Republic Services Class A Earnings Call Nuggets: Pricing Strategy and Growth Outlook

Republic Services Class A (NYSE:RSG) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Pricing Strategy

Hamzah Mazari – Credit Suisse: The first question is just on pricing. Don, maybe if you could talk about any change to how you are approaching pricing this year. One of your competitors is obviously out with a more aggressive pricing strategy, and your pricing strategy – maybe if you could talk about how you’re approaching pricing this year relative to last year and the year before given that volumes appear to be more stable?

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Don Slager – President and CEO: Well, I mean we’re going to adjust or approach pricing the same way we always have, Hamzah, and we’ve got a good system in place, a good central control over our pricing structure. We’ve talked a lot about our ratable pricing method and how we oversee pricing with our post-collection side of the business. I have said very consistently that I think as the economy returns, as some organic growth comes back into the business that the pricing dynamics will improve, I think consumer sentiment improves and sensitivity gets better. I think all of that paves the way for stronger pricing.

Hamzah Mazari – Credit Suisse: And then just on salaries and allowance for doubtful accounts, that went down and you mentioned the restructuring. Maybe if you could talk about how sustainable that is going forward and what you have baked into your current guidance?

Don Slager – President and CEO: We’ve said very clearly. We think our SG&A is going to be right at around 10% and that’s been a pretty consistent number for us. Obviously, the more growth we had over time, we can maybe get a little bit leverage there. But 10% is our number for the year. And as far as sustainability goes, the actions we took in the restructuring are very sustainable and the organization is functioning very well as a result of the restructuring.

 

Growth Outlook

Al Kaschalk – Wedbush Securities: Don, this is sort of a broader question and I’ll let you decide how to explain it or answer it. But if I look just at the top line and I look at cost of goods sold, growth rate in sales is below the cost, the quick cost of doing business. And you’re not alone in that that several other companies have done that, but specifically, are there things that you’re seeing that we should start to expect that sort of relationship to flip around going forward?

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Don Slager – President and CEO: Yeah, I think, first of all, we talk about the negative growth or the negative volume in the first half. Remember, we’ve got some anniversarying of some key contracts that were lost or large contracts were lost last year. So, we still believe that we’re going to be positive growth in the second half which sort of nets us to sort of flattish by the end of the year. But we think the business is growing. We talk about sequential improvement in pricing now for several quarters. We’ve got a pretty positive story on the collections side of the business and we’ve got – our landfill business is negative; but again, that’s coming from a couple of large contracts, maybe a little bit of weather that we’re facing. Overall, we think the trends, the current trends are positive. So, sequential pricing improvement is a good thing. As I just answered Hamzah’s question, as some organic growth comes back into the business, we think those dynamics around pricing and our ability to improve or recover, if you will, the inflationary cost get better as we go through time…

Ed Lang – SVP, Treasury and Risk Management: Al, this is Ed. Also keep in mind as you start to see positive volume growth, that does lead to better density, better asset utilization, which means you’re simply getting better return on the existing asset base. And as Don mentioned, that’s something we’ve been talking about quite a while due to the late cycle nature of the business that as we start to see the volume improvement, we get the better asset utilization, which will lead to expanding margins and a less competitive pricing environment as industry continues to grow.

Al Kaschalk – Wedbush Securities: Then my follow-up would be, we’ve talked a little bit about this previously, but just to be clear. The number of strikes or labor issues that have been popping up in the press, I think you called out in the reconciliation some of that, maybe it would be a good idea just to clarify for folks sort of where you are at in terms of the frequency of these that are showing in the press, I’d like to refer to it as sort of drive by strikes, because they are not very long in duration, but they’re certainly a headwind.

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Don Slager – President and CEO: Right, sure. Well, the issue we’re facing right now is primarily related to the central states pension issue. So we’ve got a portion of our business, a number of our drivers that are covered by the Central State’s pension which is headed for insolvency. There is no way mathematically for that fund to save itself. And so we are in the process of negotiating our way out of the Central State’s pension. We have every intention of getting out of the pension. We have a very strong feeling that we want all of our employees to be covered by a high quality retirement vehicle, and being part of a pension plan that’s going to be insolvent in the future; this is not that. So, we’re working hard for our employees to get them into something that makes sense for them. We’re about halfway through the number of CBAs that are affected by central states and we’re working through the second half. So, we hope to be through that by the end of the year. Having said all that, we historically have had a very good relationship, a very constructive relationship with the local unions and their leadership. We intend to continue to have that and we continue to (indiscernible) good faith to get through this

A Closer Look: Republic Services Earnings Cheat Sheet>>