Q2 Earnings

Republic Services announced it's raising financial guidance for the year during its earnings call Thursday, noting an 8.1% increase in volumes during the quarter and MSW and C&D landfill volumes that both exceeded their pre-pandemic baselines.

Executives highlighted a pipeline of possible M&A opportunities and landfill gas-to-energy projects, likely investment to upgrade and expand their recycling facilities, and growing emphasis on its environmental solutions businesses as focuses going forward. At the same time, they acknowledged uncertainties posed by the surging delta variant of the coronavirus and their inability to hire enough drivers to take full advantage of certain growing markets.

Pandemic recovery and performance

• Volume increases occurred across both small container (8.6%) and large container (13.7%) business lines. Those overall volumes nearly matched 2019 pre-pandemic baselines.
• In recycling, commodity prices were $170 per ton in the quarter, up from $101 on a year-over-year basis. Revenues from recycling processing and commodity sales totaled $103 million, up approximately 40% compared to the second quarter of 2020.
• The company also laid out the specific performance of its environmental solutions business. Revenue totaled $29.3 million in the quarter. Chief Financial Officer Brian DelGhiaccio said that the petrochemical and industrial manufacturing portions of that business (which are about 70% of the unit) grew 8% year over year.

Despite the recovery seen in the second quarter, CEO Jon Vander Ark recognized the potential for some positive trends to reverse. "With the delta variant and the third wave happening, and pockets of the country starting to retrench a bit, we're very mindful that we don't know exactly what's going to happen in the next six months, we're not past this thing," he said. "In the near term, there just remains some uncertainty." Those comments are a slight departure from competitors' takes on the pandemic shared during other recent earnings calls, which have expressed confidence in continued positive trends going forward.

Thus far, the pandemic environment has not greatly disrupted supply chains for Republic’s equipment orders this year. Vander Ark said the company is adding 1,200 trucks this year and has already received 700 of them, with “a good line of sight to the 500” that remain outstanding.

“We’d certainly take more drivers if we could get them right now,” Vander Ark said. “We certainly are forgoing some growth opportunities in certain markets where the economy is booming.” He said additional hiring would be particularly advantageous in the industrial and large container lines of business. Alternatively, while Waste Management recently acknowledged on its own recent earnings call that hiring challenges are affecting service for current customers, the company doesn’t feel it’s held back expansion to new customers.

Areas of opportunity

• In line with its sustainability goals, Republic said it this year expanded a landfill gas-to-energy plant and has 15 more projects in the pipeline, which Vander Ark later elaborated is a $200 million opportunity as part of a shared arrangement. Republic will likely work with partners on those projects to save its capital for other investments.
• Regarding the potential for investment in the recycling business, Vander Ark said Republic will spend on upgrading and modernizing facilities. He noted that with the labor market being tight and MRF jobs being "very challenging," that "the more automation we put in those facilities, the better off we think we're going to be long term.” In new markets, Vander Ark said the company is more likely to establish new facilities than to buy them, though both will be on the table. DelGhiaccio said the company has historically spent between $30 million and $40 million yearly on such investments; Vander Ark said it could be willing to spend more than that as well.
• The company is pressing forward on efforts to digitize operations, as Vander Ark highlighted at June's WasteExpo. During the second quarter, Republic implemented in-cab tablets in nearly half of its large and small container fleet that enable automated customer notifications. "We expect to be substantially complete by the end of this year, with plans to further deploy to the residential fleet beginning in 2022," Vander Ark said in prepared remarks.

Looking ahead

• Almost three months have passed since Republic closed its long-drawn-out acquisition of Santek. When asked about its attitude toward M&A for the remainder of the year, Vander Ark said there will be "no pause," touting the pipeline and adding, "we expect to have a really strong year on that front." The company said it will put "well over $600 million" toward acquisitions this year. At 2021's halfway mark, Republic had spent $567 million, or $521 million net of divestitures.
• Building on commentary at WasteExpo's investor summit, Republic said it intends to grow the environmental solutions business in response to customer demand for services. Vander Ark said that growth will happen organically as well as through acquisitions, and that the company is on a "steady sequential path."
• The company formally raised its expectations for full-year adjusted free cash flow to a range of $1.45 billion to $1.475 billion. That's up from the previous quarter's guidance raise to between $1.35 billion to $1.4 billion.