Republic Services' CEO Presents at Credit Suisse Global Industrials Conference (Transcript)

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Republic Services, Inc. (NYSE:RSG) Credit Suisse Global Industrials Conference December 5, 2013 1:15 PM ET


Don Slager - President and CEO

Ed Lang - SVP, Treasury and Risk Management

Brian DelGhiaccio - Head of IR


Hamzah Mazari - Credit Suisse

Hamzah Mazari - Credit Suisse

I think we'll get it started with Republic Services. We have CEO, Don Slager; Ed Lang, Treasurer and Brian DelGhiaccio, Head of the Investor Relations with us. Turn it over to you Don.

Don Slager

Thanks Hamzah. I'll start by just thanking you for having us here today. Thanks for joining us today everybody. We'll start with the forward-looking statements, of course we're going to make some comments that are forward-looking, I'll remind everybody of that. And we routinely make these conferences and our presentations, and times and dates of all those are posted on our website.

Start you out with a little bit about our industry. We're well known industry for [creditable] [ph] free cash flow. The way business works on much of our business is under some type of long-term contracts, we've got very long views into our inflows of cash and our outflows of cash as well, very predictable CapEx et cetera. A very stable business, although we've been working through a pretty tough economic environment over the last several years, the general trends are improving and the business continues to consolidate which we think is good for overall business dynamics.

Our strength is really about getting free cash flow, it's the story still about cash, how we make the cash consistently and how we give it back to you the shareholder. We're going to continue to do that in the same way that we have for many years. That really is the backbone of our story. The industry overall is as I said the trends are moving at least in the right direction albeit as for pace. We offer an essential service as I said and again have a very stable customer base.

Mix by our line of business, we have got most of our business, over 80% of our business comes from, or three quarter of our business comes from our collection business, only 17% of that throughput revenue now generated in our disposal landfill and transfer station business. The growth components for our business today really are the C&D construction market showing up very nicely in our Q3 results and also recycling has become a bigger part of our business over the last couple of years, now it’s about 9% of revenue and for that coming from the sale of commodities.

The market type mix hasn’t really changed for us, a deep concentration in and around franchise businesses or essentially [inaudible] granted by government where we are the sole provider of service. These tend to be very profitable accounts for us. Another big segment is the small and mid-size markets where there tend to be fewer competitors in those markets. And then of course the large urban markets which are much more fragmented, more disposal sites, more players and they tend to be a little more competitive. However, that’s really where we are going to see, I think with the bulk of the growth as the economy returns. So we are well-positioned to have a good business mix across all three market types.

Now this really is the money slide. We are very consistent and disciplined in our approach and returning cash to shareholders. We grow the business organically and through acquisitions setting aside about $100 million a year over the last couple of years to grow externally. And then consistently growing free cash and using that cash flow growth to fund dividend increases year-on-year, and a stable approach to buying back our shares. Very consistently the Company has bought 3-ish percent of our stock back on an annual basis. Most recently we –announced that our Board had approved a $650 million addition to our buyback authorization and at the end of Q3 we had 760 million remaining of that authorization through the end of 2015.

This slide really depicts the fact that we think we’ve come out of the pricing trough and even though CPI is low, it tends to be headwind for us, we think the worse is behind us and we get better from here. We have about half of our business, that is indexed or restricted, and 30% specifically tied to CPI so that those pose a little bit of an issue for us when CPI is low. And we can see CPI moving back to sort of a normal 3% range which is kind of the 25 year average that works very well for us in a high fixed cost business and we get some operating leverage on that type of the CPI environment. So we look forward to that.

Organic volume growth, we’ve talked pretty consistently about the fact that the volume growth in this business comes from population growth which drives housing formation. This chart depicts the correlation between the housing starts in the way our business grows with a 12 month lag. And we reported in Q3 that we grew our C&D business and the temporary roll up business by 7% with a 2% yield, so improving price per unit metrics and also expanded the margin in that vertical of our business by about 90 basis points. So we think that will continue to improve as housing starts increase.

And at some point as we see business formation take off and more service increased activity, we will see similar things happening in our commercial business, our small container business over time. We are still managing what we call the evolving ton, the waste-stream is impacted by regulation, recycling, diversion, waste minimization efforts, we’re still playing in that space as I said our recycling business is one of the parts of the business that’s growing pretty substantially. We are making investments in that business, but only make investments where we think the return on invested capital makes sense.

You will see as we move forward. We will continue to invest there, but it’s in times where we don’t think we will get the right return we will continue to use third-party operations to manage and handle our recycles. There is number of build business initiatives that we are working on, we think in total specifically CNG conversions, our automation initiatives and our maintenance initiative, will get us to the 75 to 100 basis points of margin improvement over the next three years, about 30 bps a year. So I’ll cover some of those things very quickly.

We talked about expanding recycling. We do have still a fair amount of recycling being done with third-parties where we think we can internalize that in the business. We will continue to make those investments. And we spoke in the past about public-private partnerships, so the same situation that’s causing pricing pressure in the residential business that is the abysmal condition of municipal finance, and the fact that the general fund is under a lot of pressure. We’ve seen a fair amount of price rollback activity occurring in our contract renewals. We’re using that opportunity to go into cities that do their own hauling and convince them, in some cases to outsource to us.

So we have had some luck with small and medium cities, a little tougher as we look at some of the larger cities. But we are putting a full court press on that opportunity, to take advantage of the tough economy.

Acquisition, $100 million is our target of spend this year, it’s similar to last year we are only doing that in current markets where we already have assets infrastructure and management. These tuck-ins come at a very reasonable price post synergy, and still about 4.5 times multiple. So, we think we’ve got a pipeline of acquisition opportunity that will keep us kind of feeding that for the next two years or so and it could be beyond, we’ll update as we go through time, but that’s a good use of cash, very low risk and very high reward.

CNG, we’ve continued to spend about half of our fleet spend on CNG trucks every year for past couple of years that trend will continue for the next few years. Currently at about 11% of CNG today and we can see ourselves getting somewhere up in the 35% range over the next five or six years. And it does give us a good cost advantage and sometimes a competitive advantage where it adds value to a municipal customer who is interested in a greener footprint.

We talk about fleet automation and specifically the residential system where we’ve historically used more than one person to operate the vehicle. We’re going to single operator vehicles where the driver stays in the cab, lowers our driver turnover and our safety and injury rates, and boost productivity. We continue to move forward there we’re at 65% today of our residential fleet moving toward 80% over the next several years. And again these are slow steady initiatives that are driving toward operational improvement and ultimately a better service and value for our customers.

Our maintenance initiative has been kind of a slow going initiative for us but we’re very convinced it’s the right thing to do for the business. We’re about halfway through the fleet today and we think that we’ll see improvement in the repair and maintenance expense in the latter half of next year as we kind of anniversary that halfway point. And the trucks that have already gone through with the system will start to show the benefit and begin to pay for some of the cost of to getting the other half of fleet converted.

We recently mentioned on our last call that when we get through this we’re also going to plan on aging the fleet by about a year, so we think we can extend the useful life of these trucks. Our current fleet age is seven which is one of the youngest fleets in the industry. We think we’ll age that very comfortably to eight it saves about $200 million of CapEx starting in 2015 over a four or five year period, so that would be one of the ways that we get paid back on this maintenance initiative that we’ve been working on for a number of years.

Went through that pretty quickly Ed, so it’s all up to you now and then we have time for questions.

Ed Lang

Thanks Don. Let’s kind of revisit the guidance for the year and maybe give a few comments about recapping what we discussed recently on the third quarter earnings call about thinking about where we are going into the New Year. What we talked about on the last earnings call, we maintain the current EPS guidance or the original EPS guidance of the $1.86 to $1.91. We had a couple of favorable items in the third quarter on tax and remediation so we should be towards the upper-end of that range as we discussed on the call. We maintained our free cash flow guidance at $675 million to $700 million.

Again CapEx running about 10% of revenue which I think if you’re looking to build a model for this industry that’s roughly where the CapEx runs - could be 50 basis points plus or minus depending on where you are on the business cycle but over the long-term averages about 10% of revenue. Quite often with investors we get questions as to how much is maintenance capital. Again I think this is an industry that does a great job at scaling its capital spending based on the demand for service. So for that reason there is not a big variance between maintenance and total capital spending because you’re really scaling it to what the business demands, but I think if you really try to sharpen the pencil you’d say roughly about 90% of the capital spending is replacement or maintenance.

Keep in mind you have a regular replacement cycle for vehicles we’ll talk a little bit later about that in the presentation. You need to build out your airspace at the landfill on an annual basis and then you have various types of infrastructure IT expenses that you have to continue to invest in the business. And that’s I think one thing that’s important when you do look at this industry. It is a capital intensive business. If you try to cheat the capital spending for more than two or three years it’s definitely going to show up in maintenance expense pretty quickly. And then you do going to have some pretty significant headwinds from that point going forward.

So as you look at this industry as a potential investment opportunity just to understand that it is capital intensive and that annual reinvestment of the business is going to run about 10% of revenue. As Don mentioned we’re spending about $100 million a year in acquisitions. We think we can maintain that pace for the next several years. And essentially what we’re doing is we’re looking at small deals within our existing footprint and what those type of transactions do is they help built out your operating density, get better asset utilization and because we’re many times the natural buyer for these businesses, they are a very good fit, and we’re able to extract a fair amount of synergies from the transaction.

The deals we’ve done this year, we’ve spent about $60 million year to-date. We are still comfortable with the $100 million number but post-synergy we’re buying these businesses for about 4.5x EBITDA, so when you look at that we traded approximately 8x great synergies for the Company. There is kind of a normal pace as deals come to market, and again they’re family run businesses, there is just kind of a normal process for the deals to come to market and to occur. If you try to rush them along too much, you end up really just negotiating against yourself.

So what’s in our best interest is to have a running dialogue with a number of these small businesses within the existing footprint and kind of naturally let the deals come to you at these very attractive multiples. And it’s not that we wouldn’t look at entering new geographic markets, but keep in mind this is a very mature business and we don’t really want to enter in a market where we don’t have a leading position. When we look at our current market position, we do -- the way we define markets we do business in approximately 240 different markets and in well over 90% of those markets we have number one or number two market share. So if we’re going to go a new geography, we don’t really want to step in as a number four or five player without really having some control as to the market dynamics.

We like being a leader within the marketplace we participate, so we would look at a new geographic expansion but only if it was an opportunity where we would have a leadership position. And as Don mentioned, we have very long-term commitment to cash returned to the owners. Right now, if you look at our current pace of share repurchase and dividend, it’s about a 6% and 6.5% annual cash yield to the owners with about 50-50 mix of dividend and share repurchase. We did increase the dividend this year by approximately 11%. I think we will continue to grow the dividend in the future roughly in line with the growth and the free cash flow in the business, so conservatively I think we would say that’s kind of mid single-digits. And I think we’ve been able to grow the dividend over the last several years as far as the payout to now get to the point where really have this even balanced between share repurchase and dividend.

One of the things that the share repurchase does it gives us some financial flexibility that -- there are still a number of large private companies, when I say large these would businesses with $25 million to $300 million of annual revenue vertically intergraded kind of leading market position in those markets where those companies operate, and we want to maintain some financial flexibly to be able to be participate in that bidding process, if those deals come to market. And by having some portion of the cash return built into the share repurchase. We’re not overcommitted on the dividend without any financial flexibility going forward. So again that good cash return 50-50 split between repurchase and dividend with the opportunity to continue to grow the dividend on an annual basis.

As we look at the business, there is a couple of items on the P&L that probably generates a little bit more financial volatility than maybe you would expect for kind of a mature operating business such as the solid waste business. One of those items is the sale of commodity materials out of the recycling business. As Don had mentioned in the pie chart earlier in the presentation of revenue by line of business, recycling today represents roughly about 9% of our revenue, about half of that 9% number or fees we collect or fees we earn for collecting and processing recyclable materials, and the other half of it is the revenue we generate from selling that material. And as you could see on the chart on the other side of the page there that we have in recent years seen some volatility. I will talk a little bit later about the earning sensitivity to commodities but that’s one of those deals where you have this certain amount of volume coming through the system.

And as you can see, in 2011 if you look at all commodities all regions the average price was $145 a tonne, and the last couple of years it’s been about $30 less. Now, what would really drive the values we see in the sale of the materials is fiber or recycled paper, over 70% of the material that comes out of the recycled stream is fiber and what we see there is that, that really reflects the value of recycled paper reflects the demand worldwide for packaging materials. We’re a domestic business but there is not many parts of our business that reflect the global macro environment but actually the sale of commodity materials does, and pricing has been depressed for the last couple of years and I think that’s really a function of lack of demand coming from the European consumer.

Most of the product it’s kind of a three legged stool it’s a demand from packaging materials in North America, Asia and Europe I think the demand for those materials has been reasonable in two of the three markets but unfortunately with the financial situation in Europe, there has been a lower demand for packaging materials in that part of the market. And this has led to the current environment for pricing.

We don’t -- when we give guidance next year in February for full year ’14, our philosophy is always not to try to develop a forecast for these materials, but really whatever the price is for commodity for the time we get on the call in early February is what we will use for the guidance for the full year. So we’re not going to have any type of first half, second half story as far as commodity expectations we’re simply going to go with what the value is at the time obviously we’ll clearly disclose that as to what current prices are but that’s what’s going to be built into our expectations for calendar ’14.

A couple of times you get questions from folks well dude what are some of the leading indicators and you kind of wrestle around looking at various type of economic statistics. And actually probably talking to some people who are on buying recycled product what we picked up from those discussions is actually looking at statistic like the Chicago PMI is a reasonable indicator. So when you look at the trends in that it kind of gives you a sense as to what the direction is of commodity materials. I would say generally right now pricing this year has kind of been within a fairly narrowed band. We gave guidance in this past February for $112 a tonne and year-to-date we’ve averaged about $113. So we’ve been probably plus or minus a few dollars all year versus that original guidance.

The other variable or volatile item we have in our P&L is fuel. Where our public consumes about 150 million gallons of diesel or diesel gallon equivalent if you look at natural gas on an annual basis so it’s, direct fuel is probably 6.5%-7% of revenue. And we have a couple of strategies to help mitigation that risk; number one, when you look at organic growth statistics you’ll see a separate line item for fuel recovery fee and we cover about 70% of our fuel risks through passing those costs through to the customers it’s a very open process or customers can go to the website they can see how that particular fee is calculated and how it’s going to be reflected on their invoice it’s very open part of the sales process. And it has with the volatility we’ve seen in fuel over the past several years it has helped us take some of that risk.

Also we’ve stepped up over the past couple of years or use of some financial hedges the proxy for us is if you look at the deal we website there is a statistic for on-highway diesel, that’s approximately the cost per gallon we’re paying for fuel it is, does vary somewhat by region or the country. But that is the kind of the key driver. As we mentioned earlier we are going through a conversion to natural gas in our fleet currently about 11% of the fleet runs on natural gas. We’ll probably exit the year closer to 12% and that number grows by about 3% or so annually based on our current investment.

And what that means by going through that pace of conversion that will save us about $6 million to $8 million a year of fuel expense as we continue to work our way through the CNG process. One thing based on some of the breakeven costs and the infrastructure required and really the availability of the technology we are kind of moving about as quickly as we can on the CNG conversion. So as there is improved technology, greater availability, I think some of the costs breakeven will change and become more favorable to companies in the solid waste industry, but we are really running at full pace right now on that conversion to CNG.

And then this next slide kind of takes you through the earning sensitivity. And essentially what happens is that for every $10 a tonne variance in commodity materials that translates to about $0.03 of EPS or about $18 million of operating income. And for fuel about every $0.20 per gallon of variance translates into a $0.01 of EPS or about $6 million of operating income. So as you kind of when we give, again when we give guidance next year in February what we’ll do is we’ll also let you know what our assumptions are for fuel and commodities so as we work our way through year you’ll have a way to kind of keep tabs on our performance and make changes in the model as you may see based on the volatility we see in those commodity items.

Next talking we have already kind of touch on truck purchases, I think one of the great emphasis we -- just when we meet with investors is Republic has a young fleet, we don’t have any catch up capital, we’re in a pretty good position as far as the quality fleet age and so what you’ll see from us is pretty recurring reinvestment in the fleet of about buying us maybe about a 1000 or a little bit more than a 1000 trucks per year, about half of the vehicle purchased annually is compressed natural gas, we don’t do any type of engine conversions we buy directly from the original manufacturers, the natural gas engines.

And I think that’s kind of at the current pace what you will see for us as Don mentioned as we eventually work through a completing the one fleet maintenance project. We will probably extend the fleet age by about a year which will save us about $200 million of capital spending and we’ll start to see that coming to the numbers probably sometime in ‘15 and then reduce the capital spending for about the next four years after that.

Tax rate, this is for folks who have followed us for a while, we had a number of tax controversies dating back to the merger of Republic and Allied we’ve been able to work our way through those various controversies over the past several years with some favorable settlements. We’ve seen some volatility in our effective tax rate really related to closing out those audit periods being able to realize some better fits of the reserves that we had up for the various controversies and closing those out but as you’ll see now going into the New Year we’re kind of gradually reverting back to a statutory tax rate. And keep in mind, we’re a domestic business so really don’t have the ability to shelter income offshore that will impact the effective tax rate we’re a statutory rate payor so what you’ll see from us in 2014 is going back to about a 39.5% tax rate, pay 35% federal and depending on the states where we’re generating income that will increase the effective tax rate up to that 39.5%.

Now keeping in mind we do, do business in a number of higher tax states like California, Illinois that raise at above maybe some of the other states where we do business. So, I think as we kind of look towards next year and we discuss this on the earnings call at the end of October, it’s a little bit of a headwind on our EPS performance next year because roughly that step up in the effective tax rate from 36.5% to 39.5% or that 3% increase in the effective tax rate is about a $0.10 EPS headwind on a year-over-year basis.

So, although we do expect to see continued growth in earnings and free cash flow on a normal basis, we do have a little bit of a headwind related to the effective tax rate. And then also from a free cash flow perspective right now Congress has not extended bonus depreciation for 2014 and that will also be a cash tax headwind going into the New Year. It’s about a $50 million headwind in the event that Congress does not extend it, we really don’t have a pulse right now as to whether or not that’s something being discussed but just something to note and if you go back and look at the transcript of the third quarter call, we did discuss these two headwinds on the effective tax rate and the ending of bonus depreciation and what it meant for our outlook for 2014 performance.

Debt maturity profile, this is a great story to tell from that time period from when the merger closed through the first half of ’12, we were very active on the liability management taking advantage of the low interest rate environment, extending debt maturities. And we completed that process the first half of ’12 and we don’t have another public debt maturity until 2018 with the TR average cash interest rate is about 4.5%. And so I think we’ve been able to realize a fair amount of savings post merger through the refinancing of the balance sheet and that is behind us, we don’t really have any financing efficiencies or synergies ahead of us right now, we probably will be in the bank market next year to extend one of the bank facilities and if you saw last week Standard & Poor's had a press release involving a number of companies and a change in their ratings methodology and essentially Republic along with a number of other companies was placed on CreditWatch Positive by Standard & Poor's so there is a possibility that we will be upgraded in the not too distant future. And I think that press release came out the middle of last week.

Just to wrap up here and then we can take a few questions. And this is just kind of reiterating all the things that Don had previously presented. Republic has a focus on return on invested capital and free cash flow. It is part of our business culture, it’s part of our incentive compensation system and a lot of our business decision making and investment capital allocation is built around that. We do want to continue to grow the business. We do see some acquisition opportunities. We want to maintain that financial flexibility. We see acquisitions. We see a number of cities, looking to get out of the solid waste hauling business that has provided us an opportunity for these public-private partnerships to continue to grow the business.

And as Donald also mentioned we will continue to look for ways to build out our infrastructure and better service our customer, and we will continue our strategy of a balanced approach to cash utilization. We will continue to invest in the business, continue to do acquisitions, return cash to the owners but also maintain our investment grade status. We think that provides us some strategic benefit, particularly as it comes to working with our municipal customers. And with that we have a couple of financial charts here that reconcile a number of the non-GAAP measurements we use in our presentation. And we will take a few questions here and we will leave our facility map up on the screen while we take some questions, Hamzah?

Question-and-answer Session

Hamzah Mazari - Credit Suisse

Thanks. Don, could you maybe touch on pricing trends specifically, what’s your confidence level in a higher open market pricing offsetting a lower CPI going forward? And has the sector become more disciplined in pricing, now that a volume recovery has begun to take shape?

Don Slager

Well, I think you have to pull the business apart to get at what’s really going on in pricing, but the first question around CPI, you know CPI impacts a big part of our business automatically. And so that tends to weigh down or accelerate our pricing activity in the business. I mentioned that CPI on average was 3% over the 25 years. And even if you take out some of the really extraordinary high CPI years you will still get to a 3% average.

So then we would like to think about, moving out of ’14 and ’15 and getting into again a 3%ish CPI environment that’s going to really move the whole business forward, and I think the whole industry forward. For us, we are going to be in the open market next year, trying to make up for some of the CPI pricing degradation in the open market. So we’ve got confidence that the open market can handle a little more pricing in’14 and then that’s what we will be expecting to do.

As it relates to competitive behavior and pricing, you think about the rollout business specifically I mentioned how Q3 behaved for us. We saw additional volume, additional hauls, so we saw a 7% increase in that business year-over-year in the temp space with 2% pricing yield. So improving price per unit metrics, and expanding margins in that segment of our business. We think that’s how the business should work as volumes come back. Because of the high fixed cost and the operating leverage we have we think as business grows, and unit trends improve, and we will get that pricing leverage and ultimately that margin expansion.

In the open market commercial, we think that will happen overtime as we see more service increases occur, fewer big store vacancies and so forth, so more units and overtime more price per unit and expanding margins. But that the CPI environment does go over in the open market. It’s just kind of sets a tone in the open market for customer sensitivity and other things like that. When there is not a lot of organic growth, it seems to us at least that the smaller haulers tend to more aggressive in the marketplace to keep their equipment working. And when there is more organic growth they tend to be a little more rational we would say, as we would expect as, we see that commercial business improve, we would expect to see competitive dynamics improve all along the way.

And we continue to price very diligently and systematically in the open market with about a 12th of our customers being reviewed every month, and each of those customers being reviewed at least once annually. So that’s continuing. The real weak spot for us in pricing has been, well for us it has been landfill. We continue to raise price at the landfill but have lost quite a bit of volume out of our landfill system, but really more than that our residential system. And we talk a lot about the state of municipal finance.

We’ve seen a lot of pressure in price rollbacks now for three or four years and we think we’re a little over halfway through that book of business being re-priced and we have seen some pretty sort of erratic pricing behavior occur there, mostly led by the fact that the customers the municipalities have really pushed back hard because of their current financial situation. But we also have seen companies, large companies specifically step out of that arena and not willing to deploy capital at lower terms. So directionally the trends we think they’re improving although we haven’t really seen it convert yet, we think anecdotally at least, that’s happening.

We have ourselves have stepped away from renewing some contracts recently and bidding at new work because the returns just haven’t been there. So as Ed said, we’re very ROIC-focused, it’s in our DNA, and so we’re going to continue to deploy capital intelligently. So rollup trends are good. We’re seeing the results of pricing even it dies work the way it should more demand has driven pricing up. We think that will transition up to commercial overtime and if people are smart about their investment in new capital and these residential contracts overtime, we’re going to turn that trend around too.

Hamzah Mazari - Credit Suisse

Maybe Don, if you could also speak to your appetite to do a larger deal assuming there is no DOJ issue versus sort of this 100 million tuck-in acquisition?

Don Slager

Sure and Ed mentioned in his remarks that we are very focused on maintaining this financial flexibility, we like being investment grade we are going to keep that debt in check so that we can go out and pursue a larger transaction if we would like to. We have got the flexibility of flexing our stock buyback down. If we need to use some of that cash for a larger acquisition, we do have the capacity to even in the short-term take on a little debt if we had to do to do something of size because we managed our balance sheet so well.

So we’re looking at those opportunities. Unfortunately, some of the last few things have come to the market have been private equity have scooped those things up and paid a very high price and so we look at our stock trading at 8.5 times and see some of these deals going for 10 times EBITDA. And that's just a little too rich for us. So we very comfortable in the tuck-in space, we were paying 4.5 to 5 times post-synergy but if there is something in size, that we can -- that fits into our business, creates good synergy, good value, we’ve got the appetite and the financial flexibility to do something for the right price.

Hamzah Mazari - Credit Suisse

On the recycling business, waste management seems to be pulling back from that business it seems like they’re not making any money in that business. How does your recycling business strategy defer from that?

Don Slager

Well, I think if you got to back a little ways, our focus has been primarily in that what we call traditional recycling. So paper fiber containers we haven’t gotten off into some of this other waste diversion technology and some of those other things that maybe other companies have, so we’ve always been very focused on traditional recycling, which is very much core to the waste stream. So we’re going to continue to do that, and we’ll make some investments where we’ve got the density and the volume to fund those investments, but we’re not in a hurry to do that. We frankly made very small bets over the last several years in recycling and consequently we haven’t made any big mistakes, so we have spent between 40 million and 60 million a year over the last couple of years. We could see that number come down next year and -- but we will probably spend some money in retooling some of our existing facilities to make them more efficient.

And where we just don’t ever think we can amass enough volume to make the investment, we’ll continue to use third-party. So we’re not married to the idea of having our own brick-and-mortar. And it is the same concept we think about with other parts of the waste stream where we can form effective alliances to help us serve the customers’ need, so we want to be sensitive customer demand, what is it that they expect, they need, how can we bring to them as the waste expert and be their one-stop shop, but we want to do that with the ability to bring alliances to the table, and not always having to do it with our own equipment.

Hamzah Mazari - Credit Suisse

You guys have a JV with Stericycle. You don’t want to get into the medical waste market any other businesses that look attractive, that are adjacencies that make sense for a waste company to be in?

Don Slager

Yes, so, it’s our arrangement with Stericycle is not quite a JV, it’s more of a co-selling arrangement, but an alliance nevertheless, it’s been very effective. They don’t have any interest in being in the solid waste space and we haven’t shown any interest of being in their space, so we have become pretty good partners. We have done the same thing in and around electronic waste and universal waste against small parts of the waste stream but growing, so we found partners to help us there. The hazardous space is very similar. We don’t have any anticipation of getting into the hazardous waste space. We have got partners in various parts of the country that help us do that when a customer wants to bundle. And the thing is a lot has been said over the years about bundling in the waste business and it hasn’t really, frankly, worked all that well for companies that have put a lot of effort into it.

So we’re not necessarily leading with that as much as we’re listening to customers to what they would like to see. And we want to make sure that we can bring a suite of services to bear that meet their needs, be their customer-facing waste expert, and be the contractor that brings the right subcontracts to the table. So we have got a position that we would rather be the experts in solid waste and recycling space and not really gamble in other businesses that we don’t have the deep expertise in and again it’s a function of not being distracted as well as effectively managing our capital and looking at the best return for our owners.

Hamzah Mazari - Credit Suisse

Maybe just one last question on your predecessor talked about Republic’s EBITDA margins could be 34% or should be assuming the volume comes back. Is that number still a real number when you think about your business long-term?

Don Slager

Well let me say thing I think it’s, one it’s a total function of the pricing environment and a lot of that has to do with CPI. So, again when we look at the last four years we’ve had a CPI environment that’s been low less than 1.5% and we’ve seen pricing overall struggle in the sector, if you go back before the economy took a bad turn we had historically seen 3% plus CPI and we’ve seen almost in that timeframe almost 4% price.

So, if we get CPI coming back and we’re not in control of that it seems like the fed is. So, we get pricing back to some level of normal, we do a good job managing the middle in our business and managing the fixed cost, we’ll see some operating leverage as a result so when half of our business is inflating somewhat naturally we think we can see margins expand.

And when that organic growth is happening we’ll see competitive behavior be more rational and we’ll see a little more pricing opportunity in the general market, and so it gets back to you, how you can price in excess inflation. And so we think 30% is certainly in reach and once we get there we’ll -- as we get back to 30, we’ll set our sights on 32 it looks far from there.

Hamzah Mazari - Credit Suisse

Well said site fair enough, fair enough.

Brian DelGhiaccio

And just for those folks listening on the webcast slides we used today are at Thanks.

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