Republic Services, Inc. (RSG) reported net income of $298.3 million, or $0.93 per diluted share, for the third quarter of 2019, versus $263.4 million, or $0.81 per diluted share, for the comparable 2018 period. Excluding certain gains and expenses, on an adjusted basis, net income for the three months ended September 30, 2019, was $291.7 million, or $0.91 per diluted share, versus $269 million, or $0.82 per diluted share, for the comparable 2018 period.
"We are pleased with our third quarter results. The team's continued ability to tightly manage costs and capitalize on favorable solid waste trends enabled us to price in excess of cost inflation and expand underlying EBITDA margin by 60 basis points. During the quarter, we invested $275 million in acquisitions, further strengthening our leading market position and increasing the scale of our operations," said Republic Services CEO Donald W. Slager in a statement. "We now expect to outperform our original 2019 full-year adjusted EPS [earnings per share] guidance and achieve the upper end of our adjusted free cash flow guidance range. The momentum in our business and stable economic backdrop position us well for continued growth in 2020."
During an October 30 call with investors, Slager noted that in Q3, the company continued to see additional weakness in global recycling commodity markets and further declines in U.S. rate counts and drilling activity.
“Despite these macro headwinds, the business is performing ahead of plan. As a result, we are raising our full-year adjusted EPS guidance from $3.28 to $3.30, and we expect to achieve the upper end of our free cash flow guidance range,” he said. “In the third quarter, we generated $372 million of free cash flow and approximately $1 billion of cash flow year-to-date. We believe investing our free cash flow in acquisitions is the best way to increase long-term shareholder value.”
In the third quarter, Republic invested approximately $275 million in acquisitions, bringing its year-to-date acquisitions investment to $490 million.
“Our acquisition pipeline remains robust. For the full year, we are on track to invest approximately $550 million and believe 2020 could be another strong year of acquisitions,” added Slager.
In addition, Republic Services was recently certified as a Great Place to Work for the third consecutive year. During the October 30 call with investors, Slager congratulated the team for this acheivement.
“We believe an engaged and diverse workforce is the greatest indicator of our success. This is yet another recognition of the inclusive culture we are building at Republic, one where the best people come to work,” he said.
During the Q&A portion of the October 30 call, one investor asked Republic about the sanitation workers currently on strike at Republic Services in Marshfield, Mass., who extended their picket line to Seattle earlier this month. The striking workers, members of Teamsters Local 25 in Boston, began their strike on August 29 after claiming Republic refused to agree to a contract “with a livable wage and affordable healthcare.”
In response, Slager explained that this strike has been “incredibly narrow.” “This is one business unit in the Northeast, and we are bargaining in good faith; our team is doing a great job. We hope to get back to work soon. There have been a couple of one-day strikes in a handful of markets, but the good news is customers are not disrupted. We are getting the recycling and garbage off the ground, given those minor disturbances. From a cost standpoint, it has been nominal for the quarter.”
Additional Q3 2019 highlights include:
- EPS was $0.93 per share. Adjusted EPS was $0.91 per share, an increase of 11 percent over the prior year.
- Cash provided by operating activities was $651 million, and adjusted free cash flow was $372 million. Year-to-date cash provided by operating activities was $1.8 billion, and adjusted free cash flow was $1 billion.
- Cash flow invested in acquisitions was $275 million, or $228 million net of divestitures. This brings the company's year-to-date acquisition investment to $490 million, or $441 million net of divestitures. The annual revenue acquired, net of divestitures, in the third quarter was approximately $55 million. Year-to-date annual revenue acquired, net of divestitures, was approximately $161 million.
- Total cash returned to shareholders through dividends and share repurchases was $271 million.
- Core price increased revenue by 4.7 percent. Core price consisted of 5.7 percent in the open market and 3.1 percent in the restricted portion of the business. This is the highest level of core price Republic has achieved in more than a decade.
- Adjusted EBITDA was $742 million, and adjusted EBITDA margin was 28 percent of revenue, a decrease of 40 basis points versus the prior year. Underlying margin expanded 60 basis points during the quarter but was more than offset by a 50-basis point headwind from lower recycled commodity prices and a 50-basis point headwind from an additional workday in the quarter relative to the prior year.
- The company continued to convert Consumer Price Index (CPI)-based contracts to more favorable pricing mechanisms for the annual price adjustment. RSG said it now has approximately $775 million in annual revenue, or 31 percent of its approximately $2.5 billion CPI-based book of business, tied to either a waste-related index or a fixed-rate increase of 3 percent or greater.
- Republic raised its full-year adjusted diluted EPS guidance to $3.28 from $3.30 and reaffirmed its full-year adjusted free cash flow guidance of $1.125 million to $1.175 million. Republic now expects to achieve the upper end of its adjusted free cash flow guidance range.
- Republic expects to invest approximately $550 million in acquisitions and $150 million in solar energy investments that qualify for tax credits. Additionally, the company expects to return approximately $900 million total cash to shareholders, through approximately $500 million of dividends and $400 million in share repurchases.
- Recycled commodity prices continued to decline, said Jon Vander Ark, Republic’s chief operating officer, during the call. Prices have continued to decline in October, and the company estimated its price per ton to be $68 for the month. “Next year, we expect our sensitivity to commodity prices to decrease,” he explained.
- Vander Ark also noted that the company rolled out a new platform for dispatch operations for the large containers business. "The platform leverages the operational foundation we have been building over the last several years, with additional mobile and in-cab technology with more real-time routing information and data and visualization tools," he said. "Ultimately, this platform enables us to digitally connect our customers, drivers, dispatchers, supervisors and trucks."
- Next year, in partnership with Mack Trucks, Republic also will begin piloting its first electric vehicle on a residential collection route.
During the call with investors, Slager said, “Given the predictability and consistency of our business, we are providing a preliminary outlook as we have in prior years.” Here is Republic’s preliminary financial outlook for 2020:
- Expect adjusted diluted earnings per share to be in a range of $3.46 to $3.51. This outlook assumes an effective tax rate of 21 percent and a non-cash charge of approximately $110 million related to solar energy investments that qualify for tax credits.
- Expect adjusted free cash flow to be in a range of $1.150 million to $1.200 million. In 2020, Republic said it expects to reinvest approximately $100 million of its tax-reform savings into its fleet and frontline employee facilities, which represents a $25 million increase from the $75 million investment in 2019.
"We expect current business and economic conditions to continue into 2020, positioning us well for another year of strong pricing, positive volume growth and continued EBITDA margin expansion,” said Slager in a statement. “Additionally, our acquisition pipeline remains robust, and we believe 2020 could be another strong year of investment, similar to 2019."