Phoenix-based Republic Services Inc. rounded out the third quarter earnings season for the publicly-traded solid waste firms reporting strong results across the board in spite of the challenges thrown up by global uncertainty in recycling markets and disruptions from two major Atlantic hurricanes.
Overall, the company posted $2.56 billion in revenue for the quarter, up 6.3 percent year-over-year.
“We are very pleased with our third quarter performance, and we are well positioned to achieve our full-year 2017 earnings and free cash flow guidance,” Donald W. Slager, Republic president and CEO, said during a conference call with investors and analysts. “We will continue to manage with the business to create long-term shareholder value and remain focused on executing our strategy of profitable growth through differentiation.”
The firm reported net income of $223.2 million versus $85.6 million for the comparable 2016 period. Excluding certain gains and expenses, on an adjusted basis, net income for the quarter was $225.2 million, versus $212.6 million in 2016.
Republic reported minimal effects from the recent hurricanes.
“Our third quarter results include cost associated with the hurricanes, which were partially offset by revenue from cleanup related work,” Slager said. “In the fourth quarter, we expect storm-related revenue to offset additional costs.”
Slager also addressed the ongoing disruption in the markets caused by China’s pushback on the quality of recycled materials.
Slager pointed out that from July to the beginning of October, published OCC export prices declined 52 percent from a high of $237 per ton to $113 per ton. Since then, however, prices have rebounded nearly 45 percent and are now above the 10-year average.
“We believe the recent volatility is again temporary and the pricing we saw in early October is not indicative of a new normal,” Slager said during the call. “Also, we haven't seen a structural change in the demand for packaging or recovered fiber and believe that continued growth in e-commerce and online shopping will further increase demand.”
He added that in addition to having buyers domestically and in China, Republic also sends its recycled material to Indonesia, Thailand, Korea and India.
Slager also echoed a sentiment others have argued, that while China is serious about improving the quality of imports, it also has a demand for fiber that needs to be met.
“We're going to continue to work on it like everybody else and it'll level out at some point, but I think it's too early to tell where they'll really end up,” he said. “At the end of the day, they need fiber and packaging demand isn't going to go down in my mind. It's not going to go down on my household, I'm pretty sure. So, we think we're going to be in a good place when it all shakes out.”
Republic also addressed the potential impacts of a drop in the corporate tax rate from 35 percent to 20 percent, as was rolled out in the tax reform proposal introduced by Republican legislators this week.
“Free cash flow would increase by approximately $180 million, or said differently for every 500 basis point reduction in the tax rate, free cash flow would increase by $60 million,” Charles F. Serianni, executive vice president and CFO for Republic said during the call.
Other highlights from the company’s earnings:
- Collection revenue was $1.88 billion, up from $1.81 billion in 2016. Residential collection contributed $576.5 million (up from $564.4 million in 2016), its small-container business generated $752.7 million (up from $728 million a year ago), and its large-container line generated $541.3 million (up from $511.7 million a year ago).
- Transfer revenue amounted to $312.8 million, up from $304.9 million. Landfill revenues were $576.1 million, up from $543 million in 2016. Energy services contributed $40 million, more than double the $17.3 million figure in the third quarter last year.
- Sale of recycled commodities generated $130.5 million for the quarter, up from $144.6 million.
- Revenue growth from average yield was 2.5 percent and volumes increased 1.6 percent.
- Average yields in the collection business were 3.1 percent, which included 4 percent yield in the small-container business, 3.1 percent yield in the large-container business and 1.9 percent yield in the residential business
- Volumes in Republic’s collection business increased 10 basis points. Volume increased 1.8 percent in its large-container business and a 1.3 percent decrease in the small-container business. Residential volumes were flat.
- Volumes at its third-party landfill and transfer stations increased 9 percent. Landfill volumes increased 10.1 percent, which included special waste of 24.7 percent, C&D of 14.5 percent and MSW of 20 basis points.
- Core price increased revenues by 4.1 percent, which consisted of 5.1 percent in the open market and 2.3 percent in the restricted portion of Republic’s business.
- Adjusted EBITDA was $718 million and adjusted EBITDA margin was 28 percent of revenue.
- Republic posted adjusted free cash flow of $605.6 million, up from $575.9 million in 2016.
- Excluding glass and organics, average commodity prices increased 26 percent to $167 per ton in the third quarter from $133 per ton in the prior year. Cost of goods sold for recycled commodities increased 22 percent, primarily due to an increase in rebates.
- The company invested $129 million in tuck-in acquisitions during the quarter and $220 million year-to-date through Sept. 30.
- In October, the company acquired ReCommunity Holdings for approximately $165 million, which included certain tax benefits valued at approximately $50 million. “The investment in ReCommunity enables us to further vertically integrate our recycling operations without adding capacity in our existing markets,” Slager said during the call. “To meet the demands of our customers who have told us recycling is important to them and have also demonstrated a willingness to pay, and to continue to capitalize on secular trends such as the growth in online shopping.”
- Republic continued to convert CPI-based contracts to more favorable pricing mechanisms for the annual price adjustment. The company now has approximately $510 million in annual revenue tied to either a waste-related index or a fixed-rate increase of 3 percent or greater.
- The company advanced its fleet-based initiatives designed to improve productivity and lower costs.
- 19 percent of its fleet operates on compressed natural gas, up from 18 percent in the prior year.
- 75 percent of its residential fleet is automated, up from 74 percent in the prior year.