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

We'll move right into our next team. We've got the honor to have Republic Services here today. We've got CFO, Brian DelGhiaccio. I mean the middle -- I mean the middle work well. I'll sit in the middle, like a hand. I think that probably worked well. I love having some good Republic people around me. Yes, we've got Brian DelGhiaccio, CFO; and Stacey Mathews, Investor Relations, Republic's the second largest waste service provider in the U.S. operating in 41 states. Brian joined in 1998 and holds the -- has been holding roles of increasing this possibility across the business. Stacey joined in 2009 and took IR responsibilities in 2020. Republic has pro forma 320 million shares outstanding trading around $133 million for $42 billion market cap and $12 billion of net debt pro forma. Welcome.

Well, let's just -- let's start off with -- maybe just to start off with -- we talked about a little bit of waste management, but fuel, what's your sensitivity to changes in fuel prices in past with the customers? Do you guys have a different model? Or is it similar? Or could you talk to us a little bit about.

Yes. So we have a fuel recovery fee, which absent a 1- to 2-month lag, we recover essentially all of the change in fuel cost. So the 1- to 2-month lag is, I think, as Ed mentioned as well, we've got the same phenomenon. Most of our customers we bill in advance, residential as well as the small container customers. So it takes 1 to 2 months for that to get into the bill. But after that lag, you're recovering 100% of the dollars I think I had made the point as well, though, there is an impact on margin, right? Because when you're adding revenue and cost at the same dollar amount as fuel costs increase, we see some headwind on margin. And conversely, as fuel costs decrease, we see a little bit of a tailwind.

And just to add for reference, a $0.20 change in the average price of diesel equates to about $26 million of both revenue and expense, as Brian mentioned, on an annualized basis.

Great. Maybe let's just jump into maybe the most topical thing for Republic is the I saw the announcement this morning. Thanks for sending me that I was a little late to the game, but US Ecology the acquisition. Maybe we could talk a little bit about what the strategic rationale? I think there are a lot of questions about that. And you could sort of allude to that a little more?

Yes. First, we're already in this business, right? So we got into Environmental Services in a bigger way when we bought the U.S. assets of Tervita back in 2015. Now Tervita at the time was primarily in the upstream oil and gas, but they also had a downstream business, more on the petrochem side, some of the implant services. And over time, what we realized is with the volatility in drilling, right, that we actually look more at that downstream side, and we said we're really good at this stuff, right? We can do this. We have the core capability. So it's material logistics, it's transportation, it's handling, it's safety, it's ultimate disposal. And so we really started building out that business quietly did a number of acquisitions, more in that Gulf area, [indiscernible] we bought a company called Sprint, which did container rental and customers valued, right, that single provider of their waste needs, right? So we were already in these plants, we were already handling a lot of these customers, solid waste and recycling needs and they said, why can't you touch this other stuff? Why can't we have that one single provider? Because again, when you think about a lot of these customers, they're larger customers, it's mostly on the industrial manufacturing side, and they want to put their waste in safe hands, okay? So did it in the Gulf last year. You guys probably know around here a company called ACV. We bought that company, and we closed that in what August of last year and done a number of tuck-in acquisition. They're primarily in the Northeast. New Jersey, New York, other places really through the Mid-Atlantic. And then really, if you take a look at what we're really good at on the solid waste side is that vertical integration, right? So we want to control the waste from the point of collection all the way through to the ultimate disposal. And when you look at US Ecology, they have one of, if not, the best footprint right, of hazardous waste landfills. And so it was a perfect fit where we had the front end, the field services side. Now we could vertically integrate into those TSDFs and those hazardous waste landfills. I mean just to put it in perspective, there's 21 hazardous waste landfills in the U.S. and Canada, US Ecology has 5, okay. 36% of every single hazardous waste tons, get disposed at one of their landfills, #1 market position in hazardous waste disposal. So now when we think about a full national platform of that disposal infrastructure, TSDFs [indiscernible] recycling capabilities and the landfills, that's how we create outsized profits in the solid waste business. right? We control the volume and then therefore, we can sit there and we control our own destiny, and that's what we want to say. If you're just a field services provider, you're beholden to disposal prices, if you're just a disposal operator, right, then you don't control the volume. And that's why we want to control both.

And then I guess the second question is the ability to -- obviously, it's a different margin profile, I know that's not the maybe not the end state, but what is the ability to improve profitability at US Ecology?

Yes. Well, first and foremost, I mean we built this deal. And the only thing we paid for were line of sight, $40 million worth of duplicative cost synergies, right? That's what we put into the model. There are opportunities well above and beyond that, cross-sell opportunities. Just look, I'll be honest with you take a look at what we did in the solid waste business, and I've been doing this for 23 years. If you look at the margin profile of the hazardous waste business right now, it's not too dissimilar to where solid waste was 20 years ago, okay? And again, there's a lot of analogs here, right? From a solid waste perspective, those that had landfills used to view, right, from a go-to-market strategy of how do I secure the unit right? Because that next ton in the landfill is your most profitable tone. But each stage of the value chain collection to transfer station to landfill was not priced on a stand-alone basis and therefore, generating an appropriate return for each of those services you were providing. That has evolved, okay? The market dynamics have gotten better. Certainly, we've been a price leader in that space to be able to say, regardless of whether we're going to internalize it, we want to make sure that if we're going to put that collection truck to work, and we're going to hire that driver. It's got to earn a return that's attractive to us on a stand-alone basis, regardless of whether we're going to internalize it or not. Hazardous waste base is not quite there yet.

Brian, just a quick hitchhike on that. you're closing -- you got approval yesterday, right?

Yes, the time lapse on the DOJ, so basically it's negative assurance.

Basically, I'm assuming for modeling purposes, not that I'm doing it, that's effective on a cash basis on May 1.

Yes, the long pull in the [indiscernible] is the shareholder vote, and I don't know how long of a pull that is. So April 26. So yes, that you could see a clue.

So basically, you'll have 8 months this year, 12 next year.

Yes.

Within -- I mean the US Ecology business has a lot of sub businesses. Are there businesses inside of it that I remember some of the acquisitions they made, are there business you prefer over the others? Could you maybe talk through those businesses briefly, but then discuss sort of the preference or what you do like what you don't like or you want to build more of?

Sure. I mean, so for those that followed their story, right, they bought a company called NRC in 2019. NRC came to market through a SPAC. Private equity owned came through a SPAC. And then U.S. college bought that and paid a hefty premium. There were parts of that business that were probably put together to give it a higher revenue profile, okay? There are some things that we're going to put under immediate strategic review. And if it's not connected to the customer, remember, we went into this business because our customers were saying they want a single provider, okay? We don't have any solid waste customers outside of the U.S. And again, I'm kind of throwing Canada into that let's just say, North America, okay? But Turkey and the U.K., we don't have customers there. So those are the sort of things we'll look at pretty hard. And again, some of it could be very good business, we may just not be the natural owner.

And then maybe does this mean that there's no by doing this large acquisition that's a little bit outside your -- I know it's -- you're fully in your your-- but maybe not in your core business, is there no remaining solid waste M&A? Or why give me some reasoning for that?

I would say it's the exact opposite. We're more bullish in solid waste than we have for the last decade as far as deals that can be done. So we talked about $500 million-plus of investment in acquisitions this year, excluding US Ecology, substantially all of that is going to be in solid waste. So we have a robust pipeline. We've put the resources closer to each of the markets in order to sit there and to build some of these relationships. So we're not out of room, right? And again, we've been talking about this, that this is not an either/or approach, environmental solutions or solid waste. This is a both and. And so you're going to see, again, I think over the last couple of years, you've seen that we've been from an investment perspective and acquisitions, we've been more acquisitive and we would expect that to continue for the next several years and again, with a nice blend between both solid waste and environmental solutions.

And I think you brought up on the call opportunities -- further opportunities in Environmental Services. Can you talk about maybe what else is out there? I mean, obviously, US Ecology was the largest? Or how is that market? What's the pipeline there maybe?

Yes, sure. I'll take this one. So US Ecology gives us that national platform and Brian talked about where we were geographically mostly in that Gulf Coast and now in the North West after ACV. But with the national platform our field services, we can do further smaller tuck-in acquisitions to really complement either the service offerings or the geographic footprint of those.

The waste in that business travels pretty far, right, because the disposal costs are pretty high. So it moves. So we've got -- from a landfill perspective, we'll have that full national presence. There's a couple of pockets that we could further densify. And again, when you -- again, the analogs are there to the solid waste business, what creates a profitable route is a dense route. And so the more you can densify and the more you can reduce some of that windshield time and again, take minutes out of the business, the more profitable you are.

Yes. I guess the dynamics are a little bit different, but still same concept.

Same concept.

Maybe over to the pricing inflation question. You talked about your guidance this year with pricing. Is there upside to that? Maybe you could go into that a little bit?

I'll answer that and give a little bit of perspective. The short answer to your question is that there's an upward bias on that number, okay? So let's kind of park that. One thing I think that investors should know is that within the space, the participants disclose their pricing metrics different ways, okay? So average yield, which is what we disclose is change in price per unit. So it's not just the effectiveness of your pricing program, it further takes into consideration on an average price per unit, the impact of new work and loss work, okay? So it's all in. So when you think about your cost inflation, the best way to sit there and measure that spread is average yield. Because if your average yield is above your cost inflation, you're going to have margin expansion. If it's below, then you're not, right? Because the cost per unit is relatively similar customer to customer, okay, except with some few exceptions. Core price, which we also disclosed, is the effectiveness of your pricing to your same-store customer base. So our core price is running 5.5% plus, okay? There are some in this industry, I think you're going to hear it from them next, that only disclose core price. So when you start hearing internal cost of inflation that's much high, we get a lot of questions that sit there and go, oh, we're hearing like 6%, 7% internal cost of inflation with 3.4% yield, is that a problem, okay? Well, no, first of all, our internal cost of inflation and again, everyone is going to be a little bit different, we're kind of seeing kind of mid-3% -- low to mid-3, okay? And most of our cost inputs, and that's excluding fuel, most because we have the fuel recovery fee, most of our cost inputs are people costs, and that's about what we're seeing. So again, the reason I mentioned this is that when you're comparing across waste management also disclosed average yield. We disclosed average, yield Connections does not. So again, just to put that into perspective, when you hear all these different inflationary-type cost numbers at 3.4% yielding, I talked about an upward bias because of that number. At that level, exclusive of productivity, we felt confident we were going to generate margin expansion in '22 on that alone, productivity only adds.

And then maybe '23 -- what are you seeing in '23?

Well, look, '23, again, a big portion of our business, let's kind of break out just big books, right? Half of our business is open market, where we don't really have any pricing restrictions and half of our has some sort of contractual pricing element, right, majority of which were tied to some sort of index, CPI, water sewer trash, garbage trash. As well as we had some fixed cost increases and there's some where you do a rate review where you're guaranteed some level of profitability. For the last decade, right, we've been operating environment where we've been paying our people a fair wage increase, right? 2.5%, 3%. CPI when it was running with a one handle on it or lower, right, we were not able to sit there and cover our cost on that 50% of our business because you're getting a 1.5%, let's say, price increase because of CPI and you're paying your people 2.5% or 3%, right? That spread doesn't work out that well. Right now, right, what we're saying where CPIs are running pick your number, high 7s type thing, right? Our costs are not increasing at that level because again, you look at our cost structure, housing is interesting. That doesn't impact our cost structure, right, or the used car prices, right? That doesn't do anything for us. So CPI is actually running above our internal cost of inflation. And so as you look at the CPI prints from '22 and you think about our 12-month lag, right, because you have the CPI print and then about 12 months later is when the price increase goes into effect. So if CPI is running at 7% for '22, we'll start to see that price increase in '23, 60% of our contracts renew in the second half of the year, 40% in the first. So this sets up '23 well with rollover, quite honestly, into '24, certainly relative to the last decade when we take a look at these prints.

Yes. And I think there's a reason why I line up -- I'll ask you this question as well. Your churn as well as that record lows. What is the -- when does price strategy need to be reviewed? When does it become an issue where you start seeing some churn?

Look, I mean we're running about 95% retention, so 5% churn on our permanent units of service, which Tony as you mentioned, is an all-time record for us as far as that retention. This is a retention game. When you take a look at our business, okay, right? Because the customers that stay with you the longest are the most profitable customers. right? And again, you bring a customer in and you bring them in, they're profitable, but marginally profitable. And with those core price increases over time, they become a very attractive customer, right? So again, you're trying to keep that customer as long as possible and even keeping a customer for a couple of extra months is material across our system. So again, I don't know that price has been as much of the consideration with retention. As you know, one of our strategic pillars around customer zeal and building that customer loyalty and giving them a better product, right, and better services and digital tools. And so as they stay longer, and then again, as the alternatives can't provide that same level of service, you've got to think to switch right? You need to have an alternative. And so if they can't provide that same level of service and give them those tools. And again, when you talk about the dollar amount that people are switching over, it's pretty small dollars in the grand scheme of thing, I mean we're a really, really, really, really small portion of those customers' overall cost outlays. And so I think that's what's ultimately driving it. It's -- price is, obviously, a consideration, but price-sensitive customers are going to leave you for a penny. There's nothing you can do about that. That's not a majority of our customer base.

I do like hearing John and he is a pricing guy. I love to hear him talk about modeling of it and [indiscernible]

Well, look, I mean it's a core capability, a functional capability that we have. And again, that's, I think, one of the opportunities that we have with environmental solution space and with US Ecology is that we can bring that core capability right, to that portion of the business? I mean just to put it in perspective, I mean, U.S. Ecology is a great business. they had one pricing person in the entire company out of 3,600, okay? We have an entire function at both HQ as well as at our area office and all they think about is price.

Tying of price, I like that. Yes, it's -- maybe looking at volume, maybe any thoughts on the second half of the year? How does volume look like it's going to shape up this year? Any potential upside to that?

Yes. So our guidance assumes 1.5% to 2% volume guidance. You're seeing really strong economic backdrop for continued growth, and we feel really good about producing that number for the year. And just to put that in perspective, that is above average for the long-term history of the company, yes.

Got a shock from that. Maybe to ESG, we could talk about your investment approach to renewables and your -- I think you serve a leader and you've talked about some of the projects that you're doing on the landfill side, and then we could talk -- we can keep going on that with the electricity and all that. But maybe you could talk a little bit about what you're seeing on your renewable projects. .

Yes. Look, it's a great opportunity. I think this is where you're seeing some differentiation though in the space. So some have decided to sit there and go their own way, right, and make those capital investments on some of these RNG projects, we tend to partner and for a couple of reasons. So when you look at a landfill gas to energy of the high BTU project, landfills produce methane gas, there's a peak amount of gas, methane output, and then it's a declining asset until the landfill ultimately becomes a inert. And so when the landfill becomes inert, there is methane gas. Therefore, there's no revenue, okay? So we look at this as an opportunity -- great opportunity but speed to market matters as well as when we think about where we're going to deploy our capital, we want to deploy in places where we have evergreen growth opportunities, not something that is ultimately going to be a diminishing asset over time. So that's why I think you hear some, again the price tag on some of these facilities is pretty high. We're using partner capital, but with an opportunity to invest in equity ownership, it would be a minority ownership. But just for supplying the gas, we're going to get the royalty no matter what, right? So again, we get a little bit of a look at how the plant will be performing, and then we have an opportunity to invest over time. But as you've heard some are talking about 2 to 3 to 4, whatever else, we're actually actively developing 18 as we speak, and there's opportunity for another 40 beyond that. And that's, again, getting out to market quick, making sure we're capturing that methane gas as it's being produced, but at the same time, not sitting there deploying all of our capital to that one thing and something that will, ultimately, be a diminishing asset.

Maybe we could talk about plastics recycling and plastics. We had a good conversation earlier. Could you maybe -- where do you see sort of that business going? And you guys made an announcement recently about a facility that you're looking to build here soon. Could you talk sort of what that facility is? And what are your plans with that?

Yes. Let me start and then Stacey can add in some stuff. So this is a place where we do want to invest our capital, okay? So we announced our Polymer Center, it's going to be in Las Vegas. This is a hub-and-spoke model. So let me just give kind of the backdrop. Today, when we recycle plastics, PET, olefins, we aggregate, we separate and we bail right? Over 85% of those bail wound up getting down cycled, right, meaning they go to -- into pipe, they go into textiles, they go into carpet. So it's recycled, but then after that product is used, it most likely goes in the landfill. So it's not truly circular, okay? With the Polymer Center, we're going to be able to sit there and move all of the PET and some olefins that are generated on really the western part of our footprint, and we're going to be able to bring that into one center. We're going to be able to do a better sort. We're going to be able to do some chipping, some cleaning and some flaking and ultimately create that into a food-grade product. We'll be able to sell that to a converter who can then turn that back into a plastic bottle and you're talking about 5, 6, 7 kind of turns on this stuff, so truly circular. It's the first one in the U.S. I mean they are doing some of this technology in Europe. This is the first one in the U.S. And really, the issue here is aggregation. We have this stuff already on our back. So when we take a look at that West Coast facility, 100% of the PET we're already collecting. So this is in the field, the [ dreams ] already have it. And when you take a look at the economics very attractive. I mean, when you take a look at the price per ton for bailed product, I mean, this is over 2x that you can get from upcycling. So this is -- this first center, we at run rate will probably be an incremental $50 million worth of revenue for that one center with a margin profile that's accretive to our current company performance. So it's over 30% margin.

And would you want to move -- I mean, a sort of a value chain or a chain of where these molecules are going. Are you in a sweet spot where you naturally -- you're a natural aggregator, right? You get your fingers on it is do you want to be further up the chain of what you do or further down and where it gets recycled or what are your thoughts on that?

Yes. Look, I don't know that we can move further up because we're -- from the time you drink that bottle to collecting like there's no one in between you and I, right? We're already collecting that stuff. So I think we're in a pretty good position there. Now when you start talking about though, making sure that we're getting every bottle, right, in those recycling programs, that's where education comes into play and some maybe again, trying to get further penetration on the business side for recycling, I mean, go to any gas station and take a look in the garbage can, and you see a lot of plastic bottles, right? So how do you actually get more of that material because, again, right now, when you take a look at the demand for recycled plastic, there's not enough supply out there to fulfill all the commitments that the CPG companies are making, doesn't exist, right? Even with what we're talking about, it still will fulfill what they're pledging to sit there and say with kind of 30% post-consumer content. So again, the demand is there, the supply isn't. So the more that we can actually capture, right, so again, when the yield is greater because we're doing a better sort and creating a cleaner product as well as then working more on the front end to make sure that consumers are recycling, right, all of that material. That's where we see the highest value over time.

Pretty material, I'm sure, of the rates -- of recycling rates. Maybe as we have a few more minutes to talk about the current situation in the Ukraine crisis and oil prices. You guys were early on talking about battery electric vehicles. Can you maybe talk about maybe the economics around that diesel prices? Why did you decide to really sort of double down on battery versus maybe some other competitors, not so much or?

Well, I mean, first, the electric is currently the only 0 emission type propulsion. So I mean, again, that's where we started, right, is to sit there and say CNG is better. We have 21% of our fleet on CNG. So it's marginally better than diesel, but it's not 0 emission. And so when we took a look at where we wanted to go, we were building out a CNG network. And then as we looked and said, we are the perfect fit for electrification. Our trucks, they leave the barn, they do their route and they come back to the barn. So we don't need to refuel right, on route. Basically, our range -- if we get into that 120 to 125 miles range, that's our sweet spot for our residential and our small container routes. Right now with the pilots, we got -- how many trucks we have 5 or 6 trucks out there running right now with different manufacturers. We're getting a consistent 80 or so miles. So it's getting better, okay? And we're working with them, and we want them to get better. And there are certain routes and certain applications where 80 miles is fine. But in order to sit there and get our sweet spot over time, we want to get in that 120 miles, 125 miles, confident that they'll get there. And again, we want multiple suppliers to win, right? We want competition in that space. CNG, there's one -- it's a JV, right, of that Cummins Westport engine. And again, when you start putting all your eggs into that basket, if your whole fleet is there and you have no competition with parts and other things you can imagine, you could be held hostage from a cost perspective. So we want multiple manufacturers win multiple vendors to win, so that the parts availability is there and again, that we can sit there and over time, see some of the prices of that technology decrease.

It just seems like a natural fit with the breaking the electricity on the -- all the stuff that's going to be needed to run the power. Maybe we'll -- maybe last question here we can talk about capital allocation priorities? And what are you seeing in the M&A environment?

Yes. I mean first and foremost, we want to reinvest back in the business. We talked about the fact that the pipeline is robust, right? So we're going to invest in M&A, right, in order to sit there. And again, the idea is to sit there and [ smartly ] grow the business. And again, we are very returns focused. We're very intrinsic focused. And so I mean that's where our first priority is going to be. And then you look at the dividend and the dividend we kind of grow roughly in line with the growth in cash flow when you express that as a percentage. And then I think we've done a pretty good job about being opportunistic on the share repurchase. So it's not necessarily a mandate. If the stock is cheap, we're buying, right, type thing. And again, in my 20 years of doing this, I haven't really seen an opportunity where I wouldn't say that I'd be a buyer of our stock. So again, we've done it consistently. I think we've created a lot of value for our shareholders that way. And again, we'll continue to be opportunistic.

You guys have done a great job. Brian, thanks for being here. Stacey, thanks for being here, and I look forward to having you back next year.