Republic Services Inc. of Phoenix has reported net income of $298.3 million for the three months ended Sept. 30 versus $263.4 million for the comparable 2018 period. Excluding certain gains and expenses, on an adjusted basis, net income for the three months ended Sept. 30 was $291.7 million versus $269.0 million for the comparable 2018 period.
"We are pleased with our third quarter results. The team's continued ability to tightly manage costs and capitalize on favorable solid waste trends enabled us to price in excess of cost inflation and expand underlying EBITDA margin by 60 basis points. During the quarter we invested $275 million in acquisitions, further strengthening our leading market position and increasing the scale of our operations," says Republic CEO Donald W. Slager. "We now expect to outperform our original 2019 full-year adjusted EPS [earnings per share] guidance and achieve the upper-end of our adjusted free cash flow guidance range. The momentum in our business and stable economic backdrop position us well for continued growth in 2020."
Other third quarter highlights include:
EPS was $0.93 per share. Adjusted EPS, a non-GAAP measure, was $0.91 per share, an increase of 11 percent over the prior year.
Cash provided by operating activities was $651 million and adjusted free cash flow, a non-GAAP measure, was $372 million. Year-to-date cash provided by operating activities was $1.8 billion and adjusted free cash flow was $1 billion.
Cash flow invested in acquisitions was $275 million, or $228 million net of divestitures. This brings the company's year-to-date acquisition investment to $490 million, or $441 million net of divestitures. The annual revenue acquired, net of divestitures, in the third quarter was approximately $55 million. Year-to-date annual revenue acquired, net of divestitures, was approximately $161 million.
Through the end of the third quarter, the company repriced approximately 35 percent of its recycling collection contracts and 55 percent of its contracted recycling processing volume.
To help reduce recycling contamination rates and ensure local recycling programs remain sustainable for future generations, Republic introduced a free, downloadable curriculum for pre-kindergarten through 12th grade. The curriculum is designed to support students' real-world learning about sustainability and how to recycle properly.
Slager (DS), Republic President Jon Vander Ark (JVA) and Republic Chief Financial Officer Chuck Serianni (CS) hosted a conference call Oct. 30 to discuss the earnings. Here are the highlights:
On the pricing environment
DS: "During the quarter, we continued to see additional weakness in global recycled commodity markets and further declines in U.S. rig counts and drilling activity. Despite these macro headwinds, the business is performing ahead of plan. As a result, we are raising our full-year adjusted EPS guidance to $3.28 to $3.30. We also expect to achieve the upper-end of our adjusted free cash flow guidance range."
JVA: "In the third quarter, the pricing environment remained favorable. We continued to price in excess of our cost inflation and maintain customer defection, or churn, of 7 percent. Core price, which represents price increases to our same-store customers, net of rollback was 4.7 percent. This included open market core price of 5.7 percent and restricted core price of 3.1 percent.
"Average yield, which measures the change in average price per unit and takes into account customer churn, was 2.8 percent. Average yield was strong across all lines of business. In our small-container collection business, average yield was 4.1 percent. In our landfill MSW [municipal solid waste] business, average yield was 3.3 percent. This level of landfill MSW pricing is especially impressive, given approximately two-thirds of our MSW volume is restricted.
"During the quarter, recycled commodity prices continued to decline. Our average price per ton in the third quarter was $72. This represented a $6 sequential decrease from the second quarter and a $34 decrease versus the prior year. Prices have continued to decline in October, and we estimate our October price per ton to be approximately $68.
"Importantly, we continue to make progress transforming recycling into a more durable, economically sustainable business model. As a result, next year, we expect our sensitivity to commodity prices to decrease."
JVA: "Our team has made great progress moving our disposal contracts away from CPI [Consumer Price Index]-based pricing to a more favorable pricing mechanism. In total, including both collection and disposal-related contracts, we’ve converted $775 million, or 31 percent of our CPI-based book of business to a waste-related index, or fixed rate increase of 3 percent or greater.
"Average yield is also benefiting from improvements in our municipal recycling collection contract. We are working to ensure they reflect the true cost of recycling and include a more equitable risk-sharing arrangement. We’ve now secured price increases from approximately 35 percent of our municipal recycling collection customers."
On waste volumes
JVA: "Total volume in the quarter decreased 40 basis points and was in line with our expectations. Underlying volumes increased 10 basis points after normalizing for the impact of intentionally shedding certain volumes, including non-regrettable contract losses in our residential collection business and work performed on behalf of brokers. We expect the broker-related headwinds in our small-container business to decrease in 2020, as we anniversary some of the larger losses.
"In the third quarter, volume across all collection lines of business improved sequentially. At the same time, average yield for our total collection business was 3.1 percent. On the disposal side of the business, MSW volume growth continued to be strong at 1.8 percent, and C&D [construction and demolition] volumes increased 15.8 percent. As expected, special waste volumes decreased versus the prior year due to a difficult comp. Looking forward, the Q4 pipeline remains strong."
On acquisition strategies
DS: "We believe investing our free cash flow in acquisitions is the best way to increase long-term shareholder value.
"We look for appropriately priced solid waste acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles. We also look for opportunities to increase the scale of our environmental service offerings, including materials management and waste disposal. These offerings address the needs of our upstream E&P customers and downstream refinery and petrochemical customers.
"In the third quarter, we invested approximately $275 million in acquisitions. This brings our year-to-date acquisition investment to $490 million. Our acquisition pipeline remains robust. For the full-year, we are on track to invest approximately $550 million and believe 2020 could be another strong year of acquisition investment."
On the outlook for 2020
CS: "Regarding our adjusted EPS outlook, we’re assuming recycled commodity prices remain at current levels of approximately $68 per ton. Next, we’re assuming an adjusted effective tax rate of 21 percent and a non-cash charge of approximately $110 million. The year-over-year increase in tax-related expense in 2020 results in a $0.16 headwind to earnings relative to 2019.
"Turning to our adjusted free cash flow for 2020. Our outlook includes $100 million of CapEx associated with the reinvestment of tax-reform savings. These funds represent continued investments in updated locker rooms, break rooms and training facilities for the benefits of our frontline employees. This $100 million capital investment will not reoccur in 2021.
"Our 2020 cash flow outlook also includes an incremental headwind of approximately $40 million from working capital. The working capital headwind is due to the timing of disbursements in 2020 relative to 2019 and will not reoccur in 2021.
"Lastly, regarding capital allocation in 2020. Although we believe next year will be a strong year of acquisitions, our outlook only contemplates $200 million of investment. Additionally, we’re assuming we spend approximately $400 million in share repurchases."