Republic Services Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 14 speakers on the call.

Operator

Good afternoon, and welcome to the Republic Services Third Quarter 2024 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations. Please go ahead.

Speaker 1

I would like to welcome everyone to Republic Services' 3rd quarter 2024 conference call. John Vander Ark, our CEO and Brian DelGachio, our CFO are on the call today to discuss our performance. I would like to take a moment to remind everyone that some information we discuss on today's call contains forward looking statements, including forward looking financial information, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive.

Speaker 1

If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 29, 2024. Please note that this call is property of Republic Services Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. Our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with the recording of this call are available on Republic's website at republicservices.com. I want to remind you that Republic's management team routinely participates in investor conferences.

Speaker 1

When events are scheduled, the dates, times and presentations are posted on our website. With that, I'd like to turn the call over to John.

Speaker 2

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. We delivered strong third quarter results by effectively executing our strategy that supports profitable growth and value creation. The Republic Services team continues to deliver world class service and innovative solutions to meet the needs of our customers. During the quarter, we achieved revenue growth of 7%, generated adjusted EBITDA growth of 14%, expanded adjusted EBITDA margin by 2 10 basis points, reported adjusting earnings per share of $1.81 and produced $1,740,000,000 of adjusted free cash flow on a year to date basis.

Speaker 2

Through our differentiated capabilities, customer zeal, digital and sustainability, we continue to be well positioned to capture new opportunities and create long term value for our stakeholders. Regarding customer zeal, our focus on delivering world class essential services continues to support organic growth and enhanced customer loyalty. Our customer retention rate remains strong at more than 94%. 3rd quarter organic revenue growth was driven by strong pricing across the business. Average yield on total revenue was 4.6% and average yield on related revenue was 5.5%.

Speaker 2

This level of pricing continued to exceed our cost inflation and helped drive 2 10 basis points of EBITDA margin expansion. Organic volume on total revenue declined 1.2%. Volume losses were heavily concentrated to the cyclical portions of our business, including special waste and construction activity. Turning to our expanding digital capabilities. We continue to advance the implementation of digital tools to improve the experience for both customers and employees.

Speaker 2

Deployment of mpower, our new fleet and equipment management system is underway. MPOWER is designed to increase maintenance technician productivity and enhance warranty recovery. Deployment of the new system is anticipated to be completed by the end of 2025. We estimate Empower will deliver $20,000,000 annual cost savings once fully implemented. We continue to benefit from innovative technology on our recycling and waste collection routes.

Speaker 2

Our platform utilizes cameras to identify overfilled containers and recycling contamination. This technology generated more than $60,000,000 in incremental revenue in the 1st year of operation. Moving on to the sustainability. We believe that our sustainability innovation investments in plastic circularity and renewable natural gas position us to continue grow and create long term value creation. Development of our Polymer Centers and Blue Polymers joint venture facilities continues to move forward.

Speaker 2

Las Vegas Polymer Center production volumes continued to increase throughout the quarter. Construction is progressing on our Indianapolis Polymer Center with initial equipment commissioning underway. This operation will be co located with a Blue Polymers production facility. We expect construction on this facility to be complete by the end of this year with earnings contribution in the second half of twenty twenty five. We recently broke ground on a Blue Polymers production facility in Buckeye, Arizona.

Speaker 2

This facility will complement the Las Vegas Polymers Center. We expect the completion of this facility in late 2025. We continue to bring decarbonization solutions to the market that will unlock value for all of our stakeholders, including the communities we serve. The renewable natural gas projects we're developing with our partners continue to advance. Two projects came online during the Q3, bringing the total completed this year to 4 projects.

Speaker 2

We expect 4 additional RNG projects to be completed during the Q4. We continue to advance our commitment to fleet electrification. We currently have 28 electric collection vehicles in operation and expect to have more than 50 EVs in our fleet by the end of the year. We have 18 facilities with commercial scale EV charging infrastructure. As part of our approach to sustainability, we are committed to being an employer of choice in the markets we serve.

Speaker 2

Our 3rd quarter employee turnover rate improved more than 100 basis points compared to the prior year and we are proud to be certified as a great place to work for the 8th consecutive year. With respect to capital allocation, year to date we have invested $104,000,000 in strategic acquisitions. Our acquisition pipeline remains supportive of continued activity in both recycling and waste and environmental solutions. We currently have more than $200,000,000 of transactions that are expected to close by the end of the year. Year to date, we returned $834,000,000 to shareholders, which includes $330,000,000 of share repurchases.

Speaker 2

I will now turn the call over to Brian, who will provide details on the quarter. Thanks, John. Core price on total revenue was 6.2%. Core price on related revenue was 7.4%, which included open market pricing of 9.1% and restricted pricing of 4.8%. The components of core price on related revenue included small container of 10.3%, large container of 6.9% and residential of 7.2%.

Speaker 2

Average yield on total revenue was 4.6 percent and average yield on related revenue was 5.5%. As expected, average yield stepped down sequentially as we began to anniversary the impact of new fees implemented last year. The fees relate to overfilled containers and recycling contamination and were enabled by our digital platform. 3rd quarter volume on total revenue decreased 1.2% and volume on related revenue decreased 1.5%. Volume results included a decrease in large container of 3.6%, primarily due to continued softness in construction related activity and a decrease in residential of 2.9 percent primarily due to municipal contracts lost in 2023 that anniversary in the Q4 of this year.

Speaker 2

During the quarter, small container volume decreased 40 basis points, while landfill MSW increased 30 basis points. Moving on to recycling. Commodity prices were $177 per ton during the Q3. This compared to $112 per ton in the prior year. Recycling processing and commodity sales increased revenue by 70 basis points during the quarter.

Speaker 2

Commodity prices are currently $160 per ton reflecting a recent decline in the price for recovered cardboard or OCC. Total company adjusted EBITDA margin expanded 2 10 basis points to 32%. Margin performance during the quarter included margin expansion in the underlying business of 120 basis points, a 40 basis point increase from net fuel, a 30 basis point increase from recycled commodity prices and a 50 basis point benefit from an insurance recovery related to a prior year claim. This was partially offset by a 30 basis point decrease from acquisitions completed in the prior year. Now turning to our Environmental Solutions business.

Speaker 2

3rd quarter Environmental Solutions revenue increased $60,000,000 compared to the prior year driven by the rollover contribution from prior year acquisitions. Adjusted EBITDA margin in the Environmental Solutions business expanded 2 90 basis points to 25.5% in the 3rd quarter. Environmental Solutions EBITDA margin was 22.6% in the prior year. Environmental Solutions margin included a positive 110 basis points from an adjustment to an allowance for bad debts established in the prior year. Excluding this benefit, Environmental Solutions margin would have been 24.4%.

Speaker 2

Year to date adjusted free cash flow was $1,740,000,000 The decrease from the prior year is primarily due to the timing of capital expenditures. Year to date net capital expenditures of $1,190,000,000 represents an increase of $256,000,000 or 27% compared to the prior year. Capital spending is more ratable in 2024 whereas 2023 was heavily weighted to the 4th quarter. Prior year capital expenditures were impacted by vendor related delays in truck and equipment deliveries. Total debt was $12,600,000,000 and total liquidity was $2,600,000,000 Our leverage ratio at the end of the quarter was approximately 2.6 times.

Speaker 2

With respect to taxes, our combined tax rate and impact from equity investments in renewable energy resulted in an equivalent tax impact of 21.6% during the quarter. This favorable tax rate driven primarily by the timing of equity investments in renewable energy contributed $0.09 of EPS benefit during the quarter. I will now turn the call back over to John. Thanks, Brian. With respect to 2024, we believe we are trending toward the low end of our full year revenue guidance due to continued softness in cyclical volumes.

Speaker 2

That said, we expect to more than overcome this revenue headwind and achieve the high end of our full year adjusted EBITDA guidance. As a result, we expect EBITDA margin to outperform our expectations. Looking forward to 2025, we expect continued growth across the business supported by pricing ahead of underlying costs, cross selling our complete set of products and services and capitalizing on value creating acquisition opportunities. We also expect financial contribution from the investments made in sustainability innovation, including plastic circularity and renewable natural gas projects. We believe that the fundamentals of our business remain strong and supportive of continued growth in revenue, EBITDA and free cash flow along with margin expansion in the underlying business.

Speaker 2

Over the long term, we believe our business can consistently deliver mid single digit revenue growth and grow EBITDA, EPS and free cash flow faster than revenue. Our initial perspective on full year 2025 is consistent with this long term growth algorithm. We plan to provide detailed 2025 guidance on our earnings call in February. With that, operator, I would like to open the call to questions.

Operator

Certainly. We will now begin the question and answer session. And our first question today comes from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 3

Yes. Hi. Good afternoon and good evening, everyone. Nice quarter. Brian, I'm wondering if you could just expand if there were any other one time type items in the quarter, really impressive margin performance.

Speaker 3

And as I look at the Q4 guidance, it looks like you're guiding to margins to step down a couple of points more than normal seasonality 4Q versus 3Q. I'm wondering is that just conservatism or were there any other embedded tailwinds in the Q3 beyond that bad debt item that you spoke about in Environmental Services?

Speaker 2

Yes. Thanks, Jerry. Yes, taking a look at the Q3, we called out the 2 big pieces that you would sit there and say were somewhat large and unusual for the quarter. So the insurance recovery, which had an impact of a positive 50 basis points to the quarter itself. We called out the bad debt as well.

Speaker 2

So it was 110 basis points to Environmental Solutions, about 10 basis point contribution to the enterprise taken as a whole. So 60 basis points, we would say ex that. The rest, I mean, I called out the pieces about what fuel and commodity prices we're doing, but the underlying business, you saw the strength of that 120 bps.

Speaker 3

Really impressive performance. And then if I can shift gears and ask you to talk about on the polymer center rollout, can you just expand on the performance so far? How has the production ramp played out versus the initial plan? And any updates to the timelines that you folks previously shared?

Speaker 2

Sure. Yes. We're really happy in terms of the pricing we're getting. We're beating our pro form a on that. Certainly happy on the volume ramp in terms of how that equipment is building.

Speaker 2

We got off to a little later start than we would have liked for things all unrelated to the equipment. So permitting of the facility, getting electricity and just getting all the things around the construction and the building envelope. Those things take time. Maybe we're a little aggressive in our time line to begin with. A little delayed from the start there, but the underlying assumptions other than a delayed start, we still feel very confident in.

Speaker 2

And India is hitting its marks, including the construction timeline there. So we feel really good about that. Listen, we think we're producing some of the cleanest flake in the world. And so that's what the market needs. It's good for circularity and certainly going to be good for our shareholders as well.

Speaker 3

I appreciate it. Thank you.

Operator

Your next question today comes from Trevor Romeo with William Blair. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks so much for taking the questions. I had one kind of on pricing, thinking about open market versus restricted. I think the last several quarters, your open market core price has been 400 basis points or more above restricted. Is that kind of a good spread for us to still think about going forward, even if some of the inflation indices kind of continue to ramp down?

Speaker 4

And then in your shift away from CPI to more of those open market and alternative indices, how much further room do you think you have to continue that shift at this point?

Speaker 2

Yes. When you take a look at the spread and we certainly talked about fact that we thought we were in an elevated pricing environment in part due to the fact that there was the backdrop of elevated inflation. And we said that throughout this year that would step down sequentially. And as we look forward into 2025, we would expect that to step down as well. Now if you take a look back historically, open market pricing has tend to run above that which you can achieve on the restricted portion of the business.

Speaker 2

I would say right now that spread is probably a little bit more than what I would think about through the cycle. But all that said, we would expect a price in excess of our cost inflation consistent with what we've done over the last couple of years and drive margin expansion in the business.

Speaker 4

Got it. Thank you.

Speaker 2

And then in terms of moving away from the industry or rotating away from CPI, we continue to make incremental progress on that. So a couple of big contracts moving to water, sewer, trash and it's really some moving to fixed and above and it's really the portfolio that we think positions us well across the cycle. Yes. And we're about 61% of those contracts that were historically pegged to headline CPI that have moved to something that we would consider favorable.

Speaker 4

Got it. Okay. Thank you both. That's helpful. And then just quickly, wondering if we could talk about labor availability a bit.

Speaker 4

I think based on the BLS data, wage inflation in your industry is kind of mid single digits. Curious if that's still what you're seeing as well? And then just kind of as the overall labor market has maybe cooled a bit the past few months, have you seen any changes in labor availability?

Speaker 2

Yes. We mentioned turnover down 100 basis points year over year. We continue to trend in a really positive direction there. Labor cost inflation is 4.5% -ish. We're hanging out right there and getting that cake is largely baked because we start we give our people a wage increase at the end of February.

Speaker 2

On that front, we expect that to step down marginally as we move into next year based on where the current numbers are pointing. And then yes, labor availability is improving. There's still categories like technicians, which have been historically tough in this industry and they are getting tougher. That's why we vertically integrated into technical education and sort of our own tech institute and are growing our own and having a lot of success fielding entry level techs out of that center.

Speaker 4

Okay. Thanks so much. Appreciate the color.

Operator

And your next question today comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Speaker 5

Thank you so much. I was hoping to ask for some additional color on the core price deceleration this quarter. I know you mentioned the anniversarying of the new fees from last year. Obviously, that was expected. Anything else that you would point to in the quarter to call out that was notable in terms of the price environment and how we should be thinking about it as we progress through the year?

Speaker 2

Yes. If you take a look at the sequential step down from Q2 to Q4, also point out that the restricted portion of our business went from 5.6 to 4.9. So and that's just on the price increase perspective. So again, that's just reflective of the indices themselves. And again, as expected, right?

Speaker 2

We knew that it would step down sequentially. As I mentioned previously, so is our cost inflation. And as long as we can maintain that spread, that's how we drive margin expansion in the business.

Speaker 5

Great. And I did want to ask about volume as well. I know you mentioned special waste and construction softness. Should we continue to expect those trends to continue in the upcoming quarters? And anything else to call out on the volume side would be helpful.

Speaker 5

Thanks.

Speaker 2

Yes. Look, I think across the industry in the last 12 to 18 months, we're in a flat to slightly negative demand environment from a unit standpoint. So probably hasn't been talked about or well understood on that front and it's a cyclical portions driving that. It's also true a little bit in the industrial side of the business to where in large container permanent, right, we're gaining customers. So we're gaining share there, but we're seeing activity that has continued to be relatively soft at individual customers on that front.

Speaker 2

On the construction side, whether this happens in 3 to 6 months or it happens in 9 to 12 months, I'm optimistic on that side of the business for both commercial and residential. Interest rates coming down certainly helps with that. You've got both sides of the aisle talking about housing policy. We've under built single family homes in the United States in the last 15 years. And so there's a lot of pent up demand on that front.

Speaker 2

And then we're starting to see some really interesting signs here on special waste and the industrial activity. And there's always a little bit of paralysis in an election year. And we're starting to see a pipeline that's been quite strong all year, but jobs haven't moved and those jobs are starting to move here in the Q4. So we're pretty optimistic for the remainder of the year and certainly into 2025.

Speaker 5

Super. Thank you.

Operator

And your next question today comes from Kevin Chiang with CIBC. Please go ahead.

Speaker 6

Hi. Thanks for taking my question. Good afternoon and congrats on some good results. I think on the Q2 call, you mentioned just on M and A here, you had mentioned I think about a $300,000,000 pipeline that were at the back stages. It looks like you've booked about $200,000,000 dollars in Q3 here.

Speaker 6

Just wondering as we think about that incremental $100,000,000 Is that something you think you could be going to close by year end? Or is there an update to that pipeline as you kind of work through that pipeline?

Speaker 2

Maybe broader backdrop, coming off 3 really great years of M and A, our commitment to M and A has certainly not dwindled and our outlook and our optimism going forward hasn't changed. There's always some ebb and flow. So we closed a couple of really big deals in Q4 last year. First half got off to a little bit of a slower start this year. If you put together what we've already done this year and what we expect to close in the Q4, we're more like $300,000,000 where we gave you an indicator of closer to $500,000,000 at the start of the year.

Speaker 2

A lot of those deals are starting to build here and so I expect us to have a really good first half next year on that front. So that gives you a sense of kind of the movement on that front, but our outlook and our enthusiasm for M and A remains strong and we expect that to be a meaningful contributor next year.

Speaker 6

That's helpful. And just my second question here, I think about a month ago, you placed an order for about 100 EVs. And I think you're targeting, I think half of new purchases in 20.28 will be electric vehicles. I guess when we hear other commercial fleet operators, there seems to be a growing pushback on, I guess, adopting this technology, whether the argument is the technology is not ready yet or infrastructure is not ready yet. Just as you think of your EV strategy in that 20 28 timeline, just I guess how you see the OEMs, their ability to keep pace I guess with the targets you have, I guess looking out kind of 4 years from now?

Speaker 2

Yes, Definitely, there will be people that move faster and people that move slower. I mean, we've learned from all kinds of experience here that EV isn't just a truck, it's a system. So you need to understand how to put in the infrastructure and get after that early. You need to understand the incentive environment on that front because that certainly accelerates adoption and shortens the payback period. And we've had teams working on that for 3 years.

Speaker 2

And listen, the unlock is somebody building a truly studs up EV vehicle. No one's ever done that in our space before until Oshkosh with their McNeil's vehicle. And that's a game changer because that allows you to get enough battery power on the vehicle that you can run a full day without sacrificing payload. And that was always the design parameter we had, which is we're not going to sacrifice productivity to do that. So we're thrilled with the product that we have running.

Speaker 2

I think there'll be other OEMs hopefully that get there. This is incentive people to move, but there's certainly going to be winners and losers in the short to medium term in terms of pace of adoption.

Speaker 6

Thanks for taking my question.

Operator

And your next question today comes from Konark Gupta with Scotia Capital. Please go ahead.

Speaker 7

Thanks and good afternoon everyone. Just wanted to maybe catch up on the housekeeping items first on the M and A side. Did you talk about the rollover effect in 2025 based on what you have closed today?

Speaker 2

The rollover impact, yes. So we would expect right now to see relatively negligible to 25 growth. It's 10 to 20 basis points at this point.

Speaker 7

Okay. And obviously there's probably upside if we at all close some of the acquisitions you're talking about in Q4 maybe then?

Speaker 2

That is correct because that only includes that which is actually closed through the Q3. There would be rollover impact of anything that closes in the Q4.

Speaker 7

Makes sense. Thank you. And then my question is on the margin side. So if I look at the trend this year so far, the margins have sequentially expanded and you talked to some of the kind of nuances on Q3 for sure, but then Q4, the margin kind of drops on an implied basis. Heading into 2025, I'm just thinking like what are some of the puts and takes you're thinking about margin as some of the circularity projects are ramping up maybe and then some of these headwinds might fade away next year.

Speaker 7

What's the best sort of proxy for thinking about margin expansion next year?

Speaker 2

Yes, we're certainly not giving 2025 guidance, but an outlook that we've talked about in the prepared remarks and we mentioned often to investors is that we want to go revenue mid single digits and then grow EBITDA margin or EBITDA slightly faster than that, which implies EBITDA margin expansion and free cash flows slightly faster than that. And EBITDA margin across the cycle kind of think 30 to 50 basis points. Obviously, this year is going to be stronger than that, but we would certainly go into next year kind of in that zip code in terms of our expectations of how we're going to expand margin in the business.

Speaker 7

Okay. That's great for that. Appreciate the time. Thank you.

Operator

And your next question today comes from David Manthey with Baird. Please go ahead.

Speaker 8

Thank you. Good afternoon, everyone. It's less than 3 years since the E. Col acquisition and I believe you said that the EBITDA in Environmental Solutions is about 24%. Going back to 2021, eCall standalone targets were like $17,000,000 and I think $40,000,000 of synergies probably picks you up 300 basis points, 400 basis points.

Speaker 8

Is the delta there the remainder, is that just improved pricing or is there any kind of acquisition mix benefit in that improvement as well? Any help you can give us there?

Speaker 2

Yes. No, all above. It's within every lever. So starting out with on the revenue side, it's customer mix. So we're going through verticals and understanding willingness to pay and where we have pricing power and what's the more profitable verticals are and less profitable verticals.

Speaker 2

So you've seen some customer churn in that space this year as we've certainly pushed price because our services are valuable and found lots of willingness to pay and a few people that want to experience lower quality for a period of time upfront. And then just the pricing of the top line pricing, very tactical account level pricing, kind of looking at every lever there, still more upside certainly there going forward as we put in the systems and technology to give our team members better tools on that front. And then good cost management, cost discipline, right, better labor utilization. As we get bigger, especially on the field services side of the business, you're able to deploy labor in different markets and therefore get better utilization rates on that labor. So really proud of the team and the work we've done there.

Speaker 2

We said we thought we could get to 25% of the mid term target and there's some ebb and flow across quarters of course, but we've made faster progress than I think we originally anticipated and have high aspirations for that business to grow both units and margin going forward.

Speaker 8

Yes. I appreciate it. Thanks very much.

Operator

And your next question today comes from Tobey Sommer with Chua Securities. Please go ahead.

Speaker 8

Thanks. Following up on the Environmental Services and U. S. Ecology Business. What's your is there any changes in your view on the long term margins that you think you can approach over sort of many years in that business?

Speaker 8

And I'd love to get your perspective on the disposal market digesting incremental capacity. I think there's an incinerator coming online.

Speaker 2

Yes. It's about 25% free cash flow converges with the recycling and waste business across the cycle, just given the lower capital intensity of that business. Over time, the longer term, we don't see a constraint of why EBITDA margin in that business couldn't be very similar to the recycling waste business, just given the nature of the products, right? These are very technical complicated waste streams, limited number of outlets, requires a lot of environmental compliance to handle those appropriately on that front. And so we think that's very valuable service and we're going to continue to price for that over time.

Speaker 2

In terms of new incineration coming online, it's welcomed. The industry has been short supply for a long period of time and we don't see that as a challenge or constraint. We see that as an opportunity because there's pent up demand that that new capacity will be able to fulfill.

Speaker 8

Thank you. In terms of the pace of M and A, it's been a little bit slower than I had anticipated year to date. I was wondering if you could speak to that as well as the margin profile of the targets generally. I'm wondering to the extent supply chain fleet, wage growth, technology and other factors have actually sort of pressured the margins of the targets that you're looking at?

Speaker 2

Yes. I mentioned the ebb and flow of pace of M and A. Again, it's not we're going to stay disciplined. I think in fact, we just looked at this, we're 8 to 1, right? For every eight opportunities that we look at, eventually we close one of those because we're going to be very disciplined.

Speaker 2

1st, it's going to have to meet our strategic hurdle. Are we the natural owners for this? Or is it a fit? A. And then B, does it meet our financial strength on that?

Speaker 2

And so we're looking for cash on cash returns double digit post synergy on that. So we're going to remain very disciplined. And again, there's ebb and flow lots of conversations. Sometimes those things break quickly and sometimes they take a little longer, right, in that front. And that's the period we're in right now, but our enthusiasm has not changed.

Speaker 2

In terms of the margin profile, it's less about what it has today and more about what it can become because oftentimes in these businesses, we're going to park the trucks, right? We're going to recapitalize the fleet. We are going to layer in to our IT system, right? Some of those drivers will come over, some won't because we layer it right into our density and so we can take routes out of the system and do the same amount of work and that's why we drive so much value in these deals.

Speaker 6

Thank you very much.

Operator

And your next question today comes from Tyler Brown with Raymond James. Please go ahead.

Speaker 9

Hey, good afternoon guys. Hey,

Speaker 2

Tyler. Hey,

Speaker 9

I got a couple of questions here. So first, I want to kind of come back to the implied Q4 guide. But if I use the high end, it implies that Q4 is around $1,200,000,000 which I think is down high single digits from Q3, which is just worse than normal seasonality. Now I get that you've got the 60 basis points from bad debt and insurance, but it still feels a little conservative or am I missing something?

Speaker 2

I would say this out in the opening remarks we talked about low end of the revenue guide, high end of the EBITDA margin guide. That's we're getting towards the end of the year. We're focusing our plans on 2025 on that front. We don't put a lot of time and attention and energy in getting Decimal level accurate, right, on updating the guide, we gave you the markers where we're feeling really good about where we're going to end up Q4 and into 2025.

Speaker 9

Okay. That's fair. And then just to be kind of clear on the implied volume guidance in Q4, is there any benefit from hurricane cleanup efforts in there?

Speaker 2

There may be a little bit. Again, we don't plan on that certainly. Sometimes you get actually quite a nice lift coming out of these. Sometimes you get a little less than you think about. Our primary focus is first taking care of our people.

Speaker 2

Some of them have been deeply impacted especially in a lean and so we're going to get them back on their feet. And when they're back on their feet, they can get back to work on that front. And then on the back end, oftentimes, we end up making some money that helps pay for that more. But if that comes, that's just icing on the cake.

Speaker 9

Okay. And then I want to kind of comment 25 a little bit different because I think there's actually quite a bit going on next year. There's actually a number of moving pieces discrete pieces if I'm not mistaken because I think you have polymer, blue polymer plants coming online, you mentioned that. I think your RISE platform still has some incremental benefits that you should get. I think you have maybe $40,000,000 of savings to go there.

Speaker 9

I think Empower comes on, that's going to be modest benefit. You should have at least some benefit from RNG. So Brian, I don't know if you can, but can you kind of maybe bucket all that together? But how much do those incremental drivers help 25? Is it $50,000,000 $100,000,000 Just any broad buckets would be very helpful if you can.

Speaker 2

Yes. Let's take those. Let's just talk about sustainability innovation, which would include the RNG portfolio, Polymer Center and Blue Polymers, right? So next year, if you think about what we're expecting from an incremental, so this would be $25,000,000 over $24,000,000 It's about $75,000,000 of revenue $30,000,000 to $35,000,000 worth of EBITDA. And so again, coming in at a nice incremental accretive margin to the portfolio, primarily driven by the RNG side of that.

Speaker 2

As you mentioned, we do expect some benefits from Empower. But remember, we're going to deploy that in a phased approach. We just started the initial business units that are getting that system. So that will be deployed throughout the year. And as we exit 2025, we expect to be fully deployed.

Speaker 2

So we called out $20,000,000 of benefit at run rate. So you kind of think about half of that or so being realized in 2025 with the other half then in 2026. And to your question on the RISE platform and some of the fees that we're generating, we talked about from a fee perspective that we've realized over $60,000,000 of those fees, but that's already in the run rate, right? So we've had that throughout the year and we're starting to comp that in Q3 of this year. From a productivity perspective, you can think we've got about $25,000,000 more to go.

Speaker 2

You can think about half of that coming in $25,000,000 half in $26,000,000

Speaker 9

Okay. Okay, perfect. So there's some in $25,000,000 into $26,000,000 Now the other thing is will there be based on what we know today an alternative tax credit sunset headwind?

Speaker 2

You're talking about the CNG tax credit?

Speaker 9

Correct. Correct.

Speaker 2

Yes. We are not assuming that in 2025. We just follow the law. And so, again, right now that's set to expire. So that is not included in our projection for 2025.

Speaker 2

And that's about for us that runs about $15,000,000

Speaker 9

Sorry, 1.5? 1.5, Dean? Yes. Okay. Perfect.

Speaker 9

All right. Thank you, guys.

Speaker 2

Sure.

Operator

And your next question today comes from Brian Butler with Stifel. Please go ahead.

Speaker 4

Hi, afternoon. Thanks for taking the questions. Just first one, can we talk maybe about where internal inflation has been running as compared to the CPI headline? Kind of what was that trending in the Q3? And how does that look into the Q4 and then I guess 2025, if you have any color?

Speaker 2

Yes. Good story, right? You're seeing that inflation come down. So I mentioned labor about 4.5% and that's pretty good indication of the overall cost inflation. There's some puts and takes in other categories.

Speaker 2

Maintenance has been a real highlight in terms of that category certainly has run hot the last couple of years and that's improved from lots of different reasons. One, we're getting truck deliveries. So the putting out or parking older trucks and taking on new trucks with less maintenance intensity. And then also, turnover to be the decline. We're doing more work internally versus outsourcing it to 3rd parties and that's a cheaper labor rate.

Speaker 2

Parts inflation certainly modulated as well. So all those pieces are helping on that side. And we expect that continue to improve modestly into 2025, so continued deceleration.

Speaker 4

Okay, great. And then when you went through the buckets kind of on what rolls into 2025 for sustainability e POWER, right? How should we think about the capital spending that detached that versus what was spent in 2024?

Speaker 2

Relatively consistent, if you think because remember, when you think about what we're doing when we're investing in RNG, when we're making those investments, that's in a JV structure. So that comes through more like an acquisition than it does CapEx. But when you think about Polymer Center and when you think about what we're going to do from an EV perspective, we would expect those to be on par what we did this year, slightly higher, but nothing of note to change the CapEx as a percent of revenue. Okay, great. Thank you.

Operator

And your next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Speaker 10

Hey, thanks folks. I think we said last quarter 32% EBITDA margins could be achievable over time and here you are, so well done. I want to ask about Environmental Solutions. I think in the prepared remarks you mentioned it was largely due to acquisitions that there's revenue growth. Can you just tell us a little bit about the organic trends in the quarter, maybe how you see the pipeline for ES shaping

Speaker 2

up? Yes. There's certainly been growth. There's also been some churn, which I mentioned, right? And we are going to continue to pass the bounds of customer willingness to pay.

Speaker 2

We believe you have to do that as a leader in the marketplace and when the services are highly valued. And we also know that customers come back around. They experience with a different provider and with high quality service where we're engaged with them from a safety standpoint, sustainability standpoint, digital standpoint, that has value. Ultimately, those customers oftentimes come back on that front. So little flat more flat this year from a volume standpoint than we would have hoped.

Speaker 2

The pricing obviously exceeded our expectations. And when forced to choose, I'll take that trade off all day. Now I push the

Speaker 10

team that we want

Speaker 2

to grow both units and price and we'll have a plan to do that in 2025.

Speaker 10

And to that point, you talked about maybe some faster pace of margin expansion, reasonable things about for ES versus overall. You talked about the 30 bps for the overall business. Sort of like 100 bps kind of the right level on an annual basis to be thinking about the segment?

Speaker 2

Yes. I think we've talked about 80 to 100 basis points kind of across the cycle. In some years that a little faster and some years maybe slower. But if you look at the trend, I think that's a ratable pace where we can take margin.

Speaker 10

Okay. Very helpful. Yes, I'll leave it there. Thanks very much.

Operator

And your next question today comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Speaker 11

Great. Just a follow-up on the last question there. Just in terms of the discussions you're having with your customers as the absolute level of headline inflation is moderating, just their willingness to sort of give that spread over the cost base. Are you finding it easier, harder than it was maybe a year ago? And is sort of the directional rate cuts and things like that helping at all?

Speaker 11

Thanks.

Speaker 2

I would say broadly, if we're in a world of 2.5%, 3%, 3.5%, 4% inflation, that's a pretty good spot for us to be, right? We've seen what really high inflation looks like and that was certainly sustainable or workable for a period of time. Over time, that's very unworkable because of what the Fed will do and they'll end up crashing the economy to bring that down. We've lived in a period of incredibly low inflation and that's really hard because we're going to give our people a wage increase every year because we know that their real costs are going to go up on that front. So living in again that kind of 3%, 3.5% zone is a really good spot for us to be.

Speaker 11

Great. And then just on the volume front, maybe if you can just give some perspective on, I think as these rates get cut, I think you're indicating you want pricing and you have volume growth next year ideally. Maybe just some perspective on your what you're seeing on the economic activity, the cyclical units? And then secondly, where you are on the volume churn front, if there's any more of that still to come in 2025? Thanks.

Speaker 2

Yes. I think I mentioned in the past that from a churn standpoint, every time we do M and A, there's always going to be some work that we're going to churn out of the portfolio. There's going to be some municipal contracts. We know that we are going to upgrade or replace in terms of pricing and we know that there's likely some broker work that we don't treat those as customers. We treat people who generate recycling and waste as customers.

Speaker 2

So that's going to get churned out of the portfolio. We're seeing some of that this year for sure on that front. And then cyclical volume, listen, construction is down and our container temp business is certainly down year over year 10% from a unit standpoint quarter over quarter. And so that's just a reflection of what's happening in the underlying construction activity. And I think what the really good news is, is given again this broader demand environment, which is when you put all the pieces together, right, something south of flat, right, you're seeing really good pricing behavior and conduct and performance.

Speaker 2

And I think if you take a look 20 years back, you just would not have seen that. You would have seen people chasing units to try to keep trucks utilized. And what we're doing and others apparently are parking vehicles and understanding that your people need to have a wage increase every year and it's important to go out and price. And so I think you're seeing a market that's behaving rationally and that's really beneficial. And as we see again really good growth indicators on the horizon whether that's 3 months, 6 months, 9 months, but we're pretty optimistic on that front, a little bit of volume will be a really good place to be.

Speaker 2

And on some of the contract losses as well, as John mentioned, right, some of this is just comping out some losses that happened earlier in the year. So for example, residential, we were down 2.9% year over year in Q3. Most of that is going to anniversary as we exit the year. So it's not that we're necessarily expecting any sort of robust growth in residential. It's just the absence of a headwind that we've been experiencing all year long.

Speaker 11

Great. Thanks very much for the color.

Operator

And your next question today comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Speaker 12

Yes. Hi. Thank you. I wanted to go back to the 3Q versus 4Q margin trend. And it seems like I get the 60 basis points of potentially one time benefit.

Speaker 12

But is it just taking a step back? Is it just commodity prices that are coming down in the 4th quarter that reflects the change in year over year margins? Or was there something in the prior year comp to be aware of? Or is there any other factor?

Speaker 2

Yes. I would say, look, as you look at last year from a prior year comp perspective, historically, you've seen margins step down from Q3 to Q4. And last year, they were flat, right? They were equal to each other. So there's certainly a tougher comp.

Speaker 2

But as John mentioned earlier, we feel really good about our prospects and how we're going to finish up this year and we'll be able to sit there and tell you how we finish out the year in February.

Speaker 12

Understood. And then just a housekeeping question for 2025, if you can. First, just want to confirm if there's any level of rollover acquisitions that we should be keeping in mind for 2025? And then like anything below the line, whether it's interest expense, I know you have some notes that are coming up, or the tax rate or any of those below the line type of things that we should keep in mind?

Speaker 2

Yes. From a rollover perspective, as we said earlier, about 10 to 20 basis points of rollover based on that, which is already closed. Obviously, that would increase for any deals that we close in the Q4, right? So again, we can give you some of that flavor when we get back together in February. Far as some of the other components, I mean, if you can take a look at the maturities of what's coming due next year, they are at lower rates than current rates.

Speaker 2

So we would expect some increase in overall interest expense just due to rate on the fixed rate debt, but nothing overly significant.

Speaker 12

Great. Thank you.

Operator

Your next question today comes from Stephanie Moore with Jefferies. Please go ahead.

Speaker 13

Hi, good afternoon. Thank you.

Speaker 12

Good afternoon.

Speaker 9

Maybe

Speaker 13

just to good afternoon. The follow-up to actually Tyler's question, I appreciate the maybe the quantifying the benefit of some of your digital efforts in the RISE platform, but maybe you could remind us what is left in terms of kind of rolling out some of those systems and capabilities. I know this year was putting a lot of tablets in the cabs and making sure you're capturing some of the overcharge and surcharges. What's next as we think about 2025 as you phase out I'm sorry, phase in the next batch of capabilities? Thank you.

Speaker 2

Yes. I mean, now that you've got the platform in place, really kind of ratcheting up what you do from a route sequencing in order to sit there and optimize those routes and then ultimately adherence, right, to make sure that the drivers are running the routes as designed. So again, we put this flavor out there before is that a minute across our system is worth about $5,000,000 annually. So it doesn't take a lot of seconds and minutes to add up to something meaningful and that's what we think that the next rev of our digital platform can yield. And I said more broadly over the last 4 or 5 years, we've done a good job of just radically replacing and modernizing all of our systems without taking some big one time CapEx event or creating any institutional risk.

Speaker 2

And so we've done it with our marketing and sales. We've done it with HR. We've done it with procurement. We've done it now with

Speaker 11

our

Speaker 2

assets, we've done it on the operating side of our business and we're working on underlying order of cash and there'll be another wave of benefits there as we think about still a lot of transactional work that we can automate on that front. So those will be opportunities that won't hit necessarily in 2025, we'll get some of those, but really into 2026 and 2027. So it's a great story and then it makes the employee value proposition stronger and provides better customer service and we're going to be able to operate the business more efficiently.

Speaker 13

Got it. It makes a lot of sense. And then maybe switching gears just to on the recycling side of your business, not the polymer centers or the like. So when you just think of your traditional merch, maybe talk about any kind of retrofitting or automation investments or anything that you might have planned or you feel like you might be implemented here in 2025 or the coming

Speaker 2

years? Yes, we're doing that every year. Every year, we're putting in new optical sorters and taking out manual work and getting more automation. The primary investment we make in our recycling centers is to produce a better product. Now in order to do that, you put in new capital and you end up taking out some labor, But taking out jobs is never our goal.

Speaker 2

Our goal is to provide the to create the best product we can for the marketplace, which drives more circularity and drives a higher price for product on that front. And so we also then we do M and A, we pick up some new recycling centers. There'll be a couple over the next few years that we're going to go studs up because there's markets where we need capacity on that front. But most of our investment is the continued upgrading of the existing 75 or 7 rigs.

Speaker 13

Yes. Absolutely. Well, thank you so much.

Operator

At this time, there appear to be no further questions. Mr. Vander Ark, I'll turn the call back over to you for closing remarks.

Speaker 2

Thank you, Nick. I want to thank the entire Republic Services team for their commitment to exceeding customer expectations and the continued growth and success of our company. Have a good evening and be safe.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
Republic Services Q3 2024
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