Good afternoon, and welcome to the Republic Services' Third Quarter 2023 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. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations.

Thank you. I would like to welcome everyone to Republic Services' third quarter 2023 conference call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, for 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 actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive. If in the future, you listen to a rebroadcaster reporting in this conference call, you should be sensitive to the date of the original call, which is October 26th, 2023. 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 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'd like to turn the call over to Jon.

Thanks Aaron. Good afternoon everyone and thank you for joining us. Our strong third quarter results reflect our focus on profitably growing the business. We produced revenue growth both organically and through acquisitions, while generating healthy margin expansion across our business. During the quarter, we delivered revenue growth of 6%, including 2% from acquisitions, generated adjusted EBITDA growth of 9% and expanded EBITDA margin by 70 basis points, report adjusted earnings per share of $1.54 and produced $1.8 billion of adjusted free cash flow on a year-to-date basis. We continue to effectively allocate capital by investing in acquisitions to create long-term value. Year-to-date, we have invested $947 million in acquisitions. All transactions were in the recycling and waste space. The M&A environment remains active with opportunities in both the recycling and waste and Environmental Solutions businesses. We remain confident that we will exceed $1 billion of investment for the year. Year-to-date, we returned $671 million to shareholders through dividends and share repurchases. This includes $201 million of share repurchases completed during the third quarter as our leverage ratio returned to target levels. We continue to make progress, demonstrating the value of our complete set of products and offerings to customers while increasing the profitability of our Environmental Solutions business. Pricing realization in the Environmental Solutions business remains strong, and we continue to drive organic growth through cross-selling. EBITDA margin in the Environmental Solutions business improved sequentially to 22.7% in the third quarter and expanded 390 basis points over the prior year. The results we are delivering are made possible by executing our strategy in support of our differentiated capabilities. Regarding customer zeal, our efforts to deliver industry-leading service continues to drive sustained customer loyalty and organic growth in the business. Our customer retention rate remained over 94% and we continue…

Thanks Jon. Core price on total revenue was 7%. Core price on related revenue was 8.6% and which included open market pricing of 10.4% and restricted pricing of 5.7%. The components of core price on related revenue included small container of 12% and large container of 8.6% and residential of 8%. Average yield on total revenue was 5.8% and average yield on related revenue was 7.2%. We continue to price new and existing business ahead of cost inflation to drive margin expansion in the underlying business. Volume on total revenue and related revenue increased 10 basis points. The component of volume on related revenue included an increase in small container of 50 basis points and an increase in landfill of 3.5%. Landfill was primarily driven by an 8.2% increase in special waste revenue. Volume growth was partially offset by a decrease in large container of 1.7% and a decrease in landfill C&D volumes of 6.2%, primarily due to a slowdown in construction-related activity. Moving on to recycling. Commodity prices were $112 per ton during the quarter. This compares to $162 per ton in the prior year. Recycling processing and commodity sales decreased revenue by 20 basis points during the quarter. We continue to see a steady recovery in fiber markets and plastics pricing has improved from recent lows. Our current average commodity price is approximately $120 per ton. Next, turning to our Environmental Solutions business. Third quarter Environmental Solutions revenue increased $8 million over the prior year. On a same-store basis, Environmental Solutions contributed 40 basis points to internal growth during the quarter. Adjusted EBITDA margin for the Environmental Solutions business was 22.7% and an increase of 390 basis points compared to the prior year. Total company adjusted EBITDA margin expanded 70 basis points to 29.9%. Margin performance during the…

Yeah, let me do one more section, please. We are proud of the results we delivered during the third quarter. Healthy contribution from our pricing strategy more than offset recycled commodity headwinds and cost inflation, which continues to moderate. Looking forward to 2024, we expect continued outsized growth in the recycling and waste and Environmental Solutions businesses, supported by pricing ahead of underlying costs, cross-selling our complete set of products and services and capitalizing on value-creating acquisition opportunities. We also expect financial contribution from the investments made in sustainability innovation, including plastic circularity and renewable natural gas projects. The fundamentals of our business remain strong and supportive of continued growth in revenue, EBITDA and free cash flow along with margin expansion. We plan to provide detailed guidance on our earnings call in February. Now with that, operator, I would like to turn it over for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Thanks very much. Not looking for guidance in 2024, but just maybe, if you could just provide some initial thoughts on pricing, maybe on the separated into open market and restricted, how those should hold up? Thank you.

Yeah. We're not providing guidance today, obviously, on 2024, but we expect – the outlook is positive. So I think about high to mid- to high single-digit revenue growth, and we'll grow free cash flow and EBITDA margin faster than that, and that gets to your pricing question, we just -- pricing will come down nominally as inflation comes down, but we'll still be pricing ahead of our cost inflation, which should lead to that formula where we're going to grow the bottom line a little faster than the top line.

Great. And then just thinking about some of the expense drivers. We've heard from peers and from you as well in prior quarters that the equipment availability has been a little bit better, that retention has been improving. Is there any way to size some of those benefits? Just trying to think about those on a go-forward basis. Thanks.

We're certainly – we talked about cost inflation modulating in the second half, and we're certainly seeing that. So you can see that in some of the cost categories, labor, maintenance, certainly a bright spot. The supply chain there, maybe getting incrementally better, but still, we're not going to get all the trucks we want this year. But I think if you see the improvement in the maintenance, that really speaks to the underlying cost of parts inflation has certainly improved versus the first half. And we expect those costs to continue to modulate into next year as well.

Thanks very much.

The next question comes from Bryan Burgmeier with Citi. Please go ahead.

Good afternoon. Thanks for taking the question. Jon, Brian, apologies if I missed this, but when I look at the EBITDA and free cash flow bridge is provided in the press release, it seems like net income kind of steps up consistent with the tax rate changes we've talked about. But it maybe doesn't flow through to cash. Just wondering what I might be missing? Is it maybe a change to an adjusted number on how your cash taxes, is there changes to working capital? Any detail you could provide would be great.

Yes. Look, as you mentioned, we raised the full year EPS guidance predominantly due to the relatively lower tax rate. There is a cash component to that as well. That is somewhat offset by relatively higher interest rates than we normally thought, which is flowing through to cash interest, and that's why your adjusted free cash flow remains relatively consistent with what we previously provided.

Got it. Thanks for that detail And last question for me. I'm just wondering if you can maybe try to characterize the M&A market within Environmental Solutions. You've obviously been very busy with acquisitions, but we haven't seen any deals and yes yet. I'm just wondering if M&A is a little bit slower than you developed or if everything is moving along and maybe it just comes down to timing? Thanks gentlemen.

Yes, it really comes down to timing. The pipeline is strong, lots of opportunities, lots of conversations. And we remain incredibly disciplined in terms of our financial strategic lens and our financial lens on that, but we feel certainly optimistic through the remainder of the year and into the first half of next year that there's a number of attractive opportunities in that space.

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

Hey, good afternoon, guys.

Hey, Tyler.

So Brian, I think restricted pricing actually accelerated again to 5 7 here in Q3. Do you think that this is going to prove the high watermark, or do you think we get maybe one more quarter of acceleration? And then we kind of hit that second derivative?

I think we're near it, quite honestly, Tyler here. Again, we talked about the relationship between CPI-based pricing starting to step down, but water sewer trash and garbage trash stepping up. And right now, I think they're somewhat offsetting each other. We think that to the question earlier about as you look forward, we do think that the restricted base pricing does step down sequentially 2024 from 2023, but again, it still stays above that longer-term average.

Yes. Okay. That's helpful. And then -- so Jon, I think last quarter, there was some talk about kind of hitting a ceiling in certain places in ES with some of the pricing actions. It said that you were -- you kind of said that you were moving forward on that front. But just curious if you can give us an update there. Is pricing good in ES? Are you starting to see some churn. And just are you seeing any impacts from the economy in that business specifically?

Yes. No, pricing remains strong. We certainly remain committed on that. There's sort of that's a customer churn on that portfolio. Some of that's permanent work, some of that is event work, and we're trading off some low-margin work, and we're adding to that very attractive cross-sell work. And so lots of really attractive growth opportunities in that space, but we're never going to do work for free, and we're always going to start out with price on that. So in the macro environment in manufacturing and ES broadly is a bit mixed. So the upstream oil and gas has been slower. Hopefully, a couple of big deals announced here that, that will ignite some increased activity there in Q4 and into next year. Automotive, obviously, has been a little bit challenged here with the labor activity. But then other parts of the petrochemical complex have been very, very strong. And overall, we're happy with the results and still feel very positive going into 2024 in terms of the demand environment.

Yes. Okay. And just my last one here, a couple of housekeeping items. But based on what we know today, what is the expected M&A rollover benefit next year? And then based on what we know today with the RNG and the polymers, what is the incremental benefit to 2024 EBITDA from those?

Yes. So first on the rollover, based on transactions that have closed to date, that'd be about 50 basis points of rollover into 2024. And then just on polymer centers and the renewable natural gas, you can think of polymer centers kind of the $12 million or so incremental contribution next year from an EBITDA perspective. and things circa $15 million to $20 million on the RNG portfolio. That EBITDA.

Got it. Thank you.

The next question comes from Noah Kaye with Oppenheimer. Please go ahead.

Hey, thanks for taking the questions. So if the prints are right, then the economy grew 4.9% real GDP annualized for the third quarter, and it's really the consumer leading that. Can you talk about your view of the broader macro right now? And specifically, and I know you're not guiding for 2024, what kind of a volume environment we are in, on an underlying basis? Are we still in a positive volume growth environment from your view?

Yes. Listen, there's tons of uncertainty in the economy. You can look back 18 months. And then even if you look forward, do you think about 2 wars going on and lots of different dynamics, election coming up next year. The underlying -- but I think we're closer to a soft landing than we certainly were a quarter ago. if you look at the outlook, and we're planning on a positive year next year, and you heard that in our numbers and forecasts with a lot of humility baked into that in terms of things could change as uncertainty and we'll adjust according to that. . The recycling and solid waste business, the underlying volume growth in that business is kind of 50 to 100 bps. We're on the lower end of that with where construction is at. That's certainly been a soft spot. And we saw that with residential and commercial starts even last year and then earlier into this year is -- slowing down. And we're hoping that starts to anniversary and rebound. -- here. So I'd say positive environment. We're not firing on every cylinder, but we're cautiously optimistic that we're going to grow out of this thing coming into next year.

Very helpful. Given the progress that you and the industry have made in reducing some of the volatility around recycling commodities and the impact of the business. Just Curious to know how to think about whether as it relates to the polymer center or any of the vertical integration efforts you have, what the level of exposure is to commodities in that business? . In other words, is this largely a processing and fee-based model for you? And is there any increased sensitivity to be expected from that?

No. The model is constructed. We're really making money on the spread and so that's one thing that we -- when we did this investment, we were very sensitive to that we're not adding to the volatility of the overall profile. So could there be spots on the margin, of course. But in general, this isn't something where we're increasing our exposure.

Yes, because you have that underlying commodity risk, as you get the value of the upside tackling you capture that spread, you have the same amount of volatility in dollars with incremental revenue. So as a percentage of volatility actually goes down.

Right, right. So it's really an infrastructure and spread play. Okay. That's really helpful. I'll turn it over.

The next question comes from Michael Hoffman with Stifel. Please go ahead.

Thank you very much. On the ES side, US Ecology used to have a decent exposure to the auto industry given its Michigan density. So how are we sort of weathering what's going on with the strikes and that business?

Reasonably well. There's been some slowdown in activity in certain spots. But as you can kind of read from the headlines, right? It's been walkouts on certain facilities to the point where if it was a mass shutdown, right, we'd have a much deeper impact because it would be all the automotive plants that we serve directly, but then it goes straight into the Tier 1, Tier 2 and even Tier 3 supply base. It's been such a case, I mean, we're a very, very small portion of the overall cost structure. So you're not seeing people going to get down to canceling service or even reducing service intervals outside of a few facilities that have been directly impacted.

And then, dwell on the RNG accounting since you're doing mostly partnerships. Is this going to be an add back into the EBITDA, or how are you going to account for this as we see printed financial statements?

Yeah. As we do the reconciliation, Michael, moving from net income to the definition of EBITDA, we will include our pickup in those joint ventures. Remember that, this first round of facilities that are coming online, most of those are going to be predominantly royalty, so you're not going to see a lot of that in 2024. That will start being 2025 and beyond, that you'll really start to see the accounting that includes the pickup in those JVs.

Okay. Great. That's what I needed. And just one last, you had a great margin expansion and yet you're reaffirming the guidance. It seems like you're then expecting a lot more seasonality in 4Q given the strength of the margins or we're at least at the very top end of the range. That's sort of where I - ?

I'd say, we have a positive outlook. Yeah, we're already in Q4, obviously, and we've got a positive outlook for that. But given that there is some seasonality of the business, where you do get some weather to start to impact the business this time of year, given there are some moving pieces in the broader economy, we thought it would be prudent to reaffirm and we'll give you the results here in February, how we finish.

But to that point, Michael, if you remember, even when we began the year, said the cadence of margin expansion was going to actually start negative, which we saw in the first quarter. And sequentially, year-over-year margin expansion was going to improve every quarter throughout the year, and we still expect that. So we still expect to see the most amount of margin expansion in the fourth quarter, ultimately driving margin expansion for the full year.

But margins might be down sequentially just because of seasonality.

That is correct.

Okay. That's what I want to clarify. All right. Thanks.

The next question comes from David Manthey with Baird. Please go ahead.

Hi. Good afternoon. Thank you. So acquisitions were 1.7% in the third quarter. You said 50 basis points for 2024. It looks like maybe couple of hundred million rolled off third quarter to fourth quarter last year. So we're looking at, what, maybe 150 basis points in the fourth quarter this year?

Yeah. Remember, when we talked about most of the rollover that we had for full year 2023 was the portion of US Ecology that we completed May of 2022 right? Coming in, which was a majority of the rollover for the full year. As we think about the actual impact within the fourth quarter, we're looking about 180 basis points.

Okay. All right. Thank you for that. And second, on the RNG development. I think around now is when these facilities were scheduled to come online and maybe you could just remind me the financial targets and how those 39 RNG facilities with the BP joint venture are expected to ramp from here?

Yes. So let me just talk about the entire portfolio rather than just the subset, right? So again, five have already come online here that are going to start contributing here nominally in the fourth quarter, but really start to contribute in 2024. You can kind of think about the cadence in the $20 million to $25 million per year of incremental EBITDA beginning in 2024 and ultimately hitting run rate $28 million at which point we expect $100 million cumulative of additional EBITDA in the portfolio compared to our current baseline. .

Got it. Okay. Thank you.

The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi. Good afternoon. I'm wondering if we could just talk about the margin opportunity over the course of 2024, Brian, as you pointed out, margin momentum on a seasonally adjusted basis is accelerating this year. So you're already on track to expand margins by, call it, a full 30, 40 basis points just on a run rate 3Q versus the full year average. And so as we think about the moving pieces in 2024, I guess it's not hard to get to double your normal margin expansion targets, especially given the moves in -- potential moves in OCC. And I'm wondering, anything that we need to keep in mind as we look at those moving pieces and the cadence of margins that you pointed out in an answer to an earlier question?

Yeah. So Jerry, the one thing I would point out is just remember from the point in time in which we acquired US Ecology and we took several pricing actions, right? And as we sit there and move forward, we're going to get more in the cadence of more of an annual price increase on that portion of the business. So while we still expect margin expansion in the Environmental Solutions business and at a rate north or higher than what we expect in recycling and waste. We would expect that margin expansion to decelerate from what you saw in 2023. So you can look in -- just in the quarter alone, margin was up almost 400 basis points year-over-year. We would not expect that level of contribution going forward.

Got it. But the base business, the momentum, it sounds like is accelerating, excluding ES.

Yeah, correct. I mean if you take a look just right now, we're kind of in the 30 basis points. We talked long term in that 30 to 50, and you start to get some of the contribution from some of the other sustainability investments that we're making. So it's a little bit of push and pull and net-net, we would expect margin expansion in 2024 over 2023.

Okay. Super. And can we talk about capital deployment with the buyback announcement. Can you just update us on how much more runway do you think you have to deploy more capital towards polymers, opportunities to redevelop gas electric plants into gas plants and stock buyback from there? Can you just calibrate us on how to think about the opportunities in each of those areas?

Sure. Just to give you an idea, if we've talked about, right, several investments, you've got the RNG portfolio, you've got polymer center and you have Blue Polymers, some of which is going to come through capital, some of which is going to be the investment in the JVs just to kind of think it from a cumulative perspective here, maybe I'll walk through each from polymer centers, we see a total investment of around $300 million, okay, for the four centers. right? And that's going to happen, right? It's happened, and we think that's over a four-year time frame of about $70 million a year. Blue Polymers, you can think of that being about $160 million investment. And again, those are going to be JVs. So that will come through as an investment in those joint ventures. And then the investment in the RNG portfolio is all around $375 million, okay? So those are the cumulative investments, but we've been making those investments. So those are somewhat in our run rate. Now -- and we talked about that after the US Ecology acquisition, where leverage elevates to 3.4 times, we were going to focus on deleveraging, getting back to that three times before we resume the share repurchase, got back to 2.9 times. We have since resumed, right, that share repurchase program. And as you just saw in the announcement, right, the Board just authorized another $3 billion program that extends over the next three years beginning in 2024 through the end of 2026.

Super. Thanks.

You bet.

The next question comes from Stephanie Moore with Jefferies. Please go ahead.

Hi. Good afternoon. Thank you.

Good afternoon.

Hey, guys. I appreciate the color so far in kind of 2024 outlook and just now on kind of the margin opportunity, too. But, maybe could you talk a little bit about your views on inflation in 2024? Not necessarily hard numbers, but kind of buckets of areas where you think some inflationary pressures maybe could linger from 2023, or -- on the other side of that, should abate versus 2023. Just trying to think of those puts and takes would be helpful. Thank you.

Yes. I think for most categories, kind of thinking about macro metric like CPPI kind of puts you in the right zone. Maintenance will be elevated off of that, just historically, it's inflated a little faster than that. And we don't expect the supply chain to be fully caught up or reconcile in 2024, which means we're going to be driving some older equipment, and that's going to be at the end of the curve where maintenance cost is higher than it normally would be. So that would be the one, I think, is going to be elevated. Everything else kind of think about that, where you see inflation going? And if that's 4%, 4.5%, whatever that plans, that's kind of where we'll build a budget against that.

Okay. That's helpful. I appreciate it. And then I just wanted to follow up a little bit on the commodity basket exposure. Can you talk a little bit about how that basket is trending today? Maybe how that compares to 4Q of last year? I know there's some puts and takes to the various components. So that would be helpful. Thanks.

Yes, sure. So as we said, our average commodity price for the third quarter was $112 per ton. Right now, we're expecting about $10 in the fourth quarter. That compared in the prior year for the fourth quarter, we were at $88 per ton. So we're expecting a year-over-year increase of about $30 a ton in the fourth quarter.

Guy, I'll leave it at that. Thank you.

The next question comes from Tobey Sommer with Truist. Please go ahead.

Thanks. To kind of follow-up on a recent question, but ask it from a different angle. If you think about some of the pressures on margins smaller players that might be potential acquisition targets. How do you anticipate trends in a few buckets impacting their financial performance and maybe desire to sell? And I kind of -- I'm thinking of inflation in terms of their costs, the ongoing requirement and necessity to invest in technology. And then as you just mentioned, I think fleet and supply chain won't fully be normalized. But if you apply those things to sort of the other side of the equation, not your own business, but those that you may look to incorporate in your business, what do you see?

Yes. The pipeline for acquisitions is strong, both in recycling and Waste and Environmental Solutions. This is the cost pressure, which is started to abate for the smaller players is on the labor side. So they're starting to get less pressure there as we've seen turnover come down and labor availability go up. It's still elevated versus historical norm, but it's gotten easier relative to a year ago. The supply chain hasn't and that's certainly becoming constrained. And anybody who was a spot buyer of vehicles is really in a challenged spot certainly through the end of next year and probably in 2025 or 2026, depending on how they -- how fast the supply chain can recover because they're prioritizing all of their base customers who buy a large number and a similar number of trucks every year. So we certainly see that as an advantage. And then digital, I'd say, has just been a building trend over the last five-plus years that I think is going to be with us for at least the next five and probably a much longer period than that, which is that we're making over a series of years, between capital and OpEx hundreds of millions of dollars of investment to our digital footprint to make the experience better for our customers and employees, and that certainly has a scale advantage for us. and also a skill advantage of investing in the resources we want to take those technologies and apply them in a way that make our customers' lives and employees lives better.

And then just as my follow-up. I know it's been in the news, maybe even too much ad nauseam. But GLP-1s in the market, looking for second, third, fourth, all the way to nth derivative impacts. Have you looked at that in have any sort of preliminary view on what that could mean for volumes over what would probably be a very long-term? Thanks.

No. We've not done a lot of work on that yet, plenty in front of us right now, obviously, is that continues to be a major trend. We'll think about that. But I'd say we're in the tertiary or beyond in terms of the impact of those.

I appreciate the response. Thank you.

The next question comes from Kevin Chiang with CIBC. Please go ahead.

Hi, Thanks for taking my question. Just in regards to the M&A pipeline within Environmental Services, I think up here in Canada, there's been the Competition Bureau is trying to prevent the merger to I guess, I'll call them energy waste service companies here. So it looks like there'll be some assets. Just wondering how the pipeline looks up here in Canada. And -- and is energy waste services in an area of growth for you or accelerated growth for you when you look at your opportunities in Canada?

Yes. We're certainly looking at opportunities in both U.S. and Canada. That probably isn't at the top of the list. We'd be more opportunistic in that side of environmental services.

Okay. And just I get the pricing, I guess, it sounds like the pricing opportunities that you're going to move from something that you're doing it three, four times a year within environmental services to once a year, which is maybe more regular as inflation starts to or continues to subside here. But just given the pricing opportunities that you've talked about and the ability to get pricing more aligned with how you think about pricing within solid waste, just why not push that lever more if you can, or did you feel the customers were starting to push back on maybe the frequency in which you are coming to them with price increases within ES?

Yeah. No. I mean, yes, it's a big and diverse space. So there's been places where we've pushed past the price line we would have wanted to. We've lost some volume, which I congratulate the team, obviously. You don't understand the sealing on price until you take it there. And listen, in certain parts of the business, we'll get into more of an annual increase for our bigger customers that's contracted, for example. In other parts of the business, particularly the more field facing field services, those are things where it's really dynamic pricing, because every opportunity event job, you've got a lot more flexibility there. And we'll certainly test the market and see what the market bears in terms of opportunity. I'd say underneath that, too, there's a big mix opportunity, which is just looking at the types of jobs we do, looking at the customer mix and making sure we're prioritizing our sales team around the most attractive customers and then conversely deprioritizing around customers who aren't willing to pay what we think is a very fair value for what we deliver.

That makes a ton of sense. Thanks for taking my question, and best of luck as you get through this year.

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

Thank you, Betsy. I would like to thank our more than 40,000 employees for their continued commitment to providing our customers with first-class service to create a more sustainable world. Have a good evening and be safe.

Ladies and gentlemen, this concludes the conference call. Thank you for attending, you may now disconnect.