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

All right. Next up, it's my pleasure to have with us today Republic Services. Representing Republic Services with us today is the CFO, Brian DelGhiaccio; and the Investor Relations Director, Aaron Evans. Republic is the second largest waste provider in the United States. We have with us today Brian DelGhiaccio, who joined Republic in 1998, holding increasing roles responsibility throughout that time. Aaron joined in 2007 and took over Investor Relations responsibility in 2022. Republic's got 320 million shares, trading around $148 million for $47 billion market cap and $12 billion of net debt.

Gentlemen, welcome and thanks for coming. It's good to be back. And it was great seeing you back the other week at Waste Expo. And it seemed like that was a great event full on as always. Maybe you could give us [indiscernible] how things are going at Republic and maybe with how the pricing outlook is going and just maybe a quick overview.

Yes. I think if you saw our recent earnings release, we got off to a strong start in the year. We've got a number of things going on as far as our integration of the US Ecology acquisition as far as some of the investments we're making in sustainability, just continuing to increase the profitability of the core business. So things are really clicking at this point.

We've asked everyone about just the inflationary environment. How do you guys see when you go to market and talk into customers that conversation capability to outpace inflation, what are your tools you have that you're able to do that? [Audio Gap]

Macro environment, just look at the CPI prints, it's obvious that everyone is dealing with cost inflation, and we're not immune to that. Obviously, we've got some productivity [Audio Gap] to reduce our internal cost of inflation, but it's real. And so if you rewind the clock a year ago, we went into '22 thinking that inflation was transitory. And it was anything but. So this year, we actually changed the mindset a little bit and said we expect inflation to remain elevated and to be sticky throughout the year and to make sure that the pricing that we were going out with in the market reflected that. And one of the things, if we see inflation moderate through the year that could provide a little bit of upside to our original expectations, but that's not the way we're going into the year. And I think what you're seeing is that nice spread. And again, we look to get about 75 to 100 basis points of price in excess of our cost inflation to drive margin expansion in the underlying business. Again, headline margin, obviously reflected in the first quarter, the impact of the U.S. College acquisition, which we completed in May of last year. So we would expect, as we move forward through the year, anniversary-ing that deal, which we anniversary here in the second quarter as well as just, again, seeing that spread between price and cost inflation as we see that gap widen through the year, we would expect margin expansion to sequentially improve quarter-on-quarter throughout the year.

And you guys have always been big believers in customers [ all ] talking to John, I learned a lot about the metrics of this. How do you get yourself in your loyalty programs, digital tools? You've discussed that for quite a few years now, and John has been a big component of that. Maybe you could give us a little more on that.

Yes. Well, I think it was mentioned before, I mean this really is a loyalty business. So again, when you think about who our most profitable customers are, they tend to be the ones that have been with us the longest. So this is really about how do we sit there and make sure that we can increase customer stickiness and that really starts with just high-quality service. So when we make a promise that says that we're going to be there on this day, during this time window, and we're going to get all of the recyclables or the garbage off the ground that we do it day in and day out. And so it starts there. And so again, we use the term customers deal, but it's as simple as that as just the Xs and the Os as far as just making sure that you're getting it done every single time. Thereafter, when you think about things that we can do is that we're bringing data, we're bringing capabilities to our customers that are helping us to differentiate. So some of the things that we're bringing things like track my truck and being able to do push notifications when we're going to miss a service window or a weather delay. These are things that sound relatively small, but they require quite an investment in order to get there, a well-capitalized company of our size and our scale, we can do that. It particularly really differentiates from some of the smaller players in the industry that really can't afford that level of investment. And the example I always use is it's like some of these customers didn't even realize they needed that. It's like heads-up display in your car. You had no idea you needed it until you had it. And then you can't do without it. So again, these are things that not only give our customers information that they want real-time but also when you give the customers data and you give them information, it reduces calls into our call center. And on average, a call to -- into our call centers is 5 a call, if you can reduce that. So it reduces cost and increase stickiness as we increase stickiness, then we can sit there and continue to price. As we continue to price, again, we just become more and more profitable over time.

And if you could talk about your Rise tablets and just the data -- use of data you guys have for pricing and price discovery. Maybe just give us a basic Mark 1 Mod 0 example of how that works.

Yes, 2 different things. So we've got our capture pricing tool. And capture really what that allowed us to do, and we put that in place in 2015, 2016. So prior to capture, we armed our salespeople with a price sheet. So there really weren't controls in place. I mean sale -- you said this is what the recommended price increase was or the price for new business. but there really were no guardrails against that. You could go after the fact. And by that time, it was too late, if someone sold below a threshold level of price. What capture does is it digitizes that whole process. And so now we can establish thresholds that say thou shall not sell below this level. But also as they increase the level of price, the salesperson sees their commission as you start increasing the level of profitability. And as most people know, if you want to motivate a salesperson, let them know what they're going to get paid. And that's actually proven to be very effective for us. But what it really gave us was control. And so we know that when we're in market, we're not selling below a certain level because the system will just bomb out if they try and actually go below a certain threshold. That's how we have control from a pricing perspective. And these are tablets that every salesperson has and we can do analytics on it, we actually capture data. And if we're not clear in the market, we can go in and adjust those guardrails to make sure that we actually can start selling new business. If we're being too effective, we start raising the thresholds. So it gives us real-time information. RISE is a little bit different. So that was a little bit more on the operational side. And what RISE really did is that, again, our dispatchers, which is really the heart of the organization as far as being able to sit there and assign work to individual drivers on certain routes. And what they had was they had to have a very good understanding of the market without being able to visualize it. So when order would come in and they'd have to say, "Okay, well, truck 1, 2, 3, 4, should be around this area right now. So I'm going to dispatch this order to that particular route." We started on the dispatch function where they can actually see where every truck is, where the customer is and where it is in relation to the nearest disposal outlet. So that what it really did is it started to increase our productivity and our efficiencies. And so where we used to be able to do from a large container or industrial route, where we were getting 7 turns a day, now we're getting 8. And as you know, every second in this business matters. Just to put it in perspective, 1 minute across our system is worth about $5 million annually. So if you can sit there and you can start grinding out seconds that lead to minutes, and minutes that lead to tens of minutes that's material. And so we then further extended from the dispatch function into the cab. And then we gave our drivers, every single driver has a tablet now. where it starts talking about -- again, you can start doing route sequencing where it's the most efficient and effective way in order to sit there and run their out. And now we can start measuring adherence to those standards. And if there's any deviation having an immediate conversation with the driver to understand why, again, all with the concept in order to be able to sit there and drive time out of the system. So all of our B2B customers, small container, large container fully implemented, will be done with residential end of this month or time. And again, when we look at RISE, we think that's a total of $100 million opportunity, of which we've realized just over $50 million to date. So there's still room to run on this. What it now gives us to is specific customer-level information. So for example, with those tablets, we can get pictures of containers that are overfilled things of that nature that you can actually capture, be able to set their pump to the customer and then bill for some of those things on a real-time basis. And so now you're starting to get revenue uplift at the same time.

And I assume there's a huge component of operating leverage in this too, as you guys grow as far as margin accretion, you're able to get a bigger piece of the pie as it improves your margin. This helps us with scale as well, I assume.

Yes. It certainly does. And when you think about our ability to capture synergies as we do acquisitions, that's important as well. So again, even in a relatively higher interest rate environment, and we always get the question our multiples on deals? Are they coming down? They've stayed relatively stable in part because we can capture additional synergies. As we start bringing people in and layering them into our platform, there's more synergies to be captured. So again, you can look at multiples relatively consistent, but still generating the same level of cash on cash return that they were historically for us.

Let's shift to volumes. I obviously talked about it in the call, for those less familiar, maybe give us update on where volumes have been, how they are currently? And how do you see them going forward and talk about your churn rates and a little update on that?

Yes, sure. From an end-market perspective, we continue to see strength really across our business. And so again, we break our business up into market verticals and all of the verticals are actually showing positive contribution. Construction has been, from a volume perspective, has been a little bit off, but that's not a new thing. We've seen that down circa 1% year-over-year for the last 3 quarters, but we're taking this opportunity to price. So even though we're seeing a 1% decline in units, price is up 9%. So again, we're improving the quality of revenue of that business. As you know, the temporary business tends to be relatively lower margin to begin with. And that's why we're making sure as we're deploying assets, as we're deploying resources, people that we're making sure that we're earning an appropriate return. I would say it's more a function of that than it is any decline in economic activity. Other parts of our business continue to show real strength. So again, we have a $1.5 billion manufacturing vertical on our recycling and solid waste side. We also have now the addition of our Environmental Solutions, which was primarily the acquisition of US Ecology, real strength on that side. I know you see mixed signals on manufacturing and the data, but at least the type of manufacturing customers that are driving the waste that we handle, we're seeing strength, and we continue to see strength with really no signs of slowing down. And so look, we are mindful of the data, and we're watching it. We're just not yet seeing it in our numbers.

That leaves me that you just mentioned the acquisition. Just give us an update on -- obviously, it was a big acquisition, it's a different business. The integration of that, cross-selling opportunities. How is that going? And what are -- what's the future opportunities of owning that business?

Yes. As far as the integration is concerned, and let me just start by saying why we got into that business, is that for some of our peers, it may not be connected. For us, it is very highly connected because I mentioned we have a $1.5 billion manufacturing vertical and recycling in solid waste. And so our customers were saying, you're here, you're picking up our recycling, you're picking up our solid waste, why can't you pick up this drum? Why can't you deliver this container? Why can't you bring a vac truck? Why can't you do these things? And so we started building out this business in a relatively small, quiet way. So we did the acquisition of [Audio Gap] 2015. That was the U.S. assets of Tervita, where it's mostly in the upstream oil and gas business where we were bearing drilling mods. They also had a relatively small downstream business so in the petrochemical sector. And what we found is while the upstream business was -- had quite a bit of volatility to it, as we all know, downstream didn't. These were stickier customers that valued performance, valued convenience and had a consistent manufacturing process where they were generating some byproduct that they need -- they had to be dealt with on a regular basis. So we actually started buying some companies. We bought some container rental companies. We actually built some capabilities and realized that this was right in our wheelhouse. We then bought a couple of deals up here in the Northeast. ACV, ECOFLO, we did that actually prior to our acquisition of US Ecology. And what we then realized was that having the infrastructure, having that vertical integration in this business, just like we have in the recycling and solid waste business was going to be important. Just started having conversations with U.S. Ecology, it was about a year ago that we announced a little bit earlier -- that we announced that transaction and what U.S. Ecology had was an asset base that just can't be replicated. Five hazardous waste landfills, deep wells, indirect thermal destruction, TSDF network and the field services side with a full national platform. And this was an opportunity for us to be able to sit there and have those assets, which, again, we think of permitting in the recycling and solid waste being difficult, it's exponentially harder on the industrial was side. And so completed that deal. We knew that there was a couple of opportunities. One, there was the cost synergies. We've talked about $40 million worth of cost synergies. Most of those were duplicate corporate costs, that sort of thing. And those are the types of synergies that will bake into a deal. So that's the sort of thing that we predicated what we were willing to pay. We do not include revenue synergies in the deal. But we knew they were there, the opportunity to cross-sell as well as the opportunity to see better pricing, better conduct quite honestly, in the industrial waste sector. And the cross-sell, we said $75 million to $100 million of opportunity, and that was really -- it was a bottoms-up and a top-down view to be able to look at our customer base, be able to look at theirs and sit there and say, there's some gaps here. Meaning we have opportunities where we might have a solid waste customer that isn't using U.S. Ecology, U.S. Ecology that wasn't using Republic or we were just actually penetrating a couple of individual locations for a customer. So we knew the cross-sell was there, especially because customers value having a single provider. And so that's where we said the $75 million to $100 million over 2 years. In less than a year, we've already done 60 million. And we really think that the flywheel has begun to spend, and we think that there's actually going to be an acceleration on that going forward just because we really didn't even have the opportunity to turn those salespeople loose until earlier this year. We didn't want to go in and sell something that we couldn't execute against. And so as we've now, we're a little bit further along on the integration, now we're starting that actual -- to formalize that cross-sell, and we're starting to see real results.