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

Okay. I'd like to invite up here, with us today, we've got CFO, Brian DelGhiaccio; and Investor Relations, Aaron Evans with Republic Services. Republic is the second largest waste provider in the United States, operating in 41 states. Brian joined Republic in 1998 with roles of increasing responsibility across the business. Aaron joined in 2007 and took over IR responsibilities in 2022. Republic's got 315 million shares, trades around at $190 for a $60 billion market cap, $12.5 billion of net debt. Thanks for coming here today, gents. We'll sit down and have a chat.

Thanks, Tony.

We were just talking here, Brian, you're the -- I think you were at the founder series. I think you're the only person that has been at this conference today that was here at our first one in 2014. So thanks for your support and always been here. I appreciate it very much. And welcome again, Aaron. And thanks for making the trip and last night, I guess you had a pretty hairy flight into New York. Maybe you can discuss the -- a little bit more about what Republic does and the growth algorithm. Maybe you could just break it down on price and volume and M&A.

Yes, certainly. So, first of all, thank you, Tony. Thank you, Mario and the entire Gabelli team for hosting us today. I appreciate being here. Like Tony said, it was a bit rough getting in last night. So we experienced turbulence that I don't think we had ever seen before. So quite an adventure but here we are. So Republic Services, as you mentioned, leading provider in the broader environmental services industry. So -- and when I say broader, just because we are not just exclusively in the traditional recycling and waste business, we are also in the broader environmental services, including some of the industrial services, which we got to in a bigger way with our acquisition of US Ecology in May of '22, which I'm sure we'll talk a little bit about as well. But we look to continue to grow and grow at a pace and we'll talk about that algorithm as well. If you take a look back historically, we used to talk about growth in that mid-single-digit type range and that would be a good year. And what you're seeing is, now that we've opened the aperture a little bit and we've expanded where we compete, we're now talking more mid- to high single digit on a repeatable basis. As you've seen over the last couple of years, that's actually been in the double-digit range and in part, some of that's the recovery from the pandemic as well as some of the outsized acquisition growth that we've had. But we do see a path and more of a -- on a sustainable basis in that mid- to high single digit and I'll kind of break down the components. We look to price in excess of our cost inflation. And if you can imagine an inflationary backdrop in the, call it, 3% range, we look to get at least 100 basis points above that. So you're in that kind of 4% plus from a pricing perspective. As you heard Tony talk about earlier, when you think about GDP, when you think about population growth, when you think about housing starts, we look at organic volume growth in that 50 to 100 basis points through the cycle. And then increasingly more, as we've made investments in sustainability, innovation and Hanna, you set us up perfectly with some of the investments we're making in advanced plastic recycling, together with some of our RNG investments, we look to sit there and those can contribute as well so that when you take that together with a consistent diet of M&A, that's what gets you into that mid- to high single-digit year in, year out.

That's a great overview, Brian. Let's discuss how the business is broken down. You mentioned the acquisition of US Ecology and some other businesses you have is in industrials, how is it broken down with your traditional recycling waste business and the recent acquisition into environmental services?

Yes. I mean broad-brush when you kind of think about the business, a little less than 90%, about 89% or so is that traditional recycling and waste business, 10% to 11% in the environmental solutions. Now we don't look at them as different businesses because we really started with the customer, right? So we have a number of customers in the manufacturing end markets. We have a $1.5 billion market vertical in recycling and waste, that we're saying, we want you to do more. You're at our facility, you're at our plant, you're taking this material, why can't you take this as well? So customers are the ones that kind of brought us into this business. We built out the business and it really started back in 2015, we bought the U.S. assets of a company called Tervita. And that was more in the upstream oil and gas business but they also had a small downstream business. And what we liked about the downstream business is, it was much more stable. So it wasn't as dependent on oil prices in the upstream, it's really -- as oil prices went up, people are drilling and then you get some of the muds that you're burying. The downstream is much more consistent. And so we started building that business out in a much bigger way. And then we expanded up here into the Northeast. We bought a company called ACV. And then shortly thereafter is when we started the dialogue with US Ecology. And what we really liked about US Ecology was infrastructure, those post-collection assets, the landfills, the TSDFs that just can't be replicated, right? And so again, just shy of 40% of every single hazardous waste ton that goes into a landfill, goes into 1 of those 5 landfills. And when you think about that national platform, from which we can continue to sit there and do tuck-in acquisitions and really gain the benefits of vertical integration, Tony, you mentioned on your slide, scale matters. Scale really matters in this business. So we think we can continue to grow that. We can continue to sit there and grow that at a rate that actually exceeds what we're going to see in recycling and waste. So I'm sure we'll get into the margin cadence going forward. But we think about margin in the recycling and waste business moving in the 30 to 50 basis points per year, year in and year out. For the near term, we see on the Environmental Solutions business more like 75 to 100 basis points.

That's a great story and a great model, I think, for growth as you diversify into the services -- Environmental Solutions. Maybe -- you talked about inflation. It's obviously gone up in the recent years. And still being a little stubborn, how do you actually -- how do you mechanically go about and are you able to price ahead of inflation year on -- year in, year out?

One of the things that -- look, 2 years ago, when we went into the year, we actually thought that inflation was going to be transitory and we [ undershot ] that, right? And again, that's tough because when you think about going out to the market, from a price increase perspective, the last thing you want to do is go to your customer and say, "Hey, we have to come back with another price increase within the year." So you really only want to sit there and price once per year. So last year, we took a different approach. In '23, we went in thinking that inflation was going to be sticky and it was. And we're doing the exact same thing this year as well. So I know many have called, right, for this downtick or this modulation, if you will, with respect to inflation, which may happen certainly but that's not the way we built our plan. So we want to go in thinking that inflation is going to remain somewhat elevated. So we're in the, call it, the 5.5% all-in type inflation levels. So when you think about that historically, that is certainly elevated compared to a historical normal, okay? But the reason we did that is we've got to get from the mindset of our field operators, that's the type of cost increase you have to expect in order to go get the price you need to cover that level of cost inflation. Now a lot of that is already known, right? So our biggest cost input is the cost of people. And so we've already gone out with our [indiscernible] increase for the year. So we know that. One of the other larger pieces, I would say this year, is just the cost of maintenance. I wouldn't say it's necessarily just inflationary. Some of that was some of the supply chain constraints as we are maintaining an older fleet, right? So we -- in the last 3 years, we have not gotten our full truck order. We've been running somewhere between low 70s to as high as little over 80% of the trucks that we ordered have been received. And what that means, is that when you're maintaining an older truck, let's say, a 13-year-old side loader, is you've got your maintenance cost, higher cost per engine hour, versus if you're able to buy that new truck that's under warranty, a very low cost per engine hour. So it's a little bit of an OpEx, CapEx tradeoff. We would certainly rather have that truck and have that lower maintenance spend because we've done the math and we know where the optimal replacement age is. So that's why when you talk about cost inflation, that number is in there. We're kind of expecting more about 8% increase in maintenance year-over-year. That's something where if we do get those trucks, if they start to be delivered, the manufacturers have said they're on track, yet to be seen, right? We've seen that over the past couple of years as well but that could certainly be a source if we get those trucks and maintenance comes in, that could be certainly a tailwind relative to our initial expectations.

Could you go into a little more detail? You went over -- you briefly went over about this margin expansion algorithm and alluded to -- and sort of alluded to my comments, too. But maybe walk through how the model works for margin expansion in maybe both sides of the business in a little more detail?

Yes. Well, it's relatively consistent on both sides of the business. So we talked about price. It starts with price, right? So pricing in excess of our cost inflation because one of the things, when you think about our business with our largest cost input being people, is that we're not perfect but we've done a pretty good job from a productivity perspective. So we don't have enough productivity gains to offset those wage increases, right? So we have to price. So it starts with price and again, we look to get somewhere around 100 basis points of price in excess of our cost inflation. And then together with some of the investments we've made in realizing the benefits, so starting with some of our digital initiatives, where we've done our RISE platform and that really was about a visualization tool for our dispatchers, where they can now go in and optimize the way in which they build routes, where before it was really paper-based. So you had to have a really good knowledge of the market in order to sit there and determine what trucks should go pick up that extra stop. Now they can actually see where the truck is relative to the customer request and they can allocate that pickup to the most efficient route, right, as well as putting the tablets in the cab for the drivers and giving them an optimized route structure, turn by turn instructions in order to sit there and drive seconds and ultimately, minutes out of the business. And just to put that into context, a minute of savings across our system is worth almost $5 million per year. So every second matters. So again, driving productivity savings helps to drive some of that margin expansion per year. With respect to some of those investments we've made, again, in digital, right, expect about $100 million of cumulative benefits over time, of which we've realized about $65 million to date. And then I mentioned some of those investments we're making in sustainability innovation, right and all of which are accretive. So our RNG portfolio, what we're doing with our polymer center in order to sit there and get revenue streams, right, that are coming in at an [indiscernible] margin profile, collectively, those are the sort of things that give us confidence with our ability to drive 30 to 50 basis points of margin expansion per year. And that's not just in a single year. Again, when you start talking about the way in which these are going to layer in, I mean, we've got visibility to these coming in over the next 4 to 5 years, which gives us a nice glide path to ultimately see better performance over time.

You discussed the Environmental Solutions business and the acquisition US Ecology, could you just give us an update on how that is going? Have there been hiccups as you -- do you foresee it going this way? Or is it better or worse? Maybe just an update on that.

Yes. So we completed the acquisition of US Ecology in May of '22. When we originally valued the deal, we did it based on the U.S. Ecology performance plus $40 million worth of cost synergies. Although we knew that there were revenue synergies that were there to be obtained, we don't include that. We never pay on revenue synergies. So a combination of both cross-sell opportunities. As I mentioned earlier, we have a $1.5 billion market vertical that is exclusively focused on manufacturing end markets. These customers, we knew that there were cross-sell opportunities, as well as the ability to price. And again, the price for the value of the service that we were providing and the scarcity of the asset, that post collection infrastructure that exists in that space. And so we actually were able to achieve some of our performance targets when you take a look at how we were able to sit there and price in that business and again, getting over $100 million of cross-sell within the first 18 months, we were able to achieve those targets sooner than anticipated. But we knew that, that was there, right? We just accelerated some of that value capture. I would say some of the things that -- I don't know if it's necessarily a surprise, I don't know that we fully appreciated was the amount of integration that was going to be required on US Ecology more into itself. So US Ecology was somewhat acquisitive. There were pieces that were out there that hadn't yet been fully integrated from a system perspective. So we are still doing some of that integration. We expect to be completed in '24. And I think the important point about that though is that we've been doing everything we've done somewhat through brute force. What I mean is that we don't have a common CRM platform yet between the recycling waste business, Environmental Solutions. Environmental Solutions is still on multiple systems. So to be able to get to customer profitability can be somewhat challenging. So as we deploy these systems, as we continue to integrate, as we get on a common platform, our ability to certainly get smarter about the way in which we go to market and to be able to really get a little bit more surgical with the way in which we price our customer starts to increase, which is one of the reasons why we feel the cadence with respect to margin expansion, somewhat elevated in that business and that's why I mentioned before, 75 to 100 basis points because there's still more opportunity.

It seems like there's a lot more opportunities, the potential to come from that integration. Again, you mentioned the RISE platform. Could you talk a little bit more, I think this is where you guys differentiate yourselves, on how you look at pricing and the pricing tools. I think Jon has done a great job of driving that in your company. And it seems like you're probably one of the leaders in that space.

Yes, we have a tool, a digital tool in our recycling and waste business called Capture. And so what it is, essentially, it's understanding the unique cost about each one of the customers. So when you're configuring a product for the customer, so for example, if a driver has to get out and open up a lock, right, in order to service that container, that costs more. So we understand on average how much time that is. Because again, if you take a look at our business, it's -- I'm going to grossly oversimplify our business but if you understand time and the weight, you have a majority of your cost structure. So we put those costs. We understand that in a restaurant, the weight of a container is heavier than a pillow factory. So we put all of those attributes in against which then we sit there and have to have some sort of return on the investments that we're making in the truck that we're deploying and the containers that we're buying. And then we create a threshold price that a salesperson cannot sell below, okay? That's the minimum. And if they want to sell below that, it's got to go up through a number of different approvals. And I can tell you there aren't many exceptions granted by design. The nice part though is that we pay based on profitability. We don't pay based on revenue. So that a salesperson can also see as you slide the price to the customer and you start to move it up, they start to see what their commission will be for increased profitability of that customer. And so it gives us visibility, it gives us control but it also gives us real-time information. So again, if we're in a market and we're out there and every single customer is saying, yes, well, guess what, the guardrails were moving up. If we're out there and we're batting at 0 on these things, then we have to address, are we sitting there and potentially selling above market and you've got to make those corrections in order to make sure that you're really trying to sit there and get it right. And that's what we strive to do. And it's just -- again, it's more information, it's more real-time information or prior to that, what a salesperson was armed with was a price sheet. And that's all they had and they had to just walk around with that and that could become outdated pretty quickly. Now we can actually change some of those guardrails. We can push a button and it will change every quote from that point forward.

That's a very interesting model and very easy to visualize in my mind. Let's switch gears here and talk about some other -- some things going on in the industry. RNG, renewable natural gas development approach. You guys have taken a different approach than some others in the industry with a joint venture model, a royalty partnership. Can you talk, maybe just give a little maybe a background on what this is and how -- why you're differentiated, why you went the way you did?

Yes. So when you think about renewable natural gas, first landfills, as the waste decomposes create methane gas. So one of the conditions of our permit in every Subtitle D landfill is required to put in the infrastructure to vacuum the gas. And you can do 2 different things, you could either flare it. So you're converting methane into CO2 which is better for the environment but it's not awesome, right, for the environment when you're discharging the CO2 or you can put in some infrastructure in order to sit there and to clean up the gas and ultimately convert it into electricity or into renewable natural gas. So when we looked at the opportunity there for renewable natural gas, the reason that we went the JV route, we've got -- it started with a partnership with Archaea that was ultimately acquired by BP. The reason we went to that path is, there's several reasons. One, we actually put this out as a portfolio deal. So meaning it couldn't be cherry picked. So if you cherry pick landfills, you're going to take the ones that are going to create the most gas. And you're not going to have anyone that's going to go and develop some of those smaller sites. So this came as a portfolio of 40 sites, okay? So again, we ran it as a process. And as a result of running it as a process because it was a competitive process, we were ultimately able to strike a deal where we invest 28% of the capital but we get 40% of the return. And we get that 12% step up, again, just because it was competitive, right? I mean that's what it took to get the deal done. The other reason why we went the JV route is that we don't have the capabilities, the resources in order to design, develop, operate 40 sites concurrently, right? That's why we said let's leverage a partner that has those capabilities and that can move quick. And the reason why moving quick matters is that when you think about a landfill and the associated landfill gas curve, this is not something that grows into perpetuity, right? So you have a peak amount of gas production and then ultimately, once a landfill closes, each year, that landfill gas production is going to decline. And ultimately, the idea is that a landfill becomes inert. So getting after this as quick as possible and that's why we're actually working in some form or fashion in order to sit there and move all 40 of these at the same time. Now it's going to come in at a phased approach but to capture as much of that and monetize as much of that landfill gas as possible.

Yes, that's a pretty interesting business that you guys have and it seems like there will be a lot of opportunities coming from that going forward. Maybe we could switch gears again and talk about recycling. You guys are leaders in, I'd say, advanced recycling, you've sort of attacked it in a different method. Could you talk about your advanced recycling program in your polymer center, which you've -- and you've opened a few of them recently.

Yes. I think again, Hanna, I think, set us up well. I think you called it a crisis. So we're here to help solve that crisis on the plastic side. So if you think about our portfolio of recycling centers across the U.S., what we typically do with all materials but in particular, I'll talk about plastics, where we're going there, is that we collect the material, we separate it, we bale it and a lot of the plastics ultimately get down cycled. So you take the PET. The PET gets sold into, for example, carpet manufacturers where it's used as an input and they're doing that because they can actually buy that down cycle product at a discount divergent. What -- we're now doing hub-and-spoke model, we're going to actually create, the original plan is 4, what we call polymer centers, first one being in Las Vegas but these are going to be geographically based. So I think everything on the West Coast will be all that material but the PET and the HDP, the olefins will be shipped to the polymer center where we're going to be able to separate the material, finer sort. We're ultimately going to grind, wash and flake the PET and we're going to be able to sell that back as a food-grade flake back to either CPG companies or converters, so the water bottle gets turned back into a water bottle, right? So true circularity. And what we're seeing from brand commitments, so CPG companies, as well as now enhanced regulation, right? So starting in California, moving up in Washington, New Jersey, that's going to require a certain amount of those plastic bottles to have that post-consumer content. And so we certainly see the demand for this product. The problem has been limited supply. And one of the reasons when you think about why the supply has been limited, think about the 2 largest aggregators of this material, it's us and WM. And we were sitting there and baling the stuff and then down cycling it, which is one of the reasons why this hasn't been done previously is because no one would step into this market and just build one of these facilities without relative control of the feedstock. We built these things knowing that this stuff is already on our back. And so we have visibility to this material. So supply of the feedstock is not a concern. It was just, can we actually get this machinery to work? We had seen it in Europe and it was working. We have now delivered, right? Our first rounds of -- from a commercial operation perspective to our customers, we actually did that like 2 weeks ago and I think we delivered our first loads and the quality is phenomenal. There's -- our customers are saying it's better than anything they've ever seen.

I mean you're natural operators, there's a lot of dynamics there that are, a lot of goodness. I don't want to -- I know there's some questions from the audience. Anyone would like to ask a question. Mario?

10 years from now, we'll have our 20th, you'll be here for 20 years. The turbulence will be different in the world. I don't want to get into the election or taxes for 2025, with the change of your fleet. I want to know what's on your radar screen where you're signing NDAs?

As far as...

What kind of businesses would you like to buy? What kind of locations geographically, where do your technology taking you next to handle the PFAS plastics and whatever else is going on in your world?

Yes, a couple of things. I would say this from an M&A perspective, I would sit there and say more of the same from the perspective of building out that route density on the recycling and waste side and for that matter, on the Environmental Solutions. So think more tuck-in type acquisitions, where when you build that density, again, you can really punch out those synergies, especially on the Environmental Solutions side, which carries a larger SG&A burden. So a lot of cost synergies that are available on that side. When you think about things like regulation on the PFAS side, again, to -- on the recycling and waste side, we see that as a modest risk at this point. So meaning that if landfills are required to do any sort of enhanced treatment or processing of the leachate, we've shown, right, as a company, as an industry that those increased costs can be passed along to the customer, okay? So we would expect most of that to pass through on that side of the business. However, on our Environmental Solutions side, we're a natural owner of that material in order to process and treat. So we actually think of that as an opportunity and you push the 2 together into the enterprise, we see a nice opportunity between the 2.

Yes. Just [indiscernible] out, refresh for us your multiple of EBITDA, to how you look at your debt leverage.

We're right around 3x.

And what's your comfort level 3x?

3x.

You got a currency to make love.

Maybe back to what Mario touched on with election and fleet electrification. You -- I think, again, you've been sort of a leader in this area. Maybe just talk to why now? Just your overall thoughts on -- on going the electric battery route.

Yes. Look, as we look forward, so you said 10 years from now, we see communities that are going to want a zero-emissions technology. And CNG is incrementally better than diesel but it's not 0 emissions. And so we were working with several vendors and we want multiple vendors to succeed here on an electric product. Really, it was Oshkosh, right? They kind of did a studs up and introduced some lightweighting so they can actually get the power that we need in order to run a full route, where when you do a retrofit of a diesel truck, it becomes a little bit more challenging just because you can't get out of the way of the weight of the truck. So we're excited about what we're seeing with this initial prototype that we've received. Again, we expect to receive just over 50 of those trucks in '24. We've got a couple that are running around Phoenix right now but it is meeting and exceeding the thresholds that were in the performance [Audio Gap] If you look at our revenue portfolio in the State of California, by 2030, there's a proportion of our heavy vehicle fleet, the collection fleet that has to be zero tailpipe emission. So we feel like we're moving ahead. You've got to secure the power off the grid, you've got to secure the units, right, to maintain our position and even further grow our position in a state such as California and you generally see other states as fast followers to that California regulation. So again, it's early bird will get the worm, not only on incentives that are offered for the zero tailpipe emissions but also our availability on the grid. So just making sure we take advantage of that while we can.

I mean it's a good point, as goes the saying, as it goes California, right? Maybe I can get in, probably can't get one last one. But well, thank you for being here today, Brian and Aaron. Thanks for making the trip in and always appreciate your support. Hopefully can get you back next year for #11 and have a safe trip back.

Sounds right, thank you.

Thank you.