Q3 Earnings

Republic Services reported another steady quarter, with ongoing acquisition activity and continuous growth across just about every line of business except for those tied to commodities.

"During the quarter, we continued to see additional weakness in global recycled commodity markets and further declines in U.S. rig counts and drilling activity. Despite these macro headwinds, the business is performing ahead of plan," said CEO Don Slager during the company's earnings call.

Adjusted EBITDA for Q3 was $742 million and free cash flow was $372 million. Core price increased revenue by 4.7% — reportedly the company's highest "in over a decade." Landfill volumes were up by 1.8% for MSW and 15.8% for C&D, but down 6.6% for special waste (due to the episodic nature of that particular volume).

M&A

• Republic spent $275 million on acquisitions during the quarter, bringing it up to $490 million ($441 million net of divestitures) through Q3. The company estimates these deals will contribute annual revenue of approximately $161 million.
• According to Slager, the majority of these deals have been small tuck-ins (5-10 trucks). Executives described core areas such as "maintenance, fleet operation, container management, land management, permitting, engineering" as ongoing priorities. There have also been some new market entries, including Bend, Oregon.
• Republic reaffirmed plans to spend an estimated $550 million on acquisitions in 2019. It sees 2020 as "another strong year of acquisition investment" in the $200 million range. 

While the industry's second-largest player continues to strike a characteristically more measured tone when discussing M&A, Republic's activity is largely pacing with that of other top competitors so far. Through Q3, Waste Management spent $513 million on acquisitions (including E&P assets from Petro Waste) and Waste Connections spent nearly $471 million on 13 different companies.

At the same time, both of those companies have big plans heading into 2020 – including Waste Management's pending acquisition of Advanced Disposal Services. Republic's expected $200 million spending for 2020 may be smaller, but that could easily change. The company initially projected spending $200 million this year and may end up nearly tripling that. Many in the industry are also waiting to move on any potential divestments required in the Advanced deal. 

In response to an analyst's question, Slager also confirmed Republic's ambitions could entail expanding north of the border. "We like Canada. There’s some great business up there," he said, noting Republic would need to find a strong position in any new market. "If there’s things available that interest us, we’re not going to shy away from that."

Other pressures

• Republic's Q3 recycling revenue was $68.6 million, down again, largely due to low commodity prices averaging around $72 per ton (as compared to $106 per ton last year). Executives reported ongoing success locking in price increases for existing contracts, and President Jon Vander Ark expressed hope that this new model will cause "our sensitivity to commodity prices to decrease" in 2020.
• In addition to an estimated $50 million EBITDA headwind from recycling, CFO Chuck Serianni also reported a nearly $20 million headwind from lower E&P revenue as drilling activity declines in the Permian Basin.
• Asked about a protracted strike by a small group of Teamster drivers in Massachusetts, which has involved some temporary collection disruptions in other markets, Vander Ark said "from a cost standpoint, it’s been nominal."

Looking ahead

• Republic is now projecting $1.15 to $1.12 billion in free cash flow for 2020 and called out plans for $100 million in capital expenditures for frontline operations. This continues planned investments in locker rooms, break rooms and training facilities as a result of the corporate tax cut. Similar investments are not expected for 2021.
• The company is projecting it will spend an estimated $400 million on stock buybacks next year. During Q3, Republic reported spending a combined $275 million on buybacks and dividends. 
• Republic also sees an opportunity to further enhance profits by doubling down on a long-running strategy of shedding low-margin business and optimizing priority customers. "We believe we can grow the business, both price and volume. That’s our aspiration. We’ve proven we can do it," said Vander Ark. "[We] feel really good about the economic backdrop and how we’re going to grow the business. And that will involve a slowing down of the shedding and taking on a lot more profitable business."