Republic Services, Inc.

Good afternoon and welcome to the Republic Services third quarter 2020 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 a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Stacey Matthews, Vice President of Investor Relations. Please go ahead.

Hello. I would like to welcome everyone to Republic Services' third quarter 2020 conference call. Don Slager, our CEO, John VanderArk, our President, and Brian DelGaccio, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discussed on today's call contains forward-looking statements, which involve risks and uncertainties, and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discussed today is time sensitive, 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 November 5th, 2020. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings Our earnings press release, which includes gas reconciliation tables and a discussion of business activities, along with a recording of this call, are all available on Republic's website at republicservices.com. I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to Jonathan.

Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. We are extremely pleased with our third quarter results, which clearly demonstrate the strength and resiliency of our business. The Republic team is working hard every day delivering quality service to our customers and communities. Our deep expertise and dedication, together with the strength of our market position and assets, made these results possible. During the quarter, we delivered adjusted earnings per share of $1, which is an 11% increase over the prior year, and expanded adjusted EBITDA margin 230 basis points to 30.3%. These strong operating results, together with effective cash management, helped us deliver $1.1 billion of adjusted free cash flow through Q3, which represents a 14% increase over the prior year. We believe We believe investing our free cash flow in quality acquisitions is the best way to increase long-term shareholder value. We continue to prioritize acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles. Year to date, we have invested $154 million in acquisitions. We recently received regulatory approval on a leading recycling and solid waste provider in the Twin Cities area. Combined with the previously discussed pending acquisition of Santec, we now expect to invest $850 to $900 million in acquisitions in 2020. Our acquisition pipeline remains robust, and we expect 2021 will be another strong year of activity. Year-to-date, we've returned nearly $500 million to our shareholders through dividends and share repurchases. Our board recently approved a $2 billion three-year share repurchase authorization, which will begin in January 2021. This is consistent with prior practice. As we look forward, we remain optimistic about our business and continued prospects for profitable growth. Pricing continues to exceed cost inflation. Volumes continue to recover and margins are expanding. Accordingly, we are raising our full year 2020 adjusted free cash flow guidance to a range of $1.15 billion to $1.2 billion. Additionally, with better visibility through the end of the year, we are reinstating adjusted EPS guidance. We now expect to achieve adjusted earnings per share in a range of $3.37 to $3.40 for the full year 2020. With respect to 2021, John will provide some color in just a few minutes. Before I turn the call over, I'd like to congratulate the Republic team for being certified as a great place to work for the fourth consecutive year. We believe an engaged and diverse workforce is the greatest indicator of our success and the most important element in driving lasting results. This is yet another recognition of the inclusive culture we are building at Republic, one where the best people come to work. With that, I'll turn the call over to John.

Thanks, Don. During the third quarter, we successfully executed our pricing program, improved volume performance on a sequential basis, effectively managed costs, and continued to make investments to drive future growth. Total core price was 4.5%. This included open market pricing of 5.4% and restricted pricing of 3.2%. Core price represents price increases to our same store customers, net of rollbacks. Average yield was 2.6%. Average yield measures the change in average price per unit and takes into account the impact of customer churn. As expected, volumes were down compared to the prior year, but our performance improved sequentially. In the third quarter, volume decreased 3.4%. This compares favorably to the 7.4% volume decrease we experienced in the second quarter with all lines of business showing improvements from Q2 levels. By September, volumes were down only 2.7% versus the prior year. Third quarter small container volume decreased by 4.8% and was relatively consistent throughout the quarter. We continue to see most of the volume decline concentrated to customers in the education, hospitality, and restaurant businesses. However, we continue to see positive signs in our customer base, including small container customers. Approximately 80% of customers that paused service have now returned, and approximately 45% of customers that decreased service levels at the onset of the pandemic have subsequently resumed. Said another way, Only 1% of our small container customer base is not receiving some level of service. Additionally, container weights were only 5% lighter during the third quarter compared to 13% lighter in the second quarter. This suggests continued improvement in economic activity. Third quarter large container volume decreased 5.4%. The volume decline was relatively consistent between the permanent and temporary portions of this business. By September, large container volume was down 3.7% versus the prior year. Total landfill volume decreased 3.1% versus the prior year. This included an increase of 3.3% MSW volume, which is offset by a decrease of 2.5% in C&D volume and a decrease of 11.7% in special waste volume. The decrease in special waste volume was due to jobs being deferred, not canceled, and the pipeline remained strong. Our customers continue to value our quality service and commitment to supporting them throughout the pandemic. Our net promoter score increased eight points from the prior year, and we maintained our low customer churn of 7%. We continue to invest in capabilities to deliver our customer-centered digital experience, which we believe will further differentiate us from our competitors. For example, during the quarter, we began piloting automated proactive communications to our customers. This allows customers to set up customized preferences to receive tailored communications through the channel of their choice. Further advancements in customer-facing technology were made possible by the strong foundation we built as part of our digital transformation, including our RISE platform. We continue to partner with our municipal customers to address the impact of COVID on our business. Third quarter residential weights remained up 10% versus the prior year, which was consistent with Q2. We also made further progress on renegotiating contracts with favorable pricing terms. We now have $855 million of annual revenue or 34% of our CPI-based contracts tied to a waste-related index or a fixed-rate increase of 3% or greater. From an operational perspective, we effectively managed costs to meet the change in underlying demand for service. Thanks to the team's unwavering efforts, we reduced costs to more than offset the decline in revenue. This resulted in a $41 million increase in adjusted EBITDA and margin expansion of 230 basis points. This was enabled in part by our RISE platform, which allows us to dynamically adjust our routes. We are now 97% complete with the implementation of the RISE platform across the organization. We also maintained our record-setting safety performance by reducing safety incidents by approximately 20% versus the prior year. This drove a 10% decrease in risk management costs. Next, turning to our environmental services business. Third quarter environmental services revenue decreased $34 million from the prior year. This resulted in a 130 basis point headwind to total revenue growth. This was primarily due to a decrease in drilling activity and delays of in-plant project work. Since mid-August, we have seen rig counts begin to increase, but expect revenue to remain compressed through the end of the year. Finally, turning to recycling. Recycled commodity prices increased 38% to $99 per ton in the third quarter. This compared to $72 per ton in the prior year. The benefit from higher recycled commodity prices was partially offset by a 7% decrease in inbound recycling volume. With that, I will now turn the call over to Brian.

Thanks, John. Adjusted EBITDA margin expanded 230 basis points to 30.3% in the third quarter. The components of margin expansion included 70 basis points of improvement from favorable net fuel and higher recycled commodity prices and 160 basis points of improvement from the underlying business. Margin expansion in the underlying business was broad-based. and nearly all operating expenses improved compared to the prior year. Additionally, SG&A has a percent of revenue with 10%, an improvement of 40 basis points over the prior year. Our performance reflects cost controls put in place and reductions in non-essential spending, while continuing to make investments for the future to ensure the long-term health of our business. Although we're not providing specific EBITDA margin guidance, I'd like to remind you that there's a 50 basis point headwind in the fourth quarter due to the timing of CNG tax credits. Even with this headwind, we expect EBITDA margin to be at or above fourth quarter 2019 performance. This would result in full-year margin expansion and exceed our original full-year EBITDA margin guidance that we provided back in February. Year-to-date adjusted free cash flow was $1.1 billion, an increase of 14% over the prior year. Free cash flow growth was driven by an increase in earnings and improvements in working capital. The contribution from working capital includes a one-and-a-half-day improvement in DSO, a two-day improvement in DPO, and $68 million of deferred payroll taxes under the CARES Act. It's important to note that even without the benefit of the payroll tax deferral, adjusted free cash flow would be up nearly 7% compared to the prior year. Cash collections remain strong. We believe our DSO performance reflects our customers' willingness to pay for the high-quality service we provide and the essential nature of our business. As Don mentioned, we are raising our adjusted free cash flow guidance to arrange $1.15 billion to $1.2 billion for the year. It's important to note that this level of performance assumes over $1.2 billion of capital expenditures, which is an increase from our prior guidance and relatively consistent with the level of spend we contemplated in our original guidance back in February. While we have already achieved over 90% of this full-year guide, it should be noted that certain expenditures are back-end loaded. During the fourth quarter, we expect to pay approximately 70 percent of our full-year cash taxes, receive approximately one-third of our full-year capital expenditures, and anniversary the benefit from DSO and DPO improvements. Our full-year adjusted free cash flow guidance assumes we will defer approximately $100 million under the CARES Act in 2020. However, If our performance is trending at or above the high end of our guidance range, it is highly likely we would repay the deferred taxes early. During the quarter, total debt was $8.8 billion and total liquidity increased to $3.4 billion. This includes our new 364-day credit facility. Our leverage ratio was approximately 3.1 times. We have plenty of capacity to find outsized acquisition growth while maintaining leverage within an optimal range. Interest expense in the third quarter was $89 million and included $17 million of non-cash amortization expense. During the quarter, we refinanced our 2021 bonds to capitalize on the low interest rate environment. This will reduce cash interest by approximately $22 million per year, which we'll begin to realize in the fourth quarter. Our adjusted income tax provision was $75 million, which resulted in an effective tax rate of 19%. Together with the $8 million charge from solar investments, we had a total tax-related impact of $83 million during the quarter, or 21% of adjusted earnings before taxes. The charge related to solar investments is recorded as a loss from unconsolidated investments on our income statement. The 21% all-in rate was less than our statutory rate of 27%, which resulted in an EPS benefit of approximately $0.08 during the quarter. We expect an all-in tax-related impact of 27% of EBT in the fourth quarter, which will be made up of the income tax provision and charges from solar investments. Let me now turn the call over to John to provide some initial thoughts on 2021.

You've heard Don, Brian, and me talk about the positive momentum in the business, which we believe will carry over into 2021 to drive continued growth in revenue, earnings, and free cash flow. In particular, we believe we will improve free cash flow conversion and deliver high single digit adjusted free cash flow growth in 2021. As usual, we will provide full year 2021 guidance on our fourth quarter earnings call. With that, operator, I'd like to open the call to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. In the interest of time, we ask that you limit yourself to one question and one follow-up question today. If your question has been answered and you would like to withdraw your question, you may do so by pressing star then two. If you're using a speakerphone, please pick up your handset before pressing the keys. And our first question today will come from Hamza Mazzari with Jefferies. Please go ahead.

Hey, good afternoon. Thank you. My first question is just on free cash conversion. I think if you look pre-pandemic, Republic sort of ran at like 41%. Your largest competitors in the high 40% range. Maybe if you could talk about Can you get to the high 40s? Is there anything structural preventing that? And, you know, I'm not looking at 2020 just because it's a very different year. But just looking at your historic free cash flow conversion relative to your largest peer, what should we be thinking about in terms of catching that up?

Hi, Hans. This is Don. Yes, is the short answer. Cash flow conversion is a conversation we have here all the time. Our cash flow conversion is moving north. There's nothing structural that prevents us from getting above the 40% midpoint into the high 40s. When we provide detailed guidance with you guys in February, we're going to be talking more about that. But, yeah, you can expect a cash flow conversion to move up from its historical levels.

Okay. And just to add to that, I think you'll see opportunities on both sides, right, the numerator and the denominator. We see opportunities to both increase the EBITDA margin as well as, you know, manage capital expenditures to drive that number.

Yeah, and to John's point, Hamza, you know, that's the real leverage, right? So if you're expanding both, that's why we, you know, we believe that we're going to be able to grow free cash flow by improving free cash flow margin at a greater rate than we're increasing earnings.

Got it. That's very helpful. And just my follow-up question, I'll turn it over. You know, very strong margin performance, 30% plus EBITDA. Could you maybe talk about, you know, the sustainability of that margin profile going forward? I know time and weight is a big part of your cost structure, and this is a unique time, but How should we think about sort of costs coming back into the system as you see volume improve and how much of the, you know, margin increase we've seen is kind of structural in nature?

Yeah, good question, Hans. So a couple things to keep in mind. One is seasonality. Third quarter is typically our high point in terms of margin. So you're going to see, you know, some natural regression as you get seasonality in the business. And to your point, during the pandemic, there have been a few tailwinds, just in terms of productivity with lack of traffic, as well as lower container weights and small container while maintaining that revenue profile. So it will certainly help us, and we expect to dissipate some as we go forward. That being said, we've learned a lot of things in the pandemic and do believe we've found a different level of performance in terms of productivity and safety, which is associated to our risk costs. And some of that is the pandemic, and some of that is just the return on the investment we've made over the years in digital operations and our operating discipline, and those things are all starting to accrue to the bottom line. And, again, we expect to have, you know, line of sight to a 30% margin over the next few years on a sustainable basis.

Great. Thank you so much.

The next question will be from Tyler Brown with Raymond James. Please go ahead.

Hey, good afternoon, guys. Hey, Tyler. Hey, Brian. So lots of info in the prepared remarks, but I just want to be clear. So in the 2020 guide of free cash flow, you're assuming $120 million payroll deferral benefit this year? 100, Tyler. 100. Okay. So then, John, whenever we think about your comments about free cash flow for next year being, I think, up in the high single-digit range, So is that number assuming something like $150 million payroll deferral negative comp? Is free cash flow looking better than high single digits?

Yeah, this is the way you have to think about it, Tyler, is just that you would have the normal payroll taxes that you would pay in any given year, plus you would have $50 million that you would have to repay from 2020.

Right. But your high single digit is a comp, right, versus prior year? Yeah.

Yes, correct. But you're right, it's 150 starting point to end point hedge when we're overcoming and still achieving the high single-digit free cash flow growth.

Yeah, yeah, yeah, that's my point. Okay, that's good. And then, so in the table in the release, I think, John, you noted that resi yields were north of 3% this quarter. I think that may be the first time, at least in the limited history I'm looking at, but I'm just curious, do you think that we have enough of that alternative index, that set rate increase mix to kind of drive sustainability in that?

Listen, we won't have enough until we have 100% of the book. So we continue to march into City Hall and get a pricing index that we think reflects our cost structure and giving our frontline workforce a sustainable wage increase every year, which we do. And recycling is a big part of that. So Recycling 2.0, we've talked a lot about getting to a right pricing mechanism. And then, listen, we've been heavy at the curb in the pandemic as people have sheltered in place. And so the waste shed has moved from small business to homes. And we've got over 100 customers already that have given us price increases to reflect that elevated cost structure. And we're relentless. We are not going to stop continuing to ask for that price increase. So, listen, there's some puts and takes any given quarter on when pricing increases. hits or the resets of given markets, but our aspiration to get a yield that better reflects our overall business mix in residential is, again, unrelenting, and we'll continue to work with our municipal customers on that front.

Did resi margins go up? They did. Yeah. Awesome. Thank you, guys. You bet.

Next question will be from Walter Spracklin with RBC Capital Markets. Please go ahead.

Thanks very much. Good afternoon, everyone. So my first question here is on technology. Obviously, you've made some significant and meaningful investments on the technological front. If we were to put it into three buckets as being kind of revenue generative as you provide a better service as a result of that technology, cost-saving because you're becoming more efficient, or safety-related, If you look at a dollar spent last year in technology, how would you bucket into those categories, and what evidence, say, for revenue generative have you seen the success of that technological spend?

Yeah, so we don't break down the specific nature of that spend. We've certainly invested in all three categories. You know, steady investment on safety, which has been going on for a number of years, heavier investment on the operating side and the customer side. And while there's some distinction between those two, there's also a lot of relatedness between those two. So when we, you know, put in our RISE dispatch platform and we put tablets in our trucks, that certainly helps us become more productive and efficient. It also provides a better customer experience. It allows us to improve on our 99.9% on-time delivery rate. It also allows us to communicate with a customer in a different way in terms of proactive service notifications and verification over time, which, again, makes our product even better and drives an even higher level of loyalty. So investments on all fronts in online buying and business billing and taking calls out of call centers. So we're investing on all fronts and certainly have not pulled back on any of those investments in the pandemic. We've invested as much as effort. So this isn't just about performance. It's certainly about running the business for the long term.

Yeah, and I think you saw, Walter, in my remarks, I talked about spending a similar level of CapEx this year as we originally guided, even though we've got lower volumes. A lot of that's because we're investing more in this digital transformation, and we think that based on the benefits we've seen so far, that there's much more to come, and that's why we're trying to accelerate that spend.

Okay, that's great, Collin. And my second follow-up question here is on the M&A environment. Can you speak a little bit about your pipeline? I guess specifically whether there had been a degree of pull forward of M&A activity in advance of the election and whether you think a lull might be created here post-election as a result of that pull forward.

Yeah, there was certainly some accelerated activity in wanting deals to close in a certain time period. I think there's far much less people who wanted to sell because they thought there was going to be a certain... you know, political risk and then therefore don't want to sell because they see the election coming out in a different way than they expected, right? People typically sell for structural events, right? They have a change in their life circumstances. There's a generational transition where the next generation doesn't want to run the business. There's some, you know, life-changing event. Something happens that triggers people to sell. And again, the political risk and what they think would be implications around taxes might accelerate timing a month or two, but that isn't really driving activity in our experience.

So the pipeline, as you see, it really hasn't changed from, you know, October to December. The pipeline has not changed and it remains strong.

Got it. Okay. Appreciate the time as always.

The next question will be from Kyle White with Deutsche Bank. Please go ahead.

Hey, good afternoon. Hope everyone is doing well. I just want to focus on volumes. They're a bit better than I expected and better than your peers. Even your sequential improvement was better. You're also one of the few calling for kind of gradual improvement here for the remainder of the year, whereas others seem to be more flattish. Is there anything notable that is driving this relative to the others and just any high-level thoughts on the economy from your vantage point and views on different subsectors here going into 4Q?

Yeah, we see steady improvement. Listen, there's puts and takes in different spots. So if you dial in to any specific geography, right, you might see some flatlining or if people have temporary shelter-in-place orders, even a slight pullback. But I think it's the power of the portfolio overall, both geographically and across business lines. And again, we have a really strong special waste pipeline for the fourth quarter. Feel very good about that. And we're seeing steady improvements across the business. I think we remain cautious in the sense that there's certainly still some uncertainty about we're in a pandemic, right? And how the pandemic moves is uncertain. And so we remain mindful and watchful of that. But based on the trends we're seeing, we see pretty good progress momentum. And that's the external standpoint. The one thing I think we've done well is we've been very engaged with our customers, right? We have a sales team that is highly connected and to meet their needs, which is if they need to dial back service, we're dialing back service. But when they're ready to increase service, we're connecting with them frequently to make sure that they're ready to come back online. We moved our call centers from all in buildings to 98% work from home in about a 72-hour period without any drop in service. And our performance metrics are as good or better than ever in that environment. So that's also enabled us to serve the customer.

And so let me add that, you know, top of the line is better than what people may have expected. But again, the operation has been really strong, right? So we've talked for a long time about the strength of the company, the strength of the team. And we've talked about our resilience as, you know, the business model. But, you know, that's still all true. But what we're seeing now, to John's point, is agility, right? John mentioned how quickly we adapted to new ways of working. Adoption, you know, how quickly we're changing to new using and adopting new tools like the RISE platform. And then momentum, right? So we're All the investments, all the efforts of the last several years, call it decade, kind of compounding, coming together, kind of this breakout moment with a crazy backdrop of COVID. But all that together builds this momentum through the year and carries us really well into 2021.

Gotcha. And just to follow up, I think you mentioned that you continue to see the biggest volume declines in education, hospitality. And I missed the third category, but is there any way to quantify your exposure to these kind of subsectors and how have they performed in October relative to September?

Well, let me take education for example, right? I mean, normally we have a pretty big seasonal upswing here in September as all those schools come back online. And we've just seen what you've seen, which is people are moving all over the place, some Some schools are fully in-person, some are fully remote, and then others have hybrid options that have every kind of variation in between. So, again, we've been flexible with our customers to adjust our service level to better meet their needs.

But it's clearly temporary, right? It's going to, at some point, get back to in-class learning, right? And then that business just comes back when it comes back, and it builds right into our route base, so it usually comes in at a pretty decent margin to boot.

Yeah, and one of the things, you know, we had mentioned, you know, last quarter what the impact was from education, you know, and if you take a look in the third quarter, it was about 20% of our small container decline was due to education alone.

Got it. That's helpful. I'll turn it over.

The next question will be from Sean Eastman with KeyBank Capital Markets. Please go ahead.

Hi, team. Really, really another really nice solid effort this quarter. So many compliments. I just wanted to ask on this question just in a bit of a different way. I mean, just considering all these moving parts, you know, considerably better margins than expected this year. you know, is sort of a normal 30 basis points-ish kind of margin expansion outcome achievable in 2021? You're talking about for the full year, 30%? I'm just talking about, you know, can RSG expand margins sort of at a normalized, say, 30 basis point level year over year in 2021 in light of some of these you know, non-recurring cost savings in 2020?

Yeah, look, I think you do have to take into consideration, John mentioned it, right? There are certainly some things that are happening in the macro environment, right? Things that are helping productivity, some of the lighter container weights. So there are some puts and takes, but we do feel that, you know, 30% margin, you know, and improvement towards 30% margin is something that's in the near term. And it's going to be something that we're going to continue to move toward. 21 might have a little bit of noise in it just because you have some of those macro benefits modulating. But after that, certainly, you know, 30 plus basis points a year is something that's certainly achievable. We're on the cusp.

Gotcha. All right, great. And is there any reason to think price won't trend up next year? I mean... It was called out. The resi yield number was really a standout in the quarter. Does that give us some juice into next year? I mean, what are the puts and takes there?

Yeah, our pricing philosophy certainly hasn't changed over the pandemic, which is to get a fair price for the great work that we do. I think you'll see continued strong pricing in the open market, strong pricing on the landfill side. I think that's You know, let's fight headwind on CPI, which we have a 10, you know, 12 to 18-month lag in terms of when that CPI changes and when that actually hits our contracts on how those escalators work. So that will provide the headwind, but there's no fundamental change in our pricing philosophy. We'll expect to have, you know, strong kind of mid-20s yield at a minimum price.

Yeah, take a look at the progress that was made in converting the book on the resi municipal business that John talked about. The 100 contracts were sold that have already engaged with us and approved price increases because of the elevated volumes. That's a great new trend and we're going to continue just like when other things like this occur, we'll push through that. And landfill pricing has held up very well. And we still think that there's room in landfill pricing and that a lot of the pricing still needs to emanate from the landfills based on, you know, the cost structure there and the difficulty of permitting and expanding landfills. I mean, that pricing will continue to stay strong. And overall, through all this sort of chaos, you know, the market was very rational, right? And that's the backdrop.

Yep. Excellent. Super helpful summary there. And again, nice work. Great. Thank you.

The next question will be from Jeff Goldstein with Morgan Stanley. Please go ahead.

Hey, good afternoon. Good afternoon. Can you just compare how you're thinking about the volume recoveries between both small container and large container at this point? I know large container had a larger initial drop and now they're both down about a similar rate in this quarter. So just going forward, would you expect a large container recovery to pick up faster, especially given some tailwinds we're seeing, especially around housing, or would you expect those to move relatively in lockstep going forward?

Yeah, look, there's certainly, I mean, when we look at, you know, single family housing starts and some of the strength that we've seen in some of those prints, right, and we've had in our investor presentations how that positively impacts our volumes generally about 12 months later. So we tend to lag. But the one thing when you take a look at small and large container, remember, a good portion of our large container business is permanent in nature, right? So you're kind of talking more about the temporary portion of that, which tends to be the, you know, construction-related and then some of the other event jobs. That's where you might see some acceleration more on the event side. But the permanent large container and the permanent small container tend to move at about the same rate.

Yeah, it depends what happens with school. It depends what happens with restaurants. A lot of restaurants have gotten very innovative in the north in terms of outdoor dining, and that will be more of a challenge as we move into the late fall and winter season here. So there will be a few puts and takes that could impact us the next quarter or two in small container in terms of that trying to maybe a little bit less than the large container firm, but I don't think there will be any fundamental differences to Brian's point.

Sequential gap continues to close, I guess.

Okay, that was all very helpful. And then on the recent pledge to purchase 2,500 electric trucks, and I know you're a few years away from actual integration of those vehicles, but can you just talk about how you view those trucks relative to diesel and C&G and operations today, and maybe any rule of thumb we can think of in terms of financial benefit, if any, you'd be expecting, or is it mostly just an environmental benefit from your point of view? Just any thoughts that would be helpful.

We're very bullish on electrification long term. We think that's the winning technology in this space because that's the only truly zero emissions option out there. But we've said all along it's going to be a challenge and it's going to take time. We're making commitments in this space because we need to innovate and help innovate. We've got relationships across the value chain that we're showing a leadership position in that over time. We also have a fundamental belief that if something's going to be environmentally sustainable over time, it's got to be economically sustainable. So we don't expect to do this by reducing returns. We expect over time to enhance returns. Now, there might be some puts and takes between higher upfront capex and then lower operating costs through reduced fuel costs or reduced maintenance costs over time. But again, we're very proactive in that space.

Philip, we're the seventh largest vocational fleet in the nation. And to John's point, you know, we're the right kind of company to be innovating and to be pushing innovation onto the market. And, again, when you get there, those benefits accrue in large ways because, you know, we've got 16,000 trucks on the street every day.

All very helpful. Thank you.

The next question is from Michael Hoffman with Stiefel. Please go ahead.

Hi. Don, John, Brian, Stacy, I hope everybody's well. I do have two specific my questions, but there's two I'd like to make sure I get everybody heard the answer correctly, if you would bear with me. My two specifics are 160 basis points in solid waste improvement. If you thought about traffic and that type of productivity, what's that give back out of the 160 when we're all driving full time and you guys have you know, increased labor for that.

Yeah, Michael, it's hard to, we're looking at that, right? It's hard to tease that out exactly because we have a mix of two things going on. One, we've got lower traffic patterns because of people sheltering in place. And we also have the rollout of all of our digital tools driving higher productivity. Listen, we hope to, we're not going to sustain all of it, but we hope to sustain a lot of it on the productivity side. And one of the things we've seen is not a big difference between rural and urban market productivity. So we're seeing benefits in both. And I would have expected to see if it was purely pandemic-related, a lot bigger lift for us in urban markets. And we're seeing benefits across the board. So again, back to our plan to expand margins, a big portion of that is capturing some of that productivity benefit going forward.

Yeah, so look, there's definitely some impact to your point, Michael, with traffic, but Look, the initial rollout of the RISE platform is the foundational elements of RISE. The stuff the team is working on now, the next things that they'll layer in, now once the platform is rolled out and established, is additive. So there's going to be layer after layer of additional feature, benefit, and capability on that digital platform. that's going to drive new market expansion and better operations, better customer-facing stuff, more information in our pricing tools, and just better, safer operations day-to-day.

John, you want to talk about a couple of those things? Yeah. Tablets in our trucks, right, and giving our people the visibility both in the branch as well as the driver out communicating together, right, not talking, seeing where those trucks are. And so a large container route, for example, will have seven movements in a day. It's about getting eight movements in a day in the same time period while improving safety, while providing better customer service. So that's a very tangible example. We're seeing those tools accrue to the bottom line.

Hey, Michael, one thing I just wanted to kind of clarify that, too, is that when we talk about the 160 basis points, calling that the underlying business, that's not just solid waste. That also includes the impact from environmental services. So the only thing that doesn't include of the 230 basis points of total margin expansion is the impact that both net fuel and higher commodity prices had on margin expansion.

Okay. All right. That helps. And then... The clarification question, somebody asked something about margin and margin expansion, and I was scribbling really fast. You were expecting margins to expand next year, and maybe 30 is a great goal, but you're not given a goal, but you expect margins to expand. The way I was writing it down, it sounded like you were going to be flat.

No, we expect margins to expand. We're not giving a guide on that topic, but we are expecting margins to expand.

And, Michael, that's the point of the momentum, right? When you heard me use that word twice, John, use it, Brian, look, you know, underlying strength in our business, you know, sort of developmental strength in our people, resiliency in the business model, again, rational backdrop. And then, you know, again, proven agility through this downturn, you know, you prove it. You can't question it, right? You can see how quickly the company turned and reacted and adapted, adopted, proven agility and momentum, right? And that is the key takeaway here. I mean, there is really strong momentum in the business, in the team, and in all the work that's been done over recent years coming together to carry us into 2021.

Okay, and then my second one is on free cash flow, and it's got both a clarification and a question in it. You know, maybe your cat version rate has been less than peers, but your fundamental year-over-year growth rate has been better than your major peer for a decade. One, and two, you do have headwinds. Your leverage ratio has been consistently higher, and you pay out more in closure and post-closure in absolute dollars. So the question is, you expect to be able to raise this number by high single digit and still have all of that in front of you.

Yeah, look, we're not going to change the structural issue with legacy landfills, right, overall, right? I mean, they're going to have that cost. Maybe somebody else doesn't have. And, you know, our formula of returning cash to shareholders the way we do is a very – time-tested formula, right? We're going to continue to invest in capital even through this tough time. I mean, look, when we went through the Great Recession, we did stop investing in the business. We had strong enough cash flow to carry us. We continued to invest in fleet, all the other things. Through this year, you know, we didn't shut it down. We actually, in some cases, accelerated, you know, some of the spending and some of the digital tools. And, yeah, I mean, we're very strongly focused on cash flow conversion, as I said earlier, we're going to get ahead of that 45% and it's going to carry us into a northern 40% territory.

Right. And that's what I was saying, Michael, as I made those comments about both the combination of EBITDA margin expansion and being able to reduce expenditures. That combination is why we feel that there's going to be an accelerating event here on free cash flow conversion. to drive that pre-cash flow growth.

Look at the things that John and Tim and the team have built momentum on. We talked already about changing the pricing mechanism on municipal to a fair and equitable arrangement. That's underway. Recycling. making a lot of headway there. And it's not just the recycling markets that are helping us, right? They will. But again, we're retooling that business, right? Making it truly sustainable, right? That's happening. Now, some pricing on the resi side for the elevated weights, right? All those things. And then all the underlying operational benefits. I mean, safety is a great story. Employee turnover is a great story. Engagement is a great story. All those things adding up And, you know, those are all going to come to fruition, you know, I think regardless of COVID. And then COVID sort of, you know, kicked us into another gear. We found new agility that we didn't have and made some other, you know, operational changes because we frankly had to. And those are going to carry, you know, into future periods.

Thank you very much.

The next question will come from David Manthe with Baird. Please go ahead.

Thank you. Good afternoon, everyone. Last quarter, you mentioned that about 15% of your labor costs is overtime, and it was down 25%. Can you tell us by how much overtime was down year to year in the third quarter in October, if you care to share that data?

Yeah, in the third quarter, it was down about 10% overtime hours year over year.

Okay. And second, I realize you're not giving fourth quarter guidance, but due to the ongoing recovery here and your current mix of business, is it possible you might see lower than normal seasonality in the fourth quarter revenues based on those realities?

Well, if you think about seasonality, typically where you see it's an uptick in the second and primarily the third. So from a seasonal perspective, then you start to see it kind of come down in the fourth quarter. So your toughest bogey is generally the third quarter to hit from a year-over-year perspective when you talk about seasonal volumes. So there typically isn't something that increases significantly in the fourth quarter from a volume perspective when you look at Q3 to Q4.

Yeah, except you might have some other just recovery because certain sectors open up you know, that work may be shut down. It might be economic, maybe construction in some places.

Yeah, some of it is purely seasonal, which is in the north, there's construction activity that just doesn't happen because of the weather. Now, there could be some special waste jobs that are teed up for us that we would have hit in the second or third quarter that have just gotten delayed, and now that people have more clarity going forward, that they'll hit, and we feel really good about that pipeline. So there should be some modest opportunities there. Normally, seasonally...

Q3 is our strongest quarter. Two is our second strongest. Then four. And then one.

Right. So we don't see certainly any headwinds as we look in the fourth quarter from a seasonal perspective year over year versus what we just went through in the third quarter.

Thank you very much.

The next question is from Mike Senegar with Bank of America. Please go ahead.

Hey, guys. Thanks for squeezing me in. Don, for many years we were hearing about you guys intentionally shedding business. Every call there would be a lot of questions on why your volumes were underperforming some peers. I guess my question is, you know, one, are you guys kind of through that intentional shedding? And two, how do you think that has positioned you guys, you know, going into this downturn and really coming out of the downturn?

Well, look, you heard John use this phrase, the power of the portfolio, and that's something that we speak to a lot, right? And, you know, when you spend decades and decades building the business, you know, and pulling, you know, the business together the way we did five public companies, blah, blah, blah, you know, you end up with some stuff that you've got to clean up. We're kind of through all that. You know, we've done some, you know, some puts and takes of markets. We've gone to markets. We've exited markets. You know, we used to talk about national accounts and stuff we had to shed. You know, we're not going to be talking much about that anymore. Now, the fact is, because we have such a strong pipeline in acquisitions, right, it's something I think John talked about last quarter. You know, we're always going to have some business that comes with an acquisition that, you know, may be likely to be shed because it doesn't sort of fit the model. But overall, we think we've done a good job. We think we've had a good – filter and test in place on the way in as we're selling new business, you know, with all the sales tools that have been launched over recent years. So we think we've got the safety mechanism on the organic sales side. There'll still be some stuff that maybe gets shed, you know, through, you know, as a result of strong M&A. But look, we are well positioned. Again, the power of the portfolio, you know, works. It's the mix of geographies. It's the mix of business, you know, large containers, small, It's a strong approach with fixing a big piece of business, which happens to be municipal. It's been, you know, kind of our nemesis with, you know, tough recycling contracts, you know, bad escalators. You know, that's starting to now come around the corner here for us. And it just shows the relentlessness of the team, as John already mentioned. So all that work, right, just adds to the strength. of the portfolio. The power of the portfolio is real. Seasonality, winter events, you know, weather events, you know, balances out when you've got, you know, a strong portfolio. And no different than the portfolio that you invest in, you know, yourself, right? We have invested in building a strong portfolio and then sticking with it and then continually improving it over time. And it's just going to, it'll just get better and better as we go.

That makes sense. And Don, just, piggybacking off that, this is kind of a big picture question. I mean, you've seen a lot of consolidation in your day, you know, big and small. Some of your peers right now are integrating some large-scale acquisitions, you know, in Q4 and in the middle of COVID. You guys have elevated M&A, but you passed on some of these bigger deals. I'm curious how you and the management team think that positions the company kind of into 2021.

Well, look, you know, I would say this. You know, we've looked at every decent deal that's come around. I would say there's probably been times where we've had sort of the lead seat on some deals. And, you know, on an ROI basis, we just couldn't get as comfortable with it as we'd like. And we passed. And in a couple of cases, other people came in and decided to go forward with it. In some cases, people paid more than maybe we would have, right? There are a lot of really high-quality companies out there that we compete with vigorously every day, and we've got a pretty good look at who they are, how they operate. We know they're good quality. Those are the companies we're talking to. We're not going to win every deal, right? I always say there tends to be a natural buyer, and that might be a cultural fit. It might be a geographic fit. It might just be where the purchasing company is in the life cycle or, frankly, what promises they've made to the market that they feel they have to keep. We're not in a situation where we're being paid some high growth multiple. We've got to do things that are unnatural. So we stick to what we know. We've got a great M&A team, a great team of people out there who know their markets. Our 10 area presidents all have market plans that think about how they want to expand their business through whether it's landfill expansions and acquisitions or new lines of business. All that is up and running. So, look, I remember when we paused M&A, when we did the big merger over a decade ago, and then we put our toe back in the water. And year after year, I've come to you and said, and we're going to do X next year. And sometimes we've missed it a little bit because we've said no to some deals that, you know, proved, you know, frankly unworthy in the end. We found some things in diligence that we didn't like, and we backed off. And we weren't so... hot and heavy to make the number as we were to do what's best for the company and then there's years like this year where we're kind of we're kind of blowing it out because opportunity arises and uh these companies that we're buying today are high quality companies and a really great fit and that's how we're going to continue to play it and uh you know uh and you know we've taken some opportunity to expand the core a little bit there's some great opportunity you know uh that the team is has brought to us that expand our abilities in and around the environmental space that we're fond of. So that's going to continue. And, you know, we haven't given you any guidance on that. And we'll talk about that in February based on what the pipeline is. And, you know, when we say we're well positioned, I think you can take that to the bank. We're well positioned.

Thanks, Don. And just off that, with what you expect to close in 2020, Can you, or Brian, can you give us a number on how much rollover do we get on the top line? Is there a way you can just kind of frame that for us?

Yeah, with that $850 to $900 million investment that we guided to, again, it's going to be very heavily back-end loaded. You know, we would expect, you know, call it 150 basis points plus of acquisition rollover on the top line.

Okay, that's perfect. And just lastly, I know I might have missed this with October. Did you guys say it was October volumes up for September, kind of flat sequentially? I might have missed that.

Yeah, they were somewhat flattish from September levels, but about 100 basis point improvement from the Q3 average. Got it.

Thanks, guys.

Thanks. The next question will come from Noah Kay with Oppenheimer. Please go ahead.

Hey, good afternoon, everyone. I think you mentioned the 160-bit expansion margin was inclusive of environmental services, which I've got to imagine was a relative drag, at least, versus the average. So any chance you can quantify the environmental services margin impact in the quarter, how you think about that for the year, and then if you extrapolate the current run rate to 21, what does that mean for margin impact year over year?

Yeah, so within the 160 of expansion overall, there was a 20 basis point headwind from the environmental services business.

And I know, you know, you're not giving formal guidance, but just, you know, thinking about it for the year, you would expect to be a continued headwind?

Yeah, in the fourth quarter, yes. Yeah, probably a similar level, if you will.

Yeah, so if we annualize that into next year, you may be looking just on the, you know, significant drop-off. You may be looking at a little bit of a headwind here. Again, in 2021, but not massive. Okay, and just to clarify, the high single-digit growth in free cash flow year-over-year, that does include the contributions from the chunkier acquisitions, correct? Correct. Okay, great. So one, you know, after these specific questions, one more general one. I think, as one of my peers noted earlier, Relative to some of the other companies in this space, you are looking for continued improvement here. If I just step back and look at the consumer's personal savings rate here in the third quarter, it's doubled year over year. There is a lot of cash on a relative basis sitting with the consumer. Now, some of it may be going into house down payments or what have you, But eventually that cash has to come off the sidelines. And I guess I just want to see how you think that translates, you know, to the recovery and to the eventual growth here. You're talking about a large container maybe picking up, maybe it stays in the resi line of business, but just your thoughts there.

Look, we're not going to give you the exact formula because there's too much mix involved, right? But look, I mean, our business grows based on population growth, household formation, business formation. So very simply, more people, right? Job creation, wage growth, more people working. people sort of settling down after sort of the chaos. You know, there's been a lot of chaos this year, right? You know, COVID, you know, social unrest, you know, the election. You know, I was suffering personally from a great deal of election fatigue, okay? And so I'm sure a lot of people were, right? So, you know, things are going to start to settle down. You know, America ends up conquering all in the end. How much time will it take? You know, to your point, people, you know, people have a lot of savings set aside. You know, people are waiting to see. You know, we have good news from the Fed today. Look, as things get back to normal, right, and we get on a path and the economy recovers and people find a way to continue to sort of save and grow their businesses, as John mentioned, people innovate. We see it all the time. we're going to be right there with it. Our market position allows us to take full advantage of all that organic growth somewhat naturally. And then our ability to grow through M&A, our ability to look at even expanding some of our core offerings, a lot of good there. And so we're well positioned. Strong balance sheet, strong asset base, strong market position, strong team, and I can go on and on and on and brag about this group. So, you know, this quarter is a great showing of all the hard work that's been going on. And I said, strength, resilience, and now an expression of agility and real momentum in the business. And with a good backdrop, I think now as things start to settle down around us, then, you know, it'll be a good story to tell. And we'll be here in February to share with you the full year results and the outlook for 21 in more detail and, based on what we see today, I think everyone will be pretty happy with that.

Thanks, Tom. That's great. Take care, everyone. Thanks, Greg.

Thanks.

At this time, there appear to be no further questions. Mr. Slager, I'll turn the call back over to you for closing remarks.

Thank you, Chad. In closing, we are very pleased with our third quarter performance and continue to have a positive outlook on our business. We deliver double-digit adjusted EPS and free cash flow growth, expanded EBITDA margin, and achieved EBITDA margin performance above 30%. We raised our full year 2020 adjusted free cash flow guidance, and we see strong free cash flow growth in 2021. Once again, we have proved the resiliency of our business and the strength of our model. I'd like to take a moment to recognize the hard work, commitment, and dedication exhibited by our 36,000 team members this year. At the onset of COVID, we launched our Committed to Serve program to recognize our frontline employees who deliver an essential service to our communities across the country each and every day. And since then, their dedication has continued. Even through record-setting weather events, including fires and hurricanes, and frankly, you name it, they've never let up. And it's their consistency and willingness to take care of our customers, communities, and each other that makes them truly relentless. It makes me proud to work for Republic Services. I hope you all have a good evening. Stay safe out there.

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