Republic Services, Inc.

Good afternoon and welcome to the Republic Services Third Quarter 2022 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. 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 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations. Please go ahead.

I would like to welcome everyone to Republic Services' third quarter 2022 conference call. John van der Ark, our CEO, 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 discuss on today's call contains forward-looking statements which involve risks and uncertainties and may be materially different from our actual results. Our SEC filings discuss factors that cause actual results that could cause actual results to differ materially from expectations. The material that we discuss on 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 October 27, 2022. Please note that this call is 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 GAAP reconciliation tables, and a discussion of business activities, along with a recording of this call, are available on our 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 John.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our strong results in the third quarter demonstrate our ability to properly grow the business and effectively manage our cost structure, even with increased volatility in the broader marketplace. Cost pressures remain elevated and more persistent than we originally anticipated. In the face of those cost headwinds, we are leveraging our tools and technology to price ahead of cost inflation and drive margin expansion in the underlying business. From our perspective, customer demand remains strong and supportive of continued volume growth. The sound fundamentals in our business, together with a laser focus on the customer, position us well to capitalize on growth opportunities in the market. During the third quarter, we delivered revenue growth of 23%, including over 12% from acquisitions, generated adjusted earnings per share of $1.34, which is a 20% increase over the prior year, and produced more than $1.6 billion of adjusted free cash flow on a year-to-date basis, a 23% increase over the prior year. We remain confident that investing in value-creating acquisitions is the highest and best use of our cash flows. Year-to-date, we invested $2.6 billion in acquisitions, which includes the acquisition of U.S. Ecology. The integration of UDS Ecology is progressing as planned, and we remain confident that we will achieve at least $40 million of cost energy. Our initial pricing actions have been successful. We will continue to increase prices to ensure that all stages of the value chain earn an appropriate return. We are also gaining traction cross-selling our products and services, achieving over $25 million in new sales to date. Apart from musicology, we have invested over $400 million in acquisitions this year. Substantially, all of these deals are in the recycling and solid waste space. Our robust acquisition pipeline continues to support outsized levels of activity over the coming years. Year-to-date, we return $640 million to our shareholders through dividends and share repurchases. We continue to invest for the future and advance our strategic initiatives to build distinctive capabilities in customer zeal, digital, and sustainability. With respect to customer zeal, we delivered organic volume growth of 2.2% during the third quarter. Volume growth was broad-based across our market verticals and geography. We also demonstrated our ongoing ability to price in excess of underlying cost inflation. Poor price increased to 6.9%, and average yield increased to 5.6%. This is the highest level of pricing in company history. Moving on to our digital capabilities. The team continues to advance the implementation of digital tools that improve the experience for both customers and employees. Our proprietary RISE tablets have been fully deployed across our large and small container routes, and deployment to residential routes is 26% complete. The remaining residential routes are on track for completion by mid 2023. We have also launched TrackMyTruck. This technology connects the customer to their large and small container truck utilizing a GPS-enabled RISE tablet. This is a major milestone that serves as a foundation for further digital offerings to our customers. As it relates to sustainability, development of our renewable gas projects remains on track. We expect the first tranche of these projects related to our joint venture to come online beginning in late 2023. We are pleased to work with BP on these RNG projects, who recently announced its intent to acquire Arceus. This provides additional opportunities to work together on decarbonization and environmental services initiatives. Regarding polymer centers, we are accelerating the development of these projects I now expect to invest an additional $40 million of capital this year to start working on future locations. Finally, our company values guide everything we do. I'm proud of our recent certification as a great place to work for the sixth consecutive year. This is a significant achievement as employee retention and recruiting remains a top priority in today's market. I will now turn the call over to Brian, who will provide details on the quarter. Thanks, John. Core price during the third quarter was 6.9%, which included open market pricing of 8.7% and restricted pricing of 4%. The components of core price included small container of 10.7%, large container of 7.6%, and residential of 6.7%. Average yield on total revenue was 5.6%, an increase of 60 basis points when compared to our second quarter performance. Average yield on related revenue was 6.3%. The team continues to dynamically adjust price on new and existing business to offset higher levels of inflation in our operating costs and capital expenditures. Third quarter volume increased 2.2%. The components of volume included an increase in small container of 2.3%, an increase in large container of 1.7%, and an increase in landfill of 6.8%. Our customer retention rate remained strong at over 94%. Moving on to recycling. Commodity prices were $162 per ton in the quarter. This compares to $230 per ton in the prior year. Recycling, processing, and commodity sales were a 130 basis point headwind to internal growth during the quarter. We are now forecasting fourth quarter commodity prices to be approximately $90 per ton. This would result in a full-year average commodity price of $165 per ton. Next, turning to our environmental solutions business. Third quarter environmental solutions revenue increased $343 million over the prior year, which primarily relates to the acquisition of U.S. Ecology. On a same-store basis, environmental solutions contributed 60 basis points to internal growth during the quarter. adjusted EBITDA margin for the environmental solutions business was 18.7%, a sequential increase of 160 basis points. This includes our existing operations in the Gulf and Northeast, together with the addition of U.S. Ecology. Total company adjusted EBITDA margin for the third quarter was 29.2%. This compares to 30.5% in the prior year. Margin performance during the quarter included a 150 basis point decrease from acquisitions, including 90 basis points related to U.S. ecology, and a 40 basis point headwind from lower commodity prices. These margin headwinds were partially offset by a 10 basis point increase from net fuel and underlying margin expansion of 50 basis points. Adjusted EBITDA margin in the recycling and solid waste business was 30.5%. SG&A expenses, excluding transaction costs from U.S. ecology, were 9.8% of revenue. This is a 30 basis point improvement over the prior year and reflects continued cost management as we grow the business. Year-to-date adjusted free cash flow was $1.67 billion, an increase of $309 million, or 23%, compared to the prior year. This was driven almost exclusively by EBITDA growth in the business. Similar to prior years, we expect to spend a disproportionate amount of our full-year CapEx and cash taxes during the fourth quarter. Year-to-date net capital expenditures of $808 million represents a little more than half of our projected full-year spend. And year-to-date adjusted cash taxes of $115 million represents 50% of our projected full-year spend. Total debt was $11.8 billion, and total liquidity was $1.9 billion. Variable interest rates on our debt increased 1% during the third quarter and an additional 50 basis points in October. As a reminder, a 1% increase in interest rates results in $36 million of additional annual interest expense. Our leverage ratio at the end of the quarter was approximately 3.2 times. We expect to revert to three times leverage by mid-2023. With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 25.1% during the third quarter and 24.8% on a year-to-date basis. We expect an equivalent tax impact in a range of 28% to 29% in the fourth quarter and an equivalent tax impact of just under 26% for the year. I will now turn the call back over to John. We are proud of the results we delivered during the third quarter, which exceeded our expectations. Stronger contribution from price more than offset persistent cost inflation, which we have seen stabilize but not retreat from elevated levels. That said, we remain comfortable with our full-year financial guidance we provided in July, even with a recent drop in recycled commodity prices and increase in interest rates. Looking forward to 2023, the fundamentals of our business remain strong. Recent decreases in recycled commodity prices, increased interest rates, and rising fuel costs will have a direct impact on our business. While these headwinds may modulate our performance expectations, we remain confident in our ability to price ahead of cost inflation. We still expect to deliver above-average levels of growth in revenue, EBITDA, and free cash flow. We plan to provide detailed 2023 guidance on our fourth quarter earnings call in February. With that, operator, I would like to open the call to questions.