Q3 2021 Republic Services Inc Earnings Call

October 28, 2021

Good afternoon, and welcome to the Republic services third quarter 2021, Investor Conference call.

Public services is traded on the New York stock exchange under the symbol our S. G. All participants in today's call will be in listen only mode.

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I would now like to turn the conference over to Stacy Matthews, Vice President of Investor Relations.

Hello, I would like to welcome everyone to Republic Services' third quarter 2021 conference call, Jon Vander Ark, our CEO 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, which 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 the future you listen to a rebroadcast or recording of this conference call you should be sensitive to the date of the original call, which is October 28 2021.

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 express written 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 presentation are posted on our website with that I'd like to turn the call over to John.

Thanks, Stacy and good afternoon, everyone and thank you for joining US we are pleased with our strong performance in the third quarter.

We continue to execute on our strategic priorities of customer zeal, and digital and sustainability to drive growth and value for our stakeholders.

During the third quarter, we delivered revenue and EBITDA growth of approximately 14% compared to the prior year.

Generated adjusting earnings per share of $1 11.

Which represents an increase of 11% over the prior year and produced $1 $4 billion of adjusted free cash flow on a year to date basis.

We continue to effectively allocate capital by investing in value, creating acquisitions and returning excess cash to our shareholders.

Year to date, we've invested over $900 million in acquisitions to further enhance our market position and increased free cash flow.

This is the highest level of acquisition investment in over a decade.

On August 31, we completed the acquisition of ACD and viral.

This strategic acquisition broadens, our capabilities and offerings in the environmental services industry.

It also provides us with a platform to pursue additional growth we.

We are excited to welcome <unk> to the Republic team.

Our acquisition pipeline remains robust with opportunities in both the recycling and solid waste and the environmental solutions businesses.

We now expect to invest over $1 billion in acquisitions for the full year.

In addition in addition to investing in acquisitions, we have returned $622 million to our shareholders through dividends and share repurchases.

We continue to prioritize customer zeal to drive profitable growth. This.

This includes increasing customer loyalty driving willingness to pay and attracting new volume as the provider of choice.

Our customer retention rate remains at a record setting level of 95%.

During the third quarter, we delivered outsized revenue growth throughout our business.

Total core price remained at an all time high of five 2% and average yield increased to three 2%.

Volume increased four 3% compared to the prior year, which exceeded our expectations.

And acquisitions contributed an incremental 350 basis points to total revenue growth.

The outlook for organic and acquisition growth for the remainder of the year is strong.

Turning to digital.

We continue to realize the benefits of our investments in technology in the third quarter, we made meaningful progress on the rollout of the next phase of our <unk> platform.

We have now implemented tablets and approximately 70% of our large and small container fleet.

We expect to be substantially complete by the end of this year with plans to further deploy to the residential fleet beginning in 2022.

Next turning to our sustainability platform.

We continue to partner with developers to capitalize on landfill gas to energy opportunities.

We currently have 17 projects in the pipeline with more opportunities thereafter.

On top of the royalty revenue these plants will generate a majority of equity investment opportunities to further participate in the project economics.

We also recently opened a solar project on one of our closed landfills in Bellevue, Illinois.

This project consists of 30000 solar panels and will produce enough energy to power 2200 homes annually.

We remain committed to increasing the recycling and circularity of key materials as part of our ambitious 2030 sustainability goals.

We recently opened our first solar power compost facility in California to further our progress and address the growing community needs.

This facility will provide critical organic processing capabilities to residents and businesses in the greater San Diego area.

Our strong financial and operational results would not have impossible without our dedicated Republic employees.

We continue to invest in developing both existing and new talent and creating innovative solutions for the increased demand for skilled workers.

We recently unveiled a Republic services Technical Institute, which is the industry's first ever diesel technician school.

This subsidized program is already building a strong pipeline of high demand technician talent for Republic. Additionally.

Additionally, graduates will have upscaling opportunities to further grow their career with Republic.

These types of innovative investments in talent lead to external recognition for our company.

Republic was recently certified as a great place to work for the fifth consecutive year. This.

This is a meaningful achievement as employee recruiting and retention remains a prominent focus in today's labor market.

Finally, turning to our outlook for the remainder of the year.

Given the continued strength in our business, we now expect to exceed the full year guidance, we upwardly revised last quarter.

Accordingly, we are increasing 2021 full year financial guidance as follows.

Adjusted EPS is now expected to be in the range of $4 10 to $4 13.

And adjusted free cash flow is now expected to be in the range of 1.4 dollars 75 billion to $1 5 billion.

I will now turn the call over to Brian. Thanks, John core price during the third quarter was five 2%, which included open market pricing of six 5% and restricted pricing of two 9%.

Bonus of core price included small container of eight 2% large container of 5% and residential of 5%.

Average yield was three 2%, which increased 60 basis points from the second quarter.

Third quarter volume increased four 3%.

The components of volume included an increase in small container of five 4% an increase in large container of three 9% and an increase in land sale of six 6% for reference small container and MSW volumes in the third quarter were both above our 2019 pre pandemic baseline.

Moving on to recycling.

<unk> prices increased to $230 per ton in the third quarter. This compares to $99 per ton in the prior year.

Recycling processing and commodity sales contributed 160 basis points to internal growth during the third quarter.

Next turning to our environmental solutions business.

<unk> third quarter environmental solutions revenue increased $27 million from the prior year. This was driven by both organic growth from increased activity and the contribution from acquisitions.

On a same store basis, environmental solutions contributed 20 basis points to internal growth during the third quarter.

Adjusted EBITDA margin for the third quarter was 34% and increased 10 basis points over the prior year.

This included a 90 basis point increase from recycled commodity prices, a 50 basis point headwind from net fuel and a 30 basis point headwind from the impact of recent acquisitions, primarily driven by deal and integration costs.

SG&A was 10, 2% of revenue. This represents an increase of 20 basis points over the prior year, which was exclusively due to higher incentive compensation accruals.

Year to date adjusted free cash flow was $1 4 billion and increased $247 million or 22% compared to the prior year. This was primarily driven by EBITDA growth in the business.

With respect to our full year cash flow guidance, we expect to spend a disproportionate amount of our full year capex and cash taxes during the fourth quarter. It should also be noted that we increased our expected full year capital spending and our upwardly revised guidance by over $50 million. This.

<unk> relates to capital to support growth opportunities.

Free cash flow conversion through September continued to track ahead of our original expectations and increased 330 basis points over the prior year during.

During the quarter total debt was $9 3 billion and total liquidity was $2 4 billion.

Interest expense decreased $11 million due to refinancing activities completed last year and our leverage ratio was two eight times.

With respect to taxes, our third quarter adjusted effective tax rate was 25, 5%.

We had an equivalent tax impact of 27%. When you include noncash charges from solar investments.

We expect our fourth quarter equivalent tax impact to be approximately 25%. This includes the effective tax rate and noncash solar charges I will now turn the call back over to John.

Thanks, Brian we continue to create value for our stakeholders by executing our strategic priorities, which drive profitable growth and increased returns.

We are expecting the positive momentum in our business to continue to produce profitable growth in 2022.

At this point, we anticipate producing above average revenue growth leading to high single digit adjusted free cash flow growth compared to our full year 2021 performance as usual, we will provide full year detailed 2022 guidance on our fourth quarter earnings call with that operator, I would like to open the call to questions.

We will now begin the question and answer session.

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Our first question today comes from Tyler Brown with Raymond James.

Hey, good afternoon guys.

Good afternoon.

Hey.

Brian Thanks for the detail on the 10 basis point improvement, but one kind of how should we think about margins in Q4 will they likely hold sequentially and the number two and I know you'll give more details on this but big picture you've got a strong CPI rollover you got a rational open market do you expect in 'twenty two to make progress on that 32% Mark.

<unk> goal.

Yes, Tyler let me kind of answer your the first part of your question there I think two.

Two or three questions in there so.

At least with respect to sequentially. There is a normal step down sequentially from Q3 into Q4 as well as you know we've talked about the fact that we're doing more deals than originally anticipated. So we expect the highest level of deal and transaction and integration costs in the fourth quarter. So again, while we expect to see in the underlying business.

We're expecting to continue to see really strong performance, we do expect a sequential step down in Q3 to Q4.

And then on your second part of your question Tyler, Yes outlook.

Outlook is strong for next year certainly we've.

But strong on pricing in the open market portion of our business already and we will continue to do that and then as some of these escalators kick in you know the lag effect of 12 to 18 months. So some of that kick in in the 2022 that provide more upward pressure on pricing, which we think will lead to margin expansion in 2022.

Okay, and then just from a modeling perspective, how much revenue today, we'd likely rollover next year.

If you just take a look at the deals that have been completed through September its 160 basis points.

Okay and then my last one here so John it's interesting if you look at the Big three I think you guys posted actually the best volume growth. This quarter, you actually had the toughest comp so I am not asking you to necessarily compare and contrast, your with the peers, but what is there a line or a vertical that just gave you that's outside outsized strength that you saw.

Just I'm just trying to it's not really your strategy to prioritize volume over price I just want to make sure that that's me.

Make sure I've got that all straight.

While you suddenly have the left bar chart, which is we're always going to start with price over volume right. I mean, the thesis of broadly of our company and the industry is that we can price ahead of.

Our cost inflation and I think we've proven to do that in a kind of rapidly changing environment. This quarter. So we certainly feel good about that in the short term and the long term over time.

And on the volume side listen, we certainly lost some volume on the table. If we had more labor if we would've gone after some more opportunities on that front, so very strong demand environment and Victor GDP GDP print was a 2% for the quarter a lot of us on the consumer side. The industrial side of our economy is very very strong right now and so.

Our volume has been pretty broad based pretty strong across the board.

Okay, Alright, thanks, guys.

Okay.

Our next question comes from Hamzah <unk> with Jefferies.

Hey, good afternoon.

My first question is just on SG&A leverage going forward, maybe you could.

Just walked through.

Any potential COVID-19 related costs that came out of your system that are now coming back maybe there's some costs that are permanent in nature.

But both sort of looking at the business through Covid that you've instituted just give us a sense of how to think about that going forward.

Yeah, I would say there is some modest puts or takes and we're already seeing some of that for example, small container weights are coming back and long term. That's a good thing because it's a positive sign for demand, but that's certainly a financial headwind for us in the very short term periods that we already saw some oven and we think that modulates over time.

Certainly some with the Delta variant we had some.

Elevated PTO cost right in the quarter of people, who are sitting out and still getting paid for it.

So that's the headwind that abates overtime, it's listen as traffic patterns come back because that slows down a little bit maybe I would have guessed, we would've seen a lot of that but our <unk> platform is really delivering a lot of productivity into the business and then more from a central function standpoint, we will shrink our real estate footprint incrementally here as we have.

Some of our more transactional colleagues working from home permanently, but thats pretty modest broad strokes, you know get a little bit of travel will come back, but we'll also take advantage of teams and do things in different ways over time, so again lots of individual puts and takes.

I don't see certainly I don't see any big structural headwinds that are going to come after us.

And Hamzah to your question specifically on SG&A, we've had a number of those costs come back into the system as.

As far as some of the travel related costs. So we're seeing that in the current period as I mentioned in my prepared remarks, most of the increase we saw really had to do with incentive compensation and really didnt have to do with any of those ongoing SG&A expenses. So we feel pretty good about our performance and our ability to leverage SG&A going.

Forward as we continue to grow the topline and migrate towards that 10% of revenue.

Got it very helpful and just my.

Follow up question.

You mentioned landfill to gas you mentioned 17 projects in the pipeline.

Historically, I think you've just outsourced and taken royalty revenue.

Thank you referenced there.

We have equity stake opportunities.

Is that something you've done before and why not just bring them in house given.

Given some of the ROIC.

And strong sort of margin profile of sort of some of that.

Some of those projects. Thank you.

Yeah. That's a great question. So historically again, we've been more opportunistic and site by site in this.

As.

The world is moving into a more sustainable operation we're certainly.

Doing our part and hopefully leading the way this has become more critical for us going forward. So not only do we have 70 projects that we've got another slate behind that that were evaluating.

And we will participate in a different way than we have historically, probably on an equity basis.

We are not full ownership and why I say that we have a limited number of landfills and so this is a great growth opportunity for us to pursue but there is a ceiling to it once you've kind of built it out on all the landfills that makes sense that's it.

We like to put our all of our financial capital in our human capital in places that we think grow in an evergreen way and so that will put our attention combine that with the fact that there's a lot of external financial and human capital resources, who are anxious to partner with us and we think thats, probably going to be the winning combination for us going.

And the other thing too is that partnering up.

With a third party, we can actually move faster than if we were to sit there and go.

All our own way and that's one of the reasons, we want to we want to move quickly on this opportunity.

Got it I just had a clarification.

Sure.

Historically I think at Q3, you you've talked about preliminary point D point due to sort of maybe topline.

Is that a change in sort of how you were thinking of our guidance or or maybe historically you haven't done that.

Yeah, No Hamzah I think we talked in our remarks as well when we talked about here was providing visibility into where we see free cash flow going at this point, but that said I think you also hear the tone.

Optimistic about the momentum in pricing volume is strong and there is additional opportunities and again when you look at just the acquisition rollover as well as the pipeline of acquisitions that are there. We feel that 2022 is going to be very strong on that front as well so contribution from multiple facets that at least relative to our historical.

Growth weight rate, we feel it's going to be outsized.

Got it thank you.

Our next question comes from Jeff Goldstein with Morgan Stanley.

Hey, good afternoon, thanks for taking my questions here.

So labor expense has clearly been a key topic in the quarter, but within your Cogs labor I noticed actually declined as a percent of revenue year over year. So maybe you can just talk about how you've managed to contain that is it primarily from raising prices or anything around scheduling or maybe doing proactive wage increases that you'd call out.

Maybe just talk a little bit more about the success managing that in the quarter and then I guess going forward is there any reason to think you won't be able to manage it as well.

Yes. Thanks for your question I think you have to look way back to <unk>.

Low CPI environment, and we've always had this fundamental belief that we want to give our people a fair and certainly steady increase every year. So we were way raising their wages at two or two 5% even in low CPI environment. So.

Our people have and focusing in parallel on employee engagement and making sure. This is the place that the best people come to work. So you put those two things together and we think our employee value proposition has been really strong.

Turnover has been elevated it's been modestly elevated.

We've really we've taken more people if we could to pursue some incremental growth opportunities, but our retention has been really strong now that being said we are facing the same.

Ain't pressures of the macro environment, So we've looked and done surgery and targeted markets, where we think we weren't as competitive or maybe turnover was elevated but just kind of take those cost increases and you offset it with what we think is our.

Digital apps and our <unk> platform, which is really driving productivity, we look at our performance.

In the quarter versus 2019, but we're just seeing we're getting more work right out of the same labor hour and Thats been really productive and I think youre seeing it holds in a very challenging environment and then on top of that of course, we're pricing because.

The market bears at and we want to support future wage increases for our employees.

Okay that all makes sense and then now now that you've had <unk> for a few months.

I think it closed back in May I'm, just I'm curious for the path forward I'm, bringing those margins back up to Republic levels and any sense of synergies you would expect out of that business.

And then remind me in terms of pricing within the sand textbook was that in a place you were happy with or is there room to reprice some of that business as well.

Just an update there would be helpful.

Yeah, we're really excited about that acquisition, great set of assets gets us into certainly some geographic markets that we werent in before and creates a basis or a platform for further growth both organic and.

Additional tuck in acquisitions.

Well.

But Brian mentioned, there's always start up costs in the first year and the bigger the deal but more of the startup costs, because we really don't have to get multiple sites in the systems integrated and there's a lot of.

<unk> benefits and related costs, and we really try to front load all of those and get all those done at once.

To get those behind us, but b to create a great play experience and so both linger forever. They feel like they are not really part of the company.

We think that leads to higher turnover over time, so we get after that and have a very proactive and potential plan and we're ahead of that plan and I think youll see in 'twenty, two that'll be a nice certainly tailwind for us as those costs come behind us and given the nature of that company and being fairly landfill centric.

<unk> are really attractive.

Okay. Thanks for the color.

Yeah.

Our next question comes from Walter <unk> with RBC capital markets.

Yeah, Thanks, very much operator, and thanks for taking my questions everyone I'd like to turn back to acquisitions for a moment. When you. When you look at the pipeline, which you mentioned is quite robust right. Now I was wondering if you could be able to provide a little bit of color on the pipeline, perhaps discuss whether are these smaller tuck ins or are there any large.

Roger Chunkier targets in markets that interest you in and.

Those are fun.

And as a follow up.

As the regulatory review and scrutiny at all impacting your ability to do deals in this environment right now thanks very much.

Yes. The pipeline is does that mean the performance has been very strong this year and the pipeline looking forward is very strong and I would say the.

Paolo and characteristic of that it is a very very balanced right. It's.

It's balanced certainly.

Weighted more heavily toward recycling and waste just given that's where the bulk of our businesses, but certainly plenty of opportunities in the environmental solutions portion of our business as well, it's certainly balanced across size plenty of small tuck ins.

A number of what we'd call medium sized deals and then listen we maintain a perspective on everything so could there be some larger deals that come through over time, yes. Those are obviously more.

<unk> can be.

It could be challenging from a regulatory review.

Balance we have a very crystal clear point of view of where the regulations set and so if we think there is a deal that really is not going to get through we just don't spend energy and time pursuing that opportunity and or if we do have limited regulatory scrutiny on a deal we baked that right and we understand what we probably have to divest and we go right to the <unk>.

And say here is our perspective and can they can draw their own perspective, but we plan that right into the model. So we're never surprised on the back end of that so yes, there is heightened risk.

Scrutiny versus four or five years ago on larger transactions, but more broadly it has not slowed us down at all from I think what is a different level of acquisition than we've historically done.

And then as my follow up on special waste it looks like it was a good quarter free on special waste.

<unk> had some nice tailwind there, but it can be lumpy business. How do you. How do you look at contribution from special waste from quarter quarter in and is there any any flags that you would give us in terms of how we model it in.

Quarter to next or are you fairly confident that that's going to be a good a good tailwind for you here over the next several quarters, Yeah. I think it's a good tailwind again, we saw we were active as ever we saw times of uncertainty I think if you go back 2025 years special waste typically pushes right jobs get sold and they get.

Confirm but they just don't drop and get delivered and so I think what youre seeing now is those things are starting to move and so feel good about that the pipeline is very robust going forward. It's a project based business. So by definition right, there's going to be quarters that are a little higher versus others, but I think the outlook for the next 12 to 18 months is very <unk>.

Strong.

That's fantastic appreciate the time as always thank you.

Our next question comes from Michael Hoffman with Stifel.

Good afternoon, and thank you for taking my questions.

Yeah. The challenge when you have two is can you actually asked a question with 14 different questions in it. So you are quite good at that Michael I Trust you.

My attempt to do that is on organic growth.

Thinking about a baseline exit momentum.

Going into 'twenty two.

Can you parse price and volume.

Are we in the right neighborhood, if we're starting with a three handle on twice and then volume ex special waste Lumpiness still has momentum from new business formation service interval trends being positive, but we havent seen a peak that activity so that creates tailwind.

What's the right way to think about going into 'twenty two.

Oh, yes, certainly on the pricing, we would expect something starting with a three and then on volume.

Coming out of a we are in a V shape recovery and obviously as the further along you get just arithmetically write that slope starts to flatten, but I think there's still plenty of momentum I talked about the labor side being a little constrained there so yeah versus a pre pandemic youre going to see outsized volume growth in 2022 from us.

Yes.

And a follow up to that though is probably not at <unk>, what we're going to see in 'twenty, one it's somewhere in between.

I Couldnt hear you Brian could you say that again I would just add to John's point most of 'twenty. One was a recovery of units that were lost during the pandemic My only point was that the.

Volume at least the way we're thinking about it right now would be somewhere in between what we're doing in 'twenty, one and what we're going to deliver in 'twenty, one and that historical average.

Got it got it and then.

Last one for me is on <unk>.

Free cash flow.

Do you think about a baseline of the conversion ratio and you've talked about getting into the mid forty's.

Here's that youre going to be there. This year. So is that now that you've got to it and.

And in that context going forward.

You are spending more capex this year, but.

Did you pull any forward or should I think of Capex is the same rate of spend per cent of reps and 22.

Yes, I think that.

Capex was really more a function of growth Capex and.

These acquisitions with you oftentimes there's a plan there is development projects associated with those which are great which of those are more onetime in nature right and then you get the benefit the returns of those in future years and from a free cash flow conversion standpoint, yes, right. We think we've hit a new baseline and we have plans to further expand that going into 2022 and beyond.

Okay. So how do they do they get enough questions in there too.

That was excellent.

Thanks.

Thanks, Michael.

Our next question comes from Jerry Revich with Goldman Sachs.

Hi, good afternoon, everyone.

Hey, Jared.

Can you talk about what pricing announcements that you've made to your open market customers.

Tober.

As you folks look at it.

Inflation that everyone across the industry is seeing how much do you feel like you need to push open market pricing over the next couple of months to make sure we've got.

No room to execute.

We hit the medium part of the inflation cycle.

Yes, I would say that you've got to look back we've already done that we jumped on that pretty much in the mid to end part of the first quarter understanding where inflation was going and you are seeing or open market.

Another 100 bps of incremental pricing versus the prior quarters right, because we're pricing not only existing customers, but also new customers that our capture pricing tool as we saw steel go up for example on containers right. We just we put that right in and so immediately we're selling a different price on the street right to cover the cost of that.

The.

Incremental steel right with a return against it so we're not diluting returns as we priced that through so listen we're price, we're putting more price out that price is being realized in the marketplace.

And again, we have a good broad backdrop right when things like Bacon is doubling in all kinds of things are going crazy rental cars and from a.

Just a consumer purchasing standpoint, where prices are going are these price increases are relatively modest against that backdrop and I think that's a good reason why they are holding.

Yes, Jeremy.

Just a follow up there again, we've been quick to act in the open market you really haven't seen the contribution yet from the restricted portion of the business that's still to come in 'twenty, two with the rollover benefit into 'twenty three.

Okay.

Just to clarify so the current level of core price increases for open market.

Happen, obviously, we'll see the restricted excellent ratio from here, but it is a six and a half now at a high enough.

Just to cover that this heightened level of inflation or should we look for open market increases to be higher than the six and a half we're posting now.

Yes, you could see that incrementally pick up.

Also managing cost in a way, where we're taking the price and the cost inflation and expanding margins as we go not only looking back right. We're almost 200 basis point expansion. If you look back a couple of years and we think we've got more room to run in that going forward. It should keep my we price to existing customers, it's not a onetime event.

Right, we price Ratably kind of an open market roughly a 12 month or a book goes out every month right. It's our ability to flex up on that is really really high.

Okay, Great and then you alluded to recycling investment opportunities.

Could you just expand on that.

Whats the range of opportunities in terms of building facilities organically, you're seeing recycling rate increases out of your existing footprint versus acquisitions can I trouble you just flush out that opportunity so I place.

Yes, we think there is a five or six core markets. We're in that we would like to have an asset that was won over time, we'll probably build if we could buy it that would also be an opportunity, but it's probably something we'll build.

Certainly seeing acquisition opportunities smaller ones for recycling centers as we do some more medium size deals going forward.

In part because we want to make sure we've got a place to take the material off our back and not always be dependent on a third party in those markets and in part because we think these resources have increased in value over time right in a world where plastics for example, the consumer packages companies.

Really in a need for <unk>.

Post consumer content, and we Havent and were an aggregator so over time that materially more value and we think we're going to be able to capture a piece of that as we move forward.

And the other thing I'd add Jerry terrific, there's plenty of opportunities on our existing facilities to drive in more automation to kind of change the capex opex trade off those are tough jobs those are higher turnover jobs and so it allows us to reduce the labor force just incrementally in those facilities, but then <unk>.

So produce a better product with more state of your equipment.

I appreciate the discussion thanks.

Sure.

And our next question comes from David Manthey with Baird.

Good afternoon, and thank you.

First off.

Can you give us some early thoughts on Capex for 2022, I don't know if you expect that to drop back into the 11% to 12% of revenues range and if you're willing to share with US a couple of your spending priorities for next year.

Yes, David look we'll get into details when we're back together in February on the components within the free cash flow, but I would sit there and say as you think about over time right as John mentioned, we've made really good progress on free cash flow conversion, we expect to continue to make progress and start to drive that free cash.

Hello conversion into the high 40% range some of that is going to be by reducing our capex as a percent of revenue.

Okay second.

How do you think about your commodity basket as you move into next year I mean, do you budget for flat or do you assume it's going to be lower than that just how do you think about that.

The basket broadly as you look to the out year.

Yeah, right now, Brian what we're kind of looking at it more in line with our year to date average as compared to current pricing, but again once this plays out and we have a couple more months under our belt, we'll be able to give you a better perspective, when we're back together in February.

Sounds good thank you.

Matt.

Our next question comes from Sean Eastman with Keybanc capital markets.

Nice quarter.

Couple of a couple of modeling ones for me I think Brian.

Brian I think you mentioned 160 basis points of acquisition rollover is that a net number or gross number and.

And then secondly, I guess, it's safe to assume that.

You guys are you going to do something better than that because you are indicating that next year is going to be.

Elevated level of deal activity as well is that correct.

Yes. So the 160 is essentially both gross and net quite honestly, but yes. If you think about that only includes deals that have.

Closed through September.

Okay got it and okay. So we will have more upside there by the end of the year and then whatever you guys do next year.

Layer on to that.

Alright.

Got it and then just drilling in on margins.

I don't want to paint you guys into a box before you have given the guidance, but maybe just thinking about the normative 30 to 50 basis points of operating leverage in the business just naturally.

What would be the moving.

Moving pieces to think about relative to that I mean, maybe recycled commodities are a tailwind in the first half I'm not sure maybe the acquisitions you've done are modestly dilutive into next year.

Trying to think through those moving pieces that would be helpful.

Yes, I mean, the core of the business right you should think about margin expansion at pricing ahead of our cost inflation, which we're certainly very committed.

Committed to doing and then there's some other pieces around that right commodity prices right could create a drag depending on where that basket goes but fuel was a drag in the quarter right you know that in general we.

Price fuel and our fuel recovery fee is a pretty good broad hedged fuel, but we had a little bit of drag as we go up and then it happens a little bit of lag as we go back down for depending on where fuel goes, but I'd say theres, probably more chance, that's neutral or tailwind headed into next year.

And then acquisitions, where it like I said, what we've kind of load up all those integration costs in the first year and so we expect that to be a little bit about.

When did the overall margin for a portion of that headwind the equation into next year, but nothing dramatic that we're still committed to expanding.

Margins next year with all those pieces put together.

Okay excellent very helpful. I'll turn it over thanks guys.

Thank you great. Thank you.

Our next question comes from Noah Kaye with Oppenheimer.

Hi, good afternoon, thanks for taking the questions.

I think your footprint.

Just to get to a line naturally with some population and demographic trends and so you know that maybe partly explain.

The great organic growth trends, we've seen from there, but I wonder if you could talk a little bit about new business.

Formation of new business origination for the company and specifically John how you might be leveraging your digital platform helped drive that new business formation, rather than new business origination for the company.

There anything that you're doing differently now at Republic than you might have done in years past the help.

Identifying and building the business.

Yes, it would certainly advance the cause with our digital tools I mean, our sales team is on the Salesforce platform and.

We got a lot of lead generation tools across the different verticals in our business that populate new leads going forward and we've certainly seen some of that frankly, I think there's more of that to come as we get through delta and consumer confidence even get higher here.

We will get back to traveling at back to business. So we're optimistic there is more upside of that going forward, but we think we're getting certainly our fair share of the growth or more because we've got that.

Plus sellers out there.

Working very local markets to find opportunities one at a time.

Okay, and then I guess in the context of a B C D and via acquisition.

Wondering if you're able to share.

Provision for what kind of scale you want to have in this segment over time, and obviously you've talked about environmental services Tam being around 20 billion and the fact that the customer base wants to kind of consolidate who would use it for services given sustainability and other drivers but.

Do you want us to be a $1 billion business within a few years if that is that out of range of what you were thinking can you talk a little bit about your ambitions.

Yeah, No I think that is actually really.

Good starting point I think $1 billion in three years I think is a reasonable target, we certainly will not rates or reach to get there by any means we certainly wouldn't be afraid to clear that if we think we have the right opportunities going forward it will be a mix of organic growth and.

Acquisitive growth more acquisitive and organic just on a percentage basis as we scale that business and that's been a really good fit for us in the early days not only have they performed well, but we expected to see a lot of integration opportunities with our waste and recycling business and we're seeing a lot of those come through opportunity to internalize it.

Mozel cross sell with customers.

And it's just going to strengthen the value proposition of both sides of our business.

Okay. Thanks, so much.

Thanks, Tom.

Our next question comes from Kyle White with Deutsche Bank.

Hey, good afternoon. Thanks for taking the question I wanted to go back to our special waste volumes as well as C&D. Just curious have you guys seen any impact on these volumes from the tight labor market and kind of the stressed supply chain across.

The business and the environment.

No not not really I mean listen the supply chain is impacting us and weird ways like.

We have a solar project, we're putting in we can't get from the equipment. It's trapped on a boat outside of long Beach. So that project might not go in this year, but those are more incremental one off things and get we're blessed to be in a business that has a service based business right and not materials based or we would be probably suffering like some of the other companies are so we feel.

They're not that but not in the special waste or <unk> side, we think there's more demand coming back in that business without question, but I don't think the supply chain disruptions that attach any anything to that part of the business right now.

Got it and then on the solar investments I think initially you were targeting $125 million for this year is that still the right target and should we expect that targets to go higher next year.

It might be modestly more than that as John mentioned, we've got some of these these projects right now it's all based on market is placed in service by the end of the year I would say a good number to use through the cycle is in that $1 50 to 175 range.

Alright, so I will turn it over to Kim.

Yes predicated on.

Some of the tax laws that are in place today.

And again, if you have a question. Please press Star then one.

Our next question comes from Michael Feniger with Bank of America.

Hey, guys, yeah, thanks for taking taking my questions.

I appreciate the outlook raise but just to put a finer point on it I might have missed it.

Even though margins year over year on the fourth quarter or is there just a lot of integration and acquisition costs that kind of creates some.

Some noise.

On the quarter.

Yes, I think it's a couple of things.

Yes, what you said on kind of the integration costs, but also when you take a look year over year, we've consistently seen since the fourth quarter of last year heavier container weights that sort of thing so that that probably will put a drag on the performance relative to the prior year.

Okay.

Got it and.

Yes.

Just to be clear, Brian just on the 32% margin target.

You guys might have already flushed out is this.

The track 2024 is that how to think about it can it be much earlier or something.

Inflationary pressure and just a lot of this acquisition.

Obviously, it's lower than you integrate I get it you move it higher.

Do we think about the margin.

In the context of that 32% target.

Yes, I think it's.

<unk>.

We're not going to put a specific year on it but we are certainly trending in that direction and I think youre going to see steady ratable improvement right I don't think youre going to see any big jump on it.

Youre going to see it flatten and it's going to be a consistent set of levers, which is we are going to continue to grow we're going to price ahead of our cost inflation.

Give our people a fair wage increase the drive productivity right alongside that and let the board growing at a different way than we ever had before over time, we think that gives us leverage on SG&A, which further helps with the margin expansion.

And just lastly, if I could squeeze it in when I think about these acquisitions of solid waste and environmental services can you just help us John is like the environmental services.

Lower than average margin when we think of some of this stuff outside of that.

The oil and gas more of the downstream is that lower margin you guys can bring it up over over time.

Just kind of thinking about that portion of the business that you guys are growing relative to like the non hazardous solid waste.

Yes, so we start with everything on intrinsic value returns right, that's where we start from a fundamental standpoint.

And in any deal we do is going to have to clear that hurdle right individually and then naturally collectively it will over time as the platform.

These businesses in general do have a lower margin profile than recycling and solid waste or they also have a different capital intensity. So when you think about free cash flow conversion rate looks very similar and we do think there is certainly an opportunity to raise those margins over time and again, we have been incredibly.

And over the last decade on our commitment to pricing right and that we won't Flintshire.

Back off of that right as we grow in the broader environmental services space right. We are going to be able to price because we are going to provide a differentiated service and that supports us not only giving a fair wage increase to our employees, but then expanding margins and providing great returns for our shareholders over time.

Thank you.

And at this time there appear to be no further questions. So I'd like to turn the call back over to Mr. Vander Ark for some closing comments.

Thank you Ali in closing we are pleased with our third quarter performance, we delivered double digit growth in revenue EBITDA EPS and free cash flow.

We continue to manage the business to create long term value for all stakeholders and expect continued profitable growth in 2022.

I would like to thank all our employees for their continued hard work and commitment to our customers.

It is our team of dedicated employees that make these results possible have a good evening and be safe.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good afternoon, and welcome to the Republic services third quarter 2021, Investor Conference Call Republic services is traded on the New York stock exchange under the symbol our S. G.

All participants in today's call will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions.

I ask a question you May press Star then one on your Touchtone phone.

Withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Stacy Matthews, Vice President of Investor Relations.

Hello, I would like to welcome everyone to Republic Services' third quarter 2021 conference call, Jon Vander Ark, our CEO and Brian Dow Garfield, Our CFO are joining me as we discuss our performance.

Our SEC filings discuss factors that could cause actual results to differ materially from expectation.

I want to remind you that my public management team routinely participates in investor conferences. When events are scheduled the dates times and presentation are posted on our website with that I'd like to turn the call over to John.

Thanks, Stacy and good afternoon, everyone and thank you for joining US we are pleased with our strong performance in the third quarter.

We continue to execute on our strategic priorities of customer zeal, and digital and sustainability to drive growth and value for our stakeholders.

During the third quarter, we delivered revenue and EBITDA growth of approximately 14% compared to the prior year.

Generated adjusting earnings per share of $1 11.

Which represents an increase of 11% over the prior year and produced $1 $4 billion of adjusted free cash flow on a year to date basis.

We continue to effectively allocate capital by investing in value, creating acquisitions and returning excess cash to our shareholders.

Year to date, we've invested over $900 million in acquisitions to further enhance our market position and increased free cash flow.

This is the highest level of acquisition investment in over a decade.

On August 31, we completed the acquisition of ACD and viral.

This strategic acquisition broadens, our capabilities and offerings in the environmental services industry.

It also provides us with a platform to pursue additional growth.

We are excited to welcome ACB to the Republic team.

Our acquisition pipeline remains robust with opportunities in both the recycling and solid waste and the environmental solutions businesses.

Yes.

We now expect to invest over $1 billion in acquisitions for the full year.

In addition in addition to investing in acquisitions, we have returned $622 million to our shareholders through dividends and share repurchases.

We continue to prioritize customer zeal to drive profitable growth.

This includes increasing customer loyalty driving willingness to pay and attracting new volume as the provider of choice.

Our customer retention rate remains at a record setting level of 95%.

During the third quarter, we delivered outsized revenue growth throughout our business.

Total core price remained at an all time high of five 2% and average yield increased to three 2%.

Volume increased four 3% compared to the prior year, which exceeded our expectations.

And acquisitions contributed an incremental 350 basis points to total revenue growth.

The outlook for organic and acquisition growth for the remainder of the year is strong.

Turning to digital.

We continue to realize the benefits of our investments in technology in the third quarter, we made meaningful progress on the rollout of the next phase of our <unk> platform.

We have now implemented tablets and approximately 70% of our large and small container fleet.

We expect to be substantially complete by the end of this year with plans to further deploy to the residential fleet beginning in 2022.

Next turning to our sustainability platform.

We continue to partner with developers to capitalize on landfill gas to energy opportunities.

We currently have 17 projects in the pipeline with more opportunities thereafter.

On top of the royalty revenue these plants will generate a majority of equity investment opportunities to further participate in the project economics.

We also recently opened a solar project on one of our closed landfills in Bellevue, Illinois.

This project consists of 30000 solar panels and will produce enough energy to power 200 homes annually.

We remain committed to increasing the recycling and circularity of key materials as part of our ambitious 2030 sustainability goals.

We recently opened our first solar power compost facility in California to further our progress and address the growing community needs.

This facility will provide critical organics processing capabilities to residents and businesses in the greater San Diego area.

Our strong financial and operational results will not a impossible without our dedicated Republic employees.

We continue to invest in developing both existing and new talent and creating innovative solutions for the increased demand for skilled workers.

We recently unveiled a Republic services Technical Institute, which is the industry's first ever diesel technician school.

This subsidized program is already building a strong pipeline of high demand technician talent for Republic. Additionally.

Additionally, graduates will have upscaling opportunities to further grow their career with Republic.

These types of innovative investments in talent lead to external recognition for our company.

Republic was recently certified as a great place to work for the fifth consecutive year.

This is a meaningful achievement as employee recruiting and retention remains a prominent focus in today's labor market.

Finally, turning to our outlook for the remainder of the year.

Given the continued strength in our business, we now expect to exceed the full year guidance, we upwardly revised last quarter.

Accordingly, we are increasing 2021 full year financial guidance as follows.

Adjusted EPS is now expected to be in the range of $4 10 to $4 13.

And adjusted free cash flow is now expected to be in the range of 1.4 dollars 75 billion to $1 5 billion.

I will now turn the call over to Brian. Thanks, John core price during the third quarter was five 2%, which included open market pricing of six 5% and restricted pricing of two 9%.

Components of core price included small container of eight 2%.

Large container of 5% and residential of 5%.

Average yield was three 2%, which increased 60 basis points from the second quarter.

Third quarter volume increased four 3%.

Moving on to recycling.

<unk> prices increased to $230 per ton in the third quarter. This compares to $99 per ton in the prior year.

Recycling processing and commodity sales contributed 160 basis points to internal growth during the third quarter net.

Next turning to our environmental solutions business.

Third quarter environmental solutions revenue increased $27 million from the prior year. This was driven by both organic growth from increased activity and the contribution from acquisitions.

On a same store basis, environmental solutions contributed 20 basis points to internal growth during the third quarter.

Adjusted EBITDA margin for the third quarter was 34% and increased 10 basis points over the prior year.

SG&A was 10, 2% of revenue. This represents an increase of 20 basis points over the prior year, which was exclusively due to higher incentive compensation accruals.

Year to date adjusted free cash flow was $1 4 billion in.

<unk> increased $247 million or 22% compared to the prior year. This was primarily driven by EBITDA growth in the business.

Growth opportunities.

Free cash flow conversion through September continued to track ahead of our original expectations and increased 330 basis points over the prior year.

During the quarter total debt was $9 $3 billion in total liquidity was $2 4 billion.

Interest expense decreased $11 million due to refinancing activities completed last year and our leverage ratio was two eight times.

With respect to taxes, our third quarter adjusted effective tax rate was 25, 5%.

We had an equivalent tax impact of 27%. When you include noncash charges from solar investments.

We expect our fourth quarter equivalent tax impact to be approximately 25%. This includes the effective tax rate and noncash solar charges I will now turn the call back over to John.

Thanks, Brian we continue to create value for our stakeholders by executing our strategic priorities, which drive profitable growth and increases returns we're expecting the positive momentum in our business to continue to produce profitable growth in 2022 at this point we.

Anticipate producing above average revenue growth leading to high single digit adjusted free cash flow growth compared to our full year 2021 performance as usual, we will provide full year detailed 2022 guidance on our fourth quarter earnings call with that operator, I would like to open the call to questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

In the interest of time, we ask that you limit yourself to one question and one follow up question today.

Your question has been answered and you would like to withdraw your request you may do so by pressing star Q.

You are using a speakerphone please pick up your handset before pressing Nicky.

Our first question today comes from Tyler Brown with Raymond James.

Hey, good afternoon guys.

Hey.

Brian Thanks for the detail on the 10 basis point improvement, but one.

How should we think about margins in Q4 will they likely hold sequentially and the number two and I know youll give more details on this but big picture you've got a strong CPI rollover you got a rational open market do you expect in 'twenty two to make progress on that 32% margin goal.

Yes, Tyler let me kind of answer you. The first part of your question there I think two or three questions in there so.

<unk> business, we're expecting to continue to see really strong performance, we do expect a sequential step down in Q3 to Q4.

And then on your second part of your.

Question Tyler yes.

Outlook is strong for next year, certainly we have.

Both stronger pricing in the open market portion of our business are ready and we will continue to do that and then as some of these escalators kick in you know the lag effect of 12 to 18 months. So some of that kick in in the 2022 that provides more upward pressure on pricing, which we think will lead to margin expansion in 2022.

Okay, and then just from a modeling perspective, how much revenue today would likely rollover next year.

If you just take a look at the deals that have been completed through September to 160 basis points.

Okay and then my last one here so John it's interesting if you look at the Big three I think you guys posted actually the best volume growth. This quarter, you actually had the toughest comp so I'm not asking you to necessarily compare and contrast, you with the peers, but what is there a line or a vertical that just gave you that's outside outsized strength that you saw.

Just I'm just trying to it's not really your strategy to prioritize volume over price I just wanted to make sure that that's.

Make sure I've got that all straight.

Well you certainly have the last part which is we're always going to start with price over volume.

Pieces broadly of our company and the industry is that we can price ahead of.

Our cost inflation and I think we've proven to do that in a rapidly changing environment. This quarter. So we certainly feel good about that in the short term and the long term over time.

And on the volume side listen, we certainly lost some volume on the table. If we had more labor we would've gone after some more opportunities on that front, so very strong demand environment and Victor GDP GDP print was at 2% for the quarter a lot of Thats on the consumer side. The industrial side of our economy is very very strong right now and so on.

Our volume has been pretty broad based pretty strong across the board.

Alright, thanks, guys.

You bet.

Our next question comes from Hamzah <unk> with Jefferies.

Hey, good afternoon.

My first question is just on SG&A leverage going forward, maybe you could.

Just walked through.

Any potential COVID-19 related costs that came out of your system that are now coming back maybe there are some costs that are permanent in nature.

Sort of looking at the business through Covid that you've instituted just give us a sense of how to think about that going forward.

Yes, I would say there is some modest puts or takes and we're already seeing some of that for example, small container weights are coming back and long term. That's a good thing that's a positive sign for demand, but that's certainly a financial headwind for us in the very short term period that we already saw some oven and we think that modulates over time.

Certainly some with a delta variant we had some.

Elevated PTO cost right in the quarter of people, who were sitting out and still getting paid.

Overtime, so thats, a headwind abates overtime listened as traffic patterns come back because that slows down a little bit maybe I would have guessed we would have seen a lot of that but our <unk> platform is really delivering a lot of productivity into the business and then more from a central function standpoint, we will shrink our real estate footprint incrementally here as we have.

After Ah, yes, Hamzah to your question specifically on SG&A, we've had a number of those costs come back into the system.

Far as seen with some of the travel related costs. So we're seeing that in the current period as I mentioned in my prepared remarks, most of the increase we saw really had to do with incentive compensation really didnt have to do with any of those ongoing SG&A expenses. So we feel pretty good about our performance and our ability to leverage SG&A going for.

As we continue to grow the topline and migrate towards that 10% of revenue.

Got it very helpful and just my.

Follow up question.

You mentioned landfill to gas you mentioned 17 projects in the pipeline.

You know historically I think you've just outsourced and taken royalty revenue I think you referenced there.

You have equity stake opportunities.

Is that something you've done before and why not just bring them in house given.

Given some of the ROIC and strong sort of margin profile of sort of some of that.

Some of those projects. Thank you.

Yeah. It's a great question. So historically, we've been more opportunistic and site by site in this.

Yes.

The world is moving into a more sustainable operation we're certainly.

<unk> are part and hopefully leading the way this has become more critical for us going forward. So not only do we have 70 projects and we've got another slate behind that that were evaluating.

And we will participate in a different way than we have historically, probably on an equity basis.

Not full ownership and why I say that we have a limited number of landfills and so this is a great growth opportunity for us to pursue but there is a ceiling to it once you've kind of built it out on all of the landfills that makes sense that's it.

We like to put our all of our financial capital in our human capital in places that we think grow in an evergreen way and so that will put our attention combine that with the fact that there is a lot of external financial and human capital resources, who are anxious to partner with us and we think thats, probably going to be the winning combination for us going.

And the other thing too is that partnering up.

With a third party, we can actually move faster than if we were to sit there and go.

All our own way and that's one of the reasons, we want them, we want to move quickly on this opportunity.

Got it I just had a clarification question.

Historically I think at Q3, you talked about preliminary 2022 sort of maybe topline.

Is that a change in sort of how youre thinking about guidance or or or maybe historically you haven't done that.

Yes, <unk> I think we talked in our remarks as well when we talked about here was providing visibility into where we see free cash flow going at this point, but that said I think you also hear that tone. We are optimistic about the momentum in pricing volume is strong and there is additional opportunities and again when you look.

Just the acquisition rollover as well as the pipeline of acquisitions that are there. We feel that 2022 is going to be very strong on that front as well so contribution for multiple facets that at least relative to our historical growth rate, we feel it's going to be outsized.

Got it thank you.

Our next question comes from Jeff Goldstein with Morgan Stanley.

Hey, good afternoon, thanks for taking my questions here.

Maybe just talk a little bit more about the success managing that in the quarter and then I guess going forward is there any reason to think you won't be able to manage it as well.

Yes. Thanks for your question I think you have to look way back to <unk>.

Low CPI environment, and we've always had this fundamental belief that we want to give our people a.

Fair and certainly steady increase every year. So we were way raising their wages at two or two 5% even in low CPI environment. So.

Our people have been focusing in parallel unemployed engagement and making sure. This is the place that the best people come to work. So you put those two things together and we think our employee value proposition has been really strong.

I'll turn it over has been elevated it's been modestly elevated.

And we've really.

Taken more people, if we could to pursue some incremental growth opportunities, but our attention has been really strong now that being said we are facing the same pressures that the macro environment. So we've looked and done surgery and targeted markets, where we think we werent as competitive or maybe turnover was elevated but just kind of take those cost increases in the offset.

With what we think is our digital app or <unk> platform, which is really driving productivity. We look at our performance in the quarter versus 2019, right. We're just seeing we're getting more work right out of the same labor hour and Thats been really productive and I think youre seeing it holds in a very challenging environment.

On top of that of course, we're pricing because.

The market bears at and we want to support future wage increases for our employees.

Okay that all makes sense and then.

Now now that you've had <unk> for a few months.

It closed back in May I'm, just I'm curious for the path forward on bringing those margins back up to Republic levels and any sense of synergies you would expect out of that business.

And then remind me in terms of pricing within the <unk> book was that in a place you were happy with or is there room to re price some of that business as well.

Just an update there would be helpful.

Yeah, we're really excited about that acquisition, great set of assets gets us into certainly some geographic markets that we werent in before and that creates a basis or a platform for further growth both organic and.

Additional tuck in acquisitions.

Floyd benefits and related costs, and we really try to front load all those and get all those done at once.

<unk> to get those behind us, but b to create a great place spirit and so both linger forever. They feel like Theyre not really part of the company.

We think that leads to higher turnover time, so we get after that and had a very proactive and intentional plan and we're ahead of that plan and I think youll see in 'twenty two that'll be a nice certainly tailwind for us as those costs are behind us and given the nature of that company and being fairly landfill centric the margins are really attractive.

Okay. Thanks for the color.

Yes.

Our next question comes from Walter <unk> with RBC capital markets.

Yes, thanks, very much operator, and thanks for taking my questions everyone I'd like to turn back to acquisitions for a moment. When you. When you look at the pipeline, which you mentioned is quite robust right. Now I was wondering if you could be able to provide a little bit of color on the pipeline, perhaps discuss whether are these all smaller tuck ins or are there any <unk>.

<unk> chunkier targets in markets that interest you in and is there a phone.

And as a follow up.

As the regulatory review and scrutiny at all impacting your ability to do deals in this environment right now thanks very much.

Yeah, no. The pipeline is I mean, the performance has been very strong this year and the pipeline looking forward is very strong and I would say the top.

Tolerant characteristic of that it is a very very balanced right. It's balanced certainly weighted.

A number of what we'd call medium sized deals and then listen we maintain a perspective on everything so could there be some larger deals that come through over time, yes. Those are obviously more.

Besotted intent.

It could be challenging from a regulatory review.

Later, and say, here's our perspective and can they can draw their own perspective, but we plan that right into the model. So we're never surprised on the back end of that so yes, there is heightened risk.

Scrutiny versus four or five years ago on larger transactions, but more broadly it has not slowed us down at all from I think what is a different level of acquisition than we've historically done.

Okay, and then as my follow up on special waste it looks like it was a good quarter free on special waste.

Quarter to next or are you fairly confident that that's going to be a good good tailwind for you here over the next several quarters, Yeah. I think it's a good tailwind again, we saw we were active as ever we saw times of uncertainty I think if you go back 20 to 25 years special waste typically pushes right jobs get sold and they get.

Confirm but they just don't drop and get delivered and so I think what youre seeing now is those things are starting to move and so feel good about that the pipeline is very robust going forward. It's a project based business. So by definition right, there's going to be quarters that are little higher versus others, but I think the outlook for the next 12 to 18 months is very <unk>.

Strong.

That's fantastic I appreciate the time as always thank you.

Our next question comes from Michael Hoffman with Stifel.

Good afternoon, and thank you for taking my questions.

Yeah. The challenge when you have curious can you actually asked a question with 14 different questions in it. So you are quite good at that Michael I Trust you.

My attempt to do that is on organic growth.

Thinking about a baseline exit momentum.

Going into 'twenty two.

Can you parse price and volume.

Activity, so that trades tailwind.

What's the right way to think about going into 'twenty two.

Oh, yes, certainly on the pricing, we would expect something starting with a three and then on volume.

Coming out of a we're in a V shaped recovery and obviously the further along you get this arithmetically write that slope starts to flatten, but I think there's still plenty of momentum I talked about the labor side being a little constrained there so yes.

Versus a pre pandemic year youre going to see outsized volume growth in 2022 from us.

And the follow up to that though is probably not as high as what we're going to see in 'twenty, one it's somewhere in between.

I couldn't hear you Brian could you say that again I would just add to John's point most of 'twenty. One was a recovery of units that were lost during the pandemic. My only point was that the volume at least the way we're thinking about it right now would be somewhere in between what we're doing in 'twenty, one and what we're going to deliver in 'twenty, one and that.

Rick will average.

Got it got it and then last one for me is on <unk>.

Free cash flow.

When you think about a baseline of our conversion ratio and you've talked about getting into the mid forty's.

Here's that youre going to be there. This year. So is that now that you've got to it and.

And in that context going forward.

You're spending more capex this year, but.

Did you pull any forward or should I think of Capex is the same rate of spend per cent of reps and 22.

Yes, I think that Capex is really more a function of growth Capex and.

These acquisitions with your oftentimes, there's a plan in their development projects associated with those which are currently so those are more onetime in nature right and then you get the benefit the returns of those in future years and from a free cash flow conversion standpoint, yes, right. We think we've hit a new baseline and we have plans to further expand that going into 2022 and beyond.

Okay. So how do I do they get enough questions and Thats it.

That was excellent.

Thanks.

Thanks, Michael.

Our next question comes from Jerry Revich with Goldman Sachs.

Hi, good afternoon, everyone.

Pat Jaret here.

Can you talk about what pricing announcements that you've made to your open market customers.

Tober.

As you folks look at it.

The inflation that everyone across the industry is seeing how much do you feel like you need to push open market pricing over the next couple of months to make sure we've got.

<unk> room to execute.

As we hit the medium part of the inflation cycle.

Now the 100 bps of incremental pricing versus the prior quarters right, because we're pricing not only existing customers, but also new customers at our capture pricing tool as we saw steel go up for example on containers right. We just we put that right in and so immediately we're selling a different price on the street right to cover the cost of that.

The.

Incremental steel right with a return against it. So we're not diluting returns as we priced that through so listen I've, we're priced we're putting more price out that prices being realized in the marketplace.

And again, we have a good broad backdrop right when things like Bacon is doubling in all kinds of things are going crazy rental cars and from a.

Just a consumer purchasing standpoint, where prices are going are these price increases are relatively modest against that backdrop and I think thats a good reason why they are older.

Yes, Jeremy.

It does.

To clarify so the current level of core price increases for open market.

Happen, obviously, we'll see the restricted acceleration from here, but it is a six and a half now at a high enough.

<unk> covered this heightened level of inflation or should we look for open market increases to be higher than the six and a half we're posting now.

Yes, you could see that incrementally pick up.

Right, we price Ratably kind of an open market roughly a 12 of our books goes out every month right. It's our ability to flex up on that is really really high.

Okay, Great and then you alluded to recycling investment opportunities.

Could you just expand on that.

Certainly seeing acquisition opportunities smaller ones for recycling centers as we do some more medium size deals going forward.

In part because we want to make sure we've got a place to take the material off our back and not always be dependent on a third party in those market in part because we think these resources have increased in value over time right in a world where plastics are example, the consumer packages companies.

Really in a need for post consumer content, and we Havent and were an aggregator so over time that materials more value and we think we're going to be able to capture a piece of that as we move forward.

And the other thing I would add Jerry terrific, there's plenty of opportunities on our existing facilities to drive in more automation that kind of change the capex opex trade off those are tough jobs those are higher turnover jobs and so it allows us to reduce the labor force is incrementally in those facilities, but then also.

Produce a better product with more steady our equipment.

I appreciate the discussion thanks.

Thanks Robert.

And our next question comes from David Manthey with Baird.

Good afternoon. Thank you.

First off.

Could you give us some early thoughts on Capex for 2022, I don't know if you expect that to drop back into the <unk> to.

12% of revenues range, and if you're willing to share with US a couple of your spending priorities for next year.

Cash flow conversion into the high 40% range some of that is going to be by reducing our capex as a percent of revenue.

Okay second.

How do you think about your commodity basket as you move into next year I mean, do you budget for flat or do you assume it's going to be lower than that just how do you think about the commodity basket broadly as you look to the out year.

Yes, right now, Brian what we're kind of looking at it as more of in line with our year to date average as compared to current pricing, but again once this displays and we have a couple more months under our belt, we'll be able to give you a better perspective, when we're back together in February.

Sounds good thank you.

Matt.

Our next question comes from Sean Eastman with Keybanc capital markets.

Nice quarter.

A couple a couple of modeling ones for me I think Brian.

Brian I think you mentioned 160 basis points of acquisition rollover is that a net number or gross number in.

And then secondly, I guess, it's safe to assume that.

You guys are you going to do something better than that because you are indicating that next year is going to be on and off.

Elevated level of deal activity as well is that correct.

Yes. So the 160 is essentially both gross and net quite honestly, but yes. If you think about that only includes deals that have.

Closed through September.

Okay got it and okay. So we will have more upside there by the end of the year and then whenever you guys do next year.

Layer on to that.

Correct.

Got it and then just drilling in on margins.

I don't want to paint you guys into a box before you have given the guidance, but maybe just thinking about the normative 30 to 50 basis points of operating leverage in the business just naturally.

What would be the move.

Moving pieces to think about relative to that I mean.

Maybe recycled commodities are a tailwind in the first half I'm not sure maybe the acquisitions you've done are modestly dilutive into next year.

Trying to think through those moving pieces that would be helpful.

Yes, I mean, the core of the business right you should think of a merchant expansion with pricing ahead of our cost inflation, which we're certainly very committed.

<unk> is doing and then there's some other pieces around that rate commodity prices right could create a drag depending on where that basket goes right fuel was a drag in the quarter right you know that.

In general we.

Price fuel and our fuel recovery fee is a pretty good broad hedged fuel, but we have a little bit of drag as we go up and then it happens a little bit of a lag as we go back down for depending on where fuel goes, but I'd say theres, probably more chance that neutral or tailwind headed into next year.

And then acquisitions right like I said right, we've kind of load up all those integration costs in the first year and so we expect that to be a little bit about.

Well Edwin to the overall margin for a portion of that headwind the equation into next year, but nothing dramatic right, we're still committed to expanding.

Margins next year with all those pieces put together.

Okay excellent very helpful. I'll turn it over thanks guys. Thank.

Thank you great. Thank you.

Our next question comes from Noah Kaye with Oppenheimer.

Hi, good afternoon, thanks for taking the questions.

I think your footprint.

Just to get to align naturally with some population and demographic trends and so.

They make partly explain.

The great organic growth trends, we've seen from there but.

I Wonder if you could talk a little bit about new business.

Formation of new business origination for the company and.

Specifically, John how you might be leveraging your digital platform helped drive that new business formation, rather than new business origination for the company is there anything that you're doing differently now at Republic than you might have done in years past to help.

Identifying and building the business.

Yes. It was certainly advanced that caused with our digital tools I mean, our sales team is on the Salesforce platform.

Got a lot of lead generation tools across the different verticals in our business that populate new leads going forward and we've certainly seen some of that frankly, I think there's more of that to come.

As we get through Delta.

Consumer confidence even get higher here and.

And we co COO will get back to traveling get back to business. So were optimistic there is more upside of that going forward, but we think we're getting certainly our fair share of the growth of more because we've got a.

<unk> thousand plus sellers out there.

Working very local markets to find opportunities one at a time.

Okay. Thanks, and then I guess in the context of the HCV and via acquisition.

I wondered if you're able to share.

Provision for what kind of scale you want to have in this segment over time, obviously, you talked about environmental services Tam being around 20 billion.

The fact that the customer base wants to kind of consolidate.

And as for services, given sustainability and other drivers.

Do you want us to be a $1 billion business within a few years if that is that out of range of what youre thinking can you talk a little bit about your ambitions.

Yeah, No I think thats actually really.

Good starting point I think $1 billion in three ish years, I think is a reasonable target, we certainly will not rates or reach to get there by any means we certainly wouldn't be afraid to clear that if we think we have the right opportunities going forward it will be a mix of organic growth and.

Acquisitive growth more acquisitive and organic just in a percentage basis as we scale that business and that's been a really good fit for us in the early days not only have they performed well, but we expected to see a lot of integration opportunities with our waste and recycling business and we're seeing a lot of those come through opportunity to internalize.

It's mozel cross sell with customers and it's just going to strengthen the value proposition of both sides of our business.

Okay. Thanks, so much.

Thanks, Tom.

Our next question comes from Kyle White with Deutsche Bank.

Hey, good afternoon. Thanks for taking the question I wanted to go back to special waste volumes as well as CMV. Just curious have you guys seen any impact on these volumes from the tight labor market and kind of the stressed supply chain a crop.

The the business and the environment.

No not not really I mean looking at supply chain is impacting us and weird ways like we were.

Have a solar project, we're putting in we can't get from the equipment is trapped on a boat outside of long Beach. So that project might not go in this year, but those are more incremental one off things and get we're blessed to be in a business that has a service based business right and not.

Reals based or we would be probably suffering like some of the other companies are so we feel good about that but not in the special waste or CND side, we think there's more demand coming back in that business without question, but I don't think the supply chain disruptions that attach any anything to that part of the business right now.

Got it and then on the solar investments I think initially you were targeting $125 million for this year is that still the right target and should we expect that target to go higher next year.

It might be modestly more than that as John mentioned, we've got some of these projects right now it's all based on market placed in service by the end of the year I would say a good number to use through the cycle is in that 150 to $1 75 range.

Alright, prefect I'll turn it over again predicated on.

Some of some of the tax laws that are in place today.

And again, if you have a question please press star bundling or.

Our next question comes from Michael Feniger with Bank of America.

Hey, guys, yeah, thanks for taking taking my questions.

I appreciate the outlook raise but just to put a finer point on it I might have missed it.

Even though margins.

Every year on the fourth quarter or is there just a lot of integration and acquisition costs that kind of creates some.

Some noise on the quarter, yes.

Yes, I think it's a couple of things.

Yes, what you said on kind of the integration cost, but also when you take a look year over year, we've consistently seen since the fourth quarter of last year heavier container weights that sort of thing so that that probably will put a drag on the performance relative to the prior year.

Okay.

Got it and.

Yes.

Just to be clear, Brian just on the 32% margin target.

You guys might have already flushed out is this okay.

<unk> 2024 is that how to think about it could it be much earlier.

Inflationary pressure and just a lot of this acquisition.

Obviously, it's lower than you integrate I get it you move it higher.

Do we think about the margin.

In the context of that 32% target.

Yes, I think it's.

It's.

We're not going to put a figure on it but we are certainly trending in that direction and I think youre going to see steady ratable improvement right I don't think youre going to see any big jump or.

Youre going to see it flatten and it's going to be a consistent set of levers, which is we are going to continue to grow we're going to price ahead of our cost inflation and.

Give our people a fair wage increase will drive productivity right alongside that and listen we're growing at a different way than we ever had before over time, we think that gives us leverage on SG&A, which further helps so the margin expansion.

And just lastly, if I could squeeze it in when I think about these acquisitions of solid waste and environmental services can you just help us John is like the environmental services.

Lower than average margin when we think of some of the stuff outside of that.

The oil and gas more of the downstream is that lower margin you guys can bring it up over time.

Just kind of thinking about that portion of the business that you guys are growing relative to like the non hazardous solid waste.

Yes, so we start with everything on intrinsic value returns right, that's where we start from a fundamental standpoint.

And then any deal we do is going to have to clear that hurdle right individually and then naturally collectively it will over time as the platform.

These businesses in general do have a lower margin profile than recycling and solid waste. They also have a different capital intensity. So when you think about free cash flow conversion rate looks very similar and we do think there is certainly an opportunity to raise those margins over time and again, we have been incredibly.

And over the last decade on our commitment to pricing right and that we won't Flintshire.

Back off of that right as we grow in the broader environmental services space right. We are going to be able to price because we're going to provide a differentiated service and that supports us not only giving a fair wage increase to our employees, but then expanding margins and providing great returns for our shareholders over time.

Thank you.

And at this time there appear to be no further questions. So I'd like to turn the call back over to Mr. Vander Ark for some closing comments.

Thank you Ali in closing we are pleased with our third quarter performance, we delivered double digit growth in revenue EBITDA EPS and free cash flow.

We continue to manage the business to create long term value for all stakeholders and expect continued profitable growth in 2022.

I would like to thank all our employees for their continued hard work and commitment to our customers.

It is our team of dedicated employees that make these results possible.

Good evening and be safe.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q3 2021 Republic Services Inc Earnings Call

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