Good afternoon, and welcome to the Republic Services Second Quarter 2019 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. Please note this event is being recorded. I would now like to turn the conference over to Nicole Giordano, Senior Vice President of Investor Relations and Treasurer.
Thank you, Alison. I would like to welcome everyone to Republic Services' Q2 2019 conference call. Don Slager, our CEO John Vander Ark, our President and Chuck Sirianni, 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 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 rerecording of this conference call, you should be sensitive to the date of the original call, which is July 25, 2019. 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 expressed 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 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 Don.
Thanks, Nicole. Good afternoon, everyone, and thank you for joining us. We are extremely pleased with our 2nd quarter results, which clearly demonstrate the underlying strength of our business. During the quarter, we successfully priced in excess of our cost inflation, achieved EBITDA margin expansion of 50 basis points and increased earnings per share by 8%. We expect the strong momentum in the first half of the year to continue.
As a result, we are reaffirming our original full year EPS and free cash flow guidance provided in February despite continued declines in recycled commodity prices. During the Q2, commodity markets continued to be challenged. We overcame these headwinds by focusing our efforts on things we can't control. In particular, transitioning to a more durable, economically sustainable recycling business model. As you'll hear from John, we are making good progress in seeing results.
For example, the revenue and EBITDA impact of lower recycled commodity prices in the Q2 was $8,000,000 Because of the team's relentless efforts, we overcame this headwind and increased recycling revenue 6% versus the prior year. In the Q2, we invested $129,000,000 in acquisitions to further enhance our leading market position and drive growth in free cash flow. Our current deal pipeline continues to be strong. As a result, we now expect to invest approximately $550,000,000 in acquisitions this year. We estimate these acquisitions, net of divestitures, will provide 125 basis points to 100 and 50 basis points of top line revenue growth in 2019.
During the quarter, we also continued our balanced approach of returning cash to shareholders. We returned $213,000,000 through dividends and share repurchases. Additionally, our Board approved an 8% increase in the quarterly dividend, in line with our 10 year dividend CAGR. The consistent growth in the dividend demonstrates the stability and predictability of our cash flow as well as our confidence in the future cash flow generation capabilities of our business. Through the consistent execution of our profitable growth through differentiation strategy, we have created a solid foundation for our business.
We are leveraging this foundation to deliver results and increase long term shareholder value. Our second quarter results clearly demonstrate this. Next, turning to our people. In recent years, our efforts to create an environment that attracts and retains the best talent have been recognized by reputable third parties such as Barron's, Ethisphere and Glassdoor. Most recently Republic Services was named to Forbes list of best employers for women.
I would like to thank our team for their relentless efforts to create a more inclusive culture and an environment in which all individuals feel welcomed and valued. Finally, we believe as we grow the business, so does our potential to drive change and positively impact the environment and society overall. We know we can do more and are raising the bar through our latest long term sustainability goals, which we announced last week. Through the pursuit of achievement and achievement of these goals, we will further enhance the foundation of our business and continue to create long term value for our employees, our customers, communities and shareholders. I'll now turn the call over to John to discuss our Q2 operating performance.
John?
Thanks, Don. The pricing environment in the 2nd quarter remains strong. Total core price was 4.6% and average yield was 2.8%. Core price included open market pricing of 5.5% and restricted pricing of 3.1%. Our pricing continues to benefit from the use of our tablet based pricing tool.
Through this tool we are monitoring price elasticity and adjusting accordingly. Additionally, we are benefiting from the advancement of several other strategic initiatives. 1st, we continue to successfully convert customers from CPI based pricing to a waste related index or a fixed rate increase of 3% or greater. These waste indices are more closely aligned with our cost structure and continue to run higher than CPI. We have now converted $715,000,000 or 29% of our $2,500,000,000 CPI based book of business.
Next, we regularly reassess our contracts. We are ensuring they reflect the true cost of recycling and include a more equitable risk sharing arrangement. We've now secured price increases from approximately 29% of our municipal recycling customers, up from 21% in the Q1. And finally, we're increasing our customers' willingness to pay by providing superior service and leveraging technology to make it easier for them to do business with us. Turning to volume, total volume in the second quarter increased 10 basis points versus the prior year.
Underlying volume growth was 80 basis points after normalizing the impact of intentionally shedding certain volumes. This included work performed on behalf of brokers and non regrettable contract losses in our residential collection business. During the quarter recycled commodity prices continued to decline. Our average price per ton decreased 14% to $78 versus $91 in the prior year. This resulted in an approximately $8,000,000 or $0.02 headwind versus the prior year.
We offset the impact of lower commodity prices through additional pricing and increased recycling revenue in the Q2 by 6% versus the prior year. Our ability to increase revenue and overcome these headwinds demonstrates that we are transforming the recycling business into a more durable, economically sustainable business model. In our recycling processing business, we have now secured price increases on approximately 55% of our contracted volumes, up from 34% in the Q1. In our collections business, as I mentioned earlier, we continue to proactively secure price increases and renegotiate our municipal contracts. Additionally, in the collection open market, our recycling processing charge is enabling us to recover our processing costs and minimize volatility from changes in recycled commodity prices.
This charge contributed
an additional 40 basis points of pricing not reflected in average yield. If included, average yield would have been 3.2%. These results demonstrate that our customers do value recycling and are willing to pay for the service. Finally, our adjusted EBITDA margin in the 2nd quarter was 27.9% and expanded 50 basis points versus the prior year. Strong pricing and solid cost controls enable us to more than offset a 20 basis point headwind from lower recycled commodity prices.
We saw good operating leverage in both labor and maintenance again this quarter. Both of these costs as a percentage of revenue decreased versus the prior period. Labor expenses benefiting from our focus on process and routing efficiencies as well as our efforts to increase employee engagement. Turnover decreased versus the prior year for the Q2 in a row. Maintenance expense continues to benefit from our 1 fleet standardized maintenance program.
Today, approximately 90% of our work orders are scheduled. This enables us to take the reliability of our fleet to the next level and further improve our already high customer service delivery rate of 99.9%. By providing even better service to our customers, we can further enhance customer loyalty and increase willingness to pay. With that, I will now turn the call over to Chuck to discuss our Q2 financial results in greater detail.
Thanks, John. 2nd quarter revenue was approximately $2,600,000,000 an increase of $88,000,000 or 3.5 percent over the prior year. Revenue growth was primarily driven by strong pricing across our collection, disposal and recycling processing businesses. Our revenue growth came in at an incremental EBITDA margin of over 40%. SG and A expense as a percentage of total revenue was 10.1%.
For the full year, we continue to expect SG and A expense to be approximately 10.4% of revenue. During the quarter, we grew EBITDA dollars by 5% versus the prior year and expanded EBITDA margin by 50 basis points. For the full year, we continue to expect approximately 30 basis points of EBITDA margin expansion, in line with our original guidance. Year to date adjusted free cash flow was $621,000,000 and in line with our expectations. Cash flow generation in the first half of the year positions us well to achieve our original full year guidance.
At the end of the quarter, leverage was 3x and within our optimal range of 2.5x to 3x. Interest expense in the 2nd quarter was $99,000,000 and included $12,000,000 of non cash amortization. In the 2nd quarter, relative to our expectations, tax related expense was favorable by $0.01 Our adjusted effective tax rate was 24% and provided a $0.04 benefit. This was partially offset by a $0.03 tax related headwind from a non cash charge of $12,000,000 For the full year, we expect an effective tax rate of approximately 23%, 100 basis points lower than our original guidance, and a non cash charge of approximately $60,000,000 which is consistent with our original guidance. Finally, as Don mentioned, we are reaffirming our original full year financial guidance provided in February, which included EPS of $3.23 to 3.28 dollars to $1,175,000,000 We are assuming current economic conditions continue and recycled commodity prices remain at current levels of approximately $75 per ton for the remainder of the year.
Relative to our original guidance, the decline in recycled commodity prices has created a headwind of approximately $50,000,000 or $0.11 of earnings. We are offsetting these commodity headwinds primarily through strong pricing and solid cost management. At this time, operator, I would like to open the call to questions.
Thank you. We will now begin the question and answer session. Our first question today will come from Tyler Brown of Raymond James. Please go ahead.
Hey, good afternoon guys.
Hi Tyler.
Hey, nice quarter. But Chuck, so don't want to dwell on the guidance too much, but it seems like there's quite a bit of movement here. So like if we look at this from a high level and let's say we started at the midpoint of $3.26 you're going to reduce that by some recycling prices, you add back some from incremental M and A, maybe you take away some because you're doing less of a buyback because of that M and A. And then maybe you're getting a few pennies back on the tax rate. But basically is that are those the moving pieces?
And if I do all of that math, is there really any change in the core trends is really my question?
Yes. I think you've got the component pieces, Tyler. I mean, you talked about the commodities being a little bit more of a headwind than we had originally anticipated. We continue to do good work in terms of recycling processing charges and improvements there. Certainly, cost control has been a good story for us.
The other thing is pricing, and pricing is coming in a little bit stronger than we had originally guided to. And we believe right now that that's going to continue for the rest of the year.
Okay. And then on the M and A side though, it sounds like you're raising the expectations there. That's correct, right?
That's correct.
So that would be a positive and then maybe you're taking some of the capital from buybacks to the M and A, is that correct?
That's also correct. Okay. And as you know, Tyler, as we've said you before, especially when you're doing midyear type acquisitions, you spend a little bit of money to get things integrated. So there's not a ton of bottom line benefit in the 1st year, but great rollover benefit in the next year. But there will be some benefit.
And as we said in the comments, certainly going to drive some top line revenue growth from that as well.
Okay. And Don, so $550,000,000 if I go back in my notes, I mean, that must be one of the strongest M and A years that we've seen in a long time, maybe outside of the Trevita year. But what's really driving the strength there? Are these chunkier deals? Or are there just a lot of small tuck ins?
Well, it's both. There's a couple of chunky ones in there. Again, as we've always said to you that, 1, we're going to remain opportunistic, right? We're going to remain flexible with our balance sheet and keep our debt and leverage where it needs to be. We've got plenty of dry powder to do good deals at the right price.
When it comes down to buying good cash flow, good consistent reliable cash flow at the right multiple, we'll do that in exchange of buying in the shares. So that's always been our model, but we don't overpay. We don't overspend. If you take a look at what's happening under the hood with our ROI, we're driving that in the right direction. So you can see that these investments are paying off in the long run.
And they're all things that are well within our footprint and our ability and our team's core confidence. So it's all good stuff, and we're going to continue to do it. 550 will be an outsized year compared to the years past. I think we started this year at 200 and then boosted it to 3, 4, I guess, pretty quickly. So yes, 550 is a good number for us, and we'll talk more about what we think the pipeline looks like when we see you in October for next year.
Okay. And so
maybe my last one here. So Don, just a bigger picture question. So we saw the release around the 2,030 sustainability goals, really appreciate all that. I want to talk about 2 of the goals that were in there, that I surmise both have a sustainable and maybe a direct financial impact. So first, can you talk about some of the specific plans to cut the reportable injuries in half, just particularly given that it's kind of hung around these levels the last few years despite your side loader adoption?
And then secondly, your employment engagement scores, they
have been slipping just
a little bit, not a lot, but a little bit over the past couple of years. Can you talk about maybe why and then how you plan to get those
up, but those two pieces occurred.
Well, sure. First of all, I think, look, when you look at what's happening, just above and beyond just engagement, all the other sort of cultural impacts we're having, I think we're having and John mentioned in his commentary, a lower turnover now for the Q2, right, or 2 quarters in a row. So, it's continued focus. And I would tell you that having turnover that's flattish to down in this economy is a much bigger story than we probably mentioned on the call, right? So the combination of some of the fleet reliability stuff that John and the team have delivered on, the focus on safety, late leadership training.
We've invested in frontline leadership training. We have all of our frontline supervisors coming through this building. And some of them now come through for the 2nd time. But we're seeing really good trends develop underneath, and those trends have to continue. And again, these things this is sort of a long term aspirational goal, but we're very confident.
Let me have John add a few things.
Yes. So on the safety piece, I think technology is going to be a huge play for us. Cameras is the most immediate venture on that front. But then if
you think longer term and
you compare commercial vehicles to passenger cars, we are at the very early stages of a lot of technology that's already available in passenger cars and pushing very hard our vendors to build that into the equipment going forward and they all have that in their product roadmaps and things like active safety lane assist all those things will help us become safer. And then on engagement, we are rising our workforce are becoming digital natives and that will be an increasing percentage of our workforce. And as we put technology and we don't think about that singularly, we think about making our customers' lives better. We're also thinking about making our employees' lives better. And as we've done that, a lot of investments historically on the sales force, we've seen that with engagement scores with them.
They're more engaged. They're more connected. Their lives are easier and better. And we think we're going to see the same thing in the operating side of the business as we roll out more technology to that part of our workforce.
Okay, perfect. I know those are long term goals, but I appreciate color. Thank you.
You bet.
Our next question will come from Brian Maguire of Goldman Sachs. Please go ahead.
Hey, good afternoon, everyone, and congrats on the progress on transforming the recycling business. Just a couple of questions. On the landfill side, the volume growth was really strong there, up about 6%. Just wondering if there's any one time kind of special waste benefits in there, anything kind of unusual you would call out in that solid growth there?
Yes. I think landfill has
been very strong on both price and volume. So good sign of the economy and I think also a good sign of our leadership in that area where we continue to raise prices on landfills. We know that these are expensive assets, hard to operate and own And we want to think about the total life cycle of everything that we bring in and are pricing accordingly and also seeing the volume growth associated with that. So it's been a good story for us. There's nothing really there that's going to
it's a tough comp from last year or for next year. It's good solid across the board.
Okay. And then just sort of a little bit on the flip side, the collection volumes seemed like they and I understand you're shedding some broker businesses, some of this is not regrettable, but it seems like it slipped a little bit and continues to kind of underperform the industry a little bit. Just any comment you have on general trends there outside of the broker business?
Well, no, I would say there was one sizable loss, a customer loss in the quarter, a large national account with garbage that was just too heavy for the amount of price they wanted to pay, right? And so that does happen. We're going to continue to, again, have non regrettable losses. And so nothing unusual nothing's changed with, I think, the market and nothing's really changed with our strategy. It's just timing.
It's a little bit lumpy from time to time.
Okay. And then just on the input costs, the one that seemed like it ticked back up again was just some of the disposal costs and I know leachate has been kind of a problem for a lot of the industry. Just any color you can give on how those are trending into 3Q in the back half of the year? Should we expect sort of continued margin headwinds on leachate?
Yes. I think you're right on the landfill operating particularly leachate. Listen, we suffer from weather and we've had a couple of wet seasons and that doesn't come out of the landfill immediately, but it does over time. I think you'll see that trend, that cost, that trend move favorably going forward. But while we continue to maintain a pretty robust pricing environment.
Okay. I'll turn it over. Thanks.
The next question will come from Noah Kaye of Oppenheimer. Please go ahead.
Thank you for taking the questions. Actually, if I could just follow-up on the previous question. So you got about $10,000,000 it looks like in price realization on the landfill and I'm just applying the yield growth to the landfill business, and the leachate costs also went up about $10,000,000 So obviously, getting 1.7% yield is better than it had been in the past. But just in view of tightening disposal capacity and these cost pressures, could this be an area where maybe you can push price a little bit more and we can kind of see it tick up past the 2% range?
Well, let me take the high level
and John give you some background. But if you look at the results in the quarter and you look at our landfill pricing trends and you look at, to your point, the ultimate long term scarcity and difficulty of owning and certainly, certainly believe there's more room for pricing in landfill space. And then specifically, the cost of leachate, that's the kind of thing that it's a real cost that ultimately will pass back through to the market. And the market is willing to pay for it because, again, these landfills are ultimately still few and far between. John?
Yes. There's a natural lag, right? The costs hit us immediately and we can't price it immediately, where we price typically over a 30, 60, 90 day environment, sometimes a little bit longer depending on the contract. We are raising our environmental recovery fee because as we see costs increase, we are going to price ahead of that cost.
Okay. And roughly how much does that add in that recovery fee?
Well, that's going to be a future period thing that we talk about. So we'll stand by and we'll talk about how that's impacting us in October when we talk about Q3.
And the benefits to that are contemplated in the kind. Yes.
Yes. And I don't want to take away from what you did in this quarter. I mean, your price your total price was ahead of your total operating cost inflation, which is impressive. And I think if we just look at some of these cost items, you held your maintenance flat year over year. And so I guess the question is, is that really from one fleet?
Is this kind of level of holding the line on maintenance of some of these items sustainable? How should we think about that?
Well, think about some of the comments that John shared with you that scheduled maintenance is now 90%. That means unscheduled maintenance is 10%. So reactive maintenance now is, we only spend a certain or a very small amount of our time on reactive maintenance. So think about what that means to downtime, to driver satisfaction, to customer service, to safety and all the implications, not to mention just fleet cost, right? So that's been a long road for us to roll out one fleet, but we started on the other end of that, but we were 20% scheduled.
Now we're pretty over our goal of 80%. So that's now become a durable process in the company, right? So that's ongoing. You were saying some nice things about the price traction and the price consistency that we got. Don't overlook the fact that in the restricted market we got over 3% price.
So the team's been long working at turning around that restricted book of business which was kind of the bane of my existence for a couple of years, right? And now we've got that book performing at 3% price. So it just goes to show you the way this business works. It takes time to get these things up and running. They've got a long term benefit.
They do find their stride. And when we tell you we're going to do something, we're going to
do it. And we've got
a couple of great examples here that all those things are coming to fruition.
Excellent. Thanks very much.
The next question will come from Michael Feniger of Bank of America. Please go ahead.
Hey, guys. Thanks for taking my question. Just on I'm just curious on the second half. Can you just give us anything in terms of how we should be thinking Q3 versus Q4? I mean, you definitely got the operating leverage in the second quarter, but margin in the first half of last year are still flat.
So we're expecting more leverage, it seems like in the second half. Is there anything you could kind of help parse through how we should think about the Q3 versus the Q4?
I think that we are expecting margin improvement in both the 3rd and the 4th quarter, but most of that's going to come through in the 4th quarter. Keep in mind also that in the Q4 of last year, the margins were a little bit lower. They were 27.4%. So when we talk about that margin expansion for the second half of the year, like I said, a lot of that will come through Q4.
And Chuck, just on the $550,000,000 for acquisitions, how much is actually is baked into 2019? Clearly, you must have some line of sight to be able to put that number out. How much of that is actually going to be baked in, you think, to 2019?
In terms of the op income, you mean?
Yes.
Or in terms of the revenue. So it's going to have a very little impact in terms of the margins. Obviously, it's going to improve the dollars, but very little impact on the margins just because of the ramp up time, because of the time it takes to get the synergies out of those acquisitions. The true tailwind associated with those acquisitions will come in 2020.
Okay. And just lastly, I know this is splitting hairs, but like average yield last quarter was the highest in a decade. It ticked down a little bit. How do we think about that number in the back half? I mean, I know comps get a little tougher, but how do we think about that in the back half?
And why don't we include the processing fee? I think that was taking you above 3%. Is that just because that number is just a quarter, it's not sustainable? Why don't we actually include that processing fee and some of the actual recycling within that number? Thank you.
Yes. That processing fee actually fluctuates with the price of commodities. And so what we didn't want to do is introduce that volatility into our yield, right? In terms of the yield, it does tick up and down a little bit. There's a little bit of volatility associated with it.
But as we think of the back half of the year, we think it's going to be relatively consistent.
And so remember, in yield, there's always a little bit of a right? There's mixed geographically, there's mixed by line of business, by market vertical. That's always in the business. So we're always going to have that. But remember, you're always getting the benefit because we're in this pricing environment and we're in this pricing reset environment when it comes to pricing differently than CPI and also now repricing the book of business around recycling.
So you're going to have that running out ahead of you. In other words, we're going to have this rollover benefit as we reprice contracts now with better contract structure and terms that we negotiated last year this Q1 and Q2. So as we keep anniversarying new quarters, that's going to kind of start catching up. So you're going to have that benefit out in the future. And one more point on RPC, that's what's fair for customers, right?
It's good for us because we don't have this crazy volatility we have to talk about, but that's what's real and spare to customers and that helps us sell that to customers, but trying to still partner with them and doing what's right for the environment, something they can get their mind around.
Our next question will come from Jeff Silber of BMO Capital Markets. Please go ahead.
Thanks so much. Excuse me. In your prepared remarks, you pointed out that the incremental margins you got on the revenue growth, I think, were over 40%. You haven't seen those numbers in quite a while. I'm just curious how sustainable you think that is and where that might normalize over time?
Thanks.
President Trump and congressional leaders agreed this week to lift.
Okay. Well, I'm not sure what that was. But look, we told you for a long time that when the business is working sort of normally that we do bring in new business in and around that 40% margin. That's not new to us. Yes, it's been it hasn't been that high lately, but you've got a robust environment, right?
So pricing is strong. You've got consumer sentiment is good. Consumer spending is good. All these things point you in the right direction. You've got job growth, you've got wage growth, you've got all these things that help the pricing work.
You've got certain amount of volume growth that helps drive pricing up. So again, we've got the tools deployed. When you first introduced Captur, how many years ago was that, John? 5? Yes.
So we've got 5 years now of integrating that and making that sort of the way we do business. The adoption rates are about 100%, right? So all of those things working in a good environment and that's the result we get. So as long as we have that kind of a backdrop, that's what we'll have.
Okay, great. That's helpful. And I know when we kind of look at the broader economy, you mentioned the consumer is very strong, but you just we're not seeing those kind of numbers on the industrial side or the commercial side as much. I'm just curious from your exposure there, what are your customers telling you? Are you seeing the kind of weakness that we're seeing in some of the broader economic indicators?
Well, we're seeing a little bit of softness in the Midwest, in the Great Lakes and some of those areas. We're still seeing strong economies, East and West. So, you know, we've got a lot of good indication. Look, when we look at special waste being strong, we think that's a great indicator of future projects. We see, again, more service increases and decreases.
There's a lot of good data in our system that we track that still paints a pretty positive future. And when there's a little softness here or there, that could be related to a number of things, but we're not too concerned about that right now.
All right. That's very helpful. Thanks so much.
The next question will come from Michael Hoffman of Stifel.
I just want to make sure that point of clarity here. I mean, you had 3.2% price increase yield in the landfill side of MSW, which is where the bulk of the leachate gets generated that's expensive. So that's more than covering what you need to do and from the margin leverage of that all the way through the revenues of inflation. And you're getting pricing leverage on the part of the business that has the worst part of the leverage from leachate?
Yes. So we're getting leverage on that piece of the business, Michael. You're right about that. But you need to get leverage on the entire landfill book. And as John mentioned, the leachate costs continue to rise, and we need to make sure that we're getting an appropriate return on that entire asset.
So there's still some work to do there.
Okay. On the revenues, the $550,000,000 that you want to spend, you spent $180,000,000 in the first half, that means $370,000,000 When you gave the number in the beginning, Don, and I'm going to ask you if you'd repeat it because I didn't write it down fast enough. What are you assuming in the current outlook that that converts to in booked revenues in 2019?
Yes, 1.25% to 1.5 percent top line.
Top line. And that and you've spent the whole $550,000,000 Can you check
if you sold out
or okay.
We'll do the remainder over the second half of
the year. Yes. We haven't spent it all yet, but we'll spend it in
the year. We'll spend But the assumption in the $125,000,000 $15,000,000 is the whole $550,000,000 spend.
Yes, right. Yes. So we'll give a free type system here on deals in pipeline, deals in process, deals under contract. So we got a pretty idea where we are. So we have a high level of confidence in that number.
Or we
wouldn't have given it to you.
Okay. And no, no, I get that. I just wanted
to understand. So what do you think the rollover into 2020 for acquisition? On January 1, you have in hand what contributing related to acquisition?
Yes.
I would say,
if you
think of the incremental growth on that, it's 50% that would roll in. Because if you think of the 550, we're about halfway through that. So you'd have half of that contribution to top line growth rollover.
We're talking revenue. We're not giving you guidance on margin and yes, that comes in October.
Just trying to understand what
the revenue rollover is. Yes, just trying to understand what the revenue rollover is.
And this was my point earlier, right? I mean, I
think
right? So you'll that's a good thing
to have.
And with it comes operating leverage on that rollover, so it creates momentum. Absolutely. So that's the point of this. Okay.
Thank you
very much.
All right. And then it's all solid waste?
Yes. It's not all solid waste. It's all waste. It's all environmental service. It's all industrial waste.
It's all stuff that we kind of do now and stuff that we're good at, and it's all within our capability set. We spent a little bit of money this year on some things around E and B and Environmental Industrial stuff. So it's a basket of things, right, but nothing outside what I would call our core capability.
Yes. Okay. And at Expo, Brian offered up that you were looking at industrial liquids as an opportunity because basically you have the skill set there because you do so much leachate processing. Tervita right
now. Our timing wasn't the best fact that we were going to invest in Tervita right now. Our timing wasn't the best on that deal, but it turned out to be pretty nice for us. It's delivered good returns for us. And what I told everybody then was, look, this is about what?
What's it about transportation? It's trucking, it's material handling, it's disposal, it's engineering, it's land management, it's landfill expansion, it's environmental service, it's all the kind of thing we do. We've taken that business, we've learned everything we need to know about it, we've expanded, we've made it a better business. And then what happens is that opens you up to some additional capability, right? So we're not going to go very far from what we do well because that doesn't make sense.
And so we're slowly looking at other opportunities. The one you mentioned is an opportunity in the space, right? So just like I always say about M and A and solid waste, we look at everything. We take a look at how it lays over our capability and our footprint. And then we look at the cash returns.
And we compare the cash returns of that M and A and our capability to run it against the returns on buying back our stock, and it's kind of that simple. But just like we did a great job at Tervita, just like we're doing a great job turning the recycling business around, we've got capacity beyond just dumping 2 yarders and 4 yarders, right? We're really good at that, by the way, Michael. Got
it. Yes, you are pretty good at it.
Last question for me. Based on if the commodities all stay right where they are and all the things you're doing, will you on a run rate basis fully offset all of the headwinds, including the first half incremental headwind going into next year that you'll that we don't have to talk about recycling if the commodity stay right here as far as a headwind.
What I'd say, Michael, just to clarify. So in 2019, all of the year over year commodity headwinds that we're experiencing were more than offsetting through pricing. So we're improving the profitability of the recycling business overall. If you as far as 2020 goes, we'll talk about that more in October.
But having said that, if you listen if you reread the prepared remarks, we're making progress on every front, right? So we're making progress on moving those contracts, derisking. And again, recycling is a mini faceted business, but we're making progress on every front of recycling. So we are on a path, right, not only to sort of ultimately overcome any deficit we've created for ourselves, but we're on a path to derisk the business to a point where we're not going to spend a lot of time talking about it anymore,
right? We're going
to grow it. We may shrink it a little bit here and there to grow it, but we're going to be able to grow it and run it and do a great job for customers in the environment without having to talk about all this crazy volatility that exists.
Okay. So I then opened up one more question for me. Sorry. So the Plano, Texas facility, that's sort of an example of opportunity where you'll lower labor because of the technology you're bringing to bear there?
Well, it's a combination of applying new technology and know how with a customer who values recycling, is willing to pay and willing to take their fair share of the risk. It's a combination of all those things. So that may not be the Cadesbury customer, but certainly it was for the people in Plano. They valued it enough to come to the table. And they were looking for a great partner, and they found it in us, right?
So we're going to continue to push that model, and the model works. John?
Yes, it allows us to do 2 things. We'll take out about half of the labor in a tight unemployment environment that becomes important because that sorter job is can be a tough one to fill. It also helps us produce a better product. The technology produces
a cleaner product on the
end and therefore we think we're going
to get a little more from
what we saw out of
the back door of the facility.
Terrific. Thank you.
Thanks, Michael.
Our next question will come from Sean Eastman of KeyBanc Capital Markets. Please go
ahead. Hi, guys. Compliments to the team on the first half. Really nice work. Thanks, Sean.
Yes. The first question for me is just in light of the first half sort of price volume being ahead of expectations and you guys are saying you're expecting that momentum to carry into the second half. I think we came into the year with a 2.75% average yield guide and then a volume outlook of flat to up 25 bps. I'm just wondering, is that still the algorithm that we're trending to here? Or is that not the way we should be modeling anymore?
Yes, it's close. I would say that
on the yield side, we're probably a little bit higher than the original guidance, maybe something a little bit closer to 3. And then on the volume side, maybe a little bit lower than what we had originally guided to, maybe something slightly negative. So but net net in good position here for the rest of the year.
Okay, that's helpful. And then next one is just on the acquisitions, dollars 200,000,000 to $550,000,000 definitely not an insignificant change versus initial expectations. So just wanted to get a little bit more color on how you guys came that far? I mean is it just a function of timing or is there some sort of change in behavior in terms of your acquisition targets?
Well, it's mostly timing, right? And when we start the year, we've got a pretty good view of the pipeline, but then things develop over time. So remember, it went from 200 to
400 to 550 or was it 300? 300. 200. 200. 200.
24. Anyways,
so anyway, the point is we walked it up. And so we know what we know, we share what we know, and we give you numbers that we're confident in. And as the world moves, we've been able to move it up. But some deals maybe move faster than we thought and some deals came to market that weren't in the market when we first gave you guys February. John?
Yes. The team has done a great job. We've invested in resources and we've become a preferred buyer. And I would say we've got a higher number of referrals to buy companies than we ever have because that's where employee engagement comes back. We treat the employees that we acquire with dignity and respect and they understand this is a great place to work.
And listen, owners care about money, but they don't care just about the money. They also care about legacy and how people are going to take care of the businesses they built. And we've proven ourselves to be very good stewards of the business they're selling to us.
Okay, got it. That's helpful. And just last one for me, leverage at 3x, I think you guys said at the end of the quarter. I'm just wondering kind of later in the cycle or maybe at the higher end of the leverage target?
Does this mean you guys sort of
cool your jets a little bit at this point or just wondering how you guys are thinking about that?
Well, look, we've kept our leverage at our target leverage for, I don't know, how many quarters. But we do that very intentionally, right? So we continue to do the work continuing through the year on the debt portfolio. We continue to do the work on what we think optimum leverage looks like. We continue to look at all the other outlooks that we should look at to understand our leverage.
And we do that consistently, and we have a lot of discussion on our board that. We still think the target is that optimum is between 2.5% to 3% and frankly, more optimally 3%. So again, when we're buying cash flow, right, we're growing the business, that obviously allows us to actually increase our absolute debt, but still maintain our leverage ratio. So it's just that's just math. So as long as you're buying really good cash flow at the right multiple with the right returns, we've got frankly a lot of dry powder to do that.
So there really is no limit on us from that perspective.
Yes, that makes sense. All right, gents, congrats again and thanks for the time.
Thanks.
The next question will come from Derek Spronck of RBC. Please go ahead.
Okay. Thank you for taking my questions. Just first off, sorry to belabor the acquisition pipeline, but does the 550 make any assumptions around potential divestitures of Advanced Disposal from the acquisition there?
No, it does not.
Okay. So that okay. I guess it's still pretty early, but do you see that elevated potential M and A environment carrying forward into 2020 as it stands now? And then on top of that, the potential divestitures as well?
Well, it's too early to talk about 2020. Again, we'll give you our preliminary outlook in October, and we'll shore up that guidance in February. It's a robust pipeline, I will say that. And again, it's deal activity is usually driven by sort of seller situations and life changing events and other things that occur. So there's nothing we're really doing to go out there and set people to sell.
It's all about being there with people already, and as John said, being the right kind of company that people want to sell to. And of course, maintaining our flexibility financially to do deals and integrate those quickly. So and then as far as the demand in divestitures from the big merger that's been announced, I think it's really to talk about that. I think from what I know, they're still in second request and they've got some work to do and they publicly said what their target range is for divestitures. You could probably all imagine that we've got a pretty good handle on markets across at least 48 states and that when deals like that come to market, we're pretty good at assessing what opportunity might be there for us or where certain market positions might be something we're interested in.
So there might be an opportunity there for us and others. And I'm sure my counterpart at that Big Green Company in Houston has this phone ringing off the wall with people who want to buy those
assets. So Okay. And then on the for sure.
Okay. That's great color. Thanks, Don. And how is the competition for these from the assets? Are the buyers that you're competing against for potential some of the more attractive assets, they remain relatively rational or is it pretty competitive in terms of acquisitions versus your peers there?
I would say yes and yes, it's competitive and it's rational. In the end, there's always a mix, right? You may have to pay more for something that comes with real estate, a permit, a landfill, certainly infrastructure, a platform type acquisition in a new market you're trying to expand into, those things are going to come at a higher purchase price than a tuck in. Tuck ins come at a very nice value, and they're very quick to turn around to producing cash flow and so on. But so competitive, yes, and rational, still, yes.
There are issues there are times when maybe certain thing comes to market or maybe private equity comes into the program, things get a little squirrelly then. So but you've seen by our pipeline and what we've done, we know we haven't chased deals. We've looked at just about every deal, large and small, that's come to market, and we haven't bought them all because sometimes we're not the natural buyer. I think there's always a natural buyer who's got sometimes some type of leg up with synergy value, etcetera, or market position that we don't have. So we're not as the natural buyer.
We're not as willing to pay the going price, maybe it's somebody else's because of their current situation or willingness to believe on what they can do with the asset. And then there's sometimes there's a disruptor in there like private equity. But if you look at what we're paying for deals now last year, the year before that, all really pretty rational. And that will be still our MO as we go forward.
Okay, that's great. And then just one last one for myself, if I could. Just on the restrictive markets in the move towards the wastewater sewer index or CPI plus type of index. Do you think you'll be able to continue to increase that book of business on your restricted side towards the new index? And what happens if a customer just says no?
I mean, do you just revert back to the original pricing index and try again next time? Or do you walk away from a contract at that point?
Well, look, first of all, there's something really great about being the incumbent, right, because you've already made the capital investment. You know exactly the weight of the trash and the disposal cost and the cost of labor and all the situations that exist in the contract. So nobody knows the cost and the profitability of the contractor in more than you do. So that's the good news. We're dealing with people that we already have in our book of business.
So we kind of know where we're at.
If you look at the
success that the team has had that John spoke of in his comments, we add to that book every quarter. What do we add now, John? 7. 7.29. Okay.
So when we first went down that road, right, it was, oh, it can't be done, it can't be done. And now here we are a couple of years in, and we've converted basically 30% of it. So I think frankly when CPI is higher like it is now, it's actually easier to have the conversation with customers because you don't have this big chasm between this 0.5% CPI and the 3% we need to get at. So if a customer flat out doesn't want, can't, will not accept the fluctuation of an index, again, this is a government index. This is not an index we made up.
It's got a lot of science behind it. It makes sense. If they would accept that, then we negotiate for flat rates of 3% or better. It's not sometimes 4% or better, depending. And if the customer just frankly flat out doesn't make us a reasonable return, we cannot obviously keep that customer going forward in the current state.
So we're a returns based seller, right? The capture tool, everything we do is based on the return, and this is a very capital intensive business. So sometimes we got to go back in 3 or 4 times to get it.
Yes. We have 2 things on
our side. 1, we're relentless, so we just keep asking. 2, we're only asking for what's fair. We're asking for a reasonable increase that supports our cost increase for employees who live and work
in the communities in which
we're negotiating. So that argument over time resonates. We might not get it immediately because local government, it takes time to get things done. But we keep asking and we're really pleased with our progress.
And we do a really good job for customers, right. So and having said all of that, we're every now and then going to walk away from a piece of business because we just can't get there.
Okay. No, thanks for the added color and congrats on the nice quarter, guys.
Thank you. Thank you.
The next question is a follow-up from Michael Feniger of Bank of America. Please go ahead.
Hey, guys. Just Don, you mentioned some softness in the Midwest. Just to be clear, is that something that has transpired recently? Is that something you picked up in June or tracking that way in July? And Chuck, just on the volume side being slightly negative this year, I know you're doing a lot of intentional shedding.
Is that just the intentional shedding portion of the brokerage business that you guys were talking about? Or is there something underlying of why that might be more negative than what you guys kind of were expecting at the beginning of the year? Thanks.
Yes, I think the softness, I think, I would even say more of
a slowdown or not meeting
our growth expectations. Certain parts of construction you see in the outside of the Midwest, some of that's weather related, right? And we've seen some of those markets kind of bounce back to our expectations too. So I wouldn't read too much into that right now.
Right. And in terms of the volume growth itself, we have walked away from some business. As Don mentioned, we're very returns focused. So as our system begins to fill up, we're looking for where we can get the best returns. And we've demonstrated an ability to redeploy assets if certain customers aren't giving us an appropriate return on our work.
So that's part of it also.
Yes. So overall, look, we think we're getting our fair share of the business. We've got great sales tools and pricing tools. We've got great pricing internal controls working for our benefit. Again, don't lose sight of a really strong and crystal clear yield that we report, and low churn and improving ROI.
I mean, those are the results of that kind of internal control environment that Chuck described, right? So and again, there's always a little bit of lumpiness in our business. You lose one big national account, and it does ding your revenue growth when you're a slow growth business like us. And if you net all this out, I mean, we're growing like we say that we typically do. It's population growth that drives growth in our business.
And if you kind of net some of these things, we're right on top of that. So we're feeling pretty good about it.
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, Alison. In closing, we are extremely pleased with our 2nd quarter performance, are well positioned to achieve our original full year financial guidance. Our teams relentless focus on operational execution and passion for our customers enable us to deliver these results. Thank you to everybody. We expanded EBITDA margins by 50 basis points and grew earnings per share by 8%.
And then finally, we increased the quarterly dividend by 8%, again demonstrating our continued commitment to increase cash returns to shareholders, and it also shows our confidence in the cash flow generating capabilities of this business. The team did a great job this year. Thank you, everybody. Thank you, Republic team. Thank you for spending time with us today.
Those of you on the phone, have a good evening and be safe out there.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's