Q2 Earnings

Republic Services reported revenue and volume declines during the second quarter, as anticipated, but saw positive results on multiple fronts that executives said were a sign of resilience. Adjusted free cash flow was $743 million (up 19.7% year-over-year), pricing growth remained stable and July revenue levels were up 1.5% from June.

"The consumer we think is getting stronger, people are adjusting to a new way of doing things," said CEO Don Slager during the company's Thursday earnings call. "We have a very positive outlook."

Pandemic effects

• Overall volumes were down 7.4% in Q2, improving from a 10.2% decline in April to a 5.4% decline in June. Landfill special waste volumes were down 17% and MSW volumes were down 3.5%. C&D volumes were mostly flat, with construction described as "the bright spot" in many markets. Small container volumes dropped by 8.8% and large container volumes by 12.4%.
• Residential volumes were up 10.1% year-over-year, but those levels moderated to 7.6% above 2019 levels in June. Executives said they were working with municipalities to account for this new normal in terms of costs and noted progress continues on a years-long effort to convert such contracts to alternative pricing indexes.
• Republic reported $31 million in specific COVID-19 expenses – including personal protective equipment, facility cleaning, employee benefits and charitable giving. At the same time, the company saw overtime expenses drop by 25%, safety expenses drop by 19%, turnover hit record lows and productivity increase due to measures such as routing changes.

Republic stood out as taking one of the more optimistic outlooks about the pandemic during its Q1 earnings call in May and that perspective appears to have largely panned out for the company's balance sheet. According to new CFO Brian DelGhiaccio, the quarter's $150 million revenue decline was offset by a range of other savings and some of those are expected to carry forward even as time goes on.

"We do expect to be more profitable as we look forward, we’ve learned things about ourselves on how we can operate differently..." said DelGhiaccio.

While areas such as transfer and disposal costs may increase again as container weights rebound, Republic's leadership also expects it could see long-term changes in other areas. Travel, entertainment, real estate and labor were among multiple examples.

Another lesson for Republic is it could continue planned price increases amid an economic downturn. The company reported that core pricing increased revenue by 4.7% for Q2 (breaking down to 5.5% in open markets and 3.4% in other areas) and President Jon Vander Ark said "we expect a strong pricing performance in the second half." While Republic is not alone in this, the move stands in partial contrast to Waste Management's one month of free service to qualifying customers that are reopening and pauses in price increases by some others. 

Vander Ark said the company tried to be "empathetic" to customers, allowing some to break contracts for service suspensions, forego late fees or have more flexible payment terms. He also pointed to employee spending at customers' restaurants through the Committed to Serve charity initiative as another benefit.

While recognizing conditions were shifting by geography, Republic's leadership said they were seeing something of a return to normal in the economy even as the pandemic's fatal effects continue with an emphasis in Southern and Western states around the country.

"We have significant market positions in all of those markets and yet we're still seeing volumes recover. So that gives us a lot of optimism that the outlook is positive. There's still uncertainty, of course," said Vander Ark. "We're running the business for the long term, but we feel like we’ve certainly far more than exceeded the floor and we’re on our way to a nice steady recovery."

Other developments

• Recycling revenue rose to $73.5 million in Q2, up from $71.9 million in 2019. While the company saw a substantial 29% increase in commodity values, that was offset by an 11% decline in inbound volumes. Environmental services (E&P) revenue was down 26% year-over-year, to $30.1 million, due to decreased drilling activity and other factors expected to continue through the year.
• Capital expenditures were up $51 million year-over-year, which DelGhiaccio said was a sign "of our commitment to invest throughout the pandemic." At the same time, the remaining $40 million of a $100 million commitment to enhance employee facilities following corporate tax cut savings has been deferred to 2021. Republic now anticipates spending around $1.1 billion on capital expenditures in 2020.
• Like Waste Management, Republic's positive experience with technology during the pandemic has prompted it to ramp up deployment plans for new tools in the field and continue broader digitization efforts through its RISE platform. Slager said this will improve customer service levels and have ongoing productivity benefits.

Looking ahead

• Following a prior suspension of guidance, Republic released a new expectation of $1.1 billion to $1.175 billion in adjusted free cash flow for 2020. It was noted during the call this is not far off the company's pre-pandemic guidance of $1.175 billion to $1.225 billion, prompting Slager to say "nothing is ever out of reach."
• The company increased its dividend by 5%, the 16th consecutive year of increases, and has paid $257.9 million to date. While share repurchases remain paused, the company still has $605.8 million in authorized capacity and Slager said "we'll flex buyback based on opportunity in the market."
• Republic reiterated a pre-pandemic target of $600-650 million in M&A for the year, with $124 million completed to date. Much of the remainder is expected to be for the pending acquisition of Santek Waste Services. The two signed an agreement in February, according to comments from Santek's CFO reported by the News-Herald. Based on the full pipeline ahead, Slager said Republic would have "a continued appetite for good deals, good companies."