Republic Services Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

There are 13 speakers on the call.

Operator

Good afternoon, and welcome to the Republic Services Third Quarter 2021 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen only mode. Exchange. I would now like to turn the conference over to Stacy Matthews, Vice President of Investor Relations.

Speaker 1

Hello. I would like to welcome everyone to Republic Services' 3rd Quarter 2021 Conference Call. Exchange. John Vander Aarck, our CEO and Brian DelGachio, our CFO are joining me as we discuss our performance. Exchange.

Speaker 1

I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward looking statements, Exchange, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause Exchange. The material that we discuss today is time sensitive. Exchange. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 28, 2021.

Speaker 1

Please note that this call is the property of Republic Services Inc. Any redistribution, Exchange. Retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. Exchange. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, Exchange, along with a recording of this call, are all available on Republic's website at republicservices.com.

Speaker 1

I want to remind you that Republic's Management team, which team participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website. Exchange. With that, I'd like to turn the

Speaker 2

call over to John. Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. We are pleased with our strong performance in the Q3. We continue to execute on our strategic priorities of customer zeal, digital and sustainability to drive growth and value for our stakeholders.

Speaker 2

During the Q3, We delivered revenue and EBITDA growth of approximately 14% compared to the prior year, generated adjusting earnings per share of $1.11 Which represents an increase of 11% over the prior year and produced $1,400,000,000 of adjusted free cash flow on a year to date basis. We continue to effectively allocate capital by investing in value creating acquisitions and returning excess cash to our shareholders. Year to date, we've invested over $900,000,000 in acquisitions to further enhance our market position and increase free cash flow. This is the highest level of acquisition investment in over a decade. On August 31, we completed the acquisition of ACV Enviro.

Speaker 2

This strategic acquisition broadens our capabilities and offerings in the environmental services industry. It also provides us with a platform to pursue additional growth. We are excited to welcome ACB to the Republic team. Our acquisition pipeline remains robust with opportunities in both the recycling and solid waste and the environmental solutions businesses. We now expect to invest over $1,000,000,000 in acquisitions for the full year.

Speaker 2

In addition to investing in acquisitions, we have returned $622,000,000 to our shareholders through dividends and share repurchases. We continue to prioritize customer zeal to drive profitable growth. This includes increasing customer loyalty, driving willingness to pay During the Q3, we delivered outsized revenue growth throughout our business. Total core price remained at an all time high of 5.2% Exchange and average yield increased to 3.2%. Volume increased 4.3% compared to the prior year, which exceeded our expectations Exchange.

Speaker 2

Turning to digital. We continue to realize the benefits of our investments in technology. In the Q3, we made meaningful progress on the rollout of the next phase of our RISE platform. We have now implemented tablets in approximately 70% of our large and small container fleet. We expect to be substantially complete by the end of this year With plans to further deploy to the residential fleet beginning in 2022.

Speaker 2

Next, turning to our sustainability platform. We continue to partner with developers to capitalize on landfill gas to energy opportunities. We currently have 17 projects in the pipeline Exchange with more opportunities thereafter. On top of the royalty revenue these plants will generate, a majority of equity investment opportunities to further participate Exchange in the project economics. We also recently opened a solar project on one of our closed landfills in Bellevue, Illinois.

Speaker 2

This project consists of 30,000 solar panels and will produce enough energy to power 2,200 homes annually. We remain committed to increasing the recycling and circularity of key materials as part of our ambitious 2,030 sustainability goals. We recently opened the 1st solar powered compost facility in California to further our progress and address the growing community needs. This facility will provide critical organic processing capabilities to residents and businesses in the Greater San Diego area. Our strong financial and operational results would not have been possible without our dedicated Republic employees.

Speaker 2

We continue to invest in developing both Existing and New Talent and creating innovative solutions for the increased demand for skilled workers. We recently unveiled our Republic Services Technical Institute, which is the industry's first ever diesel technician school. This subsidized program is already building a strong pipeline of high demand technician talent for Republic. Exchange. Additionally, graduates will have upskilling opportunities to further grow their career with Republic.

Speaker 2

These types of innovative investments and talent This is a meaningful achievement as employee recruiting and retention remains a prominent focus in today's labor market. Finally, turning to our outlook for the remainder of the year. Given the continued strength in our business, we now expect to exceed the full year guidance Exchange. We upwardly revised last quarter. Accordingly, we are increasing 2021 full year financial guidance as follows.

Speaker 2

Expected to be in the range of $1,475,000,000 to $1,500,000,000 I will now turn the call over to Brian.

Speaker 3

Thanks, John. Exchange. Core price during the Q3 was 5.2%, which included open market pricing of 6.5% and Exchange and restricted pricing of 2.9%. The components of core price included small container of 8.2%, large container of 5%, Exchange and residential of 5%. Average yield was 3.2%, which increased 60 basis points from the 2nd quarter.

Speaker 3

3rd quarter volume increased 4.3%. The components of volume included an increase in small container of 5.4%, Exchange, an increase in large container of 3.9% and an increase in landfill of 6.6%. For reference, Exchange. Small container and MSW volumes in the Q3 were both above 2019 pre pandemic baseline. Moving on to recycling.

Speaker 3

Commodity prices increased to $2.30 per ton in the Q3. This compares to $99 per Exchange in the prior year. Recycling, processing and commodity sales contributed 160 basis points to internal growth during the Q3. Next, turning to our Environmental Solutions business. 3rd quarter Environmental Solutions revenue increased $27,000,000 from the prior year.

Speaker 3

Solutions contributed 20 basis points to internal growth during the Q3. Adjusted EBITDA margin for the Q3 was 30.4% and

Speaker 2

Exchange and increased 10

Speaker 3

basis points over the prior year. This included a 90 basis point increase from recycled commodity prices, Exchange, a 50 basis point headwind from net fuel and a 30 basis point headwind from the impact of recent acquisitions, primarily driven by deal and integration Exchange. SG and A was 10.2 percent of revenue. This represents an increase of 20 basis points over the prior year, Which was exclusively due to higher incentive compensation accruals. Year to date adjusted free cash flow was $1,400,000,000 and increased $247,000,000 or 22% compared to the prior year.

Speaker 3

This was primarily driven by EBITDA growth in the business. With respect to our full year cash flow guidance, we expect to spend a disproportionate amount of our full year CapEx and cash taxes during Exchange and Exchange Commission. It should also be noted that we increased our expected full year capital spending in our upwardly revised guidance by over $50,000,000 This increase relates to capital to support growth opportunities. Free cash flow conversion through September continued to track ahead of our original expectations Exchange and increased 330 basis points over the prior year. During the quarter, total debt was $9,300,000,000 and total liquidity was 2,400,000,000 Exchange.

Speaker 3

Interest expense decreased $11,000,000 due to refinancing activities completed last year and our leverage ratio was 2.8 times. With respect to taxes, our 3rd quarter adjusted effective tax rate was 25.5%. We had an equivalent tax impact Exchange. We expect our 4th quarter equivalent tax impact to be approximately 25 Exchange. This includes the effective tax rate and non cash solar charges.

Speaker 3

I will now turn the call back over to John.

Speaker 2

Thanks, Brian. We continue to create value for our stakeholders by executing our strategic priorities, Exchange, which drives profitable growth and increases returns. We are expecting the positive momentum in our business to continue to produce profitable growth in Excluding the impact of the company's earnings release, we anticipate producing above average revenue growth leading to high single digit adjusted free cash flow growth compared to our full year 2021 performance. As usual, we will provide full year detailed 2022 guidance Exchange on our Q4 earnings call. With that operator, I would like to open the call to questions.

Operator

We will now begin the question and answer session. Exchange. Exchange. Our first question today comes from Tyler Brown with Raymond James.

Speaker 4

Hey, good afternoon guys.

Speaker 2

Good afternoon, Tom.

Speaker 4

Hey, Brian, thanks for the detail on the 10 basis point Exact Improvement, but one, kind of how should we think about margins in Q4? Will they likely hold sequentially? And then number 2, and I know you'll give more details on this, but big picture, You've got a strong CPI rollover. You've got a rational open market. Do you expect in 2022 to make progress on that 32% margin goal?

Speaker 3

Yes. Tyler, let me kind of answer the first part of your question there. I think you embedded 2 or 3 questions in there. So

Speaker 2

At least with respect to sequentially, there's

Speaker 3

a normal step down sequentially from Q3 into Q4, as well as we've talked about the fact that Exchange. We're doing more deals than originally anticipated. So we expect the highest level of deal and transaction and integration costs in the 4th quarter. So again, while we expect to see in the underlying business, we're expecting to continue to see really strong performance. We do expect a sequential step down Q3 to Q4.

Speaker 2

And then your second part of your question Tyler, yes, outlook is strong for next year. Certainly, we've Been strong on pricing in the open market portion of our business already and we'll continue to do that. And then as some of these escalators kick in, the lag effect 12 to 18 months, so some of them kick in into 2022 that provides more upward pressure on pricing, Which we think will lead to margin expansion in 2022.

Speaker 4

Okay. And then just from a modeling perspective, how much revenue today would likely roll over next year?

Speaker 3

If you just take a look at the deals that have been completed through September, it's 160 basis points.

Speaker 4

Okay. And then my last one here. So John, it's interesting. If you look at the big three, I think you guys posted actually the best volume growth this quarter. You actually had the toughest comp.

Speaker 4

So I'm not asking you to necessarily compare and contrast you with the peers. But was there a line or a vertical that just gave you this outsized strength that you saw. I'm just trying to it's not really your strategy to prioritize volume over price. I just want to Make sure that that's make sure I've got that all straight.

Speaker 2

Well, you certainly have the last part straight, which is we're always going to start with price over volume, I mean the thesis broadly of our company and the industry is that we can price ahead of our cost inflation and I think we've proven to do that Exchange in a kind of rapidly changing environment this quarter. So we certainly feel good about that in the short term and the long term over time. And on the volume side, listen, we certainly left some volume on the table. If we had more labor, we would have gone after some more opportunities on that front. So very strong demand environment and I think the GDP print was at 2% for the quarter.

Speaker 2

A lot of that's on the consumer side. The industrial side of our economy is very, very strong right now. And so our volume is in pretty broad base, pretty strong across the board.

Speaker 4

Okay. All right. Thanks guys.

Operator

Our next question comes from Hamzah Mazari with Jefferies.

Speaker 5

Exchange. Hey, good afternoon. My first question is just on SG and A leverage Going forward, maybe you could just walk through any potential COVID related costs Exchange. That came out of your system that are now coming back. Maybe there's some costs that are permanent in nature, Post sort of looking at the business through COVID that you've instituted.

Speaker 5

Just give us a sense of how to think about that going forward?

Speaker 2

Yes. I'd say there's some modest puts or takes and we're already seeing some of that. For example, small container, right, weights are coming back and long term that's a good thing because it's a positive Time for demand, but that's certainly a financial headwind for us in the very short term period that we already saw some of and we think that modulates over time. Certainly some with the Delta variant, we had some elevated PTO cost, right, in the quarter of people who were sitting out and Still getting paid over time, so that's a headwind that abates over time. Listen, as traffic patterns come back, does that slow us down a little bit?

Speaker 2

Maybe I would have guessed we would have Exchange. We'll shrink our real estate footprint incrementally here as we have some of our more transactional colleagues working from home permanently. But that's pretty modest broad strokes. A little bit of travel will come back, but we'll also take advantage of teams and do things in different ways over time. So Lots of individual puts and takes, but I don't see certainly I don't see any big structural headwinds that are going to come after us.

Speaker 3

Yes. And Hans, to your question specifically on SG and A, we've had a number of those costs come back into the system As far as some of the travel related costs, so we're seeing that in the current period. As I mentioned in my prepared remarks, Most of the increase we saw really had to do with incentive compensation, really didn't have to do with any of those ongoing SG and A expenses. So We feel pretty good about our performance and our ability to leverage, right, SG and A going forward as we continue to grow the top line and migrate towards that 10% of revenue.

Speaker 5

Got it. Very helpful. And just my follow-up question. You mentioned landfill to gas. You mentioned 17 projects in the pipeline.

Speaker 5

Historically, I think you've just outsourced and taken royalty revenue. I think you referenced that you have equity stake opportunities. Is that Something you've done before and why not just bring them in house given some of the ROIC and Exchange. Strong sort of margin profile of some of that some of those projects. Thank you.

Speaker 2

Yes. It's a great question. So historically, again, we've been more opportunistic and side by side in this. As the world is moving into a more Exchange operation. We're certainly doing our part and hopefully leading the way.

Speaker 2

This has become more critical for us going forward. So not only do we have 70 projects,

Speaker 6

Exchange. We've got another slate behind that that

Speaker 2

we're evaluating. And we'll participate in a different way than we have historically probably in an equity basis, But probably not full ownership. And why I say this, we have a limited number of landfills. And so this is a great growth opportunity for us to pursue, but there is a ceiling to it. Once you've kind of built it out on all the landfills that make sense, that's it.

Speaker 2

We like to put our all of our Exchange. Financial capital and our human capital in places that we think grow in an evergreen way. And so that will put our attention. Combine that with the fact that there's a lot of external financial and human capital resources who are anxious to partner with us And we think that's probably going to be the winning combination for us going forward.

Speaker 3

Yes. The other thing too Hamzah is that partnering up With a third party, we can actually move faster than if we were to sit there and go our own way. And that's one of the reasons we want to move quickly on this opportunity.

Speaker 5

Got it. I just had a clarification question. Historically, I think at Q3, you've talked about Preliminary 2022 sort of maybe top line. Is that a change in sort of how you're thinking about guidance Or maybe historically you haven't done

Speaker 3

that. Yes. No, Hamzah, I think we talked in our remarks as well. What we talked about Exchange. We're optimistic about the momentum in pricing.

Speaker 3

Volume is strong and there's additional opportunities. And Again, when you look at just the acquisition rollover as well as the pipeline of acquisitions that are there, we feel that 2022 is going to be very strong on that front as well. So contribution from multiple facets that at least relative to a historical growth rate, we feel it's going to be outsized.

Speaker 5

Got it. Thank

Operator

you. Our next question comes from Jeff Goldstein with Morgan Stanley.

Speaker 7

Hey, good afternoon. Thanks for taking my questions here. So labor expense has clearly been a key topic in the quarter, but within your COGS labor, I noticed, actually Excluding the impact of the revenue year over year, so maybe you can just talk about how you've managed to contain that. Is it primarily from raising price? Is Anything around scheduling or maybe doing proactive wage increases that you'd call out.

Speaker 7

Maybe just talk a little bit more about the success Managing that in the quarter. And then I guess going forward, is there any reason to think you won't be able to manage it as well?

Speaker 2

Yes. Thanks for your question. I think you have to look way back to low CPI environments. And we've always had this fundamental belief that We want to give our people a fair and certainly steady increase every year. So we were raising their wages at 2% or 2.5%, Even a low CPI environment.

Speaker 2

So, people have been focusing in parallel on employee engagement and making sure this is the place that the best people come to work. So you put those two things together and we think our employee value proposition has been really strong. And while turnover has been elevated, it's been modestly elevated. And we've really we've taken more people if we could to pursue some incremental growth opportunities, but our attention has been really strong. Now That being said, we're facing the same pressures of the macro environment.

Speaker 2

So we've looked and done surgery in targeted markets where we think we When it's competitive or maybe turnover was elevated, but you kind of take those cost increases and you offset it with what we think is Our digital ops and our RISE platform, which is really driving productivity. If we look at our performance kind of in the quarter versus 2019, Right. We're just seeing we're getting more work right out of the same labor hour and that's been really productive and I think you're seeing it hold in a very challenging environment. And then On top of that, of course, we're pricing because the market bears it and we want to support future wage increases for our employees.

Speaker 7

Okay. That all made sense. And then now that you've had Santac for a few months, I think it closed back in May, I'm curious for the path forward on bringing those margins back up to Republic levels and any sense of synergies you'd expect out of that business. And then remind me in terms of pricing within the Centek book, was that in a place you were happy with or is there room to reprice some of that business as well? Exact.

Speaker 7

Just an update there would be helpful.

Speaker 2

Yes. We're really excited about that acquisition, great set of assets, gets Certainly some geographic markets that we weren't in before and that creates a basis or a platform for further growth both organic and Additional tuck in acquisitions. As Brian mentioned, there's always start up costs in the 1st year and the bigger the deal, the more Startup costs because we really then have to get multiple sites and the systems integrated and there's a lot of employee benefits and related costs And we really try to front load all those and get all those done at once. A, to get those behind us, but B, to create a great employee experience. And so if they linger forever, they feel like they're not really part of the company.

Speaker 2

We think that leads to higher turnover time. So We get after that and had a very proactive and intentional plan and we're ahead of that plan. And I think you'll see in 2022 that will be a nice Certainly tailwind for us as those costs come behind us. And again, given the nature of that company and being fairly landfill centric, the margins are really attractive.

Speaker 7

Okay. Thanks for the color.

Operator

Our next question comes from Walter Spracklin with RBC Capital Markets.

Speaker 8

Yes. Thanks very much, operator, and thanks for taking my questions, everyone. I'd like to turn back to acquisitions for a moment. When you look at The pipeline which you mentioned is quite robust right now. So I was wondering if you could be able to provide a little bit of color on that pipeline, perhaps discuss whether Are these all smaller tuck ins?

Speaker 8

Are there any larger chunkier targets in markets that interest you? And as a follow-up, is the regulatory review and scrutiny at all impacting your ability to do deals in this environment

Speaker 2

Exchange. Yes. The pipeline is I mean the performance has been very strong this year and The pipeline looking forward is very strong. And I would say the power and characteristic of that is it's very, very balanced, Right. It's balanced certainly weighted more heavily toward recycling and waste just given that's where the bulk of our business is, but certainly Plenty of opportunities in the environmental solutions portion of our business as well.

Speaker 2

It's certainly balanced across size, plenty of small tuck ins, Pick a number of what we call media size deals. And then listen, we maintain a perspective on everything. So could there be some larger deals that come through over time? Yes, those are obviously more Episodic and can be could be challenging from a regulatory review. On balance, we have a very crystal clear point of view of where the regulation sits.

Speaker 2

And so if we think there's a deal that really is not going to get through, we just don't spend energy and time pursuing that opportunity. And or if we do have limited regulatory scrutiny on a deal, we bake that right in. We understand what we probably have to divest and we go right to the regulators and say here's our perspective and again they can they'll draw their own perspective, but we plan that right into the model so we're never surprised on the back end of that. So Yes, there is heightened scrutiny versus 4 or 5 years ago on larger transactions, but more broadly it's not slowed us down at all from I think what is a different level of acquisition than we've historically done.

Speaker 8

Okay. And as my follow-up on special waste, it looks like it was a good quarter for you on special waste, Had some nice tailwind there, but it can be lumpy business. How do you look at contribution from special waste from quarter to quarter? And is there any flags that you would give us in terms of how we model it in quarter to next? Or are you fairly confident that that's going to be Good tailwind for you here over the next several quarters.

Speaker 2

Yes, I think it's a good tailwind. Again, we saw kind of we were active as ever. We saw times of uncertainty. I think if you go back 20 to 25 years, special waste typically pushes, Jobs get sold and they get confirmed, but they just don't drop and get delivered. And so I think what you're seeing now is those things are starting to move.

Speaker 2

And so feel good about that. The pipeline is very robust going forward. It's a project based business. So by definition, right, there's going to be quarters that are a little higher versus Others, but I think the outlook for the next 12 to 18 months is very, very strong. That's fantastic.

Speaker 2

Appreciate the time as always. Thank you. Exchange.

Operator

Our next question comes from Michael Hoffman with Stifel.

Speaker 9

Good afternoon and thank you for taking my questions. The challenge when you have 2 is can you actually ask a question with 14 different

Speaker 2

You're quite good at that, Michael. I trust you.

Speaker 9

My attempt to do that is on organic growth, Thinking about a baseline exit momentum going into 2022 The new price and volume, are we in the right neighborhood if we're starting with a 3 handle on price and then volume ex special waste lumpiness, still has momentum from new business formation, service interval trends being positive that We haven't seen a peak in that activity, so that trades tailwind. That's the right way to think about going into 2022?

Speaker 2

Yes, certainly on the pricing, we would expect something starting with a 3. And then on volume, listen, we're Coming out of a we're in a V shaped recovery and obviously the further along you get because arithmetically right that slope starts to flatten. But I think there's still Plenty of momentum. I talked about the labor side and being a little constrained there. So versus a pre pandemic year, you're going to see outsized volume growth in 2020

Speaker 3

Yes. And the follow-up to that though is probably not as high though as what we're going to see in 2021. It's somewhere in between.

Speaker 9

I couldn't hear you, Brian. Could you say that again?

Speaker 2

No, I just said to John's point, most of 2021 was

Speaker 3

a recovery of units that were lost Exchange during the pandemic.

Speaker 2

My only point was that the volume, at

Speaker 3

least the way we're thinking about it right now, would be somewhere in between What we're doing in 2021 or what we're going to deliver in 2021 in that historical average.

Speaker 4

Got Got it. And

Speaker 9

then last one for me is on free cash flow. When you think about a baseline of a conversion ratio and you've talked about It appears that you're going to be there this year. So is that now the new you've got to it? And in that context going forward, you're spending more CapEx this year, but did you pull any forward? Or should I think of CapEx as the same rate of spend percent of revs in 2022?

Speaker 2

Yes. I think that CapEx was really more a function of growth, Integral CapEx and these acquisitions we do oftentimes there's a plan and there's development projects associated with those, Those are more one time in nature, right? And then you get the benefit, the returns of those in future years. And from a free cash flow conversion standpoint, yes, right? We think we've hit A new baseline and we have plans to further expand that going into 2022 and beyond.

Speaker 9

Okay. So how did I do? Did I get enough questions in the 2?

Operator

Our next question comes from Jerry Revich with Goldman Sachs.

Speaker 10

Hi, good afternoon, everyone.

Speaker 2

Hi, Jerry.

Speaker 10

Hi. Can you talk about what pricing announcements you've made to your open market Excluding the impact of the U. S. Dollar in October. And as you folks look at the inflation that everyone across the industry is Seeing how much do you feel like you need to push open market pricing over the next couple of months to make sure we've got Enough room to execute as we hit the immediate part of the inflation cycle.

Speaker 2

Yes. I would say that you got to look back, right? We've already done that. We jumped on that pretty much In the mid to end part of the Q1, understanding where inflation was going. And you've seen in our open market Another 100 bps of incremental pricing versus the prior quarters, right, because we're pricing not only existing customers, but also new customers, Exact capture pricing tool as we saw steel go up for example on containers, right?

Speaker 2

We just we put that right in. And so immediately we're selling a different price on the street, Right to cover the cost of that incremental steel, right, with a return against it. So we're not diluting returns as we price that through. So Listen, we're putting more price out. That price is being realized in the marketplace.

Speaker 2

And again, we have a good broad backdrop, right, when Where prices are going, these price increases are relatively modest against that backdrop and I think that's a good reason why they're holding.

Speaker 3

Yes. Jerry, just a follow-up there. Again, we've been quick to act in the open market. You really haven't seen the contribution yet from the restricted portion of the business. That's still to come in 2022 with some rollover benefit into 2023.

Speaker 10

And just to clarify, so the current level of core price increases for open market, 6.5% and obviously we'll see The restricted acceleration from here, but is the 6.5% now at a high enough pace to cover this heightened level of inflation? Or should we look for open market Increases to be higher than the 6.5% we're posting now.

Speaker 2

Yes. You could see that incrementally tick up, but we're also managing costs in a way, right, where we're Taking the price and the cost inflation expanding margins, right, as we go. Not only looking back, right, we're almost a 200 basis point expansion Exchange. If you look back a couple of years and we think we've got more room to run on that going forward. And keep in mind, we price the existing customers.

Speaker 2

It's not a one time event, right? We price ratably kind of in our open market roughly a 12th of a book goes out every month, right. And so our ability to be flexed up on that is really,

Speaker 10

Exchange. Okay, great. And then you alluded to recycling investment opportunities in the press release. Could you just expand on that? What's the range of opportunities in terms of building facilities organically or seeing recycling rate increases out of your existing Footprint versus acquisitions.

Speaker 10

Can I tell you just to flesh out that opportunity side please?

Speaker 2

Yes. We think there's 5 or 6 Core markets we're in that we would like to have an asset. That's one over time we'll probably build if we could buy it. That would also be an opportunity, but it's probably something Certainly seeing acquisition opportunities, smaller ones for recycling centers as we do some more medium sized deals going forward, In part because we want to make sure we've got a place to take the material off of our back and not always be dependent on a third party in those markets and in part because We think these resources have increasing value over time, right? In a world where plastics, for example, the consumer packages companies, We are really in a need for post consumer content and we have it and we're an aggregator.

Speaker 2

So over time that material has more value and we think we're going to be able to capture a piece of that as we move forward.

Speaker 6

And the other thing I'd add

Speaker 2

Jerry, there's plenty of opportunities on Existing facilities to drive in more automation to kind of change the CapEx, OpEx trade off. Those are tough jobs. Those are higher turnover jobs. And so it allows us to reduce the labor force just incrementally in those facilities, but then also

Operator

And our next question comes from David Manthey with Baird.

Speaker 2

Good afternoon. Thank you. Exchange. First off, could you give us some early thoughts on CapEx for 2022? I don't know if you Expect

Speaker 11

that to drop back into 11% to 12% of revenues range and if you wanted to share with us a couple of your spending priorities for next year?

Speaker 3

Yes. David, look, we'll get into details when we're back together in February on the components within the free cash flow. But I would sit there and say, as As you think about over time, right, as John mentioned, we've made really good progress on free cash flow conversion. We expect to continue to make Progress and start to drive that free cash flow conversion into the high 40% range. Some of that is going to be by reducing our CapEx as a percent of revenue.

Speaker 2

Okay. And second, how do you

Speaker 11

think about your commodity basket As you move into next year, I mean, do you budget for flat or do you assume it's going to be lower than that? Just how do you think about The commodity basket broadly as you look to the out year.

Speaker 3

Yes. Right now, right, what we're kind of looking at is more of in line with

Operator

Our next question comes from Sean Eastman with KeyBanc Capital Markets.

Speaker 6

Hi, team. Nice quarter. Couple of modeling ones for me. I think, Brian, I think you mentioned 160 basis points Acquisition Rollover. Is that a net number or a gross number?

Speaker 6

And then secondly, I guess it's safe to assume that You guys are going to do something better than that because you're indicating that next year is going to be an elevated level of deal activity as well. Is that correct?

Speaker 3

Yes. So the $160,000,000 is essentially both gross and net, quite honestly. But yes, if you think about that only includes Deals that have been closed through September.

Speaker 6

Okay, got it. And Okay. So we'll have more upside there by the end of the year and

Speaker 3

then whatever you guys do next year, we'll layer on

Speaker 2

for that? Correct.

Speaker 6

Got it. And then just drilling in on margins, I don't want to paint you guys into a box before you're giving the guidance, but Maybe just thinking about the normative 30 to 50 basis points of operating leverage in the business just naturally. I mean, what would be the moving pieces to think about relative to that? I mean, maybe recycled commodities are a tailwind in the first half. I'm not sure maybe the acquisitions you've done are modestly dilutive into next year.

Speaker 6

Just trying to think through those moving pieces that would be helpful.

Speaker 2

Yes, I mean the core of the business, right, you should think of margin expansion or pricing ahead of our cost inflation, which we're certainly very Committed is doing. And then some other pieces on that, right, commodity prices, right, could create a drag depending on where that basket goes. Fuel was a drag in the quarter, right? You know that in general, we price fuel and our fuel recovery fee is a pretty good broad hedge to Exchange. But we have a little bit of drag as we go up and then it happens to have a little bit of lag as we go back down.

Speaker 2

So depending on where fuel goes, But I'd say there's probably more chance that's a neutral or tailwind added in the next year. And then acquisitions, like I said, we Kind of load up all those integration costs in the 1st year. And so we expect that to be a little bit of a headwind to the overall Margin portion of that, if you had to win the equation into next year, but nothing dramatic, right? We're still committed to expanding margins next year with all those pieces put together.

Speaker 6

Okay, excellent. Very helpful. I'll turn it over. Thanks guys.

Speaker 2

Exchange. Thank you.

Operator

Our next question comes from Noah Kaye with Oppenheimer.

Speaker 11

Hi, good afternoon. Thanks for taking the questions. I think your footprint just to align naturally with some Exchange. And so that may partly explain the great organic growth trends we've seen from you. But I wonder if you could talk a little bit about new business formation and new business origination for the company.

Speaker 11

And specifically, John, how you might be leveraging your digital platform to help drive that new business formation rather than new business Exchange Commission for the company. Is there anything that you're doing differently now at Republic than you might have done in years past to help identify and build new business?

Speaker 2

Yes. We've certainly advanced the cause with our digital tools. I mean our sales team is on the sales force platform and Exchange. Got a lot of lead generation tools across the different the verticals in our business that populate new leads going forward. And we've certainly seen some of that.

Speaker 2

Frankly, I think there's more of that to come, right, as we get through Delta and consumer confidence even gets higher here And we get back to traveling and back to business. So we're optimistic there's more upside of that going forward. But we think we're getting Certainly, our fair shares of growth are more because we've got 1,000 plus sellers out there working very local markets to find

Speaker 11

Okay, thanks. And then I guess in the context of the ACV Enviro acquisition, I wondered if you're able to share your vision for what kind of scale you want to have in this segment over time. Obviously, you've talked about Environmental Services TAM being around $20,000,000,000 and the fact that the customer base wants to consolidate Who it uses for services given sustainability and other drivers. But do you want us to be a $1,000,000,000 business within a few years? Is that out of range of what you're thinking?

Speaker 11

Can you talk a little bit about your ambitions?

Speaker 2

Yes. No, I think that's actually a really Good starting point. I think $1,000,000,000 in 3 ish years, I think is a reasonable target. We certainly We'll not raise or reach to get there by any means. We certainly wouldn't be afraid to clear that if we think we have the right opportunities going forward.

Speaker 2

It will be a mix of organic growth and acquisitive growth, more acquisitive than organic just in a percentage basis as we scale that business. And Listen, that's been a really good fit for us in the early days. Not only have they performed well, but we expected to see a lot of integration Exteriors with our waste and recycling business and we're seeing a lot of those come through opportunity to internalize disposal, cross sell with customers And it's just going to strengthen the value proposition of both sides of our business.

Speaker 11

Okay. Thanks so much.

Speaker 3

Thanks, Kyle.

Operator

Our next question comes from Kyle White with Deutsche Bank.

Speaker 6

Hey, good afternoon. Thanks for taking the question. I wanted to go back to special waste volumes as well as C and D. Just curious, have you guys seen any impact on these volumes from the tight labor market and kind of the stress supply chain across the business and the environment?

Speaker 2

No, not really. I mean, listen, the supply chain is impacting us in weird ways like We have a solo project we're putting in and we can't get some equipment that's trapped on a boat outside of Long Beach. So that project might not go in this year. But those are more incremental one off things and get we're blessed to be in a business that is a service based business, right, and not materials based or we would be Probably suffering like some of the other companies are. So we feel good about that, but not in the special waste or C and D side.

Speaker 2

We think there's more demand coming back in that business without question, but I don't think the supply chain disruptions that attach anything to that part of the business right now.

Speaker 6

Got it. And then on the solar investments, I think initially you're targeting $125,000,000 for this year. Is that still the right target? And should we Expect that target to go higher next year.

Speaker 7

It might be modestly more than that.

Speaker 3

As John mentioned, we've got Exchange. Some of these projects right now, it's all based on what gets placed in service by the end of the year. I would say a good number to use through the cycle is in Yes, predicated on some of the tax laws that are in place today.

Operator

Our next question comes from Michael Feniger with Bank of America.

Speaker 12

Hey guys, yes, thanks for taking my questions. I appreciate the outlook raised, but just to put a fine point on it, I might have missed it. Is even our margins up year over year On the Q4 or is there just a lot of integration acquisition costs that kind of creates some noise on the quarter?

Speaker 2

Exchange. Yes, I think it's a

Speaker 3

couple of things. Yes, what you said on kind of the integration costs, but also when you take a look year over year, Since the Q4 of last year, heavier container waste that sort of thing. So that probably will put a drag on the performance relative to the prior year.

Speaker 12

Okay, got it. And just to be clear, I'd like Brian, On the 32% margin target, I you guys might have already fleshed it out. Is this is the track 2024, is that how to think about it? Can it be much earlier? Or is some of this inflationary pressure and just a lot of this acquisition, Obviously, it's lower than you integrate.

Speaker 12

I get it, you're moving higher. Just like how do we think about the margins In the context of that 32% target.

Speaker 2

Yes. Listen, I think it's We're not going to put a specific year on it, but we are certainly trending in that direction. And I think you're going to see steady ratable improvement. I don't think you're going to see any big jump or I don't think you're going to see us flatten. And it's going to be a consistent set of levers, which is we are going to continue to grow.

Speaker 2

We're going to price Out of our cost inflation and give our people a fair wage increase, but drive productivity right alongside that. And listen, we're growing at a different way than we ever had before. And over We think that gives us leverage on SG and A, which further helps with the margin expansion.

Speaker 12

And just like last, if you could squeeze it in, when I think about these acquisitions, the Solid Waste and the Environmental Services, Can you just help us, John, is like the Environmental Services, is this a lower than average margin when we think of some of this stuff outside of The oil and gas, more of the downstream. Is that lower margin? You guys can bring it up over time. Just kind of thinking about that portion of the business that you guys are growing relative to like the nonhazardous solid waste.

Speaker 2

Exchange. Yes. So we start with everything on a intrinsic value and returns, right? That's where we start from a fundamental standpoint. And any deal we do is going to have to clear that hurdle, Right, individually and then naturally, collectively it will over time as a platform.

Speaker 2

These businesses In general, do have a lower margin profile than recycling and solid waste. They also have a different capital intensity. So when you think about free cash flow conversion, right, it looks Very similar and we do think there's certainly an opportunity to raise those margins over time. And again, we have been Incredibly consistent over the last decade on our commitment to pricing, right? And that we won't flinch or Back off of that, right, as we grow in the broader environmental services space, right, we are going to be able to price because we're going Exchange.

Speaker 2

And that supports us not only giving a fair wage increase to our employees, but then expanding margins and providing great returns

Speaker 4

to our shareholders over time.

Operator

Exchange. At this time, there appear to be no further questions. So I'd like to turn the call back over to Mr. Vander Ark for some closing comments.

Speaker 2

Thank you, Eilidh. In closing, we are pleased with our Q3 performance. We delivered double digit growth in revenue, EBITDA, EPS Exchange and free cash flow. We continue to manage the business to create long term value for all stakeholders and expect continued profitable growth Exchange in 2022. I would like to thank all our employees for their continued hard work and commitment to our customers.

Speaker 2

It is our team of dedicated employees that make these results possible. Have a good evening and be safe.

Operator

Exchange. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Republic Services Q3 2021
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