Republic Services Inc (RSG) — Q2 2019 Earnings Call Transcript

Thank you, Alison. I would like to welcome everyone to Republic Services' second quarter 2019 conference call. Don Slager, our CEO; Jon Vander Ark, our President; and Chuck Serianni, 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 recording 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 the GAAP reconciliation table and the 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 second 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 second quarter, commodity markets continued to be challenged. We overcame these headwinds by focusing our efforts on things we can control, in particular, transitioning to a more durable, economically sustainable recycling business model. As you'll hear from Jon, we are making good progress and seeing results. For example, the revenue and EBITDA impact of lower recycled commodity prices in the second quarter was $8 million. Because of the team's relentless efforts, we overcame this headwind and increased recycling revenue by 6% versus the prior year. In the second quarter, we invested $129 million in acquisitions to further enhance our leading market position and drive growth in free cash flow. Our currency pipeline continues to be strong. As a result, we now expect to invest approximately $550 million in acquisitions this year. We estimate these acquisitions net of divestitures will provide 125 to 150 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 million 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, EpiSphere, and Glassdoor. Most recently, Republic Services was named to Forbes List of Best Employers for Women. I'd 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 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 Jon to discuss our second-quarter operating performance. Jon?

Thanks, Don. The pricing environment in the second quarter remained 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. First, 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 million or 29% of our $2.5 billion CPI-based book of business. Next, we regularly reassess our landfill pricing to ensure we are covering the total lifetime cost of managing the waste we accept. Third, we are proactively renegotiating our municipal recycling collection contracts. We are ensuring they reflect the true costs 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 first quarter, 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 by 10 basis points versus the prior year. Underlying volume growth was 80 basis points after normalizing the impact of intentionally shutting certain volumes. This included work performed on behalf of brokers and non-regrettable contract losses in the 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 million 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 second quarter 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 first quarter. 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 change contributed an additional 40 basis points of pricing not reflected in the 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 second quarter was 27.9% and expanded 50 basis points versus the prior year. Strong pricing and solid cost controls enabled 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 benefited from our focus on process and running efficiencies as well as our efforts to increase employee engagement; turnover decreased versus the prior year for the second quarter in a row. Maintenance expense continues to benefit from our One 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 second quarter financial results in greater detail.

Thanks, Jon. Second quarter revenue was approximately $2.6 billion, an increase of $88 million or 3.5% 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&A expense as a percentage of total revenue was 10.1%. For the full year, we continue to expect SG&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 margins 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 million, 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 three times, and within our optimal range of 2.5 to 3 times. Interest expense in the second quarter was $99 million, and included $12 million of non-cash amortization. In the second quarter, relative to our expectations, cash-related expense was favorable by $0.01. Our adjusted effective tax rate was 24%, which provided a $0.04 benefit. This was partially offset by a $0.03 cash-related headwind from a non-cash charge of $12 million. For the full year, we expect an effective tax rate of approximately 23%, which is 100 basis points lower than our original guidance, and a non-cash charge of approximately $60 million, 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, and free cash flow of $1.125 billion to $1.175 billion. We're 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 million or $0.11 of earnings. We're 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.

Hey, good afternoon guys.

Hi, Tyler.

Hey, nice quarter. Chuck, I don't want to focus too much on the guidance, but it looks like there are several factors at play. If we take a high-level view, starting at a midpoint of 326, you'll be reducing that due to some recycling prices, then adding back some from incremental M&A, and possibly even taking away some because of a reduced buyback related to that M&A. You might also gain a little back from the tax rate, but are those the key factors? And if I do all that math, is there really any change in the core trends? That's really my question.

Yes, I think you 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&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&A, is that correct?

That's also correct.

Okay, so that's correct.

And as you know, Tyler, and as we've said to 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 first year, but great rollover benefit in the next year, but there'll be some benefit, and as we said in the comments, surely going to drive some top line revenue growth from that as well.

Okay. And Don, so $550 million, if I go back to my notes, I mean that must be one of the strongest M&A years that we've seen in a long time maybe outside of the Tervita year, but what's really driving the strength there, are these chunkier deals or are they just a lot of small tuck-ins?

Well, there's a couple of chunky ones in there. Again, as we've always said to you, that one, we're going to remain opportunistic, right, we're going to remain flexible with our balance sheet and keep our debt and the 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 in the right direction, so you can see that these investments are paying off in the long run. And so all things that are well within our footprint and our ability and our team's core competence, so it's all good stuff. And we're going to continue to do it. $550 million will be an outsized year compared to the years past. I think we started this year at $200 million, and then boosted it to $300 million, up to $400 million, I guess pretty quickly. So yeah, $550 million 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, my last question is for Don. Looking at the bigger picture, I wanted to mention the recent release regarding the 2030 sustainability goals, which we really appreciate.

You bet.

But I want to talk about two 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 flipping 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…

First of all, I think that when we consider what's happening beyond just engagement, including the cultural impacts we're making, I believe we're seeing lower turnover now for the second consecutive quarter. This is a continued focus. Having turnover that is flat or declining in this economy is a significant achievement that we may not have emphasized enough during the call. The combination of improvements in fleet reliability, safety focus, and leadership training we've implemented, including training for our frontline supervisors, is showing positive trends. Some supervisors are coming through this program for a second time, and we are observing encouraging developments. It’s important for these trends to continue. While these goals are long-term aspirations, we are feeling very optimistic about our progress. Let me have Jon add a few more points.

Yes, regarding safety, I believe technology will play a significant role for us. Cameras represent our most immediate initiative in this area, but looking ahead, when we compare commercial vehicles to passenger cars, we're still in the early phases of implementing a lot of technology that is already being used in passenger cars. We are actively encouraging our vendors to incorporate this technology into their products moving forward. They all have these features, such as active safety and lane assist, included in their product plans, which will contribute to enhanced safety. Moreover, as our workforce becomes increasingly digital, we anticipate a growing portion of our team will embrace this change. Our focus is not just on technology for its own sake but on improving the experiences of both our customers and employees. Historically, the investments we've made in our sales force have shown that they are more engaged and connected, leading to easier and better working lives. We expect to see similar improvements as we introduce more technology to the operational side of our workforce.

Okay, perfect. I know those are long-term goals, but I appreciate the color. Thank you.

You bet.

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 at 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 economy, and I think also 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, own, and we want to think about the total lifecycle 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.

Yes, there isn't anything significant that will affect the performance compared to 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, collection volume seemed like they - and I understand you're shedding some broker business, some of this is non-regrettable, but it seems like it flipped a little bit and continues to kind of underperform the industry a little bit, just any comments you have on general trends there outside of the broker business?

I would say that there was one significant loss in the quarter, involving a large national account whose pricing demands were too low relative to their waste volume. These situations do occur. We will continue to experience non-regrettable losses, and nothing unusual has changed with the market or our strategy; it's just a matter of timing and some fluctuations.

Okay. And then just on the input costs. The one that seem like it ticked back up again was just some of the disposal costs and leachate. It's been kind of a problem for a lot of the industry. Just any color you can give on what - how those are trending into 3Q and the back-half of the year, as we expect sort of continued margin headwinds on leachate?

Yes, I think you're right on the landfill operator, particularly leachate. Listen, we suffer from weather and we've had a couple of wet seasons 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, and while we continue to maintain a pretty robust pricing environment.

Okay. I'll turn it over. Thanks.

Thank you for taking the questions. Actually if I could just follow up on the previous question, so you got about $10 million, 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 million. So obviously getting 1.7% yield is better than it had been in the past, but just a 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 going to see it tick up past the 2% range?

Well, let me take the high level and Jon 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 operating landfill business. Yes, there are, pricing has been trending up in landfill space. And certainly, we believe there is more room for pricing in landfill space. And then specifically to the cost of leachate, that's the kind of thing that you answer 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. Jon?

Yes, let me add. There is a natural lag, right. The cost hit us immediately and we can't price immediately, where we price typically over a 30, 60, or 90-day environment, sometimes a little bit longer depending on the contract. We are raising our environmental recovery fee, because as we see cost 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've talked about. So standby, we'll talk about how that's impacting us in October, when we talk about future.

Okay.

And the benefits of that are contemplated in the guidance.

Yes, and I don't want to take away from what you did in this quarter. I mean 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, if that's really from one fleet, is this kind of level of holding the line on maintenance and some of these items sustainable, how should we think about that?

Think about some of the points Jon mentioned. Scheduled maintenance is now at 90%, meaning unscheduled maintenance accounts for only 10%. This indicates that we are spending very little time on reactive maintenance. Consider what they need that downtime for, which impacts customer satisfaction, service, safety, and overall fleet costs. It’s been a long journey to improve our fleet management; we started at 20% scheduled maintenance and have now exceeded our goal of 80%. This has become a sustainable process for the company. We’re also experiencing positive price traction, with over 3% price increases in a restricted market. The team has worked hard to turn around that challenging segment of our business, which had been difficult for a couple of years. Now, that area is performing well with a 3% price level. This illustrates how our business operates: it takes time to get things moving, but we achieve long-term benefits. When we commit to something, we follow through, and we have several strong examples of how we are realizing those commitments.

Okay, excellent. Thanks very much.

Hey, guys. Thanks for taking my question. I’m just curious on the second half, could 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. First-half last year are still flat. So we're expecting some more leverage it seems like in the second half, is there anything that kind of help pass through how should think about the third quarter versus the fourth quarter?

Yes, I think that we are expecting margin improvement in both the third and the fourth quarter, but most of that's going to come through in the fourth quarter. Keep in mind also that in the fourth quarter of last year, the margins were a little bit lower there with 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 million for acquisitions. How much is actually it’s peaked into 2019. Clearly you must have some line of sight to be able to put that number out. How much is that is actually going to be baked and you think to 2019?

Yes, in terms of the Op income you mean or in terms of the revenue? So it’s going to have 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 it’s 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 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 is 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 at the back-half of the year, we think it's going to be relatively consistent.

In yield there is always a little bit of a mix, right. There is some mix geographically, there's mix by line of business by market vertical. That's always the business, we are 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 re-pricing 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 re-price contracts now with better contract structure and terms that we negotiated last year, this first quarter, and second quarter. 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 in that. That's what's fair for customers, right, it's good for us because we don't have this crazy that we talk about that that's what's real and is fair to customers and it helps us sell that to customers, who is trying to still partner with them and doing what's right for the environment, something they can get their mind around.

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.

Okay, well, I'm not sure what that was. But look what we've 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 strong, you've got consumer sentiment is good. Consumer spending is good. All these things point in the right direction, you've got job growth, you've got wage growth, all these things that that helped the price war. You've got certain amount of volume growth that helps drive pricing up. So we've got the tools deployed, when you first interest capture I mean years ago that, Jon?

Five.

Yes, so we have got five years now of integrating that and making that sort of the way we do business. The adoption rates are 100% right. So all of those things working in a good work, in a good environment and as a result we get. So as long as you 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 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 on the East and West. So we've got a lot of good in case we look at special waste 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.

Hey, thank you very much. 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 which you need to do and from the margin leverage of that all the way through the revenues and 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 we need to get leverage on the entire landfill book. And as Jon 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 million that you want to spend, you spent $180 million in the first half, that means $370 million. When you gave the number in the beginning Don. And I'm going to ask you if you'd repeat it. We didn't write it down fast enough. What are you assuming in the current outlook that that converts to and booked revenues in 2019?

Yes, 1.25% to 1.5% top line.

Top line and that and you've spent the whole $550 million, can you tell that or okay.

We did the remainder over the second half.

Yes, we haven’t spent it all yet but we'll spend it.

But the assumption in the 1.25%, 1.5% is the whole $550 million spend?

Yes, right. So we'll give a free type system here on deals in pipeline deals and process deals under contract. So we got pretty idea where we are. So high level of confidence in that number, we wouldn't give 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 was contributing related to the acquisition?

I would say because the incremental growth on that is 50% that would roll in because if you think of the $550 million we're about halfway through that. So we 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 there.

No, no 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 especially when we're having kind of robust second-half M&A activity, really nice rollover into next year, right. That’s a good thing to have.

And with it comes operating leverage on that rollover. So it excludes the momentum, so that is the point of this. Okay.

It’s not all solid waste. It's all waste, it’s all environmental service, it's all the 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 lot of money this year on some things around E&P in environmental industrial stuff. So it's a basket of things, right, but nothing, nothing outside what I would call our core capability.

Okay. And at Expo, Brian offered up that you were looking at industrial liquids as an opportunity because basically you have a skill set there. Can you do somewhat leachate processing, so that would fit into that bill as well that you might find?

Yes, look I mean here is the thing, right. When no different than when we first introduced to the fact that we were going to invest in that right now. Our timing was in 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 already then was, look, this is about 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 take in that business, we learn 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 does make sense. So we're slowly looking at other opportunities the one you mentioned is an opportunity in the space, right. So just like I always about M&A in 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&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 with Tervita, just like we're doing a great job turning the recycling business around. We've got capacity beyond just dumping two yards and four yards, right, really good that by the way.

Got it. Yep, you are pretty good at it. Last question from me, based on all 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 get, I don't, we don't have to talk about recycling if the commodity stay right here as far as headwind?

Well, what I 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 know 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, in fact we’re making progress on moving those contracts de-risking and recycling is many fast food business but we're making progress on every fronts of recycling. So we are on a path, right, not only to sort of ultimate overcome a deficit we've created for ourselves but we're on a path to the de-risk 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, we're going to be able to grow it and run it and do a great job for customers and for the environment without having to talk about all this crazy volatility that exists.

Okay. So I think that opened up one quite more question from me, sorry. So the Plano, Texas facility was Michael that's sort of, that's sort of an example of opportunity where lower labor because of the technology we'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 case for every customer, but certainly it was people point they value enough to come to the table and we were looking for a great partner and they found in us. So we're going to continue to push our model and the model works. Jon?

Yes, allows us to do two things, will take out about half of the labor in a tight unemployment environment that becomes important because that sort of job is can be a tough one to fill it also helps us produce about better product, the technology produces a cleaner product on the end and therefore we think bringing in a little more from what we saw on the back door that facility.

Terrific, thank you.

Thanks, Michael.

Hi, guys, compliments to the team on the first half and really nice work.

Thanks Jon.

Yes. The first question from me is just in light of the first-half sort of price, volume being ahead of expectations and you guys are saying you 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 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, is that not the way we should be modeling anymore?

I would say that on the yield side, we're probably a little bit higher than the original guidance, maybe something closer to 3%, and on the volume side, we might be a bit lower than what we initially guided, potentially slightly negative. Overall, we're in a good position for the rest of the year.

Okay, that's helpful. And then next one is just on the acquisition $200 million and $550 million. Definitely not an insignificant change versus initial expectations. So I just wanted to get a little bit more color on, 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 we start the year we've got a pretty good view of the pipeline, but things develop over time. So remember it went from 200 to 400 to 550. So anyway, the point is we locked it up, and so we know we know we share what we know and we give you numbers that we're confident in, and then 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 we're in the market when we first give you guide in February, Jon.

Yes, I mean I know the team has done a great job. We've invest in resources and we become a preferred buyer and I would say, we've got a higher number of referrals to buy companies than we ever have, because our 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 owners care about money, but they don't care just about the money, they also care about legacy and our 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 from me leverage at three times. I think you guys said at the end of the quarter. I'm just wondering kind of later in the cycle where 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 I'm just wondering how you guys are thinking about that.

Well, look, we've kept our leverage at our target leverage now for our over the quarters when we did have very intentionally, right. So we continue to do the work continuing to year. On the debt portfolio, we continue to work on what we think optimum leverage looks like, continue to look at all the other outlooks , that we should look at understand our leverage and we do that consistently, we have a lot of the structural our Board around that. We still think the target is that Optimum is between 2.5 to 3 and frankly more optimally 3. So again if 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. There really is no limits on us from that perspective.

Yes, that makes sense. All right guys, congrats again. And thanks for the time.

Thanks.

Okay, thank you for taking my questions. Just first off, sorry to belabor the acquisition pipeline, but does it 550 make any assumptions around potential divestitures of advanced disposal from the acquisition there.

No, it does not.

Okay. In I guess it's still pretty early but, do you see that elevated potential M&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 show that guidance in February. It's a robust. It's a robust pipeline. I will say that and again its activity is usually driven by sort of similar situations in life changing events and other things that occur. So there is nothing we're really doing to out there and say people to sell, it's all about being there people are ready. And as Jon 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 mandated divestitures from the big merger that's been announced, I think it's too early to talk about that. I think from what I know there are still in second request and they've got some work to do, and they publicly said what their target range is for divestitures. You can probably all imagine that we've got a pretty good handle on markets across for 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 the big green company, Houston has his phone ringing off the wall, with people who want to buy those assets.

Thanks, Don. How is the competition for these assets? Are the buyers you're competing against for some of the more attractive options remaining relatively rational, or is it quite competitive in terms of acquisitions compared to your peers?

I would say that it is indeed competitive and rational. Ultimately, there’s always a variety of options. You might need to pay a premium for assets like real estate, permits, landfills, or infrastructure when trying to enter a new market, compared to a smaller acquisition. Smaller acquisitions usually provide good value and can quickly start generating cash flow. While the market remains competitive and rational, there are times when specific opportunities arise or private equity enters the picture, making things more challenging. However, as reflected in our pipeline, we haven’t gone after every deal available, both large and small. We’ve been selective because sometimes we aren’t the ideal buyer. There are naturally better-suited buyers out there who have synergies or market advantages we lack. We are open to paying market prices, as other buyers may have different circumstances or insights on how to leverage the assets. Additionally, private equity can sometimes disrupt the landscape. However, if you look at our recent acquisitions, the prices we’re paying are rational, and that will continue to be our approach moving forward.

Okay, that's great. And then just one last one for myself if I could just on the restrictive markets and the move towards our Wastewater Sewer Index or is there CPI plus type of index. Do you think you'll be able to continue to increase that book of business on your ticket side toward the new index, I mean 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?

Being the incumbent has its advantages because we've already made the necessary capital investments and understand the costs associated with trash disposal, labor, and all the contract details. We have a solid understanding of our costs and the likelihood of contractor performance. This puts us in a good position as we work with existing clients. Each quarter, we continue to expand this client base. Initially, I had doubts about our capabilities, but now we've successfully converted about 30% over the last couple of years. With higher Consumer Price Index (CPI) rates, discussions with customers become easier since the difference between the CPI and our required increase is less challenging. If a customer refuses to accept adjustments based on these indices, which are grounded in reliable data, we aim to negotiate flat rate increases of at least 3%, sometimes even 4% or more. If the terms do not yield reasonable returns, we can't continue to serve that customer under the current conditions. Our approach is focused on returns, as this is a capital-intensive industry, which often requires multiple discussions to secure agreements.

Yes, we have two things on our side, one we're relentless. So we just keep asking. Two, we're only asking for what's fair. We're asking for a reasonable increase that support 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 a nice quarter, guys.

Thank you.

Thank you.

Thank you, Alison. In closing we are extremely pleased with our second quarter performance and well-positioned to achieve our original full-year financial guidance. Our teams let us focus on operational execution, the passion of 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 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.