Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Republic Services Inc (RSG, Financial) achieved revenue growth of 9% and adjusted EBITDA growth of 13% in Q2 2024.
- The company reported an adjusted earnings per share of $1.61 and produced $1.15 billion of adjusted free cash flow year-to-date.
- Customer retention rate remained high at more than 94%, with improving net promoter scores.
- The RISE digital operations platform is driving improved route optimization and safety performance.
- Republic Services Inc (RSG) continues to invest in sustainability projects, including polymer centers and renewable natural gas projects.
Negative Points
- Organic volume on total revenue declined by 80 basis points, with significant losses in the cyclical construction activity sector.
- Volume on related revenue decreased by 1%, with large container volume down 3.3% due to softness in construction-related activity.
- Residential volume decreased by 2.5%, primarily due to municipal contracts lost in 2023.
- The timing of capital expenditures has led to a decrease in year-to-date adjusted free cash flow compared to the prior year.
- The company faces delays in the timing of sustainability projects and polymer center operations, impacting revenue guidance.
Q & A Highlights
Q: I was hoping to ask about sustainability projects in the wake of the Chevron decision. It sounds like you're still going strong with your projects. Just wondering if you think there will be any impacts affecting the market, for example, supply and demand for RINs as a result of the decision? And then maybe separately, in light of the US election coming up, would that impact timing of any projects, M&A or anything else not related to sustainability, just anything in general that that you'd call out? Thanks.
A: Sure. Yeah, listen, we feel good about the project and our approach specifically on landfill gas to energy. As you know, we're in a joint venture model and there's a series of independent decisions around projects. And so, to be said that, the RINs market changes and that takes some of those projects kind of below our return threshold, those are projects that we won't do on that front. But keep in mind also that we had a very conservative set of assumptions on $2 RINs, and we built out the initial set of assumptions and what we talked to you about financial impact. So we still feel really confident, which ties into the second point. There'll be puts and takes, whether there's an administration change and there'll certainly be a new President, whether that's a party change or not. I think, in general, the conventional wisdom as a Republican administration is going to be more business friendly and a Democratic one maybe less business friendly. I think if you look at the last three years, our business has performed really well in the context of a Democratic administration. So I think in any environment we feel confident there'll be some puts or takes on the margin for sure but our team will navigate that.
Q: Just want to ask about volume. Bit of a late quarter again, I think you called out the large container and then also some of the resi contracts from 2023 on the muni side. Are you still thinking that this year will be flat to modestly positive on volume and just anything to flesh out the sort of slightly lower top-line guide? Thanks.
A: Sure. Yeah, I think from a volume standpoint, we'll be slightly below our original expectations and that's a function of -- listen, the construction market's still pretty challenged. With high interest rates, commercial construction activity and residential construction activity have been very muted and you see that our volume numbers in temp large container. The great news is that pricing is holding up and I think the industry is behaving very responsibly in that context. And I also am relatively optimistic that that is somewhat of a short-term phenomenon. We need more housing stock in the United States. And I think you're starting to see rays of hope here on interest rates cuts, which I think will be the catalyst for that to happen, whether that happens three months from now, or six or nine months from now. I do think that's more transitory versus permanent on that front. And then there's also been -- again, you talked about the residential contracts. We've accelerated some of the broker exits that we acquired in our M&A deals. We always talk about we require somebody we never value to work on brokers, because we know it's going to matriculate out of the system. We've accelerated that so that drove a little bit of outsized volume decline in the quarter. And then for the overall revenue guide, part of that is the volume outlook, which I just gave you. Part of that is the sustainability projects, landfill gas to energy. We're going to hit our number. The timing of the starts of those is going to be a little bit later in the year. I think ourselves and the industry have faced a little bit of delays in terms of permitting, getting the equipment in place, et cetera. So that's not a big surprise. And then our polymer center, well, we've teams executing phenomenally in terms of the product we're producing. We got to a little bit of a later start than we expected through all kinds of things ancillary to the system like permitting for the facility and other things. So that caused a little delay in the timing on that front. Again, that's transitory and we'll be on full run rate, as I discussed in my prepared remarks.
Q: Any color on the shape of pricing into the back half? Should we expect it to sequentially decelerate in Q3 and Q4? And just any color on how that might impact margins, because it does feel like the margin expansion is expected to slow. My hunch is that's largely in Q4 but any color there would be helpful.
A: Yeah. And Tyler, good observation. We talked about -- in Q1, we thought that would be our highest level of pricing of this year and then it would sequentially decline, in part just because of some of the index-based pricing and just the impact that has throughout the year. As you've seen though, we've also seen cost moderate, cost inflation moderate, so our spread we've maintained. So we have a similar level of margin expansion in Q1 and Q2. We would expect that spread to decrease a little bit as we move into the second half of the year. But again, if you take a look, driving outsized margin expansion and well above our initial expectations.
Q: This was the first quarter that you guys had put up a 32% core solid waste margin, if my math is right. But if we go back, you guys have always said that this could be a 32% EBITDA margin business, price compounds, recycling normalizers, and both have. So, since 32% was the new 30%, just any high-level thoughts on what the new 32% could be over the next few years? I mean, is there any reason to believe that a mid-30% margin in core solid waste couldn't be achievable in time if price-cost dynamics cooperate?
A: Yeah. And Tyler, I think our words were that, we saw that in the near term, we saw 32% as achievable. Really what we're looking at is the consistent cadence of margin expansion across our business. And we talked about that in the 30- to 40-basis point of margin expansion, the recycling waste business a little bit more in the environment solutions, call it, 75 basis points plus just given where it is in its maturity. And so we continue to see that opportunity as we move forward. So we're not going to call what the theoretical cap is. But again, it's about pricing in excess of cost inflation. It's about realizing the benefits from our initiatives, including our digital initiatives, and driving costs out of the system, and we see that runway for years to come.
Q: There have been a number of deals, excuse me, and call it hazardous waste, slash, industrial waste, slash, nontraditional waste markets; some are big, some are small. But can you just talk about your appetite, specifically in that market? Will it be slow and steady or would you entertain something that would be much chunkier?
AFor the complete transcript of the earnings call, please refer to the full earnings call transcript.
