Republic Services, Inc. (NYSE:RSG) Q4 2023 Earnings Call Transcript
Republic Services, Inc. (NYSE:RSG) Q4 2023 Earnings Call Transcript February 27, 2024
Republic Services, Inc. beats earnings expectations. Reported EPS is $1.41, expectations were $1.28. Republic Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Republic Services Fourth Quarter and Full Year 2023 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Aaron Evans, VP, Investor Relations. Please go ahead.
Aaron Evans: I would like to welcome everyone to Republic Services fourth quarter and full year 2023 conference call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are on the call today to 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 rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 27, 2024.
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 the 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.
Jon Vander Ark: Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. The Republic team finished the year strong by executing our strategy designed to profitably grow the business. We outpaced expectations throughout the year and deliver results that exceeded our full year guidance. During 2023, we achieved revenue growth of 11%, including 5% from acquisitions; generated adjusted EBITDA growth of 13%, expanded adjusted EBITDA margin by 60 basis points, including margin expansion in the underlying business of 100 basis points; reported adjusted earnings per share of $5.61; and produced $1.99 billion of adjusted free cash flow. We continue to believe that investing in value-creating acquisitions to further expand our business is the best use of our free cash flow.
We invested $1.8 billion in acquisitions in 2023, including transactions in both the recycling and waste and Environmental Solutions businesses. As part of our balanced approach to capital allocation, we returned $900 million to shareholders through dividends and share repurchases. The results we are generating are made possible by executing our strategy, supported by our differentiated capabilities. Regarding customer zeal. Our efforts to provide industry-leading service continues to drive sustained customer loyalty and organic growth in the business. Our customer retention rate remained high at over 94% and we continue to see favorable trends in our Net Promoter Score due to the value of our offerings and quality of our service delivery. We delivered outsized organic revenue growth during the fourth quarter with simultaneous increases in price and volume.
Core price and related revenue was 8.8% and average yield on related revenue was 7.7%. Organic volume growth on related revenue was 40 basis points. Turning to our digital capabilities. The team continued to advance the implementation of digital tools that improve the experience for both customers and employees. Development of our new asset management system is underway, which is expected to increase maintenance technician productivity and enhanced warranty recovery. We expect to begin utilizing the new system in late 2024. The continued operational enhancements supported by our RISE digital operations platform are expected to drive additional productivity through improved route optimization and safety performance and provide more predictable service delivery to our customers.
We anticipate the RISE platform will drive approximately $100 million of total annual earnings contribution, of which approximately $65 million has been realized to date. We continue to implement advanced technology on recycling and waste collection routes. Our platform utilizes cameras to identify overfill containers and contamination and recycling containers. This technology is reducing contamination and driving incremental revenue. Moving on to sustainability. We believe that our sustainability innovation investments in plastic circularity and renewable natural gas are a platform for profitable growth. Development of our polymer centers and Blue Polymers joint venture facilities remain on track. We are finalizing commissioning at our Las Vegas Polymer Center this week.
Delivery of plastic flake to our offtake partners is expected in the coming weeks. Construction is progressing on our Indianapolis Power Center. This development will be co-located with Blue Polymers production facility and construction at the site is expected to be completed in late 2024. The renewable gas projects being co-developed with our partners continue to advance. Five projects came online in 2023, and we expect at least eight additional projects to be completed in 2024. We continue to advance our efforts to support decarbonization, including our industry-leading commitment to fleet electrification. We currently have 11 electric collection vehicles in operation. We expect more than 50 additional EVs will be added to our recycling and waste collection fleet in 2024.
We have six facilities with commercial EV charging infrastructure, with more than 40 additional sites in various stages of development. As part of our approach to sustainability, we continue to strive to be a workplace with the best people from all background who want to work. In 2023, employee engagement improved a score of 86 with 90% -- 99% of employees participating in the survey. Turnover rates continue to turn lower with full year turnover improving 400 basis points compared to the prior year. As a result, we are better staffed to optimize our operations and capitalize on growth opportunities in the market Our comprehensive sustainability performance continues to be widely recognized as Republic Services was named to the Dow Jones Sustainability Index for the eighth consecutive year.
Our 2023 results clearly demonstrate our ability to create sustainable value and our ongoing investments to strengthen the foundation from which we will continue to grow our business. With respect to 2024, we expect to deliver outsized profitable growth while continuing to make investments in the business to drive lasting value creation. More specifically, we expect full year revenue in a range of $16.1 billion to $16.2 billion. Adjusted EBITDA is expected to be in a range of $4.825 billion to $4.875 billion. We expect to deliver adjusted earnings per share in the range of $5.94 to $6, generate adjusted free cash flow in a range of $2.1 billion to $2.15 billion. Our pipeline supports continued acquisition activity in both recycling and waste and environmental solutions.
We are targeting at least $500 million of investment in value-creating acquisitions in 2024. Our 2024 financial guidance includes the rollover contribution from acquisitions that closed in 2023. I will now turn the call over to Brian, who will provide details on the quarter and year.
Brian DelGhiaccio: Thanks, Jon. Core price on total revenue was 7.2% in the fourth quarter. Core price on related revenue was 8.8%, which included open market pricing of 10.6% and restricted pricing of 6%. The components of core price on related revenue included small container of 12.3%, large container of 8.6% and residential of 8.2%. Average yield on total revenue was 6.3% and average yield on related revenue was 7.7%. In 2024, we expect average yield on total revenue in a range of 5.5% to 6%. We expect average yield on related revenue in a range of 6.5% to 7%. Yield is expected to step down sequentially during 2024 due to relatively lower index-based pricing and certain fees implemented throughout 2023, which begin to anniversary.
Fourth quarter volume on total revenue increased 30 basis points and volume on related revenue increased 40 basis points. The components of volume on related revenue included an increase in small container of 20 basis points and an increase in landfill of 7.4%. Landfill was primarily driven by a 12.7% increase in special waste revenue. Volume growth was partially offset by a decrease in large container of 1.4% and a decrease in landfill C&D volume of 2.1%, primarily due to a slowdown in construction-related activity. In 2024, we expect organic volume growth in a range of flat to positive 50 basis points. Moving on to recycling. Commodity prices were $131 per ton during the fourth quarter. This compared to $88 per ton in the prior year. Recycling processing and commodity sales increased revenue by 50 basis points during the quarter.
2023 full year commodity prices were $117 per ton. This compared to $170 per ton in the prior year. Current commodity prices are approximately $135 per ton, which is the baseline used in our 2024 guidance. Now turning to our Environmental Solutions business. Fourth quarter Environmental Solutions revenue was flat compared to the prior year. Adjusted EBITDA margin for the Environmental Solutions business was 19.7%, an increase of 250 basis points compared to the prior year. Fourth quarter total company adjusted EBITDA margin expanded 260 basis points to 29.9%, which was driven by margin expansion in the underlying business of 230 basis points. Other changes in margin performance during the quarter included a 30 basis point increase from recycled commodity prices and a 20 basis point increase from net fuel, which was partially offset by a 20 basis point decrease from acquisitions.
Our full year adjusted EBITDA margin was 29.7%, which represents margin expansion of 60 basis points, compared to the prior year. In 2024, we expect total company adjusted EBITDA margin to be approximately 30%. We expect to more than overcome a 30 basis point headwind from acquisitions. Depreciation, amortization and accretion, was 10.7% of revenue in 2023 and is expected to be approximately 11% of revenue in 2024. Full year 2023 adjusted free cash flow was $1.99 billion, an increase of 14%, compared to the prior year. This was driven by EBITDA growth in the business and the positive contribution from changes in working capital. Total debt at the end of the year was $13 billion and total liquidity was $2.7 billion. Our leverage ratio at the end of the year was 2.9 times.
We expect net interest expense of approximately $545 million in 2024. With respect to taxes, our combined tax rate and impact from equity investments in renewable energy resulted in an equivalent tax impact of 25.1% during the fourth quarter and 24.8% for the full year. We expect an equivalent tax impact of approximately 26% in 2024, made-up of an adjusted tax rate of 20% and approximately $190 million of non-cash charges from equity investments in renewable energy. The expected increase in interest expense and taxes would result in a $0.20 EPS headwind in 2024. With that, operator, I would like to open the call to questions.
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