Third quarter earnings results at Republic Services topped expectations, with the company pointing to volume returns, strong pricing and its growing environmental solutions business as among the catalysts.
Executives also noted that at $922 million, its investment in acquisitions through the third quarter is the highest level in over a decade. The company expects to top $1 billion by year's end. The pipeline includes a mix of small tuck-ins and medium-sized deals and is "weighted more heavily toward recycling and waste," CEO Jon Vander Ark said, but noted "plenty of opportunities" in environmental solutions.
The latest pandemic impacts
- CEO Jon Vander Ark noted a handful of "modest" effects from the current stage of the pandemic. He said that one impact from the delta variant was more spending on paid-time-off costs as some workers stayed home. Overall, costs from labor and related benefits were up 20% compared to last year.
- He also noted potential route effects as traffic has picked up again, but said the company's implementation of the RISE platform, its dispatch operations technology, has helped offset that. Execs noted during the call that about 70% of their large and small container fleet have so far been outfitted with tablets, with plans to extend to the residential fleet next.
- Republic reported $295.6 million in capital expenditures during the quarter and said it expects to do "a disproportionate amount" of its full-year capital expenditures in the fourth quarter. Asked about the current supply chain challenges facing businesses across industries, Vander Ark said it's only impacting the company incrementally, one example being delays to a solar project planned for this year due to equipment hangups.
Volumes and pricing
- Overall volumes were up 4.3% over the prior year. In collections, small and large container volumes were up, while residential volumes saw a negative year-over-year change. Landfill volumes were up 6.6%. Both small container and MSW volumes in the third quarter exceeded their 2019 pre-pandemic baselines. Vander Ark said the company would have pursued more opportunities to add volume if they had had the labor to support them.
- Republic reported its total core price remained at an all-time high of 5.2%. The company maintains it can "price ahead of our cost inflation," Vander Ark said, and will recognize further benefits as index-based contracts come up for annual increases in 2022.
- Recycling commodity prices were $230 per ton, versus $99 per ton in the third quarter of 2020. Recycling-related revenues totaled $119.9 million, up 4.1% year over year.
- The company again raised its free cash flow expectations for 2021 to between $1.475 billion and $1.5 billion, versus last quarter's raised projection of $1.45 billion to $1.475 billion.
M&A and other key investments
- Environmental solutions revenue more than doubled from the prior year to $51.4 million in the third quarter, thanks to both organic growth and acquisitions, including the purchase of ACV Enviro in August and unnamed deals in June. As for the outlook for that segment's value: "I think a billion dollars in three-ish years, I think is a reasonable target," said Vander Ark.
- Republic currently has 17 landfill gas projects in the works "with more opportunities thereafter." The company's participation in these investments will be different than in the past, Vander Ark described, noting the company will not take full ownership but will take equity stakes. "We have a limited number of landfills. And so this is a great growth opportunity for us to pursue, but there's a ceiling to it."
- As far as potential antitrust hurdles for M&A, he said the company has "a very crystal clear point of view of where the regulation sits," adding: "So yes, there is heightened scrutiny versus four or five years ago on larger transactions, but more broadly, it's not slowed us down at all from what I think is a different level of acquisition from what we've historically done."
- Regarding environmental solutions deals specifically, Vander Ark said that while those businesses frequently have a lower-margin profile than solid waste and recycling targets, they're also less capital intensive and "we do think there's certainly an opportunity to raise those margins over time."