Republic Services, Inc. — 2024 Q1

No. It probably opened a month later than we thought all around related permitting and infrastructure issues. The core operations are actually exceeding our expectation. Shipping to customers, they think it is some of the, if not the, cleanest recycled PET flake in the world. So the facilities, the team are executing really, really well. And again, happy with our equipment providers, happy with everything, and we're up and running in Indianapolis, and we're probably -- should shortly announce our third location on the East Coast.

Yes. We're targeting a 25% EBITDA margin there in the midterm and it's really going to be a series of levers, right? We're going to think about customer mix and making sure that we have customers that are willing to pay. We'll obviously think about pricing for the value we deliver on that. We'll drive additional revenue through cross-sell, which we've talked about. And the IT investments help there. They also help us manage the middle, just better labor utilization, more efficiency in terms of disposal, optimizing disposal assets and getting the material into the right spot. And then as we grow, we'll certainly get more leverage on our SG&A. So we've got a series of levers that we think get us to 25% in the midterm.

We think, overall, that was about a 50 basis point drag on total volume performance. So you can think about that being down circa 1%. Half of which was weather-related and then just half more in those cyclical volumes as we talked about, construction activity and the like.

Yes, I think it modestly exceeded our expectations. And I think that cadence we laid out is still right as we see the -- it will sort of come down. Could we extend that a little higher as the interest rates remain high and I think inflation has been a little stickier than people expected? Yes, I think there's certainly potential for that.

Yes. I think we're making great progress on that, Michael. Listen, that ES was a little softer in the quarter where certainly, weather impacted them. And they were also coming off a pretty tough comp because we had a great first quarter last year. But that pipeline remains strong. I think we stopped talking about the pipeline at $150 million. That pipeline has grown from there. Now that pipeline is over a couple of years. It builds out as these opportunities develop. Either the work initiates from a recurring generator or sometimes, it's a project that has a scheduled start that has pushed out a few months.

Michael, to your point, the obvious solution to that is to sit there and either get an increased level of service, whether it be the size of the container or just the number of times, the frequency that we're providing that service. But when you take a look just at those incremental revenues, they've been fairly sticky, meaning even though we've had these, because they're not consistent, they tend to be somewhat episodic as well. So again, when we're providing the service based on a certain amount of volume within that container, if there's those overages, we're going to charge for that and same with the contamination. Ultimately, could that change behavior over time? Yes, and we would want that. And at which point then, that probably just results in increased frequency, which positively impacts the top line as well.

And that is the protocol, right? If somebody's got multiple overages, right, the protocol is it's pushed through Salesforce and the salesperson calls on that customer says, hey, it's time to go from twice a week to 3 times a week or a larger container or whatever the right solution is. To Del's point, I think it's still early days, and we've seen it's across a variety of customers, right? It's not like we're getting all this from the same small set of customers. It's kind of one-sie, two-sie on that front, so it's a little early to tell in terms of what that conversion looks like in the kind of permanent upgrades.

Well, I think what we talked about, Bryan, on the recycling side a little bit, was on those fees. We were just talking about more on the contamination side. So again, when you take a look at how we're deploying AI into the business, we're doing it on overages, right, on the traditional waste. And then on the recycling, it's more about contamination. So that's what we're talking about there.

Sure. Yes. I think we're -- the team is executing well in the middle. The outlook is favorable in terms of cost. But on the wage side, that cake is already baked. We give our colleagues all their annual increase at the end of February, right? And even if inflation cools, we don't call them up in September and say, we want some of that back. So that forms -- it's more of a step function in terms of cost. Same thing on third-party transportation. I'd say the most dynamic parts of the cost structure are landfill operating and maintenance. And just on maintenance, again, team is executing well. We're taking more truck deliveries, and that will certainly have a positive aspect as we park some older trucks and replace those with newer trucks. The maintenance cost is obviously substantially lower on those newer trucks, so that should provide a nice benefit toward the second half of the year.

Yes. We certainly feel comfortable with how the team is executing in our plan for the rest of the year on that front. And look, for the overall environment, keep in mind, we're in a pretty much a zero-growth volume environment on recycling and waste over the last couple of years, if you think about housing starts and the correlation of that to volume on that front. And certain parts of the economy are a little slower like construction for sure, with interest rates remaining elevated, both commercial and residential construction has been softer on that front.

No, it's -- to your question, right, we got off to a nice strong start, but it's the first quarter, right? So again, we like to see that continue, that seasonal uptick. We've got some strength right now in recycled commodity prices, but we're 1/4 of the way through. So to your observation, we've gotten us to a really good start to the year, which would suggest there's some modest upside. But we've got to sit there and see it play through the remainder of the year. But we're very pleased with our results in the first quarter.

Yes. Most of that is the investments that we're making in those JVs. So we would expect between what we're doing on the landfill gas to energy as well as the investments in Blue Polymers to be about $230 million of investments in those JVs in '24.

It does. Yes.

Well, the acquisition that we completed was in the fourth quarter of '23. So most of what you're seeing there on the environmental solutions side is the rollover impact of a company that we bought out on the West Coast. And we talked about that in our fourth quarter release. But when you think about the total rollover impact right now of acquisitions, so that which closed in '23, together with the deals that closed in the first quarter, it's about 220 basis points of rollover impact to revenue in '24.

Yes. Well, now you've got a system which is going to be seamlessly integrated. So when you think about the platform that we put on both the financial and the procurement side, now being seamlessly integrated with an asset management system, so our ability to track parts and to be able to sit there and make sure that we're getting warranty recovery on every single part that we take off a truck, greatly enhanced. Right now, it's a very manual exercise in order to sit there and to get those warranty dollars as well as just greater efficiency for the technician.

Yes, we would expect obviously a sequential improvement from what we saw in Q1 just because we don't -- we're not expecting the weather impact again. Q2, yes, we would expect it to be a little bit negative, given what we're seeing with some of the construction-related activity. We're not seeing a rebound there yet. As we get into the second half of the year, we start to anniversary some of those construction-related declines. So we would expect that to be flat to even potentially slightly positive.

Yes. We're -- it's a net positive for sure. We talked about kind of $70 million to $90 million last year of PFAS-related revenue. We'll have that number better this year with the pipeline that's building. So we offer a very unique set of products and services to our customers to help them remediate, all the way from the service to multiple opportunities for disposal, solid waste, landfill, obviously.

Yes. Listen, consumer packaged goods companies for a long time have talked about minimum content goals. I think when the regulatory environment came online with California and that the other states have followed, that's really what's driven different activity in the marketplace. So we had pretty clear expectations for returns when we built the Las Vegas polymer center. As we always do, we're going to be good stewards of capital, and we've certainly exceeded our expectations there. And I think there's more upward opportunity as we go. We could sell out that facility 5x over.

Yes. Pipeline is strong. It's activity, like I said, was certainly weather-related impact in the first quarter. Pipeline is strong. We got a number of attractive things, again, both on recurring streams and some event work in the pipeline. The market is structurally short supplied on incineration. And even with the new capacity coming online, I think it's likely to be tight for the foreseeable future on that front.

Yes. We're seeing certainly great trucking safety numbers. We talked about turnover. We talked about NPS. And listen, all these things are connected. We've done this a long time, and we know that when you are fully staffed and you've got trained and tenured drivers, they provide great customer service, right? It lowers your risk costs. Those customers are happy with the product offering, and they're willing to pay more and stay longer. So we're certainly seeing some of the benefits of a reduced turnover as well.

Yes. Listen, I think that market, we've talked about this at length that's -- over the last decade as the business has improved and transformed in lots of ways, that's one of the parts of the business that hasn't made as much progress. And we have a very strong belief that we need to raise returns in that part of the business. And on balance, I'd say, competitive conduct is improving in terms of people getting a fair return for the work they do. It still has room to improve. And we're going to be disciplined in that space, and we're not going to do work for low returns. And if a city wants a different provider who might be cheaper but doesn't provide as much benefit, so be it. We're going to put our -- allocate our capital to places where we get a very attractive return.

No problem. We haven't talked about it probably. It's sub-20%. And there's a seasonal curve to turnover, obviously. Again, it goes up in Q2 and Q3, just like volumes do, and comes down in Q4 and Q1. Listen, running the business sub-20%, right, this gets very attractive in terms of all the operating metrics I talked about earlier, including the financial performance of the business.

This is Harold Antor on for Stephanie Moore. I guess just on the M&A side, do you expect this year to be above average M&A? We've heard some of your other competitors say, M&A this year may be a little bit more active. And I guess in terms of your verticals, which verticals would you look to see -- would you look to make the biggest gains in M&A?

Listen, we had a really outsized -- we're coming off $5.5 billion of M&A spend over the last 3 years. There's also -- there's always some episodic nature to that. We closed 2 really big transactions last year in the fourth quarter. And I think last year, there was a $1.8 billion spend. $1.4 billion of it was in recycling and waste, so there's a natural ebb and flow of just when those deals close. And we don't time any of those things around a quarter or a year, right? We do that when the seller is ready to sell on that front. The pipeline remains strong in recycling and waste and environmental solutions.

And I believe that you said recycled commodities are trending at $160 per ton. Is that what you're baking in for 2Q? And if not, I guess, what are you baking in there? And I guess one housekeeping is, what is internal inflation running right now?

Yes. I mean right now, we're just pegging to what we see, which is running right around that $160 per ton. But back to my earlier comment, we want to see that stay for a longer period of time before we sit there and say that, that's where it's going to be for the remainder of the year.

Sure. Yes. No, most of that is the acquisition we did in the fourth quarter, ACT. And as you know, when we do acquisitions, we always invest heavily in Q1 -- or in the first year rather, the pro forma, to integrate on that front. So that's what's the drag on that. But again, our margin outlook for ES is certainly positive for the year.

Yes. And we would expect that to abate, that margin headwind on the acquisition, and we ultimately expect to see margin expansion in that business on a full year basis.

Well, look, solid waste ran at 120 basis points in our first quarter. As we say again, we talked about that cadence on environmental solutions moving in that 75 to 100 basis points per year, right? And we see that on a sustained basis in the medium term until we hit that medium-term target of circa 25%. So I think you can think of it in that ZIP code.

Yes. So if you just take a look, again, if you look at our entire revenue stream, about 45% of our revenue has some sort of contractual pricing restriction, 55% in the open market. So of that 45% that has that contractual pricing mechanism, 23% is directly linked to CPI, headline CPI. 27% are alternative indices like water, sewer trash, garbage trash. And then the remaining 50% are either a fixed rate increase, some sort of rate review, things of that nature. So we've continued to move, right, the book away from headline CPI to alternative indices, where now we have more on alternative indices than we do on headline.

Yes, certainly, Michael. I mean, we're dynamic in that in the market. And if you look at the quarter, volume was down 10.8%, but price was up 7.1%. And I just think that speaks to the strength of the execution, frankly, that strength of the industry, right, in an environment where volume is declining. If you go back a decade or 2, you might see behavior change and pricing be flat or even pricing go negative. And I think people understand the value of the products and services they're delivering. And the ability to flex and scale in that business is quicker than almost any and certainly, our team has done a great job of that.

Historically, that was true, Michael. But as we provide, again, a broader set of products and services, we certainly expanded the offering, right? And we're a significant player in that place, in that space in terms of liquids because we're going to recurring revenue generators and handling 5, 6, 7, 8, 10 products in their facilities. And it can certainly be on the organic and inorganic side.

Correct.

Thank you, MJ. I would like to thank the entire Republic Services team for their efforts and commitment to driving lasting value for all of our stakeholders. I'd also like to make a special acknowledgment to Michael Hoffman, a senior statesmen on the call. He's been with the industry for decades. And as he's announced, he's starting a new chapter, certainly supporting the industry in a different capacity. But over the last number of decades, he's certainly seen a lot of transformation in the industry and has handled this environment and this community with a lot of excellence and professionalism. So congratulations, Michael, in your next chapter. Have a good evening, everyone, and be safe.