high. Most people continued on with service because they needed it or even if they had a slight reduction in their waste flow or [ waste dead ] for certain period of time, that was relatively minor and not a big priority for them overall as they navigated through this crisis, right? They were taking care of their people, taking care of their customers, et cetera. So this wasn't big on their list. And to Don's point, we're starting to see economy turn back on, open back up. Most customers in the small container side who did suspend service are coming back at the same service level. Fewer coming on less and fewer coming on actually more. So we're seeing some really positive trends on that front. I'd say, in terms of the week-to-week progression, we're seeing steady progress continuing on to what we talked about in our call. We talked in the first quarter, we mentioned April was called the bottom at the end of April and sort of see a nice steady rebound. I think that trend continues.

And is there a difference both in service interval, so decreases versus -- or increases versus decreases as well as the trucks go across the scale every day. So you get a sense of, are the consumers showing an incremental level of engagement because the volumes increasing as well?

Yes. So I think one of the surprises of this was not only how few customers turned us off, but how heavy we remain, right? So rather than seeing -- you see a 50% or 75% drop in weights in small container, you'd say, that's a big concern, big risk. We're starting to see weights come back, right? They're not to where they were pre-COVID, and we wouldn't expect them to be given that there's still places that are largely shut down, but we're seeing a steady trend on that front. And in service -- in terms of service increases and decreases, again, the majority are coming back at the same interval. Right? There's more people coming back at reduced service than increased service. But again, the broad story is generally, people are coming back and are coming back into the same fashion that they were getting served pre-COVID.

So a slight change in -- go ahead, Don.

Well, keep in mind, while we had some service that was put on postponement or temporary reduction, that kind of thing, we also, obviously, were able to flex cost. And we talk about the fact that we've seen great safety numbers. Part of that due, of course, to low traffic, where we've seen high employee engagement, great attendance, virtually no turnover. And so not only managing costs but just leading the team, our field operating team did just an outstanding job of doing that. And then there were some other benefits like while we did certainly had the additional cost of residential volume going up. And those collection contracts don't really allow for an immediate change in cost or in price. We did also see the benefit of some of our landfills from third-party volumes, from municipalities who own their own fleets. So there are a lot of puts and takes in this process, and we could spend hours and hours, frankly walking through them all. We probably will give a little more color on the Q2 call. But there are a lot of benefits or a lot of positives that, sort of, came to the surface alongside to offset some of the negatives that we felt.

Well, and I was going to tease. So there's 2 items there -- you've anticipated one of my questions, but I want to tease out one of the benefits, I think, stands to reason that the IT investment that had been made the -- sort of, the nimbleness of it for you to be able to react. And then I think, and some of you here, correct me if I'm wrong, you all focused the customer with your IT investment early on, and you're coming back through and you're now still focusing on the truck with the RISE system, but that customer-facing investment proved its worth beyond -- in many basis for things that you learned as a result of this pandemic. Am I correct in that assumption? And if so, or can you add color to that?

Yes. Maybe I'll jump in. So yes, we had a broad number of call centers that some years ago, we moved to -- or a couple of years ago, moved down to 3 call centers. And that proved to be a really, really wise investment. A few bumps along the way as there always are, going from that many down to 3, but we were able to go from 98% to 99% of those employees working in the building to 98% to 99% of those employees working from home in about a 72-hour period with 0 interruption to customer service. So a real testament to both our customer service team and IT team that we are -- that we're able to move that flexibly without an integrated customer service system. So [ we were on salesforce ] and without consolidation like that, it would have been unthinkable for us to take 100 centers and move them at home without major disruptions in customer service. So that proved to be really, really valuable in the transition. And then our My Account, so that's our app customers deal with in our online platform, we just continue to see elevated engagements on that as we go through. And a big chunk of our small container customers primarily interact with us that way.

Okay. And then the other -- Don, you alluded to this, but I want to tease it out a little bit more. So there is more volume due to work from home. And there's 2 parts to this. I suspect the first month lots of things were happening behavior-wise that increased the volume a lot. And then we all did realize we're going to be home for a lot longer and settled into a sense of more normalcy. So things in that first 4 weeks are all of the list of projects that have not been done forever, all of a sudden start getting done and things end up in the curb. There are more people in the house, probably bought too much fresh foods and stockpiling only to throw stuff away. And then you figure out how to do your shopping and all of those things. So the part 1 of the question is, are we still up, but it's a lower high? And two, can you or should we be able to debunk the theory that because this number is higher, that's a margin compressing event for the whole company, and the answer to that is no, because there are offsets, and you alluded a little bit of that in the Landfill. But those are the 2 parts around the house.

Yes, I think you're right.

Go ahead, Don.

Well, let's talk about the portfolio again, as you said. I would keep saying that the power of the portfolio serves us very well. And certainly, we think about geographic, we think about large city, small city, we think about different lines of business. So secret that our residential business has -- had its challenges in recent years. One was CPI. We've started to come through that. One was recycling. We started to come through that. And then now we've got this pandemic issue related to volume. But you remember, these are customers that we've got long-standing relationships with. I would take the optimism side of that to say, while some of the weights have started to migrate down back to some moderately different new normal, they're not this big surge we saw. There will be some elevated weights in certain places because based on what's going on in the home and demographic, et cetera. But we're going to get to work, and we have been in contact with all of our contracts. Jon, and his sales team did a great job getting out there and getting in front of people. And we're going to start working it back. And if these weights stay elevated, we'll ultimately adjust our rates, either pre-contract and/or renegotiating time. And just in the same way we've tackled the other 2 issues I described, a faulty index and a broken recycling system, right? So these customers have shown in practice and boarded with their wallets, to stay with us and work it out because we do a great job and because we're somewhat of a utility. And Jon pointed out earlier, these prices per consumer that they pay per curb. The average homeowner pays, call it, $25 a month. And so a raise per household per month is still a very small amount in comparison to what they pay for things like Internet, cable and all their other stuff that they buy on a monthly basis.

Yes. Maybe let me add on to that. So yes, Michael, in terms of the panic-buying, and I think maybe a little bit of overconsumption on fresh, but also just packaging and all kinds of things people were buying that certainly showed up at the curb. And with everybody home for a period of time, we were heavy, that weight has modulated. Again, it hasn't come down as pre-COVID yet. But certainly on a nice trend. People see that, but they forget the other 2 parts of the equation which are offsetting for us. One is on the landfill site, right? We are -- have a number of customers who are municipalities and self-haul. So as they get heavy. That's incremental revenue for us on the landfill site from a solid waste standpoint. And also on the small container side, where we're light and the customer is light and has not changed service levels or canceled, which the vast majority of our customers didn't do, right? That's just the same revenue with less cost. So that's also a natural offset. So I think the thesis of we've gotten cracked on the resi side, it's oversold in the immediate term that, but to Don's point, long term, if this is a continued trend, we need to get paid for the work that we do, and we'll do a good job of that.

Okay. And then -- so that leads me to the next piece, because you've talked about CPI for years. And you're, what is it, about $815 million out of that $2.5 billion has been converted to an alternative index or a flat fee. April's CPI was really low. There's a whole kind of the thesis, oh, my gosh, we're going to be sub-1% for 2020. This monster is drag. I hope everybody understand how to put that all in perspective, and the lessons learned over the first time, you had to go through 6 years of terrible CPI and why everybody should take a deep breath?

Yes. Maybe let me jump in on that one. So we keep a high bar. We stood at $150 million, keep in mind. That's water sewer trash or that's 3% or above fixed. We've got a number of things outside of that, that would be like 2% fixed or 2.5% fixed. Or local CPI, for example, California's CPI historically would run much, much higher than the headline print CPI. So we keep a high bar because we're pushing the team to get to an index that we believe covers our cost and its fair over time. But the rest of the portfolio isn't on the headline print CPI. And also keep in mind the lag. There's a 12- to 18-month in terms of the timing of the pricing cycle. So this becomes really a limited 2020 event more of a 2021 event. But it will renew our energy and renew our charge to go on and make sure that we're getting paid for the work we do. Our employees live and work in the communities in which we serve and operate. So cities should have a vested interest in making sure that our employees get a fair wage and get a wage increase every year.

And I think you have to get a look at the history, as I said. I mean, the industry has the history of flexing and changing and adapting. Customers do come along. The competitive market adapts and changes to some new norm. We've got great examples. We talked about the 2. If you go back to the fuel recovery fee that we did, well, 15 years ago or more. When we went down that track, no one said it could be done and now fuel tends to be just a blip for us because we've got a built-in hedge. So look, the industry flexes, there's leadership and there's followership, if you will. We tend to be the tip of the spear on these things. We introduced the water sewer trash index to the industry, and now it's becoming more and more a norm. We set out to change the way recycling is dealt with. And this idea of a fair share, that is happening. And we made a long -- we did a lot of headway. So if there is a new sustained higher level of volume, it will adjust in our cost structure or it will adjust the way we price these businesses. Our whole system is really built on 2 really cost factors. One is time and one is weight, right? And so if the weight changes, the amount that we charge will ultimately change.

Okay. So let's talk about another item that some are trying to make a case that there's pressure, and I don't agree with it. So I think the garbage industry fully understands, has learned over multiple cycles, but not least a great recession, unit pricing does not come down. So price per yard, price per ton, the rate of change in price may tighten, but the unit pricing won't come down. Help everybody understand why that's possible and what you're seeing that gives confidence that maybe the rate of change narrows, but the unit price -- the base underlying unit price is in good shape.

Yes. I think the first -- the most important part of that is the context in which we operate, right? Such a large percentage of the work is either contracted or isn't really in play enough to bid. But unlike -- if you're selling consumer handsets, every unit you're selling every year, right? You're starting from 0, but we are a recurring revenue business. And the majority of our business is contracted or not out-to-bid. So the percentage of the business that churns every year is actually relatively small. Now in that context, we have not seen any broad-scale changes in competitive pricing behavior. There are always individual players in a select market who might be offering right, really low pricing that doesn't seem to make sense for us. Most of the time, that traces back to a poor local leader or a desperate salesperson, and that behavior gets curved relatively quickly. People can -- this is a business where there's costs and you need to price for those costs over time. And we certainly have taken a strong leadership position that we aren't willing to sacrifice chunks of price or volume, and we remain disciplined over time. And I think that's what we're seeing so far kind of in COVID. And as we start to recover in the economy, we're seeing more of the same.

And then on the cost side -- Go ahead, Don.

Yes, Look, I think there's stability in the ranks. I mean, look at our business, look at the leaders we have and look at the time they have and the seats they're in. When Jon first joined the company, over 7 years ago, pricing reported him, right? So he's very familiar with our revenue management system and the people and the processes and the controls that we have. If you look at some of the other leaders in other competing companies who own a lot of the landfill space, it's the same thing. I mean, people understand, I think. It's not like you've got a whole fresh crop of people out there who don't understand the economics or price elasticity or how the business works. And so to Jon's point, it's a capital-intensive business. It's a people-intensive business. You can't offset your inflation just through productivity measures alone because none of us are that sloppy, and so you have to price. And that's something we expect to continue to do. The other thing is that the contractual nature of our business and the -- we said it several times on the call today, but the overall small amount of per month -- the average commercial invoice is $300-ish. The average residential home pays $25 a month. I mean, these are not the highest cost they deal with. And because we're somewhat utility like, people depend on us. And if we're doing a great job, which we do. And again, through this downturn, we proved again the stellar service metrics through this time. People reward us for that. And I don't see any reason that that's going to change.

Okay. So to that end, on the cost side, do you think you can add the revenues at a faster rate than the cost will have to come back on?

Well, I'd say this that we certainly learned some things in terms of cost discipline. We are on a very good trend, both operating, labor and maintenance. And nothing like a crisis to heighten your attention and discipline. And so we continue to see really good performance in the face of some revenue challenges coming out of that. Naturally, as some of the revenue comes back, you're going to bring some costs back, right? There needs to be labor. There needs to be landfill development costs, et cetera. Exactly what rate we do that, we'll see, but we're certainly going to test ourselves.

Okay. And then cash collections, is that another area that has been pleasantly better than you might have thought, given the severity of the drop?

Yes, both bad debt and timing for receivables have both been very, very steady. And we've modeled a bit of an elevation kind of looking at past downturns in the economy, where we do see a little bit of elevated bad debt, modest to begin with, but we've had a very positive trend on that front. We've offered credit terms to some customers. As they get back on their feet and a very limited number of customers have taken us up on that offer.

Okay. And then that segues into free cash flow. So you -- in the 1Q call, you talked about greater than $1 billion. We were together recently doing some marketing virtually, and it was suggested in one of those calls that if the trends hold, maybe you might even get to the bottom of your original free cash flow guidance of $1.175 billion, how do you feel about all that today?

Well, we feel good. We just had a call with the team prior to this call to go through where we stand today. And so we feel very good about the free cash flow. And then back to the resiliency of this business, I think what people see is that, again, we talk about this hallmark being stability and predictability and get resiliency to that. We will prove that this business is as resilient as we've said it is, or even more so. And again, that's the nature of what we do for a living, we can go through all the reasons again. But we feel very confident that through and through, we're going to prove the investment thesis in this business, and that was one of the goals that we started out with. When this thing first became real, Jon and I -- I had told the story before, Jon and I sat in the room, and we talked about some of the goals that we had during this. And the first one was we were going to prove our value. We were going to take care of people, take care of customers. We improved our values were true and real and sustainable. And the second thing was we were going to prove that our investment thesis was solid, and we've done both of those things very well.

Okay. And the last one very quickly. You started the year with a pretty optimistic view about M&A. I get there may be some logistical disruptions. But is that overall M&A momentum still pretty much intact? And so as things reopen, we could be having a conversation at the end of the year that it finished on the momentum it began on?

Not necessary. Okay. I mean, at one point, we use a real -- we actually use [ Salesforce ] as a sort of our pipeline tool, if you will, to track deals. So again, we always point out, we've got a group of people that that's all they do when they wake up in the morning is think about M&A. They don't worry about landfill expansions. They don't worry about picking up the trash. They don't worry about collecting receivables. They just worry about the pipeline. And so they're hard at work. They had to work differently. They had to work virtually -- we had to slow down a little bit because doing physical due diligence is difficult, but that's starting to lighten up a little bit. But again, we always talk about, Michael, the reason people sell their businesses is not because they're bad businesses. It's because events occur in their life. They're getting to an age where they want to monetize their life's work. They don't have someone to leave it to, or it's a third generation. Just too many mouths to feed, they have no work ethic, that's unfortunately a true story. Sorry to offend anybody, but that happens all the time. Disease, illness, divorce, all these great things, COVID is one of those, right? COVID will probably bring a few deals to the table that may not have been there before. Now it's not going to be a bow wave, it's not going to be a whole new title wave of deals. But it's an event. And these events sometimes stretch the balance sheet. They sometimes cause anguish and how much time and effort it takes to run your business. And maybe there's an illness involved as well. So there will be -- it will be a solid year. We've got a great balance sheet. And with strong cash flow, we're going to be out there doing deals and buying good cash flow at the right multiple, like we always have. That's a big part of our story and a big part of how we create value for our owners.

Last one for me. ESG, environmental, social governance is becoming more topical in the investment world, both domestic and international. Can you frame for those who are participating, where you are in your initiatives around this topic?

Yes. Jon, why don't you give color, but let me start with -- we -- that's a topic that we take very seriously. It's a topic that we talk about at our Board level. We actually have a corporate responsibility and sustainability committee. It's our fourth committee on the Board. And we actually have a good story to tell. And I'll let Jon tell it.

Yes. I mean, we've been, for years, we've talked about creating value for all, right? Talking about the customers, right? Without them, we don't exist; our employees, as the second stakeholder; third, stakeholder are the communities, in which we operate. So community, small sea, local municipalities and big sea global community and what we're doing for the planet now and a 100 years from now; and then lastly, shareholders. And we've really put them in the priority because if we get the first 3 right, shareholders have done really well over time. So while I think ESG is getting more topical, it fits right in to how we've run the business, right? We're not a quarter-to-quarter player. We think about running it for the long-term and creating value for all those stakeholders. And have done a lot of good things in terms of sustainability and ethics and all things, again, that are now getting more print, but those have been, kind of, in our DNA for quite some time.

Okay. Well, with that, we've come to the end of our time. I want to thank both of you for participating. I do appreciate it, and good luck with your one-on-ones as you do those in the next day or so.

Thanks, Michael.

Thanks, Michael.

Bye, Don. Bye, Jon.