REPUBLIC SERVICES, INC. Q3 FY2024 earnings call

Key Points

• The Republic Services team executed its strategy to deliver strong third quarter results, with revenue growth of 7%, adjusted EBITDA growth of 14%, and adjusted earnings per share of $1.81.
• Customer retention rate remained strong at over 94%, and organic revenue growth was driven by strong pricing across the business with average yield on total revenue at 4.6% and on related revenue at 5.5%.
• Advanced deployment of digital tools like MPower, a new fleet and equipment management system, with completion anticipated by end of 2025 and estimated $20 million annual cost savings once fully implemented. Also, technology on recycling and waste collection routes generated over $60 million in incremental revenue in the first year.
• In sustainability, development of polymer centers and Blue Polymers joint venture facilities continued, with Las Vegas Polymer Center production volumes increasing, Indianapolis Polymer Center construction progressing, and a Blue Polymers production facility in Buckeye, Arizona broken ground. Renewable natural gas projects advanced with 4 projects coming online in third quarter and 4 expected in fourth quarter. Fleet electrification had 28 electric collection vehicles in operation and expected over 50 by year end, with 18 facilities having commercial scale EV charging infrastructure. Employee turnover rate improved over 100 basis points year-over-year and was certified as a great place to work for the eighth consecutive year.
• Year-to-date, $104 million invested in strategic acquisitions with over $200 million of transactions expected to close by end of year, and $834 million returned to shareholders including $330 million of share repurchases.

During the third quarter, Republic Services achieved revenue growth of 7% and adjusted EBITDA growth of 14%, with adjusted EBITDA margin expanding by 210 basis points to 32%. For recycling, commodity prices were $177 per ton in the third quarter compared to $112 per ton in the prior year, and recycling processing and commodity sales increased revenue by 70 basis points. The Environmental Solutions business saw third quarter revenue increase by $60 million compared to the prior year, and adjusted EBITDA margin in this business expanded 290 basis points to 25.5%. Revenue contribution percentages weren't explicitly stated for each segment but key financial figures for each segment were provided.

Guidance

• For 2024, trending toward low end of revenue guidance due to continued softness in cyclical volumes but expecting to achieve high end of full year adjusted EBITDA guidance, with EBITDA margin expected to outperform expectations.
• For 2025, expect continued growth across the business supported by pricing ahead of underlying costs, cross-selling products and services, and capitalizing on value-creating acquisition opportunities. Also expect financial contribution from sustainability innovation investments. Plan to provide detailed 2025 guidance on earnings call in February.

Risks

• Uncertainties related to the deployment and adoption of EV technology and infrastructure, as well as potential challenges in meeting EV targets given varying paces of adoption by OEMs.
• Uncertainties in the pace of M&A deals, as some deals may take longer to close and there are ebb and flow in the M&A pipeline.
• Potential impacts from changes in market conditions, commodity prices, and regulatory policies that could affect the company's financial performance.

Q: Could you expand on any other onetime type items in the quarter and the 4Q margin step down?

A: In the third quarter, the insurance recovery had an impact of a positive 50 basis points and the bad debt adjustment was 110 basis points to Environmental Solutions. The 4Q margin step down is reflective of the indices and expected given the anniversarying of new fees from last year.

Q: Can you expand on the performance of the polymer center rollout?

A: Happy with the pricing beating pro forma math, but had a later start than expected due to permitting and construction related issues. Volume ramp is going well with equipment building, but some delays in other aspects of the construction process.

Q: Talk about on the core price deceleration this quarter?

A: The restricted portion of the business went from 5.6% to 4.9% on the price increase perspective, reflective of the indices themselves and expected sequential step down.

Q: On the M&A pipeline, update on the incremental $100 million?

A: Had a slower start to M&A this year, but expect to have a good first half next year on M&A with outlook and enthusiasm for M&A remaining strong.

Q: On the EV strategy and 2028 timeline?

A: EV is a system, need to understand infrastructure and incentive environment. OEMs have varying paces of adoption, but Republic is working on it with teams and sees it as a long-term strategy.

Q: On the margin side for 2025?

A: Expect to grow revenue mid-single digits and EBITDA slightly faster than that implying EBITDA margin expansion and free cash flow slightly faster than revenue, with EBITDA margin across the cycle expected to be in the 30 to 50 basis points range.

Q: On the Environmental Services and margin view?

A: Environmental Services EBITDA margin over time could be very similar to the recycling and waste business given the nature of the products and valuable service provided, and new incineration coming online is seen as an opportunity.