Q1 Earnings

For something that is "only 4% of total revenue," recycling received outsized attention in the Q1 earnings call for Republic Services. Yet, like their counterparts at other large companies, Republic's executives seemed glad to address the situation and ready to profit from it going forward.

"It's kind of a perverse statement, but frankly, in one way, I kind of welcome this China chaos, because it gives us the platform that we need [to] have the conversation that we frankly probably should have been having 10 years ago," CEO Don Slager said during the call.

Recycling:

• The Republic team said multiple times they believe that commodity prices are on the upswing post-April, projecting an average of $115 per ton for material in 2018 — compared to $112 per ton in Q1. 
• Slager said two of the company's three segments are in solid shape. Commercial customers have responded positively to price increases and 85% of MRF contracts now have a "a fee-based structure or a fair share arrangement." Yet that number is only about 20% for municipal collection and processing contracts.
• The goal now is to make people realize that recycling may not be free, even if fiber still has value. "This stuff is not worth gold, okay. We've got residual issues," said Slager. "We've got glass, which is a contaminant at some point. We've got materials that don't have value that we have to deal with."

This talk of changing the math on recycling isn't new, but it has become more urgent since China's scrap import restrictions hit. It came up during WasteExpo last week, was a big focus on Waste Management's Q1 call and is something that certain financial analysts feel is long overdue.

As the second-largest recycler in the U.S., with an even bigger stake following last year's ReCommunity acquisition, Republic has a vested interest in making this work both for its bottom line and its "Blue Planet" branding. The company frequently touts inclusion on sustainable business lists and is actively engaged in ambitious West Coast recycling programs. Like Waste Management, Republic has also begun to note that recycling can have a higher return on invested capital than landfills in the right scenarios.

As Waste Dive recently discussed with Vice President of Recycling Pete Keller, investments in MRF equipment are underway. However, those investments are happening on a case-by-case basis and in the meantime some temporary disposal waivers have been requested in select markets.

"Organizations like ours cannot invest in sustainable practices, in recycling, unless there is a return that we can count on," said Slager.

With all of this in mind, Republic's current outlook on making recycling work appears to be based on the assumptions that residential customers will pay more and Chinese paper mills will eventually get tired of "paying eight times what they used to pay" for virgin pulp versus recovered fiber.

Everything Else:

Compared to recycling, which Slager described as the "last frontier of volatility," executives said the vast majority of Republic's business is in very good shape.

• Average yield was 2.2%, total core price was 3.8% and volume growth was up 2%. Landfill volumes were up 12.7%, with a spike in special waste due to one large project. Customer defection also dropped below 7% "for the first time in our history."
• Ongoing efforts to switch contracts to alternative indexes have also been successful. An estimated $570 million of the company's $2.5 billion in quarterly revenue now has a fixed rate increase of 3% or greater.
• Free cash flow was $356 million, up 48% YoY, and Republic returned $350 million to shareholders. Approximately $236 million of that was through share repurchases.

Looking Ahead:

Aside from recycling, which Slager said could take a few years to iron out, the Republic call yielded a few other interesting points.

• On the call, Slager said that while Republic may not have made as many big purchases as some of its competitors this year the pipepline is still "robust." The company spent $26 million on tuck-ins during Q1 and an additional $53 million in April.
• Landfill pricing is seen as "still a little weak," due in part to rising leachate and permitting costs, so the company can be expected to continue pursuing price increases on that front.
• So far, employee turnover has remained roughly flat compared to last year, despite a good economy. Unlike the post-tax cut bonuses or wage increases planned by its competitors, Republic is making fleet and facility investments to improve retention. Whether that has the desired effects will be worth watching.