Republic Services Pricing Spineometer: 5 of 5 Vertebrae

Republic Services, a waste removal and recycling services company, had a banner FY 2022.  Revenue increased 20% to $13.5 billion while earnings before interest and taxes increased 15% to $2.4 billion over year prior.

Their 15 February earnings call revealed the importance of pricing on performance at Republic Services.

Jon Vander Ark, CEO, opening comments included: “This is the highest level of pricing in company history. Organic volume growth was 1.5%.”  With revenue growth of 20%, these statements imply growth at Republic Services was driven primarily by price and secondarily by volume.

Jon Vander Ark clearly understands pricing.

In 2014 when he was CMO at Republic Services, he worked to complete a digital transformation in pricing centered on a “capture price tool”.

During the 2023 earning call, in response to an inquiry about raising prices on customers, Jon Vander Ark spoke to the individual transaction nature of price management required to capture a strong price, and the relatively minor role of their services to their customer’s spending thus the potential pricing power of Republic Services.  He stated “We’ll look at every dollar of revenue on every customer … We look at pricing with two lens(es). One is, from a customer and an insight standpoint, right, what does the market bear? What does our offer have from a value standpoint versus our competitors? And then we also want to look on the internal side and say, what is our cost? … we’re going to go systematically through every customer and every dollar of revenue. And I think the encouraging thing is we put out some double-digit price increases, and we’re seeing it stick, right? Customers are really valuing the integrated offering. And keep in mind, whatever they spend with us is a very small percentage of their cost structure.”

Later, Jon Vander Ark addressed the issue of selecting customers rather than chasing every deal.  He stated: “Customer mix is a hidden element or hidden factor in being able to get price. And we went through some intentional shedding, right, which has negative drag on our volume for a few quarters when you look a few years back. The quality of our revenue is much higher than it was historically, and we feel good about that. And that’s all the way across from national accounts to small container to getting out the last remain broker work out of the system to municipal and getting a fair escalator into those contracts. So, I think the overall health of our pricing across the portfolio, well, not perfect, of course, but it’s much, much better than it was a few years ago.”

In their presentation, Republic Services management indicated that they were transitioning customer contracts from being indexed to CPI (U.S. Consumer Price Index I suspect) to an alternative index or a fixed rate of 4% to better reflect costs.  Deloitte recommends using index-based pricing to enable companies to make volume commitments in advance of knowing costs.  As waste removal and recycling contracts are often multi-year contracts when made at the municipal level, indexing is a best practice for pricing Republic Services offerings.

With new long-term service contracts, individual customer negotiations, and the need to reprice or integrate newly acquired services and offerings, we expect to see a strong pricing team.

Research into the quality of Republic Service’s pricing team indicated a positive state of affairs.  Pricing professionals were identified with titles of analyst, manager, director, and vice president.  Pricing professionals worked on pricing execution, operations, analytics, field pricing, and proposal pricing.  Pricing supported specific lines of business such as recycling.  With a strictly North American service territory, we didn’t expect to find large geographical dispersion in pricing talent.

The review of pricing at Republic Services opened one new line of inquiry: Jon Vander Ark indicated an expectation of further improvements in pricing at Republic Services. Considering the Value-Based Pricing Framework, which area does he intend to invest in next?

Given the importance and capability of pricing at Republic Services as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of April ‘23.

Republic Services Pricing Spineometer:  5 out of 5 Vertebrae.

RSG (Republic Services Inc.) rose from 124 on the day prior to their earnings call to 129 one week later. 2022 revenue of $13.5 B with an 18% operating margin and P/E ratio near 29.

Currently, a 1% improvement in price would yield a 5.6% improvement in EBIT holding all else constant for Republic Services.

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