Republic to ramp up acquisitions, rethink operations

Republic to ramp up acquisitions, rethink operations

Republic says it expects to invest $600 million to $650 million in acquisitions and is taking steps to reevaluate how its employees work.

August 7, 2020

Republic Services Inc., Phoenix, announced its Q2 earnings Aug. 6, reporting quarterly revenue of $2.45 billion, down from $2.61 billion from the prior-year period. For the six months ended June 30, the company’s revenue was $5.01 billion, down from $5.08 billion for the same period the year prior.

Additionally, the company reported a net income of $225.5 million, or 71 cents per diluted share, for the three months ended June 30 versus $251.5 million, or 78 cents per diluted share, for the comparable 2019 period. Excluding certain gains and expenses, on an adjusted basis, net income for the three months ended June 30 was $258.2 million, or 81 cents per diluted share, versus $254.1 million, or 79 cents per diluted share, for the comparable 2019 period.

"Our second-quarter results clearly demonstrate the resiliency of our business and the strength of our cash flow. During the quarter, we expanded adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin 170 basis points, increased adjusted earnings and delivered double-digit growth in adjusted free cash flow," Republic CEO Donald Slager stated in a news release. "I am extremely proud of the team's perseverance during these challenging times. Thanks to their hard work and laser-focus, we provided uninterrupted service to our customers, rapidly adjusted the business as volumes changed and effectively managed our cost structure. We continue to invest in the safety and well-being of our people and achieved our best-ever safety performance in the company's history.

"We remain confident in the team's ability to execute in this dynamic environment and are well-positioned as volumes return,” Slager continued. “As a result, we are reinstating annual cash flow guidance and now expect to generate $1.1 billion to $1.18 billion of adjusted free cash flow in 2020."

As part of its Q2 earnings call, the company offered a number of insights. 

Slager on the company’s volume:

“Our economic outlook is positive. Since April, total volume has increased month-over-month through July. In our small container business, we are seeing a similar volume trend. Additionally, container weights increased sequentially through July, indicating steady improvement in consumption and economic activity.”

Republic President Jon Vander Ark on revenue and volume trends:

“As expected, revenue decreased in the quarter due to customers temporarily suspending or reducing service levels. Volume decreased 7.4 percent versus the prior year. The volume decline was steepest in April and sequentially improved throughout the quarter. In April, total volume decreased 10.2 percent. In June, volume improved to a 5.4 percent decline versus the prior year. The decline in volume and pace of recovery varies by line of business and by market.

“Landfill special waste volume was impacted the most, decreasing 17 percent versus the prior year. Special waste volumes were down 22 percent in April, and in June, were down 13 percent. The decrease in special waste volume was primarily due to jobs being deferred, not canceled, and the pipeline remained strong. In the second quarter, landfill MSW volume decreased 3.5 percent and landfill C&D volume was essentially flat.

“Second quarter small container volume decreased by 8.8 percent. In April, small container volume was down 10.5 percent. By June, volume sequentially improved 300 basis points and was down 7.5 percent versus the prior year. Second-quarter large container volume decreased 12.4 percent. In April, large container volume was down 17.3 percent, and by June, volume was down 7.2 percent versus the prior year. We expect volume to continue to recover over the remainder of the year.”

Vander Ark on how Republic worked with customers during the pandemic:

“During the quarter, we waived contractual terms to support our customers in their time of need. We made pausing and resuming service simple and easy. We waived late fees and offered flexible payment plans to our most loyal customers in need of assistance. Our results demonstrate that customers appreciate our efforts and value our service. Our net promoter score increased nine points from the prior year, and we maintained our customer churn of 7 percent.

“Additionally, we successfully executed our pricing program to cover our cost and inflation. This enabled us to continue to deliver the essential services we provide while being mindful of the challenges our customers faced. Total core price was 4.7 percent. This included open market pricing of 5.5 percent and restricted pricing of 3.4 percent. Core price represents price increases to our same-store customers net of rollbacks. Average yield was 2.5 percent.”

Republic CFO Brian DelGhiaccio on how the company has reevaluated some aspects of its business due to COVID:

“Real estate is certainly one [area we’re focused on], and we're reevaluating what roles should always be in the office, what roles can be permanently at home and what roles will have some flexibility to them and, therefore, we capture real estate savings on the ones that [can work from] home or the ones that are flexible. I think travel is another [area we can save money], the tools that we use to work remotely, we have spent far more [on being] connected and efficient than we expected. There is a role for travel going forward, so operating completely virtual is not a norm that we'll have, but we'll certainly be spending less on [travel and entertainment] (T&E) as we go forward.

“And then just in terms of labor productivity, I think our ability to flex labor and move people and cross-train, move people across different lines of business, has allowed us to serve customers really well, as well as manage cost at the same time, and we'll certainly carry some of those [best practices] forward as we recover from the pandemic.”

Slager on the company’s M&A expectations for the year:

“With the [M&A] pipeline not only strong for the remainder of the year—the $600 million to $650 million range—we've given what we think is [a strong projection] into next year. So, do I have a [M&A] outlook for the next 10 years? I don't, but I would tell you just based on where we are in this point of history, there're a lot of great companies out there.

“We know where they are, who they are and we have ongoing conversations. We think there is a robust pipeline of deals and [we have] a continued appetite for good deals—good companies are going to be somewhat of a regular diet for us, at least into the future here. We have the appetite and the team continues to demonstrate their ability to very efficiently integrate these things. … And as we look back at the deals we've done, we've got a high degree of confidence in what they've delivered.

“So, we know that we're paying the right price for deals and making the right assumptions on the way in. That gives us all more confidence to keep going.”

Other Q2 earnings report highlights include:

  • Year-to-date cash provided by operating activities was $1.33 billion, an increase of 17.4 percent versus the prior year. Adjusted free cash flow, a non-GAAP (generally accepted accounting principles) measure, for the same period was $743 million, an increase of 19.7 percent versus the prior year. The increase in adjusted free cash flow was primarily due to improvements in working capital.
  • Year-to-date cash flow invested in acquisitions was $124 million, or $95 million net of divestitures. The company expects to invest $600 to $650 million in acquisitions for the full year.
  • Second-quarter core price increased revenue by 4.7 percent, which consisted of 5.5 percent in the open market and 3.4 percent in the restricted portion of the business.
  • Second-quarter average yield was 2.5 percent.
  • Second-quarter adjusted EBITDA, a non-GAAP measure, was $726 million and essentially flat versus the prior year.
  • Second-quarter adjusted EBITDA margin was 29.6 percent of revenue and increased 170 basis points over the prior year. This included a 110 basis point benefit from higher recycled commodity prices and lower fuel costs and a 130 basis point headwind from $31 million of COVID-related costs.
  • The company continued to convert CPI-based contracts to more favorable pricing mechanisms for the annual price adjustment. The company now has approximately $850 million in annual revenue, or 34 percent of its approximately $2.5 billion CPI-based book of business, tied to a waste-related index or a fixed-rate increase of 3 percent or greater.
  • The company's average recycled commodity price per ton sold in the second quarter was $101. This represents a sequential increase from the first quarter of $25 per ton as well as an increase versus the prior year of $23 per ton.

2020 financial guidance

Republic reinstated its full-year adjusted free cash flow guidance. It expects to generate $1.1 billion to $1.18 billion of adjusted free cash flow for the full year. This guidance assumes continued gradual improvement in economic activity through the remainder of the year.

Company declares quarterly dividend

Republic continues to increase cash returns to shareholders and previously announced that its board of directors approved a 2-cent increase in the quarterly dividend. The quarterly dividend of 4.25 cents per share for shareholders of record on Oct. 1 will be paid Oct. 15.

"We are raising the dividend by 5 percent to reflect our confidence in delivering consistent free cash flow growth," Slager says. "The annual dividend per share has increased 16 consecutive years, which demonstrates our commitment to efficiently return cash to our shareholders."