Q3 2019 Earnings Call
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President.
Finance and Treasurer. Please go ahead.
Good afternoon, everyone and thank you for joining.
I'd like to welcome everyone to Republic services third quarter 2018 conference.
Later, our CEO certainly into arc or appraisal.
Seriously our CFO joining me.
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Great good take a moment to remind everyone.
Nation, we discussed on todays call contains forward looking statement, which involve risks and uncertainty and may be materially different from actual result.
Finally, the factors could cause results to differ materially patients.
Material, we discussed today is pretty close to their if in the future he literature or rebroadcast every recording this conference call you should be [laughter]. The original cost, which is October thirtyth gene therapy.
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I want to remind you that Republic management team routinely Curtis recent Investor Conference.
First its own 50 times presentation of course cigarettes that finally, please note all third quarter volume results on today's call earlier Workday objective eight.
Therefore excluded the benefit of an additional work they live corridor versus prior year with that I'd like to turn the call overtime.
Nicole good afternoon, everyone and thank you for joining US we are pleased with our third quarter results.
We continue to successfully increased price in excess of our cost inflation expand underlying EBITDA margin by 60 basis points.
And drive double digit growth in adjusted EPS and adjusted free cash flow during the quarter, we continued to see additional weakness in global recycled commodity markets.
The declines U.S. rig counts and drilling activity.
Despite these macro headwinds the business is performing ahead of plan.
As a result, we're raising our full year adjusted EPS guidance, two $3.28 to $3 30 sites. We also expect to achieve the upper end of our adjusted free cash flow guidance range in the third quarter, we generated $372 million your free cash flow.
And approximately $1 billion of cash flow year to date.
We utilized our free cash flow to invest back into our business and returned the remainder of up to our shareholders through dividends and share repurchases. We believe investing our free cash flow in acquisitions is the best way to increase long term shareholder value.
We look for a probably price elouise acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles. We also look for opportunities to increase the scale of our environmental service offerings, including materials management and waste disposal. These.
The offerings addresses the needs of our upstream MP customers and downstream refinery and petrochemical customers in the third quarter, we invested approximately $275 million than acquisitions. This brings our year to date acquisition investment to $490 million are.
Acquisition pipeline remains robust.
Full year, we're on track to invest approximately $550 million and believe 2020 could be another strong year of acquisition investment.
Regarding 2020.
Given the predictability and consistency of our business, we are providing a preliminary outlook as we haven't prior years.
We are midway through our annual planning process and assuming current business an economic conditions continue we project the following for 2020.
Adjusted EPS of $3.46 to $3.51 and adjusted free cash flow of 1.15 billion to $1.2 billion.
We will achieve this by continuing to prioritize the safety of our people and communities above all else.
Targeting value oriented customers to drive profitable volume growth.
Leveraging our scale to minimize costs and drive operational improvements continuing to make disciplined acquisition investments to grow free cash flow and further investing in technology to enhance the customer and employee experience.
Similar to prior years, we will provide detailed financial guidance for 2020 in February of next year.
Before I turn the call over to John I'd like to congratulate Republic team for being certified as a great place to work for the third consecutive year, we believe and engage a diverse workforce has the greatest indicator of our success. This is yet another recognition of the inclusive culture. We are building it Republic.
One where the best people come to work I'll now turn the call over to John to discuss our third quarter operating performance is John .
Thanks, Don in the third quarter, the pricing environment remained favorable we continue to price in excess of our cost inflation and maintain customer defection or churn up 7%.
Core price, which represents price increases to our same store customers net of rollbacks was 4.7%.
This included open market core price of 5.7% and restrictive core price of 3.1%.
Average yield which measures the change in average price per unit and takes into account customer churn was 2.8%.
Average yield was strong across all lines of business and our small container collection business average yield was 4.1%.
In our landfill MSW business average yield was 3.3%.
This level of landfill MSW pricing is especially impressive given approximately two thirds of our MSW volumes is restricted.
As you can see our team has made great progress moving our disposal contracts away from CP I base pricing to a more favorable pricing mechanism.
In total, including both collection and disposal related contracts.
We've converted $775 million for 31% of our Cpis based book of business.
To a weights related index or fixed rate increase of 3% or greater.
Average yield also benefiting from improvements in our meaningful recycling caution contract.
We are working to ensure they reflect the true cost of recycling and including more equitable risk sharing arrangement.
We've now secure price increases through approximately 35% of our municipal recycling collection customers.
Turning to volume total volume in the quarter decreased 40 basis points. It was inline with our expectations.
Underlying volumes increased 10 basis points after normalizing for the impact of intentionally shedding certain volumes, including non regatta regrettable contract losses in our residential question business and work performed on behalf of brokers.
We expect a broker related headwinds in our small container business. The decrease in 2020 as we anniversary some of the larger losses.
In the third quarter volume across all caution lines of business improved sequentially at the same time average yield for our total collection business was 3.1%.
On the disposal side of the business MSW volume drove continued to be strong at 1.8%.
And CND volumes increased 15.8%.
As expected special waste volumes decreased versus the prior year due to a difficult comp.
Looking forward to Q4 pipeline remains strong.
During the quarter recycle commodity prices continued to decline.
Our average price per ton in a third quarter was $72.
This represented a $6 sequential decrease from the second quarter any $34 decrease versus the prior year.
Prices have continued to decline in October and we estimate our October price per ton to be approximately $68.
Importantly, we continue to make progress transforming recycling enjoy more durable economically sustainable business model.
As a result next year, we expect our sensitivity to commodity prices to decrease.
Next turning to our environmental services business.
In the third quarter rig counts in the U.S. continued to decline.
At the end of September total us rig counts were down 18% versus the prior year.
And in the Permian basin, they were down 15%.
As a result, environmental services revenues decreased and created a 40 basis point headwind to total revenue growth in the third quarter.
Finally, turning to margins our adjusted EBITDA margin in the third quarter was 28% and decreased 40 basis points versus the prior year.
Underlying margins expanded 60 basis points, which was more than offset by a 50 basis point headwind from an additional workday in the quarter relative to the prior year.
And a 50 basis point headwind from lower recycled commodity prices.
We continue to see good operating leverage in that business as we tightly managed costs and improve productivity.
We expect this positive momentum to continue into 2020.
[noise] every year, we invest an innovative technology and equipment to enhance the customer experience improved productivity and make our employees jobs safer easier and more engaging.
For example last year, we opened our first next generation positive sort recycling facility in Plano, Texas.
To date in Plano, we've seen about a 20% reduction in our total cost per ton.
It's important to note. This improvement is net of the depreciation expense associated with the upfront capital investment.
In the third quarter, we begin to roll out our rise platform in our dispatch operations and large container business.
The platform Leverages the operational foundation, we've been building over the last several years.
It includes additional mobile and indeed in cap technology with more real time routing information and data visualization tools.
Ultimately this platform enables us to digitally connect our customers drivers dispatchers supervisors and trucks.
Through this technology, we will further differentiate our product offering empower employees an increase productivity.
Next year in partnership with Mac trucks, we will begin piloting our first electric vehicle on a residential collection route.
As you can see we have a lot of exciting projects underway and we're looking forward to discussing them more in 2020.
With that I will now turn the call over to Chuck to discuss our third quarter financial results, our 2018 guidance and the 2020 outlook in greater detail.
Thanks, John year to date, adjusted free cash flow was $993 million and in line with our expectation.
In the third quarter, we invested approximately $275 million in acquisitions or $228 million netted divestitures. We also returned $271 million to our shareholders through dividends and share repurchases.
At the ended the quarter leverage was three times and within our optimal range of two and a half to three times.
Interest expense in the quarter was $98 million and included $12 million of non cash amortization.
Our adjusted effective tax rate in the third quarter was 18%.
We also incurred a 4 million dollar non cash charge related to solar energy investments that qualify for tax credits.
For the full year, we expect an adjusted effective tax rate of approximately 15% and a 140 million dollar noncash charge.
Relative to our original guidance the benefit from lower tax related expense is approximately 17 cents.
This benefit is being fully offset by two macro headwinds.
First a 13 cents headwind from lower recycled commodity prices.
And a four cents headwind from a decline in drilling activity.
[noise] before opening the call for questions I'd like to provide some additional detail on our 2020 preliminary outlook.
Regarding our adjusted EPS outlook.
We're assuming recycled commodity prices remain at current levels of approximately $68 per tonne.
Next we are assuming an adjusted effective tax rate of 21% and the noncash charge of approximately $110 million.
The year over year increase in tax related expense in 2020 results into 16 cents headwind to earnings relative to 2019.
Turning to our adjusted free cash flow for 2020, our outlook includes a $100 million of Capex associated with the reinvestment of tax reform savings.
These funds represent continued investments and updated locker rooms break rooms, and training facilities for the benefits of our frontline employees.
This 100 million dollar capital investment will not reoccur in 2021.
Our 2020 cash flow outlook also includes an incremental headwind of approximately $40 million from working capital.
The working capital headwind is due to the timing of disbursements in 2020 relative to 29 team and will not reoccur in 2021.
Lastly regarding capital allocation in 2020, although we believe next year will be a strong year of acquisitions, our outlook only contemplates $200 million of investment.
Additionally, we are assuming we spent approximately $400 million in share repurchases.
With that I'd like to open the call to questions [noise].
Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone and the interest of time, we ask that you limit yourself to one question and one follow up today. If your question has been answered and you would like to withdraw your request you may do so by pressing star.
And then too if you are using a speakerphone. Please pick up your handset before pressing the keys. Our first question today will come from Tyler Brown with Raymond James. Please go ahead.
Good afternoon everybody.
Good.
Hey, Chuck So my Big question here is on free cash as we think about 2020. So I just want to make sure lots of all mixed up so you're talking a high in free cash this year at call. It 1175, and your preliminary midpoint is 1175.
I think that's right I gifting incremental capex on facilities, what are you, saying, there's an incremental working capital headwind at the 20 as well or those that to be kind of puts and takes or is there something in there. Yes, yes, just let me make sure unclear right. So if you go to the midpoint of the guide right now for 2020 it.
As a billion 175, and then you we have a total of $100 million Oh Capex being included in that number right for tax reform. So you would add that to that amount and then you would add back that working capital I talked about that $40 million and when you do all that.
Tyler you come up with a a baseline free cash flow of $1.3 billion.
Okay, as we kind of think out into 21.
All right on that.
So as you think out into 2021, you've got that baseline of $1.3 billion plus the growth on top of that just the natural growth growth in the business right. Okay. And then just frankly I'm just still confused on these solar energy investment.
So is there it's just like a capex item is it a M&A type of item or is it just a charge on the piano that gives you a benefit on the tax line I'm just.
Hi, good that confused there yeah, we're working more of it as an M&A type items. So this is a or an investment that we've been able to take advantage of it gives us a really good return on investment is extremely low risk and the great thing about it is because of the tax credits, we get that benefit immediately and so thats why you see.
A reduction in our effective tax rate in our cash taxes equal to the amount of the investment that we're making here.
Okay nickel, Justin just to put a one point of clarification there when we talk about our acquisition investment in the quarter to 7500 data for 99.
Our income solar investment although it runs during the same line item on the statement of cash flow.
It does okay, so that'll be Q4 item.
Yes, yes, yes, right. Okay, and then just maybe my last one for Darren just so I appreciate the color on M&A, but I am curious so all of your transactions. This year been in traditional solid waste or there is some other verticals it sounded like that maybe the case.
Yes, a mixture we're still we're still seeing great activity in the pipeline I'm really good solid waste companies.
Both collection in infrastructure like.
And we're seeing some good opportunities in environmental services that are very adjacent to what we do.
We're looking at opportunities that again or things that our customers. You know have said they want to buy from us products and services in areas things that we're good at so think maintenance fleet operations container management.
Land management permitting engineering, all those great taste, great capabilities that we have now we're finding great opportunities to move into a little space more space that still has a great.
Margin profile and works very well with our with our court with our core business our core capability.
Okay, all right I appreciate the color. Thanks.
You bet.
Our next question will come from Derek Spronck with RBC. Please go ahead.
Thanks for taking my questions just on the acquisition Prime then just to follow up just on the solid waste business side are they primarily a tuck in acquisitions and and do you have any.
Opportunity to move into new.
New markets here.
Well they tend to be primarily tuck in acquisitions and one of the reasons for that is again, where we tend to be first or second.
Place.
In 90, whatever 5% of our revenues, so again big market position tuck ins tend to have the highest return there the easiest to integrate the come at the lowest risk. So there's still a fair number of small companies out there that are getting to a place in their company lifecycle, where they're thinking about selling and we've got some <expletive> .
Restart.
Longstanding relationships with those sellers and so we're well positioned to buy those companies. We have moved into some new geographies and solid waste theres been a couple of acquisitions. We made recently that were where we're moving into adjacent geographies are in brand new geographies and we'll do that for the right deal for the REIT market position and so we.
We think there'll be more of that in the future just as companies again come to certain partner lifecycle.
We take a look on for the pipeline is robust it will primarily be existing geographies only because were 42 states. So that's where the bulk of our opportunities will set but we have plenty of things were looking at in terms to the dons point adjacent geographies or new geographies, we moved into bend, Oregon recently and that was a very value creating acquisition for us.
Okay and.
What would you say the average size from an acquired revenue perspective.
You are making that at this point.
The acquisition cycle and finally, it any any potential plans ever to come up here into Canada.
Okay, well I know I'm not going to give you an average because it be misleading most of the acquisitions are small.
Again. These are small companies you know I think 510 trucks right.
And occasionally you know you do get to opportunity look at a larger company, where maybe that company didnt have a successful.
Succession plan or the next generation or the third generation really wasn't all that interested in it or it was time to sort of monetize a lifelong work. So there are there have been a handful of sizable ones, but primarily there they tend to be small so it's a lot of work to integrate small businesses and spend as much money as we have intelligently.
That may deals to do.
As it relates to watch, but we look at every largest small it's kind of a battle cry, but look at everything.
That makes sense for US and then of course, Canada goes I would say this.
You know, we always kind of describe ourselves as a north American solid waste recycling company.
I purpose.
We'd like Canada, there's a great business up there and we would have to be looking at opportunities that gave us a strong market position, which is really the sort of first pillar of our strategy. We're not looking to be a number nine in the market with no path to number three and.
So that they would answer your question, if theres things available and interest us we're not.
We're not going shied away from from that and we are already there today, both in the east and west largely in a post collections are disposal arrangement, so that gives us and ties that relationship already into those markets you about.
Okay, great. Thanks, Thanks, guys.
Our next question will come from Michael Feniger with Bank of America. Please go ahead.
Hey, guys.
Thanks for taking my question.
I understand your.
Earnings per share is up I'm just.
If I look on a trailing 12 month basis I think your EBITDA was up like 2% you every year in a rather solid waste backdrop. It it's below your peers and everyone's contending with their cycling issue I'm just trying to get a sense is there anything structurally that we should be aware of in terms your business mix or cost basis or a regional.
Mix help us understand that that differential and how that differential might close.
In the next 12 months.
Yes, I think the two big things that impacted EBITDA. This year in particular were commodities and that ended up being in over 50 million dollar headwind for us.
The other thing was the environmental services and we had talked about the Permian cooling down a little bit and that that was another almost $20 million a headwind for US also on EBITDA now the good news that we were able to offset that.
For those headwinds through a sum.
Advantageous tax planning, but as we look into the future and as we look in particularly into 2020, we're saying at this point that we're going to we're going to have EBITDA margin expansion and that's because we feel really good about how the base business is performing.
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Chuck just to be clear on that so you're saying into 2020. Your coffee you can get EBITDA margin expansion on on the overall business, even with the if we see prices stay exactly where they are right now and you extrapolate that into 2020, that's exactly right, that's what I'm, saying.
Okay and.
Just like on the intentional shedding we go into 2020.
Is that over and do we do we see that finally drop out and into next year.
Yeah, we're expecting to grow the business next year, obviously, a very solid price environment and volume growth next year that will be a mix of taking on a lot of profitable customers and still some shedding of less attractive customers, but we said in his prepared remarks that will start to trend down.
Overall, we believe we can grow the business both price and volume that's our aspiration, we grew and we can do it.
When forced to make a trade off will take price every time right. That's how we think about the business.
So going to checkpoint 2020, we've got a really saw a plan for feel really good about.
The economic backdrop, and how we're going to grow the business and that will involve slowing down of the shedding and taking out a lot more profitable business.
Our next question will come from Brian Maguire with Goldman Sachs. Please go ahead.
Afternoon.
Check I just wanted to come back to the 40 million of working capital that seems to be swinging around a little bit.
Am I thinking about it right that you're kind of maybe pulling that forward into 2019, and that's what's getting your from more like the lower end of the range to the upper end the range and then that's just sort of coming out at the 2020 number as a as an offset.
It's really the timing of disbursements in 2020, it has to deal with a calendar and when we when we honestly when we cut HX.
And it just happens to be a worst case scenario for us in 2020, and Thats why I said in my comments that it will reverse in 21 on 2021, that's a onetime headwind for us that will reverse it has to do with the calendar.
Okay. So you get the benefit 21 is about the 19th from that progressing got it correct. Okay.
And then just wondering.
If you could comment on.
Your outlook for special waste volumes I think yeah. So they were down but mentioned that was mostly because of a year ago comps.
Under what you're seeing in the pipeline there.
The outlook there into fourth quarter.
Oh pipeline a solid both for Q4 and then in early 2020 beyond that it's hard to say, but really solid outlook and the nature of that business is a bit episodic as you know it can move around quarter to quarter do you see that with US He said that with our competitors.
It's always slow down this quarter CND way up this quarter so.
Theres, a little bit of swing in the nature of those jobs because their project base, but we feel very good about pipeline.
Okay last one from me just on the back on the tax rate in the solar credits I think initially you talked about kind of the 60 million dollar.
Offset and then noncash line from that it seems like in the quarter was only four so running a little bit lower that is it just going to be a little bit lumpy and a lot in fourq you and then just thinking about it more longer term.
How many more years do you kind of anticipate having this.
Sort of a weird lower tax rate in a higher non cash.
Other expense in there and I.
Assuming it does that at some point do we go back to that kind of high 20% tax rate at some point or somewhere lower now.
Yes, so we like the weird lower tax rate I'd like to keep that as long as we can.
Thank you first question, yes, it will be.
Most of the investment will occur here in Q4 for 2019.
And these tax credits right now I will start to phase out through 2022 into 2023. So we think that we have an opportunity to take advantage of these tax credits for next few years.
Certainly there on the books.
But at the same time, we need to make sure that we got the appropriate investments that those are available to us and these investments typically have a returns in the in the mid high to mid teens and.
We're making sure that they don't just provide us with a tax benefit here that there that we're getting overall a good return on these investments.
Okay. Thanks very much.
So for those of you that dialed in.
Q ahead of the started the call it looks like you dropped off so.
If you want to get back into the question Q. Please it started anymore.
Our next question will come from Sean Eastman with Keybanc capital markets. Please go ahead.
Tim Thanks for taking my question.
I just wanted to go back to the environmental services.
Acquisitions and.
Stuff being folded into the mix here.
It looks like that's run rate here on the environmental services line actually ticked up really nicely in the third quarter and I believe that item was called energy services last quarter. So maybe I missed some sort of reclassification, but nevertheless, I'm just kind of wondering if maybe some of the acquisitions done this year are going into that line and what their run rate.
On that looks like as we go into 2020, particularly considering the softness on the MP waste side.
Yes, so we've kind of broadly category, Okay, yes, and.
So when we first you know went into the EPA space, we called in energy services and that was primarily handling oilfield ways landfilling in.
Waste processing.
From a drilling rigs and so forth and you know that's been a good business for US good investments again, it could be will set a goal right and can be impacted by some of the global.
Issues that we face, but all in all still good business, we like it we've got great market position a lot of that depends on sort of on your geography, a lot of those customers that we serve in oil fields, our customers that we serve in salt Lake space.
And as we've looked to sort of connect dots, we talk about going sort of upstream and downstream here, we find opportunities to do other things in and around that space that fit very nicely into what we're capable of so it comes down what's the margin profile the business how does it fit with our customers does that help us with stickiness.
Does that help us to do more for current customers have kind of bigger wallet share and does it fit within our capability you won't ever see us do things that we don't know how to do.
Right and so what yeah. So it's opened up new doors, and it's not that much different frankly from when the John talked about you know a new geography and bend, Oregon.
We wouldn't have maybe no most people in added opportunity be weren't in Oregon. So issue as you move the geography footprint out you. It opens up you up to new opportunities because of new relationships and so forth. So not that much different there when we think about what's happening in the.
You know in the geography, the country, where energy services. The Petrochem is.
Got to be concentration.
Okay, and maybe you can just expand on the acquisition opportunities in that environmental services category as you see it today. So we're we're not really ready to break it out.
You know again as John I, both said the majority of our acquisition activity is still going to be in solid waste yep. So these are I would call it sort of fringe opportunities.
We're not going to do one natural acts and try to hard we're just going to make sure that we're making being opportunistic of being intelligent and staying within our our adjacent capability set but most of the investment will still be in and around good old fashioned core solid waste for the time, yes, there will be I'd add is that space is pretty Frank.
That said.
Yes, our customers have asked us to be there right. We've been in this space for a long time in plant property. They understand our safety record they understand our commitment to sustainability I understand our performance levels that we can execute against and therefore, they asked us to broaden our product and service offering to better serve them.
Interesting, yes, I mean, it sounds like a just another big consolidation runway.
I guess just to close it out there maybe how this protect their piece of the business.
Okay. That's all kind of lumped together at this point just just how it's kind of moving into 2020.
Yes, some high level comment on that would be helpful.
Okay.
Yes.
Yes, I mean, I think that the you know into 2020, obviously, you're going to see that line item on the.
On our revenue breakout continue to continue to increase because of the acquisitions that we made this year as Don mentioned that we're going to remain opportunistic here in 2020 and see if there's any other opportunities that we can also include in that.
And that piece of our business Don mentioned, some cyclicality, we expect a little bit of had we're not a year over year comp if drilling activity remained flat, obviously that could tick up and move up depending on where oil prices go downstream side of that business as much were steady from an underlying demand profile and you'll see nice growth.
Both and year over year, there because of the acquisition that within the space.
Thanks, Thats all really helpful. Appreciate it.
Our next question will come from Michael Hoffman with Stifel. Please.
Please go ahead.
Thank you very much so I'm just to tease out that last set of conversations.
51, five that's now called environmental services, a year ago is that pretty much purely energy and now 57 eight has to combinations of things.
Just some more sure I'm understanding this whole conversation that just happened.
Yes. It was we're pulling a little bit from the core business. We've been the downstream for a long long time sort of pulled a little bit of that into the business, but it's just the combination of both upstream and downstream and called environmental services largely because that's what the space calls that right Thats, where customers are you I got that John but but a year.
Ago wasn't basically gestalt ups upstream energy and this share it's got a mixture of thing primarily primarily yes, primarily so I'd just like we've we've tried to say is couple of times look we've been in and around this space for a long time, we've had little sort of outposts in our business that have.
Paul at wandered into the space done pretty well with us. So none of this is all a new to us. It's just aggregating get into one place and then and then as John said, it's somewhat of a fragmented business and customers want to sort of have that one that to grab and were that reliable well known entity and so it just it just seems to go together pretty well.
So you'll see now aggregated and you'll see some some good growth as John pointed out I guess I'm I'm correct I just wanted to make sure I understood. What was in the mix. So I don't dispute the need or been in and all that.
On the free cash flow side, one of the things that I think also needs to be thought about is there.
At $68.
That's an incremental level of pressure into next year relative to the run rate through this year and that would equal cash headwind as well.
At your overcoming so when you when you start with a were flat year over year at at the upper end versus the New guide of mid point.
Just 25 million for the incremental.
Backroom spending and the like for employees 40 million for working capital.
There's some cash tax benefit.
There is also another headwind is some recycling tight cash too right.
Yes, that's absolutely right, Michael you're right on with and that is now it's probably circa $20 million are so.
Okay, and obviously thats a negative in our 2020 preliminary outlook in terms of the cash flow. So actually Michael Your point is right that just further makes the point of the underlying strength of the business right right. Chuck made to point you know that are based on free cash flow was really a billion three.
And then all the good work that the team is doing on on restructuring recycling contracts at some point, we're going to gate that year over year impact to the nothing right. We're just going to we're going to move the risk over where it belongs in that we won't have that conversation anymore.
So Jewish shift to price for a second so I love the progress being made on both what what what needs to change.
Either within your control or macro that you can narrow the gap between the yield reported on the core that's being offered.
Now that that's the ideal scenario right is that that got closes to over time, what what can you do to close that gap.
Yes, that's obviously us focused on this maintaining that stickiness and increasing at stickiness with the customers right because what we're talking about now is that what we have historically hold churn.
The difference between that yield in that core price and Thats, where all of the technology that John talked about in that kind of activity with the customers really come into play.
And then so what I'm hearing is your tending to I'm. Sorry go ahead, Nicole I was going to the other thing that helps us and we'll continue leveraging the teachers the cancer pricing tool.
As Chuck said, you increased the sticking to reduce customer to section and then all your new unit by leveraging the cats and pricing drove we've done that discipline to move with the market Lisa and I keep in mind customer defections at 7%, Yeah pretty doggone low can we get to six we've been below seven.
Before we get it the five we will see right, but you have a certain amount of defection just from business is failing going bankrupt moving out of the country et cetera. So that's all in that number so we start with a pretty low defection number but everything else we're doing around.
All of our customer service initiatives, even fleet reliability, all that new technology. The rice platform that John talked about all that is to create differentiation in the product value and can we can we gain more customers at a higher price that goes hand in hand with using the capture tool can we keep customers law.
Longer.
Now that reduces this thing called churn over time, it Doesnt I'd say differentiation helps us on both fronts. The other thing that is helping us is upward pressure on landfill pricing, which you've seen now for a number of cores in a row that we've done a good job with right. We passed that right through to our collection company right and that question Company then as charging.
Our friends in the street. So we're getting we're taking on customers at a higher price, which ultimately reduces the chart.
Okay. Thank you very much.
Our next question will come from Jeff Cyber with BMO capital markets. Please go ahead.
Thanks, So much that's close enough excuse me.
I know there's been some media reports about some strikes that had been.
Struck against your company in a number of your markets I'm. Just wondering if it has there been any impact on your business in terms of extra cost to send in replacement et cetera, any color would be great.
Sure no yeah. So first of all were pro employee, that's where we start the conversation from a values basis. This has been incredibly narrow. This is one business unit in the northeast right, it's less than two dozen employees.
And we are targeting good faith local teams doing a great job right. We're hopeful we get back to work soon there has been a couple of one day events than a handful of markets. Good news is customers are not disrupted we're getting the recycling a garbage off the ground right in the northeast and did in those minor kind of disturbances.
Right and that cost standpoint, it's been nominal for the quarter.
Okay I appreciate you putting that in perspective.
My follow up question one of your competitors had mentioned if you look at the different end markets there seem to be a bit of a bifurcation between those that are more industrial related like God, the special waste area and more and those that are more consumer focus I'm. Just wondering if you're seeing the same kind of different trends between those end markets. Thanks.
It would just to put in perspective.
Only less than 10% of our revenue is really tied to manufacturing.
We're really tied to more so to the consumer right. So as we look at our various lines of business right now we're not seen a lot of weakness.
In that that manufacturing piece of the business that I talked about keep in mind also that when you. When you think about a manufacturer you think about a plant.
If they are going to do away with a shift or so their waste doesn't go down to zero right. They still need the way service. They make just not needed as often so that might be a little bit of a service decrease but.
It would have a minor impact on our overall revenue.
Overall, we would say the underlying economy is pretty pretty strong.
And.
John pointed out certain parts of our business our event driven we see some fluctuations in construction with seasonality you know some special waste aired large events jobs that come and go but as you averaged through the year. We're growing the business will get too excited about seasonality only don't get too excited about these episodic things.
The fact is you know we get this great portfolio were across 42 states and 200 plus markets and so if there was or what the weather event or a forest fire or work stoppage or this or that or whatever this portfolio sort of kind of winter today and it always has and we think it always will is one of the benefits of being having decide to scale we have.
And then of course, we lag so if the economy gets a little soft we we kind of lag that right. So.
Sometimes inside ourselves just kind of working through these little blips that otherwise people get excited about and our view now in our view for 2020 is is the kind of is pretty good shape, and we're well positioned across the markets and we're going to get our our our share of the growth that we want to get.
Alright, thank you so much.
Our next question will come from Noah Kaye with Oppenheimer. Please go ahead.
Thanks, very much you know the color you provided on the solid returns from the solar investments was helpful. But I was hoping to kind of broad and the question to the general topic of sustainability commitments you you called out in your release, a you know your environmental equipment to 35% greenhouse gas reduction by 20.
30, I believe some of the other sustainability goals you announced in July include increasing landfill biogas reuse, 40% increase in a materials recovery and and I just want to understand maybe helpful. As we think about your capital priorities and how they are aligning with the sustainability goals on how how does that impact.
What are the areas, we should expect to see increasing focus on for capital deployments over the next few years you know besides the solar investment what would you maybe call out in the 2020 Capex plan or other investments, you're making that address.
Yes, first as say as we believe that environmental sustainability and economic sustainability to be tightly linked so that's why we're so passionate about.
Restructuring the business model for recycling because over time were long on the cycling and we want to be a major player in that space, but it has to have.
Really attractive financial returns for us to continue invest there and we're seeing that absolutely in given markets over time. So the market is moving their deposit direction, yes, I think you'll see things like landfill gas energy projects overtime place, we meet or place. We further invest to meet the sustainability goals and yields we put out.
Ambitious goals for 2030, we don't have all the ticks and ties and all the plans to achieve every one of those items built out yet because they are ambitious goals and they're more than a decade off but we feel we feel really good that we're going to do those in a responsible way value creating way so that.
Not only is the environment, winning but the shareholders lending as well and this isn't a onetime investment either that you're going to see.
Have a set of pop into our Capex right. This is something that we've been doing over time, and it's already baked into our cost structure. So.
They won't be any big blips on the radar relative to our investments in these areas.
I think that's helpful. Thank you.
Maybe a little bit more near term just want to understand a based off of the M&A that you've completed year to date, what is kind of the rollover revenue contribution to 2020 and is that basically what's assumed in this preliminary outlook.
Yes. It is so we're about 70 basis points of Oh revenue rolling into our 2020, and then you get on top of that the revenue associated with the $200 million of investment, we're saying we're going to make in 2020.
So in other words or your outlook assumes both of those you assume some contribution from next year is happening though.
That's right 70 basis points rollover plus the if the revenue impact of a $200 million investment.
Okay. Okay. That's helpful. And then you know you are you kinda defined expectations for the recycling headwind for next year as well around 20 million.
Your processing fees now covering most of your third party volumes is there further improvement opportunity there or is it really now all about redoing you know the municipal contracts and improving the technology, what you know.
What did the levers to pull that could maybe reduce this headwind assuming a constant commodities environment right. So I think that we made really good progress in terms of the pricing initiatives and converting to the the processing fee.
Right now the processing.
Facilities themselves or continue to be profitable and we continue to look at.
That profitability in those fees that we can given what we consider to be an appropriate return on those facilities. So we've got a little ways to go in that regard and then we still have conversations that we need to happen or municipalities.
To get them to convert over two to these this process yet and we're marching into the city Hall everyday and I think the good news is lot of conversations in flight and the nature of the conversations is turning I think a year ago was soft pushing back on us and now were shift staff inviting us in saying I want to make sure that risk.
Cycling is sustainable my community, let's go into gathered a talk the elected officials because ultimately we need to get more pricing did occur to make a sustainable for the long term.
That makes sense. Thank you very much.
At this time there appear to be no further questions Mr. Sager I will turn the call back over to you for any closing remarks.
Thank you operator in closing we are pleased with our third quarter performance through the relentless operational execution of our employees. We achieved strong pricing 60 basis points of underlying margin expansion and continued grow a growth of both earnings and free cash flow.
The momentum in our business is strong economic backdrop remains supportive of continued growth in 2020 as always we will continue to manage the business to create long term value for all stakeholders, including our employees customers communities and shareholders I want to thank all of the Republic employees, everyone on our team for their hard work commitment and.
Occasion to operational excellence and creating a republic way. Thanks for spending time with us today have a good evening some please be safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending and you may now disconnect.