Republic Services reported a strong start to the year, with metrics up across the board in many categories for Q1 despite experiencing initial effects of the pandemic shutdown in March. With the likelihood of less favorable Q2 results looming ahead, executives repeatedly put a positive spin on how they believe the situation might slowly be turning around.
“In most of the places we think we’ve seen the bottom and we’re starting to see recovery," said President Jon Vander Ark, in regards to volume declines and other effects, during a Tuesday earnings call. “That bottom has been a much higher floor than we initially expected.”
- The company reported service decreases were consistently outpacing increases from March until just last week. Total yards collected in April were down by approximately 11% and container volumes were down 20%. Third-party landfill volumes were down by 20% in April, although those have also begun to see some improvement. A recent return in C&D activity for some markets was also described as one of the "brighter spots" moving forward.
- Average residential container weights increased by 15% in April, with Vander Ark reporting crews are working "harder than ever." Processing and disposal costs will be higher near term, but CEO Don Slager said "as we assess the additional tons that we’ve absorbed, we’ll begin to talk to the municipalities about what that means and look for some help.”
- Serianni recognized "there will inevitably be some customers who don't make it through," but the comapny couldn't put a number to that yet and said the number of outright cancellations have not been high. It also didn't anticipate unmanageable levels of "bad debt" among remaining customers. While customers in some sectors will be slower to rebound than others, Vander Ark said overall "we’re not seeing meaningful changes when they come back" in terms of service needs.
Coming off what would otherwise have been a positive earnings report, Republic's leadership spent the majority of their earnings call fielding questions about what comes next and trying to convey a message of resilience after weathering the pandemic's initial weeks.
“The economic environment we’re currently in is temporary and when the economy returns to some level of normalcy we will emerge stronger than ever," said CFO Chuck Serianni in his prepared remarks.
While no one questioned Republic's position of "ample liquidity," one analyst did ask why executives seemed so optimistic about an economic recovery when others were not. Vander Ark acknowledged that Republic's cautious hopes of recovery were based around thinking that Q2 would be "tough," but the economy would begin to rebound after that. He noted this scenario assumes a second wave of stay-at-home policies due to a possible COVID-19 resurgence would not occur.
The company's 10-Q filing, released this morning, recognized much uncertainty still remains: "An extended period of economic disruption associated with the COVID-19 pandemic could materially and adversely affect our business, results of operations, access to sources of liquidity and financial condition."
Slager laid out a case for why the waste industry is more resilient than others during economic downturns and why he thinks the company had been underestimated by some in the financial community during recent weeks.
"...We talk about the ability and how we can flex our cash flow or our spending in times like this, to still produce strong free cash and maintain a strong balance sheet and have a balanced approach to cash allocation," he said. "[Those are] things that we've been telling you that, frankly, we've proved in the 2001 economic decline, in the Great Recession, and we'll prove again now."
- In reaction to the sharp decline in volumes for all but the residential sector, executives noted they were rebalancing routes daily and had reduced overtime expenses (nearly one-fifth of 2019 labor costs) by around 40%.
- Republic also anticipates savings from lower fuel costs and reduced capital spending as "the replacement cycle of our assets naturally extends." This will mean lower expenses for expanding landfill capacity and replacing trucks, containers or other equipment during 2020.
- Separate from its $20 million "Committed to Serve" initiative, Republic recorded $3.1 million in COVID-19 "business resumption costs." Vander Ark described some of this as "one time in nature," while noting unpredictability, and the company's 10-Q projected related costs extending "potentially into future years." Examples included purchasing hundreds of thousands of masks, stocking up on hand sanitizer, conducting heightened facility cleaning and providing meals for frontline employees.
- Another newly reported change was the installation of "plastic protective barriers" to separate employees at MRFs where social distancing guidelines were harder to meet. While the demand for fiber was said to be increasing, reflected in part by a recent uptick in OCC pricing that brought Republic's average Q1 overall commodity value to $76 per ton, quarterly recycling revenues were still down year-over-year.
- Republic suspended its prior 2020 guidance, but said a target of $1 billion in adjusted free cash flow could still be possible "assuming the economy continues to recover, and GDP sequentially improves in the third and fourth quarter as currently predicted by economists."
- The company reported spending $98.8 million on share repurchases and paying $129.2 million in dividends during Q1, with no plans to stop an 18-year streak of dividend payments. While Slager described Republic's current stock price as "a bargain," and lamented that "we should be buying more of it," he said conserving cash was currently the more prudent approach.
- M&A spending for Q1 was $63 million, with $3.8 million reported for heightened integration and deal costs. The company could still do $600 million or more in M&A this year, including a sizable deal to purchase Santek Waste Services that is under regulatory review. "As the market starts to come back people will start to decide whether they're still in this for the long term or not," said Slager of other possible sellers. "We know that we are and we know we've got the balance sheet and the know how to get it done."