Republic Services’ Q2 Earnings Preview

The second-largest American waste disposal company Republic Services (NYSE: RSG  ) is set to release its second-quarter 2014 results on July 24. Volume improvement and better pricing scenario helped its revenue to grow in the first quarter, but higher operating expenses and absence of fuel tax benefit hit adjusted income per share.

However, management believes the company's fundamentals are strong and that it's well positioned to return shareholder value in the coming quarters. Will the company's confidence be reflected in the second quarter results? Let's find out.


Source: Republic Services

Revenue could go up
Analysts expect Republic Services' second-quarter revenue to grow 3.9% over the year-ago period to $2.19 billion. The revenue growth projection is slightly better than the 3.8% increase during the first quarter. Last quarter's improvement was driven by better yield and volume, gains from recycled commodities and acquisition synergies. Analysts' projection suggests that these very factors would continue to support the current quarter's result.

In the first quarter, volume growth was 1.5%, led by higher collection services to commercial as well as industrial customers. It's expected that collection volume will grow this quarter too, mainly due to seasonality. Typically, waste management companies process higher volumes of wastes from the construction and demolition activities during summer months. 

Apart from seasonality, Republic Services could benefit from the rebounding construction industry in the U.S. According to a report from investment banker Wells Fargo, optimism quotient for the industry has shown a positive score of 124 for 2014, a 19-year high. Despite some reservations around the economic recovery, the bank sees progress in both the residential and non-residential construction sectors. 

Higher volumes from the construction sector would improve yield based on a better pricing strategy, which in turn will help boost the company's total revenue. Republic Services follows a dual-pricing strategy based on consumer-price-index (CPI) and open market. Under CPI-led pricing, if the government-determined price of inputs like gas is low, the company charges accordingly for contracts. Under open market, prices are determined on the basis of volume growth, as in if the demand for the company's services is high, it can charge on its own terms.

Republic Services maintains a good balance between the two approaches. In the past quarter, the company maintained its average yield at 1.2% because of open-market pricing, which offset a low CPI-driven pricing scenario. The company expects open-market pricing environment to improve continually through this year.

Last, but not the least, the company could continue to gain from acquisitions. In the first quarter, acquisitions contributed roughly $7 million toward sales. In the conference call management mentioned that roughly $18 million worth of deals are waiting to be closed, which could aid revenue growth in the second quarter.


Source: Republic Services

Better earnings visibility
Analysts' consensus earnings forecast for the second quarter is $0.49 per share, reflecting a 14% growth over the same period previous year. The increase is expected to come from higher revenue coupled with cost improvements. In the first quarter, adjusted earnings per share of $0.43 dropped 6.5% from the year-ago quarter and the main reason was increased operating costs due to extreme cold weather.

Running the garbage-carrying trucks requires fuel and the cost depends solely on market. But there are certain areas where Republic Services is making efforts to reduce operating costs. It's buying compressed natural gas (CNG) vehicles, automating fleet and standardizing fleet maintenance operations, which is expected to keep costs under strict control.

Through 2013 end, the second largest trash recycler replaced 12% of its fleet with CNG-led vehicles, automated roughly 66% and brought 45% under standardized maintenance.

Though saving from expense control is expected, the cessation of fuel tax credits will have a bearing on numbers. Due to this, profitability could be suppressed to some extent

Free cash flow to improve
Republic Services has a history of generating positive cash flows, reflecting the company's efficient cash utilization. No wonder it has satisfied shareholders through dividend payments and share buybacks.

In the quarter, increase in tax rate is concerning negative, but Republic Services could make it up with volume growth, yield gains and cost controls. This may lead to strong operating cash generation. Also, the company is taking measures to keep capital expenditure low. The planned purchase of CNG vehicles and standardization of fleet maintenance is expected to bring down capex requirement.

Foolish conclusion
Republic Services has had a good start to the fiscal year and expects the momentum to continue throughout 2014. The company's focus on balancing volume and pricing is expected to improve yield. Seasonal benefits and a rebounding construction sector would perk up revenue, and cost controls thrown into the equation could shore up profits.

 


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