Q4 2020 Republic Services Inc Earnings Call
[music].
Good afternoon, and welcome to the Republic services fourth quarter 2020, Investor Conference Call Republic services is traded on the New York stock exchange under the symbol R. S. G.
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John.
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I would now like to turn the conference over to Stacie Matthews, Vice President of Investor Relations.
Hello, I would like to welcome everyone to Republic services fourth quarter and full year 'twenty.
Inc Conference call, Don Slager, our CEO, Jon Vander Ark, our president and Brian <unk>, Our CFO are joining me as we discuss our performance.
I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward looking statements.
Tronic 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 if in.
In the future you listen to a rebroadcast or.
A recording of this conference call you should be sensitive to the state of the original call, which is February 22021.
Please note that this call is the property of Republic services, Inc. Any redistribution retransmission or rebroadcast of this call in any form without the expressed.
Consent of Republic services is strictly prohibited.
I want to point out that our SEC filings our earnings press release, which includes GAAP reconciliation tables, and a discussion of business activities along with a recording of this call are all available on Republic's website at Republic services Dot com.
I want to remind you that republic's management team routinely participates in investor conferences. When events are scheduled the dates times and presentations are posted on our website with that I would like to turn the call over to Don.
Thanks, Stacy and good afternoon, everyone and thank you for joining US we are extremely proud of our strong.
Finish to 2020, we further proved our ability to overcome adversity and execute in a challenging environment.
2020 tested the company's foundation and the team repeatedly stepped up to the task at hand, and demonstrated the strength and resiliency of our business.
Through.
Strong hard work dedication and commitment we delivered record setting operational and financial results, we outperformed expectations for the year and even exceeded the high end of the original guidance. We provided last February.
During 2020, we delivered adjusted earnings per share.
True there of $3 56, which represents an 8% increase over the prior year.
<unk> generated $124 billion of adjusted free cash flow, even after repaying all deferred payroll taxes <unk>.
Expanded EBITDA margin 130 basis points to 29.
4%.
Improved free cash flow conversion to over 41%.
Increased customer retention rates to an all time high at just above 93%.
And achieved record setting safety performance profitable growth remains our number one strategic imperative and we.
Nine you to believe that investing in acquisitions with attractive returns is the best use of free cash flow to increase long term shareholder value.
We prioritize acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles in 2020, we invested more.
We continue to $600 million in acquisitions, our acquisition pipeline remains full and we expect 2021 will be an equally robust year of activity.
We anticipate the year will start strong with Santana expected to close by the end of the first quarter.
As part of our balanced approach to capital allocation.
More than kitchen, we returned $620 million to our shareholders through dividends and share repurchases.
Turning to 2021, we expect another year of record setting performance, specifically, we expect to deliver adjusted earnings per share in a range of $3.
<unk> to $3 73.
And generate adjusted free cash flow in a range of $1 $3 billion to $1 $375 billion.
We believe our strong results exiting the year provide the momentum to further grow in 2021 and.
And clearly demonstrate our ability to create lasting shareholder value.
John and Brian will provide additional insights later in this call before turning the call over I want to thank each and every one of our 35000 team members for their hard work and extra efforts during these unprecedented times.
<unk> I also want to recognize our frontline employees for their continued heroic service as essential workers throughout the pandemic.
Early in 2020, we launched our committed to serve program to recognize the contributions of our frontline team, while also supporting our small business customers and the communities we serve.
At the end of the year as the vaccine rollout began to signal Hope company leadership decided to again. Thank frontline team members with a 500 dollar award, which they each received last month.
This brings our direct financial support provided to our frontline employees to $45 million since the start of the pandemic.
Nothing.
The thing is more vital to the success of this company than our people.
And that has never been proved more true than during this past year with that let me turn the call over to John.
Thanks, Don.
Throughout the fourth quarter, we continued to see improvement in the business and reported positive combined.
Towards from average yield and volume for the first time since the beginning of the pandemic.
During the quarter total core price was four 6%.
This includes open market pricing of five 4% and restricted pricing of three 3% for.
For the full year core price was.
<unk>, 8%, which represents the highest level of pricing in the last 10 years.
Average yield for the fourth quarter was two 5%.
Average yield measures the change in average price per unit, which considers the impact of customer churn.
Looking forward, we expect average year.
Yields remained strong at approximately two 5% in 2021.
During the fourth quarter volume decreased one 8%.
This compares favorably to the three 4% volume decrease we experienced in the third quarter with all lines of business showing an improvement from Q3.
Three levels.
Fourth quarter small container volume decreased by three 5%, which is a 130 basis point improvement from the third quarter.
Fourth quarter large container volume decreased three 4%.
Volume performance was relatively consistent between the permanent and temporary portion.
Of this business.
Total landfill volume decreased two 4% versus the prior year.
This included an increase of one 7% and MSW and a 1% increase in C&D, which is offset by nine 8% decrease in special waste.
Our pipeline for special waste volume remains strong.
Looking forward, we expect a gradual improvement in the economy that we saw during the second half of last year to continue leading the volume growth of one 5% to 2% in 2021.
Next turning to our environmental solutions business.
Fourth quarter environmental solutions revenue decreased $22 million from the prior year.
This resulted in a 90 basis point headwind to total revenue growth.
This was primarily due to a decrease in drilling activity and delays in implant project work.
Looking ahead.
I believe our environmental solutions business can experience above average growth rates.
We are particularly focused on the downstream business, where customers are looking for integrated solutions, and we can leverage our broad capabilities and sustainability platform.
Turning to recycling.
Cycle commodity prices.
<unk> increased 67% to $110 per ton in the fourth quarter.
This compared to $66 per ton in the prior year.
Net benefit from higher recycled commodity prices was partially offset by a 3% decrease in inbound recycling volume.
Next turning to.
We.
Our adjusted EBITDA margin in the fourth quarter was 29, 9% and increased to 150 basis points versus the prior year.
We successfully manage our costs or changes in underlying demand and more than offset the decline in revenue due to the pandemic.
Margins enabled in part by the implementation of our rise dispatch platform, which was a critical tool to adjust our costs for rapid changes in volume.
We are accelerating the use of technology to drive productivity improvements and efficiencies as well as to improve the customer and employee experience.
I'm, especially proud of our safety results.
During the quarter, we achieved record setting safety performance by reducing safety incidents, 21% versus the prior year.
This drove a 14% decrease in risk management costs.
For the year EBITDA margin expanded 130.
This one points to 29, 4%.
We believe we have found a new level of performance and plan to further expand our margin from here.
We expect EBITDA margin of approximately 29, 5% in 2021.
Finally in 2020, we published our first year of progress to our latest.
Basis long term sustainability goals.
These goals address our most critical sustainability risks and opportunities and are aligned with the UN sustainable development goals.
We believe these goals have the potential to significantly benefit the environment and society, while enhancing the foundation and profitability of our business.
<unk> over the long term.
As part of our commitment to reduce carbon emissions, we have taken a leadership position in the industry to embrace electrification.
We believe this emerging technology will be the preferred choice to power, our recycling and solid waste trucks and equipment in the future.
In addition to our ongoing.
Business vehicle pilots, we recently made a minority investment and entered into a strategic alliance with Romeo power to further explore electric solutions for our fleet.
We remain committed to make further progress against all of our sustainability goals in 2021 and beyond.
Our sustained.
Electric performance continues to be well regarded as Republic services was named to the Dow Jones sustainability World and North America indices for the fifth consecutive year.
Additionally, we were named to Barron's 100, most sustainable companies list for the third time.
I will now turn the call over to Brian.
<unk> ability thanks, John adjusted EPS for the fourth quarter was $1. This represents an increase of 12 or 14% from the prior year adjusted EPS for the year was $3 56.
This performance was <unk> 16 above the high end of our guidance range.
Approximately <unk> of the beat resulted from operational outperformance in <unk> was due to favorable tax items.
Our adjusted EBITDA margin for the fourth quarter was 29, 9% and increased 150 basis points versus the prior year. This.
This included underlying margin.
Expansion of 130 basis points, and a 20 basis point benefit from net fuel and recycled commodity prices.
SG&A expense for the fourth quarter was 10% of revenue an improvement of 110 basis points from the prior year.
This level of spending reflects our.
Margin active management of discretionary costs, while continuing to make investments to drive growth and generate efficiencies in future periods.
Adjusted EBITDA for the year was 29, 4%.
An increase of 130 basis points versus the prior year.
The outsized margin expansion is a direct.
Are the result of pricing in excess of our cost inflation and dynamically flexing cost to optimize our cost structure we.
We are leveraging new ways of working and utilizing new tools and technology to be more efficient and agile.
We also continue to make progress on converting our municipal contract structures to.
Direct increased profitability and ensure an appropriate return on the assets we deploy.
Adjusted free cash flow for the year was 124 billion.
And increased $62 million or five 3% compared to the prior year.
Adjusted free cash flow exceeded our expectations due to better than expected.
A drive our growth and favorable contribution from working capital.
Working capital included a one five day improvement in DSO and a two five day improvement in <unk>.
The benefit we realized from positive working capital added approximately $100 million compared to our expectations, which enabled.
EBITDA repay all previously deferred payroll taxes.
Full year 2020 free cash flow conversion was 41, 3%, a 70 basis point improvement compared to the prior year.
We expect free cash flow conversion to further improve in 2021 and are planning to achieve mid 40% level performance.
Build us within the next couple of years.
As John mentioned, we expect combined average yield and volume growth of four to four 5% in 2021.
We expect average yield to remain relatively consistent with our 2020 results, even with lower CPI based pricing.
From a timing perspective.
<unk> average yield to be relatively lower than the full year average in the first quarter we.
We also expect volumes to improve sequentially, but remained negative during the first quarter. Both expected outcomes are due to the tough prior year comparison.
During the quarter total debt was $8 nine.
We have $9 billion and total liquidity was $2 8 billion.
In 2020, we refinance debt to capitalize on the low interest rate environment and extend maturities.
These activities reduced annual interest by approximately $60 million about half of this benefit was realized during 2020.
Our leverage ratio was three one times, we have plenty of capacity to fund outsized acquisition growth, while maintaining leverage within an optimal range.
With respect to taxes, our adjusted effective tax rate was slightly negative during the fourth quarter and approximately 16% for the year.
$8.
When you further consider non cash charges from solar investments, we had an equivalent tax impact of 20% during the fourth quarter and 23% for the year.
We expect an equivalent tax impact of 26% in 2021 made up of an effective tax rate of approximate.
<unk>, 22% and approximately $90 million of noncash charges from solar investments. If you normalize for the expected increase in taxes. Our 2021 EPS guidance represents high single digit to low double digit growth with that operator, I would like to open the call to questions.
Approximately.
We will now begin the question and answer session.
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Our first question comes from Hamzah.
So I'm sorry with Jefferies. Please go ahead.
Hey, good afternoon. Thank you.
I guess the first question.
Touched on it at various points in the prepared remarks, but maybe if you could just go a little deeper into sort of underlying trends that youre seeing.
No service increases how much of sort of COVID-19 impacted revenue.
<unk> has yet to come back in any way you want to frame that and then maybe how does that position you for 'twenty 'twenty, one and beyond.
One of your competitors said debt waste.
Waste is a reopening play.
The market.
Obviously, you didn't give them credit for that but just sort of just give us a flavor of underlying trends and how youre positioned long term.
Sure Hamzah. Thanks for the question Yeah, we're feeling really good about the trends. We are seeing you mentioned service decreases or increases we continue to see more increases than decreases we're seeing.
The business come back we're seeing people get back to work.
We continue to find as we have throughout the last year, new ways to work more efficiently, we're going to continue to employ that into into 2021, but we're planning for continued steady growth through the year. That's what we're seeing I mentioned the pipeline being strong.
Market.
So we're feeling really good about the business and as we've talked.
As we exited last year some of the efficiency gains that we've seen in 'twenty, we expect to hold onto but look at pricing pricing has held up the market is still very rational the underlying fundamentals are solid.
<unk> market position is better than ever our foundation is strong our team is more capable than it's ever been and.
The market is coming back.
And we're going to we're going to be right there too to get our fair share of it.
As we go through time, but debt service increased number is steadily rising.
And pricing is holding up as well.
Alongside of it and then I think there's a little bit talk of inflation out there on the horizon inflation. As you know is actually good for our business will inflation will help CPI tick up so we've got a lot of year on year improvements that we're seeing in the business John mentioned rise in his commentary.
We are still seeing the benefits of that unfold here in 'twenty, one and beyond so, but I think on the on the revenue front on the customer front I think all things are green for US right now and it's just a matter of the pace right and we will just be reporting on that pace of recovery through the year, but if you look at the.
The the guide right, we're looking at double digit EPS and cash flow growth, we've got a pretty strong year in front of US we think.
Our next question will come from Tyler Brown with.
With Raymond James Please go ahead.
Hey, good afternoon guys.
Hi, Tyler good afternoon, Hey.
Hey, Brian so in the implied guidance how much of a rollover benefit from M&A do you have baked in there.
Yeah from a from a topline perspective, Tyler we've got about 150 basis points of <unk>.
Top line.
The over in the guide.
Okay and to be clear that incorporates what you spent late in 2020, and what you expect to spend in early 'twenty one.
Jeff, but that's just what's actually closed through the end of August one.
Okay, Okay perfect that's helpful.
And then Brian I know you guys did such.
Such a good job on managing margins in 'twenty I think you may be only guiding to say a 10 basis point improvement my hunch is theres quite a bit moving in there. So can you kind of talk about some of the puts and takes there maybe recycling to the benefit core expansion and then maybe what are some of the takes like maybe healthcare M&A dilution just any help there.
<unk> look I'll give you the puts and takes here in a second but just Canada further don's comment.
One of the things I think you have to appreciate is when you take a look at our 2020 performance, we're coming off of Triple digit margin expansion, which I think really differentiates us from our peers and we're talking about further margin expansion from.
Here and we don't think we're done after we get through 'twenty, one, but if you take a look at the puts and takes what's underlying that 29 five we're looking at underlying expansion of call. It somewhere in the 50 basis point range.
The things that are offsetting that we've kind of aggregated net fuel.
From he oddity prices together to your point commodity is is a slight tailwind actually the headwind is more on fuel and that's just really more of a timing thing than anything else. The combination of those two is about a 20 basis point headwind to margin and then on the acquisition, Brian We've got about 20 basis points of dilution in year, one that's predominantly.
Income just from the innovation and the transaction and the deal costs that we that we experienced in the first year. So while it's dilutive in year. One we expect those acquisitions to actually be accretive to our average margin performance year, two and beyond.
Yeah, no a core expansion that's kind of the message, though yes.
<unk> core expansion.
<unk> 50 basis points and you know.
Again, that's the really the important story here is that's on the heels of really strong margin expansion in 2020, and then the underlying or the headline story is 30% is right there in our sights Tyler Jim.
Yeah, I'm I'm aware of that Hey, John really quick.
Do you have any specific thoughts about 'twenty, one MSW landfill yield trends do you expect that to maybe step up and I am curious how much of that line is indexed to CPI is it quite a bit.
Yes, listen we have nowhere I'll, probably six or seven quarters into.
Stansell step up in landfill average yield right over three 2% for the quarter and we expect it to be strong again in 2021 of your point.
Junk of that volume is certainly tied to contracted business.
And tied to some inflation based index. So as CPI goes up we get inflation that should.
Upward pressure on it and I also just think people have realized landfills are expensive to operate and so we need to price for the investments we make.
And of those assets and that has put upward pressure on MSW pricing of landfill pricing more broadly again across the last couple of years and I don't see that trend abating at.
Should put up okay, yes, I appreciate the time thanks guys.
Our next question will come from Kyle White with Deutsche Bank. Please go ahead.
Hey, good afternoon hope everyone's doing well thanks for taking the questions.
Just wanted to talk about on contract now that we're basically a year.
<unk> for Windows. This pandemic started has any of the terms or contract structure has changed as a result, as you kind of approached near renewal renewals, maybe particularly on the resi side.
Yeah, we we've gotten over 100 customers to amend the terms primarily municipal residential contracts because.
Because our weights have increased now.
In April and the immediacy of the shock when everyone's sheltering in place weights were up about 10% that modulate it to be down to 5%.
But again, that's still in those contracts are those are time and weight based contracts and so as we get heavy weighted price for.
That you know as that number dissipates as theirs to modulate as people get back to work knows more of those pricing renewals will come in the normal cycle of price of contract changes versus out of cycle contract changes, but.
That is not a high margin part of the business for us on all the players in.
The industry. So we absolutely have to get paid for the work we do there.
And Kyle I think if you actually take a look at the the overall average yield performance you've seen in that residential business, 3% plus pricing the last two quarters, and Thats, where youre going to see as we renegotiate and changed the structure of those contracts, that's where youre going.
Gonna say Ed.
Got it that makes sense and then on electrification of vehicles you touched on it a bit in your prepared remarks, maybe you can just talk a little bit more about your strategy and how its different from some of your competitors and then also I know you had the the partnership in the quarter that ended and I'm curious if there's any kind of ramifications from debt.
And then just maybe the rationale of the partnership with Romeo.
Sure Yeah, no listen we think electrification is.
Exciting technology for a couple of reasons, one it's truly only zero based emission technology out there seeing G is.
Incrementally better than diesel, but only incrementally better than that so it's the right technology long term.
Term.
In our application tends to be a perfect one for electrification because range anxiety is a big issue in trucking for electrification and we don't have that as our trucks come home to the same location every night and you can get into overnight charging. So we're really excited about the technology.
And we're going to get there.
We said, there's going to be multiple paths to get there and theres going to be some uncertainty.
The destination has cleared the path to get there has some uncertainty so.
We've got a number of different relationships going on pilots with multiple manufacturers, we talked about the Romeo investment and in terms of the specific.
Partnership that we exited right disappointing for us, but that didn't cost us anything that contract was very.
Intentionally designed it was performance based on the extent they couldnt execute against the performance it costs us nothing on that front, so disappointing again, because we're sharing for everybody.
To get there because we think it's good for the good for the planet, but we are confident that we've got the right set of partners and we're going to be excited update you on our progress as we move forward.
Got it I'll turn it over good luck in the year.
Thank you.
Our next question will come from Walter.
Franklin with RBC capital markets. Please go ahead.
Yes, thanks, very much good afternoon, everyone. So on the M&A guidance $600 million.
Mentioned that it could be tuck in it could be new new.
New growth areas first Scott can you give us a sense of what the rollover is there I don't know if you touched on that if you could repeat it in and really are.
Are you are you finding that the pipeline is.
As we come and exit true is it getting is it changing day to day in terms of the availability of <unk>.
Sellers or are you going after any particular targeted areas or marketplaces that that are starting to open up a little bit more just curious how things are changing.
Day to day with regards to the availability of sellers.
Yes, So let me just start with some of the numbers that you asked on the rollover. So the rollover right by definition is that which is closed in 2020 again, that's about 150 basis points.
Okay. So again the actual revenue.
<unk> contribution from the $600 million will be which of the deals that we intend to close in 'twenty, one that will be based on the timing of when they close so again, we're guiding on the top line to organic growth, which is that debt.
Combination of yield and volume how much revenue we get in 'twenty, one again on the 600 will.
Be more timing based on anything else.
Yes, the pipeline remains strong and it remains balanced balanced across.
Kind of core markets, we're in and the recycling and solid waste space, and obviously thats the bread and butter of our acquisition strategy and those tuck ins are highly accretive.
We're also looking at new geographies and have.
Gotten into different.
Uh huh.
Extended geographies in the last two years to three years, which again provides new growth opportunities and then also.
New parts of the business. So we mentioned environmental solutions and those are actually core customers of ours. We've done work for them for a long period of time it's.
Really expanding our product line into those customers because they've asked us to do it they want a.
A provider who can provide digital solutions who's got a great track record on safety and sustainability and we're finding it attractive to expand our product set through acquisitions, there as well.
Okay and.
And then my follow up just on capital allocation, obviously again.
<unk> resilient business that came through clear youre mentioning three times leverage and that looks good I mean.
There's been a whole range of kind of a little bit more aggressive too a little bit or a.
A little less aggressive whats your thought on.
How you.
This pandemic and what you can do to perhaps press the accelerate a little bit, especially with your pipeline that you just mentioned, it's full and balanced.
Could we see a little bit of higher leverage now that now that it seems that you can tolerate a little bit higher leverage to take advantage of that M&A opportunity.
Well.
I'd say, one we are weathering the pandemic and feel hopeful that will be on the other side of this thing before too long so is.
As it relates Todd to leverage we've always stayed.
As stated with our optimal leverage is and we've been for the last couple of years now kind of keeping right in that three times. The good news is when you. When you are buying good cash flow good EBITDA good reoccurring.
Occurring revenue.
You can you can continue to grow and even increase the overall debt level to keep your leverage pretty pretty stable. That's how we built this business frankly right. So.
We are we have in the past.
For the right deal increase leverage a little bit.
With the commitment to get it right back in line over a short period of time call. It 12 to 24 months. We've we've shown we can do that if the right deal came along we certainly would look at that.
We're not going over lever the company by any means but we've got a lot of dry powder. We've got a lot of capability, we're proven as it relates to getting.
It was done getting deals.
Through Doj accordingly, getting asset sold if necessary.
And getting things integrated we've got a proven model for that and proven capability within our team. So I think as the world continues to change is as maybe some.
Getting the competitors get fatigued with what's ahead of them or change in regulation, sometimes drives smaller competitors to selling a lot of it still is people coming to a point in life, where they are.
Pardon the term of that kind of edge out rate in that business for a long time and they start to think about selling their businesses. Their retirement. So we're right there to pick them up.
Again.
Second position in a market is what we're looking to achieve as John mentioned, we've gone into some new markets, where we've taken a lesser position, but with the appetite to move into that number one or timber.
Spot before too long and that's still our approach so the pipeline strong the ability to get deals done.
And integrate deals.
<unk> is strong and the balance sheet is strong so we can't be in a better place.
It sounds like it's Alex strategy I appreciate the time.
Our next question will come from Kevin Chang with <unk>.
CIBC. Please go ahead.
Okay.
First thanks for taking my question and good evening, everybody, maybe if I could just follow up on.
The electric vehicle strategy.
A question maybe just on the <unk> investment can you remind me if any of the technology that you develop wood.
Proprietary to them or is that something you could share with other Oems as you.
Thank you Bill to eventually convert your fleet turnover over time.
Then secondly, you made a comment in your prepared remarks about electric being kind of the only meaningful.
Zero carbon.
Propulsion system, just wondering how you think about hydrogen fuel cell. It seemed like that make you a little bit of a push in Europe in terms of.
Terms.
New waste based vehicles.
Testing anything from that perspective, all electric.
Electric kind of bill.
Of course, you are riding on that.
Yes, let me start with the second part and I'll work back in the first part.
So, yes lots of work in Europe, and everywhere else and listen.
Innovation is going.
To have lots of people looking at lots of different things over time, if you look at where the balance of the global Oems are the investment on electrification.
Our space is dwarfing the investment on hydrogen most of the hydrogen investment has really been in a long haul space and look at we remain open minded.
The technology is emerging.
Emerge and evolve.
But I think it's we're pretty confident electrification is going to be the right time.
<unk> for our application and then we're working through the alliance with Romeo.
Not going to become an exclusive supplier to us by any means that wasn't the nature of the relationship and deal. However, we are working on proprietary things together.
Other including a pilot, where we retrofit one of our vehicles.
Because thats whats electrification to get it to scale its going to take our commitment and willingness to innovate right trial and error learning testing right, we'll adjust and over time right. We will kind of overcome those hurdles and we will get to scale with the technology.
That doesn't sound strategy it makes a ton of sense.
Maybe just a housekeeping question. The comment you had commented that environmental should see.
A small part of your revenue stream, but it would see above average growth.
Is there a way to think about maybe what's that going to look like I don't know were going to a quarterly revenue basis.
I think it's been around kind of mid twenties.
Quarter, the last couple of quarters here.
Should we think of something like mid Thirty's or.
And any goalpost might be helpful.
Yes no.
The comment was a little bit more I would say on the top line as it relates and that's again back to the commentary was really that focus.
On the downstream portion of that business. So again as John mentioned, that's an area, where we really feel like we can leverage our core capabilities.
What we do already so it's really just expanding that addressable market.
To those customers that are really looking for an integrated solution and really from a provider.
Someone like us so that's where we just feel like a combination of both organic growth opportunities as well as through acquisition that we can see above average growth rates relative to what we may see on the solid waste side expressed as a percentage.
Thank.
I appreciate the color and have a great evening everybody.
Thanks.
Yes.
Our next question will come from Jeff Silber with BMO capital markets. Please go ahead.
Thank you so much in your prepared remarks, you talked about the accelerated use of technology and excluded.
I'm, assuming that goes beyond what you've talked about on the EV side I know you've talked about the digital platform before can you talk a little bit about how you think technology might be changing your business over the next few years.
Yes, sure. So we started with our dispatch dispatch function and so from the operation side and.
And Thats, where.
That's the team that really builds routes and directs the trucks out every morning and adjust those trucks, sometimes in the middle of a day. So that we can service our customers and we got them into a very visual based mapping structure that allows us to build routes more efficiently and frankly more effectively for customers to <unk>.
Improve our delivery time.
Time and speed, we're now in the process of rolling out technology into all of our vehicles and so now we'll have two way communication between dispatch and the vehicle and we think that is a number of benefits. One it allows us to provide a better employee experience. It certainly allows us to take more cost out of the system because we're more efficient and then it'll also.
Also will allow us to connect to all of our customer facing investments. We've made over time that allow us to provide services notification and verification and reporting in a number of the benefits that customers want which we think will help further differentiate our offering in the marketplace.
Okay, Great that's helpful. Mike.
Follow up I'm sorry.
Sorry to go back to the M&A contribution I know you said, it's 150 basis points for the deals that have closed, but im assuming that excludes sand tech.
John can you confirm that too can you just remind us how large sand tech is ed.
And what you paid for the business, so we will be paying.
Yes, so youre correct the.
150 basis points that only includes acquisitions, which are close to that specifically exclude <unk> and we're not giving any sort of details on what we pay for santana or for that matter any other deals.
Okay fair enough. Thanks, so much.
Our next question will come from Jeff Goldstein with Morgan Stanley. Please go ahead.
Hey, good evening guys.
Looking at your average yield guidance next year or two 5% how should we think about potential upside to that figure. So is it mostly revolve around increasing inflation is that around more success and you're raising a renegotiation.
Is it is it more commercial coming back online just what would be the most likely source of upside in looking at that estimate.
Well, it's all the above right, there's a lot of mix issues that go into yield.
Certainly it is CPE.
CPI has an impact on our business as CPI moves up and.
And we have all.
The automatic escalator.
Working through resi space that will happen.
We've talked about now for a couple of years as we've been changing the indices.
For the escalators in our rate base business to something Thats more representative of the solid waste space. We've had a lot of success there John has been.
Al sort about that in a quarter after quarter and we continue to have success there even though.
CPI continued to get better we still moved continually toward.
An escalated it made more sense.
Recycling, we're going to we got work to do still in recycling right. It's all of those things I don't think it's any one thing that you can point to.
Although CPI by itself if it gets north of two two and a half will be a nice a nice pickup for us two.
Two things I'd point to our construction, which certainly looks strong and it is probably gaining strength so that could provide some upside in our large container side of the business and we feel really optimistic about our special waste pipeline, we've always talked about in <unk>.
<unk> some of those jobs tend to stall out just given the uncertainty in our pipeline remained strong through 2020, but we did see some of those jobs push out and those jobs are now hitting so as special waste gets more busy that should put some upward pressure on pricing on the landfill side look it on top of Ed you think about kind of best ever service levels.
Levels right that speaks.
Well for extending customer loyalty and that means better pricing and all the rest of it. So there's just a lot of factors go ahead, Brian Yeah, I was going to sit there and say the one thing.
To remind you of how CPI works through our business as it lags right. So the CPI print from 'twenty.
2020 is impacting our pricing in 'twenty, one and even with that lower CPI based pricing, we're talking about margin expansion and strong EPS strong cash flow growth as.
As well as improvements in free cash flow conversion as we start to see inflation, Brian that's only going to benefit 'twenty, two and beyond so as you start to see those.
Those inflation prints and if you see anything kind of north of two Brian because this year was only 120 basis points anything north of two is only going to be a solid tailwind going forward.
That was all Super helpful color. Thank you then just you said last quarter that overtime.
Was down 10% year over year, and maybe I missed it but where does that stand right now and do you think moving into 'twenty and 'twenty. One over time can can still kick is it going to tick up again, given that comp or do you think you've learned how to be more efficient there.
Yes, we're still at about the 10% range I would expect over time that we settle into the five.
Five 5% to 10% kind of.
Pre pandemic post pandemic.
Change or a reduction in overtime.
And we will capture some of that benefit because we've just learned how to be more efficient right. We've taken some routes.
Off of Saturdays, and Sundays and put them into our kind.
Daily routine Monday through Friday, and Thats, certainly a more efficient way.
To service the customer, but also keep in mind, we're always looking at the income statement and the balance sheet, we're going to make the optimal tradeoff on the asset and so you could have zero time are zero overtime by running.
A truck 40 hours a week.
But that wouldn't be a very good capital trade off right. So we think in the.
Low <unk> is really the optimal spot from an hours per week, where that truck should be running in that balances out customer service and safety and employee experience and all those things. So again, we will sustain some of those savings over time.
Savings and I think that will settle out between a 5% to 10% reduction over time.
Understood. Thanks, Bob.
Our next question will come from David Manthey with Baird. Please go ahead.
Yes, hi, good afternoon.
In terms of pricing all else equal and longer term do you have a preference for a CPI based price index versus a fixed 3% increase.
And I guess more broadly if inflation does pick up generally.
Could you just outline what you see.
He is the major pros and cons to your business.
Yeah, I think on net pricing I think the first thing we won't do is we want to make sure that we secure a price increase that more than covers our cost increase and even in a low inflationary environment. We have a strong belief that our people need to raise every year.
Our expenses are going.
Up and so we want something that covers that cost increase and then hopefully increase a little more of that allows us to expand margins over time.
Our broad view is that we don't want to get too concentrated on any single.
And to see whether that be fixed or water sewer trash or anything else. So we like a balanced approach as.
As long as it's something.
Better than CPI or a fraction of CPI, which historically the industry has accepted which were no longer tolerating right. We're making sure we're getting paid for the work we do over time and then in terms of inflation why Don mentioned Thats good for us because we've always given our people affair.
Wage increase right and so our cost increases with inflation don't really change a whole lot, where we get more on the top line of the business puts upward pressure on our fixed.
Our CPI or <unk>.
CPI or water sewer trash related indices, and I think even in the open market just puts more upward pressure on pricing.
Customers are willing to pay.
Water sewer trash has consistently outpaced CPI and again, we talked about a waste related industry. It's fair that's really the that's really the point right is at 3% to 4% fixed is fair, we can negotiate with customers.
In fairness and we can make the commitment we need to.
To continue to update our fleet modernization that John talked about.
<unk> people market rates provide good benefits and do all the great things, we do to keep our people showing up every day just like they did throughout this pandemic right.
The waste service providers in America didn't get near enough respect depreciation from from people at large.
They showed up every day with very little complaining.
We are true heroes and John's point, we're going to continue to reward that overtime and.
A fair rate works and the underlying issue is really the market is.
Rational and it's allowing us to continue to move that.
That needle little by little by Little and we've got a big portion of our book now corrected.
Okay. Thank you for that.
You noted that you expect to retain efficiencies that <unk> gained in 2020 going forward specifically you outlined over time is one of those areas what are the other.
Other cost items, where you see the greatest retention of benefits that you captured during the pandemic.
Yes, certainly on TNT.
We're not the only company on that front.
I think historically most companies and we were in this bucket two modes of meeting either it was a conference.
Call or it was in person, which involved a lot of time in hotel costs, and <unk> costs, and everything else and the emergence of zoom and teams and the other technologies have allowed people to work in new ways, and there's certainly benefits from being together and so we expect over time that some of those costs will come back in the business.
But certainly not all of those costs. So we're challenging the way we work.
And the other thing over time will be real estate. There are some roles that we think will be better permanently done from home, we did an unbelievable job of transitioning our team.
From an office environment, primarily to an at home environment and some of those roles, we think long term.
<unk> are best suited to be at home and we will have some real estate savings associated with that things like that will affect turnover continually positively right. So we've seen good benefits from that.
So it's.
It's a number again a number of things but.
A lot of sustainability and as John mentioned earlier, the benefits from routing that impacts more.
Is labor that also impacts maintenance and fuel and if you look at our results. Brian you can see the improvements that we're seeing in that cost as a percentage of revenue across all of those P&L line items.
Okay. Thank you.
Our next question will.
And then John Michael Hoffman with Stifel. Please go ahead.
Thanks for the questions.
If I'm playing cleanup, Brian can I ask a couple of housekeeping. So we all hear the same message like what's the share count and the earnings guidance, What's your run rate interest expense per quarter, So we'd get those right.
In our models.
Yes.
Michael like I said, we're not going into that level of detail on the guide again, I think just keeping it to the.
EPS in the free cash flow and some of the organic growth is where we're keeping that as compared to going through some of the individual components.
That said I mentioned on the I mentioned in my prepared remarks that we are assuming that that 26% equivalent tax rate that's that combination of both the effective tax rate.
Well as the non cash charges from solar investments.
But again, we're kind of keeping it a little bit more to a higher level of.
Yeah.
Yeah.
Okay got it.
Or are you assuming share buybacks.
And that number or should we I mean, it does matter because it could be a two or three per cent movement. Okay. Yeah. I know, we've got a modest amount of share repurchases again as we've talked about previously again.
Guy the first use of that free cash flow is going to be for acquisitions, we talked about debt net robust pipeline of acquisition activity.
So again thats going to be the first use is <unk>.
B to fund that so it's not going to be necessarily I would say as significant as what you've seen in years prior to 2020.
But still a modest amount of share repurchases assumed in 'twenty one okay.
On the margin just for clarity you original guidance with midpoint was 28 and a half.
You beat that by 90 basis points.
Which I presume what's happening is there's nothing like a crisis to get you all focused on.
On a cost structure that was coming out of the model, regardless, but it's now come all out in 2020, and youre going to carry and hold it keep it and build from it.
Correct, the right way to read all this yes.
The one exception that Michael is that there is a little bit of tailwind benefit here on the safety side and on the productivity side with lower traffic patterns.
And as people return to the office right.
At what pace that happens, we will see right there may be some headwinds, but I think that's a minor part of the story I think the majority of those safety productivity benefits, but we plan on capturing because success begets success, we figure out a new way of working and those teams. Our teams are committed to cash.
Benefit when you think about to your point, Michael we were when we moved originally from answering the phone at 300 locations to three.
We set a someday we're going to think about work from home solution, but that wasn't in our mind to do in 2020 until it had to be.
Brian we were that wood.
And.
It was a couple of years out right because the other things we're working on and then all of a sudden it had to happen.
As we reported we.
Move to working from home in those three locations, where they'd like 72 hours and that was a great learning. It was a great find it was a great pickup.
Now, we will benefit from that going forward right well figure out what that all means Johnson.
John said as things sort of modulate and and we find this.
This next new.
Plateau, if you will and then we'll grow from there and from there right.
Yes.
We did better than we originally thought.
And.
The story continues to improve.
From here as I mentioned, there's still a lot of upside in this business John talking about rise talked about all these other things that we're doing that are still in early innings there.
Continue to pay benefits into the future.
And Michael I mentioned it earlier I think it was Tyler's question right. So back to on the heels and I think you were just asking this question on the heels of that triple digit margin expansion in 'twenty.
We expect further margin expansion within the guide there Theres 50 basis points of margin expansion with from the underlying business in 'twenty, one and then.
There's a couple of pieces that are somewhat offsetting that but but very strong performance, especially given what we did this year I would think about ryzen I mean, we started to roll that out and then Covid hit and then we can pump the brakes.
Brakes.
And then we kind of went full up right and we continue to implement that I mean, the team that did that did an outstanding job, we thought sort of spring last year that we'd have to pull the plug on it but just really put it aside while we were dealing with the uncertainty of Covid. Instead, we move forward, we actually increase the speed.
<unk>.
You know that that phase of it all implemented is pretty impressive.
Got it last one for me you did $128 million in 2020 in the environmental solutions business is that.
You've confused me with your answers that number going to be up or down in 2021.
It's going to be somewhat flattish.
Actually because what we're expecting on the environmental solutions, Jeff Alright, which is pretty significant since you are running at 25 million a quarter for three quarters. So you've got to overcome a really tough <unk> to be flat. So that's the importance of that statement.
Okay cool thank you.
Our next question will come from Noah Kaye with Oppenheimer. Please go ahead.
Thanks, so much for taking the questions first of all just congratulations to your entire team from the frontline folks on up for performance.
Really tough year.
Yeah.
Yeah.
I guess I have a sort of a long term or even medium term growth strategy question here, which is I think we understand that there's always a component of churn that is structural and driven by bankruptcies. I think you had said back in April that you'd be exiting the year at 93% retention rate we would.
Price.
Interesting no commercial bankruptcies are actually down year over year in the U S and still just listening to what you said about true cost structure I mean, if more companies.
Act like Republic, and continue to not spend on hospitality travel and suddenly.
<unk> been in the past.
Yes.
Where business formation, and where growth happens in the economy is still going to change from what we might have expected previously.
How do you calibrate for that how do you position the business to.
To capture where the growth is going to be.
Overall overall.
Alex about where we are right in thinking about the balance we have always talked about the power of the portfolio right that is number one and number two across the markets. We're in we have a good concentration in what I would call sunbelt markets, but markets as people move to whether it's the.
The northwest down the west coast across the south and up into the.
So your guidance.
We are well positioned in places like Texas, and Florida, Brian a lot of people moving there. These days so we'll see.
<unk> got strong positions in Metro markets right. This thing is going to settle down people are going to become more rational in their behavior again, and we are well positioned to pick up all of the growth.
In the markets we're in.
Carolina So.
The way the growth comes will change downturns in these kinds of shocks to the economy that we've lived through Reno for our entire lives here and there are different. This one is different than the last one so there's still strong demand for housing right and we've always talked about how.
Single family home.
Using.
And household formation clearly tracks with our growth so that paints a pretty strong picture household formation lends to two.
Two.
Business formation, there is a lot I think pent up demand in the consumer consumers are pretty good shape.
When you think about wage growth I think about.
Start to happen.
In savings accounts across the nation I think there's a lot of people just chomping at the bit to get out.
So while we may have pulled in a little bit on <unk>. It doesn't mean, the average consumer it's going to I think they're going to get out there and.
And rush to some new opportunity right.
And.
So we're not too concerned.
What about that.
The free market always finds a way and we're right smack Dab in the middle of the free market.
Alright.
Muscle balance sheets are in great shape.
Relative to past crises and.
You mentioned the housing sector activity plus potential color right on CPI, plus a whole year over.
Reopening and that all points to kind of a multi year.
Growth acceleration for the waste industry.
So I think you know I think your comments around the portfolio and how you can leverage off of that are well taken.
The other thing Joe as I went through when we went through the great recession right that thing was.
Pardon the term but debt by.
1000 cuts I mean, it just kept going and getting deeper and longer and sustained and as this thing everybody get over.
Theres, probably some people would have some of that feeling about COVID-19, but we went from a surprise COVID-19 is here to the bottom falling out across the market to finding that bottom in a pretty short order.
Water and then battling back it wasn't this ongoing three or four year slump of this abyss.
We're coming out of it.
Right and.
Yes, there's still people who are dealing with tragedy that people deal with hardship and were not minimizing any of that but all in all over the top of it.
The economy is coming out of it and we're coming out of it with it and we're seeing those things reflect in our business and so.
That's our viewpoint for 2021 and beyond.
Okay, great well, thanks again for taking the questions.
Our next question will come.
From Sean Eastman with Keybanc capital markets. Please go ahead.
Hi, Jim Nice work really really good.
It is getting long so I'll just ask one I'm just curious.
If you look at your.
Private competitors may be if you looked at your.
Our acquisition pipeline and the companies in your acquisition pipeline.
It sounds like the pricing discipline goes all the way down to the small independents, which is great.
Curious.
If you look at this ability RFG has had to dynamically flex costs and.
And really having gone on offense on some of these technology initiatives in 2020.
Has it been similar with.
Those private companies I mean have you observed a similar.
<unk> from them through this last year or not I'd be curious to get your sense on that.
I think it's a mix to be honest I think some people panic frankly and did mass layoffs really quickly other people.
Kind of plowed their way through I think the broader theme is theyre not making some of the investments we're making into sustainability for example oriented the digital platform.
That were made.
Making these are multiyear investments and these are eight figure investments over time that become really really expensive that we need broad scale to get value out of investments over time, so and we see them I think pricing has held up well I think in general people have tried to do the right thing in terms of taking.
There are people on balance, but we've been able to kind of do both where we've seen them more just focus on getting the average of the recycling off the ground rather than thinking longer term about where to take their business and look at our capex right. I mean, we didn't take a capex holiday in 'twenty right, we didn't hit that free cash flow.
Number by.
Taken care by not spending on the company, we will continue our investments in fleet.
Systems and in.
Some of the innovation stuff that Jon talked about of course, we invested heavily in our frontline and our people with committed to serve and we saw some of that from some of our smaller providers as John said, it's a mixed bag I mean overall.
I think it depends how healthy and strong you are going into it and as I said in my prepared remarks, I mean, we were we were coming into this.
From a position of strength.
Stability and alignment across our team and a really strong culture going in and that led the way for.
Raul and again back to the power of the portfolio, we are well positioned good balance sheet all of those things in our favor so a position of strength matters and from there.
Now, we will get back to 'twenty, one and.
We'll do it again.
Okay. That's helpful. Thanks, Thanks, I'll turn it over.
And our next question will come from Stephanie Yee with Jpmorgan. Please go ahead.
Hi, good evening.
I'll ask one question can.
Can you envision Republic getting to 30% EBITDA margins.
And can you talk about what drivers will get you there as you have to offset some.
Hi, Glenn.
When business activity picks up is there a timeframe that you have mine for reaching that target.
Well, we're right on the cusp of 30% EBITDA margins at 29 enhanced our guide we think yes, we will certainly be at 30%.
Some of the drivers.
As we continue to improve our recycling business, we're well into that we can.
Ill give you more detail bill running out of time on the call today, but we've made good progress there good progress on that John mentioned that the approach we're taking on the alternative indices in the resi space good progress there.
<unk> platform.
We've got it rolled out it's only in the early phases of that that is going to be something that will build on once we get connected digitally to customers in all different parts of our business will just continue to add enhancements that drive margin that drive quality customer experience that drive customer loyalty will.
We'll drive price.
While we right.
The safety stories is a good story.
Fleet is a good story and then M&A right as we build we're going to do a nice balance of of new platform acquisitions, new markets, but also our bread and butter is still tuck ins in markets we're already in.
At a higher margin they are quicker to integrate so.
There's just a handful of things that are in our favor and.
We'll we'll continue to invest properly in the business.
We told you we had 30% of our scientists were right there and.
A 30% margin will be here.
Before you know it cause that.
Okay, great. Thank you.
Our next.
John will come from Mike Feniger with Bank of America. Please go ahead.
Hey, guys. Thanks, I appreciate you squeezing me in just on the one.
One 5% to 2% volume and the fact that Q1 is going to be slightly negative can you just help us understand how that is going to play out through the year I mean, do we need a pickup in some commercial and some business units in the second half to get us to that one 5% to 2%.
Yes so.
We take this one so again as we mentioned the first quarter over quarter expecting that performance to be better than what we saw in the fourth quarter of this year, but still negative.
Brian as we look at the kind of the distribution of volume, we would expect our best volume performance to be in the second quarter and that's just because of the comp.
Brian So that's when we saw the biggest decline in 2020, so you've got the easiest prior year comparison, and then it gets a little bit tougher as you move into the second half, but our expectation is that it still remains positive.
So again.
We are projecting that the economy continues to gradually improve and that is.
So Michael went into our guide on the top line, but as you kind of said meaningful type volume recovery to get there I would say no. Most of that has already occurred based on what we've seen in 'twenty with some modest improvement going forward and unit recovery.
Thanks, Thanks, Brian just I know this.
<unk> asked before the $600 million spend which does not include static.
Translating to 150 bps, so the top line I mean.
You guys just get over $10 billion of sales I'm, just trying to translate the $600 million.
<unk> hundred 50 bps topline and I know youre not going to give us acquisition.
<unk> multiples I get that maybe I'm, just a little slow here, just like getting that $600 million spend to 150 bps is that like just very conservative are there like audit divestitures I'm just trying to triangulate some of that.
Yes, So let me clarify okay. The 150 basis points is the rollover impact of.
Acquisitions that closed during 2020 that includes acquisitions that closed in February of 2020.
And.
It has nothing to do with Zantac sand Tech did not close by December 31. It is not in that 150 basis points. So based on the timing of when it closed in 2020, you get a rollover Ben.
And if it just because you didn't report a full year in 2020, that's the 150 basis points if.
If you were to just annualize the revenue of what we acquired in 2020, it's over $200 million.
Okay. Okay. Okay, Alright, that's helpful. Yes. Thank you I think so as we look forward though into.
'twenty, one or $600 million investment that we're anticipating that does include <unk> as well as other deal. We are not talking about right now about the revenue contribution that we're anticipating from those deals because some of it is just based on when it closes in 'twenty one how much it will contribute in year.
Sure.
That was helpful. Thank you Brian I appreciate that.
Thanks, everyone.
Next question comes from Scott Levine with Bloomberg. Please go ahead.
Hey, guys.
Hi, Scott.
Oh, one question for you actually.
On recycling, so we've seen commodity prices come back very nicely China has essentially.
Pull back from the market, even though we're at a lower price point on most recycled commodities than we were in say 2017.
Does does the new environment give.
Being more stable give you more confidence in investing in recycling or what are your expectations now that kind of the whole China.
Import ban scenario has kind of played itself out and commodity prices are on the mend there.
Yes, two things one it certainly even strengthens our resolve to go into city Hall and get a pricing mechanism that we think works for both parties and historically the industry has price recycling on the backend which has caused a lot of volatility in a business that is otherwise quite stable and we think the ferrous pricing models that we get paid.
A fair return to pick it up a fair return to process. It and then we share in the commodity value on the backend and as commodity prices get higher it's easier to talk to customers, particularly municipalities about Getty.
Getting that model right.
Long term, we are bullish on recycling right, we see a world that has popped.
Population growth and material scarcity, and a big desire from a lot of different aspects around reuse and recycle and we think we're going to be a big part of that and a big player in that we just have to make sure that to be environmentally sustainable and economically sustainable when we get a fair return for the work that we do.
Fair enough. Thanks, I'll leave it there. Thank you guys. Thank.
Thank you Thanks, Scott Scott.
At this time there appear to be no further questions. Mr. Slager, I'll turn the call back over to you for closing remarks.
Great. Thank you operator, when we look back on 2020 is.
It is clear to see just how instrumental the foundation, we built over the past decade has been enabling us to thrive in the midst of so many challenges.
The pandemic impact on Republic was just like that of the rest of the world disrupting the lives of our customers our communities.
And of course, our people, but we were able to react from a position.
Strength taken care of all of our stakeholders are strong foundation did more than just set us apart it actually allowed us to prevail.
We believe our 2020 performance clearly demonstrated the resiliency of our business and positions us well to deliver continued growth in 2021.
At this moment.
Is bolstered by an improving economy as we move into an era of recovery and growth as always we manage this business to create long term value for all our stakeholders.
Bill providing essential sustainable services for our customers.
Thank the team for their tenacity and their enthusiasm as.
As we head into this new year.
Thanks for joining us I hope you all have a good evening and stay safe out there.
Sure.
Ladies and gentlemen, this concludes the conference call. Thank you for attending you may now disconnect.