Q1 Earnings

Like its peers, Republic Services saw strong Q1 results despite the underlying drag of recycling markets. The company reported $349 million in adjusted free cash flow, core price of 4.7%, average yield of 2.9%, an "all-time low" customer defection rate and generally positive volume trends aside from a special waste comp. 

Hunting for Deals

Amid these results, Republic reported spending $86 million on acquisitions during Q1 and another $56 million in April. According to the company's quarterly filing, that most recent deal was for a company with "hauling, transfer station, and recycling business" in Oregon. Year-to-date acquisitions are worth an estimated $55 million in annualized revenue, putting the company on track to spend $300 million on M&A in 2019 — well above its $200 million target.

• "There are just frankly a lot of really attractive companies right now who are coming to a place in their lifecycle who are thinking about monetizing their life's work ... So we don't force deals. We don't do bad deals. We don't chase deals," said CEO Don Slager during the company's earnings call. "That's how we've built Republic. We'll continue to be in the hunt for good deals."
• When asked whether that might include assets outside of solid waste — which Waste Management indicated an interest in during its own Q1 call — Slager said areas such as E&P were profitable, but that more tuck-in collection assets would likely remain the primary focus. "[F]or a long, long time, we'll be making most of what we make here out of running a solid waste business very well."
• As for Republic's interest in acquiring any potential divested assets from the pending Waste Management-Advanced Disposal Services deal, Slager said the company would go after anything if it was the right fit.

Republic's M&A spending was relatively lighter last year, compared to the aggressive pace of others and past large deals of its own. Still, the company has made clear it's ready to be opportunistic. That said, like Waste Connections, Republic did not consider buying Advanced to be worthwhile; in Slager's view, there's a "natural buyer" for every interested seller.

"[S]o you can take that comment and then imagine that we also look at ADS and some really good assets, good leadership team, some really interesting things there. It may just come down to in the end a better fit for the current company that is engaged in bringing that deal together," he said. "I think we've got great opportunity ahead of us to continue to consolidate our fair share of this business, and you'll see us do that."

Recycling Turnaround

Republic's Q1 recycling revenue was $72.9 million, down from $75.8 million in Q1 of 2018, and the company is feeling similar effects as its peers. Average commodity prices were down 17% to $93 per ton and will likely hit $85 per ton for April — but executives saw signs for long-term optimism. 

• "Republic was sort of the tip of the spear in the marketplace when it came to attacking the recycling issue, so we've got rollover benefits from what we did last year," said Slager. Approximately 21% of 1,100 municipal customers have agreed to price increases so far, yielding $55 million in pricing actions last year and $12 million during Q1.
• "[S]ome customers say no at first, and that's not stopping us. We're continuing to have that dialogue. And just like what we've done over time in the alternative index, we will make progress over time as we continue to represent the case, because the facts are on our side," said COO Jon Vander Ark. "All we're asking is for a fair model and to be an environmental partner with us over time."
• Executives believe they will begin to see further returns on this model heading into 2020 as new domestic capacity opens up, and the company's quarterly filing indicates a $10 per ton swing in commodity prices could "change both annual revenue and operating income by approximately $18 million." In the meantime, this may mean walking away from more municipal contracts if customers aren't amenable to price hikes.

Looking Ahead

• Like others, Republic's landfill operating costs continue to rise, particularly around leachate. Slager expressed frustration with the concept of "owning people's waste forever" without proper compensation, and Vander Ark noted the company is "looking at every ton that comes into every one of our landfills and understanding what is the true cost of that and ensuring that we are getting a fair return."
• So far this year, Republic has spent $233 million on dividends and share repurchases. The company reported $1 billion in remaining authorized purchase capacity when factoring in $111.5 million worth of repurchases through Q1.
• Despite recycling headwinds, Republic reaffirmed its full-year guidance for earnings per share and adjusted free cash flow.