Key Takeaways from Republic's Q4 2015 Earnings

Core price in the fourth quarter was 3.4 percent and average yield was 2.2 percent. Average yield exceeded two percent in every quarter in 2015 for the firm. Volumes increased 90 basis points. This is the 11^th consecutive quarter that Republic experienced both price and volume growth.

Charles Serianni, senior vice president and chief accounting officer, detailed that the company’s $61 million year-over-year revenue growth for the quarter. Overall, the company posted $2.3 billion in revenue in the quarter and $9.12 billion in revenue for the year. The 2.7 percent growth included internal growth of 90 basis points and acquisitions of 1.8 percent. “Average yield in the collection business was 2.7 percent, which includes 3.1 percent yield in the small container commercial business, 3.8 percent yield in the large container industrial business and 1.5 percent yield in the residential business,” Serianni said. “Average yield in the post-collection business was 70 basis points, which includes landfill MSW of 1.5 percent. Core price, which measures price increases net of roll backs, was 3.4 percent; core price consisted of 4.4 percent in the open market and 1.7 percent in the restricted portion of our business.”

In terms of volumes, its collection business increased 90 basis points, which includes large container industrial growth of 2.8 percent and residential growth of 40 basis points. Small container commercial business volume was flat. Post-collection business made up of third-party landfill in transfer station volumes increased 1.8 percent and landfill increased 2.1 percent. The landfill growth included positive MSW volumes of 5.5 percent, C&D of 8.2 percent and a decline in special waste volumes of 2.1 percent.

On the recycling front, Republic reported commodity revenue decreased by 50 basis points, stemming from a decrease in recycled commodity prices. “Excluding glass and organics average commodity prices decreased 14 percent to an average price of $108 per ton in the fourth quarter from a $126 per ton in the prior year,” Serianni said.

Fourth quarter adjusted EBITDA margin was 27.2 percent and full year margin was 28.1 percent. The margin improvement of 10 basis points reflected an expansion in Republic’s solid waste business primarily from lower fuel costs and pricing in excess of cost inflation, partially offset by lower recycling commodity prices and the impact of recent acquisitions.

Republic invested $193 million in tuck-in acquisitions in 2015, nearly twice its goal. The transactions completed represent annual revenue contribution of $143 million and a post-synergy EBITDA multiple of 4.3 times.

The company now has over 500 contracts with $250 million in annual revenue that use a waste-related index for price adjustment. “These waste indices are closely aligned with our cost structure and have consistently run higher than CPI,” Slager said.

Overall, 1.2 million customers have enrolled in Republic’s “MyResource” mobile app. It also launched “click to buy” opportunities in about 50 percent of its residential subscription markets.

In all 16 percent of Republic’s total fleet now operates on natural gas. In addition, 72 percent of the fleet is automated and 78 percent has been certified in its “one fleet” maintenance program—up from 60 percent in 2014.

Republic reported adjusted free cash flow was $813 million.

Republic returned $808 million to shareholders through dividends and share repurchase programs. Overall, Republic delivered total returns to shareholders of 12.4 percent. That included stock appreciation of 9.3 percent and dividends of 3.1 percent. Republic also declared a regular quarterly dividend of $0.30 per share.

For 2016, Republic expects adjusted free cash flow to be $820 million to $840 million. It expects adjusted diluted earnings per share to be in the range of $2.13 to $2.17 and an increase in revenue of 2.5 to 3.0 percent. It also anticipates receiving $900 million of property and equipment, net of proceeds from sales of property and equipment and its EBITDA margin to expand by 40 basis points to approximately 28.5 percent. It will also be on the lookout for acquisitions and expects to invest approximately $100 million in tuck-in acquisitions.

In response to the earnings, Stifel’s Michael E. Hoffman maintained a “buy” rating on Republic. Hoffman wrote in a research note, “We maintain our BUY rating and raise our target price on Republic Services to $51. RSG's solid waste fundamentals finished FY15 well and FY16 appears set up for more of the same. RSG raised guidance for AEBITDA margins and FCF on improving solid waste fundamentals. The headline CPI reset is a 30bps to 40bps margin headwind. We assumed RSG through its productivity initiatives could offset this pressure and report flat AEBITDA margins in FY16. RSG now expects to expand margins 40bps to 28.5% despite the CPI pressure.”