RSG - NYSE

Good afternoon, and welcome to the Republic Services Second Quarter 2025 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Aaron Evans, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon. I would like to welcome everyone to Republic Services Second Quarter 2025 Conference Call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are on the call today to discuss our performance. I would like to take a moment to remind everyone that some information we discuss on today's call contains forward-looking statements, including forward-looking financial information, 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 a recording of this conference call, you should be sensitive to the date of the original call, which is July 29, 2025. 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. Our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with the recording of this call, are available on Republic's website at republicservices.com. In addition, Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our investor website. With that, I'd like to turn the call over to Jon.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. We are pleased with our second quarter results, which reflect the resilience of our business model and consistent operational execution. We delivered robust earnings growth and margin expansion, overcoming continued lower demand from construction and manufacturing end markets. We continue to invest in our differentiated capabilities to meet the needs of our customers, allowing us to consistently grow our business and enhance profitability. During the quarter, we achieved revenue growth of 4.6%, generated adjusted EBITDA growth of 8%, expanded adjusted EBITDA margin by 100 basis points, delivered adjusted earnings per share of $1.77 and produced $1.42 billion of adjusted free cash flow on a year-to-date basis. Our focus on delivering world-class essential services continues to support organic growth and enhanced customer loyalty. Our customer retention rate remains strong at more than 94%. We continue to see favorable trends in our Net Promoter Score due to the value of our offerings and quality of our service delivery. Organic revenue growth during the second quarter was driven by strong pricing across the business. Average yield on total revenue was 4.1% and average yield on related revenue was 5%. This level of pricing exceeded our cost inflation and helped drive 100 basis points of adjusted EBITDA margin expansion during the quarter. Organic volume increased 20 basis points in the quarter. Volume growth included outsized special waste and C&D landfill activity. This related to hurricane recovery efforts in the Carolinas and wildfire remediation in the Los Angeles area. These volumes were partially offset by declines in the collection business. The decrease in collection volumes related to continued softness in construction and manufacturing end markets and shedding underperforming contracts in the residential business. Organic revenue was down in the Environmental Solutions business and resulted in a 90 basis point headwind to total company revenue. Environmental Solutions revenue has been negatively impacted by continued sluggish manufacturing activity, uncertainty around tariff policy and lower event-based volumes. Even with the revenue headwinds, our Environmental Solutions team demonstrated effective cost management to maintain EBITDA margin performance consistent with prior year results. Moving on to sustainability. We believe that creating a more sustainable world is both our responsibility and a platform for growth. We recently released our latest sustainability report, highlighting the progress we are making toward our 2030 goals and the positive impact we're delivering to our customers and the communities we serve. Our 2030 goals are supported by the investments we are making in the employee training and development programs, plastic circularity and decarbonization. We are making progress on the development of our Polymer Centers and Blue Polymers joint venture facilities. Regarding the Indianapolis Polymer Center, we commenced commercial production in July. This operation is co-located with our Blue Polymers production facility. We hosted a grand opening ceremony for this facility in June. We expect commercial production to begin in the fourth quarter upon the completion of equipment commissioning. The renewable natural gas projects we're developing with our partners are advancing. [ Core ] projects came online during the second quarter, along with another project completed in early July. This brings total projects completed this year to 6. We still expect a total of 7 RNG projects to commence operations in 2025. We continue to advance our commitment to fleet electrification. We had 114 electric collection vehicles in operation at the end of the second quarter. We expect to have more than 150 EVs in our fleet by the end of this year. We currently have 27 facilities with commercial scale EV charging infrastructure. We expect to have more than 30 facilities with charging capabilities by the end of 2025. As part of our approach to sustainability, we continually strive to be the employer where the best people want to work. We continue to have high employee engagement scores, and our turnover rate continues to trend lower compared to the prior year. With respect to capital allocation, year-to-date, we have invested nearly $900 million in strategic acquisitions. Our acquisition pipeline remains supportive of continued activity in both the Recycling & Waste and Environmental Solutions businesses. We continue to see the opportunity for more than $1 billion of investment in value-creating acquisitions in 2025. Year-to-date, we have returned $407 million to shareholders through dividends and share repurchases. Additionally, we recently announced an increase of the dividend for the 22nd consecutive year. We updated our full year 2025 financial guidance based on results delivered through the first half of the year, recently enacted tax legislation and our outlook for the remainder of the year. We now expect revenue to be in the range of $16.675 billion to $16.75 billion. We maintained our original guidance for adjusted EBITDA and adjusted earnings per share as follows: adjusted EBITDA is expected to be in the range of $5.275 billion to $5.325 billion, and adjusted earnings per share is expected to be in the range of $6.82 to $6.90. We increased our full year adjusted free cash flow guidance, which is now expected to be in the range of $2.375 billion to $2.415 billion. This increase reflects a benefit to cash taxes from 100% bonus depreciation, which passed earlier this month. Our updated financial guidance includes the contributions from acquisitions closed through June 30. We plan to remove the impact of recent labor disruptions from our adjusted results, which is reflected in our updated full year guidance. Regarding the labor disruptions, we've been negotiating good faith and remain committed to reaching a fair and equitable agreement that balances the needs of our employees, our customers and our business. While the labor disruptions have been localized in impact, I'm proud of how our team is working tirelessly to serve our customers. I will now turn the call over to Brian, who will provide details on the quarter.

Thanks, Jon. Core price on total revenue was 5.7%. Core price on related revenue was 7%, which included open market pricing of 8.6% and restricted pricing of 4.6%. The components of core price on related revenue included small-container of 9%, large-container of 7.1% and residential of 6.6%. Average yield on total revenue was 4.1% and average yield on related revenue was 5%. Second quarter volume performance on total revenue and related revenue increased 20 basis points. Volume results on related revenue included a 47% increase in landfill C&D volume driven by hurricane cleanup activity in the Carolinas and a 22% increase in landfill special waste revenue, driven by wildfire remediation efforts in Los Angeles. Large-container volumes declined 3.4%, primarily due to continued softness in construction-related activity in most manufacturing end markets. In residential, volume declined 3.2% due to shedding underperforming contracts. Moving on to recycling. Commodity prices were $149 per ton during the second quarter. This compared to $173 per ton in the prior year. Recycling processing and commodity sales increased by $7 million during the quarter. Increased volumes at the Polymer Centers and reopening a recycling center on the West Coast offset lower recycled commodity prices. Current commodity prices are approximately $130 per ton. This is the basis used for the second half of the year in our updated guidance. This would imply a full year average commodity price of approximately $140 per ton. Total company adjusted EBITDA margin expanded 100 basis points to 32.1%. Margin performance during the quarter included a 60 basis point increase from previously noted event-driven landfill volumes and margin expansion in the underlying business of 70 basis points. This was partially offset by a 10 basis point decrease from net fuel, a 10 basis point decrease from recycled commodity prices and a 10 basis point decrease from acquisitions. With respect to Environmental Solutions. Second quarter revenue decreased $11 million compared to the prior year, driven by lower event volumes and softness in most manufacturing end markets. Adjusted EBITDA margin in the Environmental Solutions business was 23.7%, flat when compared to the prior year. Year-to-date, adjusted free cash flow was $1.42 billion. Our performance reflects EBITDA growth in the business and the timing of capital expenditures. Year-to-date, capital expenditures of $727 million represents 38% of our projected full year spend. Total debt was $13.1 billion and total liquidity was $3 billion. Our leverage ratio at the end of the quarter was approximately 2.5x. With respect to taxes, our combined tax rate and impact from equity investments in renewable energy resulted in an equivalent tax impact of 23.3% during the quarter. With that, operator, I would like to open the call to questions.

[Operator Instructions] And the first question will come from Tyler Brown with Raymond James.

Brian, I know there's a few moving pieces, and I appreciate the EBITDA hold. But can you just kind of maybe parse out a little bit the $200 million or so reduction in the revenue guide? Just how much of that was ES versus, say, commodities?

Yes. Tyler, it's actually -- I would say there's 2 primary components. So one, we are reducing our volume expectation within the Recycling & Waste business. That is predominantly due to, again, we talked about weakness in construction-related activity, but also the weakness in manufacturing end markets, which impacts our Recycling & Waste business. So that's about $65 million or so of the $190 million reduction at the midpoint and then the rest of it primarily being in Environmental Solutions. If you think about commodity sales, fuel recovery fees and RINs, the decrease we're seeing there is predominantly offset by incremental acquisitions that we completed in the second quarter.

Okay. Okay. That's extremely helpful. And then just a little additional color maybe on why ES has been a little slow? I mean, I know that the industrial market is in a malaise, and it sounds like you had some bigger project work roll off. But is that really the story? Were there any share losses? Or just any additional color?

Yes. I think the dominant is the macro. I mean you think about manufacturing, and this is where trade policy impacts us, which is manufacturers are not making capital decisions, right? Production is slow. You can see that through PMI. Now somewhat optimistic here, we see a recovery of that. But that's what's impacted us to date and that we're forecasting being conservative for the rest of the year, kind of more of the same on that front. And look, we haven't always gotten it right. We've done a tremendous job of taking price. And you've seen that, and some of that is shedding non-regrettable work. And then some of that is we probably just priced ourselves out of a couple of opportunities that we're now getting ourselves back into. And then listen, a couple of parts of the business, when volume is slow, we've seen this in ES, and we've seen this in National Accounts, you see people getting -- trading off volume for price. And so those are short-term phenomenons, we think, on that front. And when forced to choose, we're always going to take price.

Okay. And just real quickly, I know that US Ecology and the [ old ] Tervita business are maybe kind of hidden in that portfolio, but can you just remind us how big your E&P business is in the U.S.?

Yes. So of the E&P when you think about of total Environmental Solutions, it's representing -- yes, mid-single digits of kind of our -- the total portfolio.

Okay. So it's pretty small. That's what I was after.

The next question will come from Bryan Burgmeier with Citi.

Maybe just on the kind of estimated impact from labor disruption. Are you able to share sort of what comprises the estimated impact that you forecasted? I mean, is it entirely lost volume? Or is there an element of assuming some higher wages or maybe you're paying an outside hauler? And is it possible to say maybe how much of that has already been experienced and how much is sort of going to be August, September moving forward?

Yes, it's primarily 2 things. The primary is the additional labor costs we have of moving our colleagues into service our customers so that our customers aren't experiencing disruption and feel very good about where we're at with that today. And then the secondary cost is some credits we'll issue to customers in markets where they have had labor disruption. Again, most of the time, we've had a very quick recovery. In places where it's been a little more protracted, we're going to take care of customers on that front.

Got it. Got it. And then maybe longer term, when these contracts are eventually renewed, presumably with some level of a wage increase. Can you maybe talk about how Republic has historically sort of mitigated the impact from higher wages? What that could sort of look like flowing through the P&L? And yes, maybe just what kind of levers are available to you?

Yes. Look, we're very frontline focused. So we want our people to make a very competitive wage in which the markets they operate, whether they're represented by a union or not. So we think about that all the time. It's critical for us to get that right, too low, right? And obviously, we have high turnover, and we can't service our customers. Too high isn't good either. It's not good for our frontline people because we become less competitive in the market, and we lose opportunities to serve customers and we shrink our workforce. And across our markets today, we're very confident in terms of the wages that we put out and benefits for our colleagues. In many of these markets, we're experiencing single-digit turnover, right? So this isn't -- not -- we don't have a wage or a benefit problem in these markets. We've got a labor disruption that we're working through, and we're actively ready to negotiate and hopefully get through it quickly, but we're also prepared for any scenario.

Your next question will come from Noah Kaye with Oppenheimer.

First one, just on the higher free cash flow outlook. Maybe just for avoidance of doubt, is that all really from the bonus depreciation benefits? Can you say how much those were? And is there any other moving pieces to take the free cash flow outlook higher?

Yes. So Noah, it's 2 components. So the increase from bonus depreciation, about $80 million benefit, that's partially offset by an increase in the CapEx of $25 million. In part, we've got a relatively small impact from some potential tariffs, but also some opportunities that we took to buy out some leases and really leverage our favorable balance sheet there and just our lower cost of capital.

Right, which has some margin benefits over time, which actually leads into my next question. I think to pick up on Tyler's point, the revenue outlook was helpful, the bridge to prior. Margins are going higher here. And I guess maybe the lower expected revenues in ES could be mix positive, but it just seems like there's kind of better underlying solid waste margin expansion here. So can you kind of help us do the similar bridge on the margin outlook versus what you had before?

Yes. And so again, as we talked about when you have the revenue and then you take a look at the flow-through to EBITDA, there is some positive mix. So while we're seeing a reduction in Environmental Solutions revenue, and I mentioned the -- on the Recycling & Waste side, the reduction in expectations around construction activity, we did see the positive contribution from those landfill volumes, right? So in both Los Angeles as well as in the Carolinas. So that mix helps the overall margin just because those landfill volumes fall through at a relatively higher EBITDA margin than, let's say, the collection volumes or the ES volumes.

And I would say it does point up the overall strength of the business, right? If you think about the demand environment, outside of COVID, this has been the most challenging demand environment now protracted for more than a decade. And softness in volume in a few spots, but overall, right, expanding margins in a very challenging environment, I think, speaks to the strength in the long- term nature of the business. And when you start to see volumes come back and return, I think we're setting our sights on even higher targets.

Your next question will come from Toni Kaplan with Morgan Stanley.

First, I wanted to ask on the C&D volumes looked particularly good in the quarter, and we saw some disparity between the big 3 on this particular line. I was wondering if you thought that this was a geographic thing or definitional? Or are you taking share in this particular part of the business? Just any color on strength versus the market would be great.

Yes. So Toni, the -- I mentioned the hurricane volumes. They're coming through the C&D line item within our landfill book of business. So that's what that entirely is. When you take a look at construction more broadly, where you see some of the temporary large-container volumes, you can see those continue to run negative, which is impacting our large-container volume. So we would say more broadly, when you take a look at pure construction activity, that's still a negative demand environment.

And those events almost always end up being connected to the landfill that's got the lowest cost logistics. So proximity matters the most in those cases.

Great. And then I wanted to ask the labor disruption question in maybe a different way. I guess how do you think that -- well, first, it sounded like maybe you're alluding to you see it as specific regional issues in different areas. Do you think it impacts the cost in the industry in the future on price/cost spread? Like, is it more of an industry thing? Or do you think that it's more contained and specific?

Yes. I think it's more contained and specific. We don't have a national contract. We have all local contracts, and we're about 1/3 unionized in our frontline workforce. And again, we feel very strong about the competitiveness of our cost position and the fitness of it, as I mentioned, right? We don't want to get it too high because we're out of market and we lose work. We also don't want it to be too low because then we can't retain our very talented people and can't service our customers, which allows us to get that price increase. So we feel very comfortable with the cost position today and moving forward.

The next question will come from Sabahat Khan with RBC Capital Markets.

Maybe just on some of the commentary from earlier around tariffs, other moving pieces in the macro. Presumably, there's some cost increase across the business, I guess. With the macro where it is, how are your discussions on pricing for next year going -- not looking for guidance, but just the acceptance of price, customers understanding that there are tariffs and other moving pieces. Should we expect a similar type of trajectory going forward relative to what we've seen recently?

Yes. We're seeing that tariff impact come through. Again, it's de minimis for us compared to most organizations. And we're working on 2 fronts, obviously, getting transparency with our suppliers, making them call out what is tariff related and then negotiating and pushing back on that, not down to 0 in every case, but pushing back to make sure that we're not just taking the headline number that they present to us. And on the other side, some of that, there will be cost increases, and we'll do everything we can to pass that through to price next year. So again, thinking about a 30 to 50 basis point margin spread per year across the cycle, we still think we're capable of doing that in this environment.

Okay. Great. And then understanding that some of the ES volumes could be affected by the macro like they might be this year, does that change the margin trajectory or the margin improvement journey you're on? And kind of second part, how far along are you on that journey, if you just think about since adding some of those platforms to your business, maybe how much more runway is there still on that front?

Yes. Maybe I'll start with the end. Over time, we think there is considerable [ runway ], just given the nature of the very technical waste streams we challenge given the number of landfills and incinerators in the post-collection environment, we think all that creates opportunity for margin expansion over time. But I mentioned before, if you measure the progress here in any given quarter, you're going to be disappointed because this isn't going to be a straight line of progress. There's going to be ups and downs and it's a smaller business, so you have comps and changes in demand. But if you look across the years, I think we've demonstrated very consistent steady margin expansion. And if you look forward, I think you're going to see the same trajectory over the next 4 to 5 years.

The next question will come from Tami

My first question is actually if you could provide a little more color on the volume cadence for the remainder of the year. Should we expect volumes to get sequentially better or pretty much ratable in 3Q, 4Q? Is there any color on volume?

Yes. We would expect, as we think about the second half of the year, if you just do the math based on what we're guiding to, to be flat to slightly negative in the second half of the year here. So we do have some of the event-driven landfill volumes. We do have some contribution continuing into the third quarter. So we expect that to be somewhat flattish on a year-over-year basis and then turn it to negative by the time of the fourth quarter as those projects are completed.

Got it. That's very helpful. And then similarly on pricing, any color on what to expect for 3Q versus 4Q?

Look, we've been just over 5% average yield on related revenue in the first half. We're maintaining our perspective of 5% for the full year. So it modulates a little bit, but you can think just under 5% in the second half of the year.

The next question will come from Faiza Alwy with Deutsche Bank.

So I wanted to ask about the lower revenues that you're citing on the core business, I think you said $65 million. So I just want to put a finer point on that because I don't think you had a lot of the event-based maybe impact that was in the guide. So I would have thought that, that would offset the incremental macro weakness. So just give us a bit more color on, like, is it more regional? Is there sort of any specific exposure that you might have that's kind of impacting the lower volume guide? I know you also talked about weather in the first quarter. So maybe it's related to that.

Well, look, if you think about when we entered the year, right, so our guidance was predicated on an economy that was relatively flat. So again, we were seeing volume declines in the construction business throughout last year. So we really expected that to anniversary and produce year-over-year results that were flat with the prior year. And you can see we're still on the large-container side, we're still producing kind of a mid-single-digit decline on a year-over-year basis. So we're seeing further declines from a level of activity perspective than what we saw in the prior year. That was not expected. So most of it is really that construction-related activity. And as I mentioned earlier, when you think about weak manufacturing end markets, that just doesn't impact our Environmental Solutions business. We have a $1.5 billion market vertical in Recycling & Waste that's focused on manufacturing end markets. So Jon just talked about the weakness that we're seeing there, some of the uncertainty that our customers are seeing and what that does to volume production, and that's certainly having an impact on our business.

All right. Understood. And then just on the Environmental Solutions business, could you give us a sense of like what your -- where we are from a volume and price perspective? I'm curious, I know we had -- again, last year, you maybe talked about sort of pricing above, I guess, trend. And I'm curious where we are at this point. And I know you mentioned sort of some of the volume versus price dynamics. So curious if you can tell us where -- what you saw volume versus price in ES.

Sure. Yes. Price positive and volume negative. And obviously, that speaks to -- and that business has got some scale sensitivity to it given the post-collection environment. So to be able to have flat margins in that environment just speaks to, again, trading off price for volume in this case. And again, we haven't always gotten it perfectly right, lost a little bit of share in that volume. And team is working really hard in places where it's positive to go get those opportunities and feel optimistic about the growth outlook. Again, the next couple of quarters, I think, are going to be uncertain. But if you think of a longer-term view here over the next 4 to 5 years, I couldn't be more excited about manufacturing in the United States.

If you just think about the results that we've produced since we acquired US Ecology, for the vast majority of that time frame, we've been in a PMI environment that's sub 50, right? So since the beginning of 2023, there's only been 3 months that have exceeded 50. So look at what we've done in a negative demand environment gives us a lot of confidence and really encourage us about what the future could bring when manufacturing activity actually resumes.

Your next question will come from Trevor Romeo with William Blair.

First one I had was just on the M&A pipeline. It sounds like maybe you did a couple of deals in Q2. You sounded pretty bullish, I think, in the past few quarters on the pipeline. So just any update there in terms of size, regions, any bias to one of the -- either Recycling & Waste or ES or just anything else on the pipeline would be really helpful.

Yes, pipeline remains strong and robust. I'd say, with the exception of don't see any transformational deals in the immediate term. It shouldn't be a surprise. Most of what we do here are some nice regional sized deals or small tuck-ins on that front. And listen, there's a little lumpiness to this pipeline, all -- the pipeline is strong, but the lumpiness to the activity of when deals close on that front and already off to a strong year, and the forecast is strong for the rest of the year.

Okay. That makes sense. And then just going back to margins, I guess, as we look to model margins in the second half, anything specific you'd call out on kind of the quarterly cadence or seasonality just because you may have a few moving pieces. So just any thoughts on, I guess, Q3 versus Q4 and the consolidated margins would be great?

Yes. The one thing I would point out, and this is more of a year-over-year type comparison, is that we called out in the third quarter of '24, we called out about $20 million of out-of-period benefits, which provided about 40 basis points of uplift to the margin in Q3 of 2024. So we have to overcome that. So again, when you take a look at, call it, relatively flat margin performance in the second half of this year compared to the prior year, probably a little bit negative in the third quarter because we have that 40 basis points we have to overcome and a little bit positive in the fourth quarter.

The next question will come from Stephanie Moore with Jefferies.

I wanted to touch a little bit about the maybe medium-term margin opportunity or just investment opportunity that comes from leveraging your RISE platform. So now that this platform has successfully been rolled out across the network and your fleet, if you could talk a little bit about what's next in terms of how you can maybe harvest that data or the opportunity of having that rolled out that eventually we can see that -- can drive kind of longer-term margin opportunity.

Yes. I think we have 2 components to it. One is it allows us to connect and communicate with the customer more proactively to understand giving them more precise times on service pickups, service verification, all of those things, and we're doing some of that already, but more proactive pushing and communicating. We know any time we're more digitally connected with the customer that they are going to stay with us longer, which creates an opportunity for a very profitable customer to stay in the portfolio. And then on the efficiency side, we're starting to use AI to build routes. And so that's the next opportunity to harness all that data and think about how do we more efficiently build routes and not doing that in a lights-out fashion, but using our very talented logistics team and AI together to figure out, hey, how do we get the same number of stops done in 5 less minutes, 10 less minutes, 20 less minutes a day. And we've talked about a minute taken out of the system across the years is worth $4 million to $5 million for us. So this is really a game of seconds and then minutes that can drive real cost efficiency into the business.

Got it. Just -- and then just wanted to touch a little bit on the Polymer Centers. Maybe you could just give us a quick update in terms of how the centers that are open are performing in terms of efficiency rates compared to what you've been targeting, pricing opportunity? Any color there would be great.

Yes. I think Vegas, we talked about a little slower out of the gate for some construction reasons on that. And then certainly had some learning curve on that in terms of exactly the quality specs our customer wanted in getting that communication clear. I think Vegas is making great progress. And then India is hitting its marks because we've taken all the learnings from Las Vegas and built those into Indianapolis. And then we'll leverage all those learnings, of course, in Pennsylvania for a third center as well. So we feel very excited that we're capturing the benefits of those learning. And listen, we have the supply. That's one of the reasons we did it. And the demand for the product is through the roof, right? The world is short supplied, and the country is short supplied on recycled PET. So we feel very confident about the returns profile of this over time.

The next question will come from Tobey Sommer with Truist.

I wanted to ask a question about your -- on the labor side. You've covered a bunch of the demand and top line stuff. Turnover and associated expenses, recruiting, safety, et cetera, have gone down now successively for a number of consecutive years. Do you think there's room to go on this? Or if we see the labor market pick up and the economy pick up, might there be sort of a trade-off between industrial volumes improving, but the labor-related expenses sort of creeping higher as well?

Yes. We're certainly not immune to the macro. And so economy takes off and we go back to a very, very tight employment market, that's going to have some impact on either our growth and/or to be able to supply workers and/or wage rates. Although, again, I feel really good about our team and our talent of recruiting people, but also the culture we've built, right? We focus intensely on employee engagement and being a place where the most talented people want to come to work. So how you treat them is a big part of that. The stability of the work is a big part of that. And then also compensation benefits. I think I talked a lot about this call about being -- getting that right and being very competitive. And while we're not perfect every time, I think we've done a really good job of improving that successively every year and dynamic enough to adjust that based on the macro environment. So it doesn't cause me any concern in terms of a hotter economy causing a labor pinch for us.

Okay. And on the ES side, you mentioned if confronted with price versus volume, you're always going to choose price. Anything you're seeing out in the market with respect to competitors' behavior make you think that there's a greater or lesser chance of continuing to fuel the business with acquisitions? Just curious if any of those behaviors are interrelated and therefore, could inform the M&A outlook.

No, I think the M&A outlook is strong. I think from a competitive contract standpoint, listen, when you're not in kind of a challenging demand environment for a period of years, you start to see some people can make different trade-offs on volume versus price. We're seeing that in part of the ES market, and we're going to stay disciplined. And I think the good news is that is marginal in the broader scheme of things and a really good story in terms of margin improvement in that part of the business over time, and we don't see that trend stopping.

And the next question will come from Rob Wertheimer with Melius Research.

I had a question on the second half incrementals, which you guys covered pretty well. But I was still left a little bit wondering if when you add back labor, is there any residual inefficiencies just from dealing with the situation that depressed margins slightly in 2H?

No. Again, I think if you -- when we talked about the labor disruption, I mean, again, we're planning on backing those out of the adjusted results. So -- and again, those were those incremental costs that Jon walked through. So when you talk about on the second half, it's not as much about what's happening in the current period. If you take a look at prior year, you can see the sequential ramp-up that we saw first half into second half. We just get into tougher comps. So we still expect to price ahead of cost inflation, and we still expect to sit there and see the benefits of some of the labor productivity investments that we're making. It's just going to sit there, and it's going to modulate and taper off as compared to what you saw as margin expansion in the first half of the year. And that was fully anticipated when we provided guidance in the beginning of the year as well.

Got you. No, understood. And then just a second minor one. When you look at the Big Beautiful Bill, does that change your appetite for CapEx? You have areas you can invest profitably. I'm just curious if you reevaluate plans given the bonus depreciation.

Yes. When you take a look -- and again, there's a certain amount of replacement CapEx that you're going to do each and every year, and we do that somewhat ratably. So just because you have a 100% bonus depreciation, that doesn't mean that you're going to sit there and take an asset that you have that still has remaining life and retire it. So again, it actually -- on the margin, if you sit there and say, would you sit there and accelerate some things, I mean, perhaps on the margin. But for the most part, we are steady, we are consistent and we're ratably replacing the assets in the business year in and year out.

The next question will come from David Manthey with Baird.

I just wanted to be clear on the third quarter '24 unusual benefit there. So I recall there was a 50 basis point insurance recovery, and then there was also a bad debt item. I wasn't clear on whether that was a positive or a negative. It sounds like you're saying that was a minus 10 leading to the net 40 basis points of favorability. Is that correct?

No. Actually, so there were $20 million worth of benefits in the third quarter of '24. The insurance recovery was a positive $15 million and the bad debt recovery was a positive $5 million. That's what impacted the third quarter of '24. Our commentary on the 50 basis points last year was in the prior year. So now you're back into '23, we actually had some negatives. So now you're talking about the spread, '23 over '24. Now what we're saying is when you compare '25 over '24, you're really just having to overcome that $20 million benefit that we saw in Q3 of '24. And again, the insurance recovery, $15 million, bad debt positive recovery was $5 million.

Perfect. All right. And then ECOL used to break out base versus event work. And it sounds like you're saying that the base ES work is pretty lackluster given industrial production levels. Do you have any comments around environmental services event opportunities you're seeing in chemicals, metals, manufacturing, refining, some of the key industries there?

Yes, I'd say one thing and good news, bad news, there's been less emergency response work this year. So good from a societal standpoint, we've had fewer emergencies to deal with. Challenging for the business, obviously, because those end up being very profitable opportunities for us to go. And we know that across the cycle, and there's going to be years of that spikes and years that, that is a little lower on that front. It's been a slower first half of the year. We'll see what the second half looks like. And then any discretionary work on site cleanups or other things, this is where the macro, I think, is causing manufacturers just to pause. I mean people are focused on tariff policy, relocating manufacturing, figuring how to get warehouse goods, et cetera. Anything ancillary to their operation, they've just put on pause. So our pipeline looks good, but events and those opportunities aren't moving at the pace that we would expect. And it's the uncertainty that hurts people. As we get more certainty around trade policy, we're optimistic that, that starts to move.

The next question will come from Konark Gupta with Scotia Capital.

I understand you will be adjusting out the labor impact from the adjusted results you will post. But just an update in terms of where the labor agreements are right now. My understanding is you had a few different regions of the country where you had these disruptions, but you have achieved maybe some agreements in some places. So can you update us where and what agreements are left right now?

Sure. What happened is a number of markets went out, right, with contracts that were expired and chose to strike. A few other contracts in different parts of the country have sympathy strike language, where if people show up to pick it, the workers don't cross those lines. We've kind of recovered on all of those sympathy strikes. Our colleagues are back to work, and we typically see this ends up being a day or sometimes a week activity, right? And now we're down to just a few markets where we're negotiating to get agreements on that front. And again, we're going to negotiate in good faith. We want a deal that is very fair and competitive for frontline people, but we're not going to do any deal that impairs the longer-term health of the business or hurts our colleagues longer term.

Okay. That's great. And just on the M&A, I think you provided some good color in terms of what the pipeline looks like. How much contribution in terms of revenue have you embedded in the guidance for the full year?

Yes. So again, if you take a look at what we're expecting, there's 120 basis points of contribution to 2025 growth, 100 of which was included in the guide. Because again, we had known about that. That was the Shamrock deal that was already known at the time when we provided the guidance.

20 is incremental?

I'm sorry, what was the last part?

Sorry, 20 is incremental, right? You had 100...

20 is the incremental, correct. Yes. And that's about $35 million of annual revenue. Correct.

The next question will come from James Schumm with TD Cowen.

Just also on the M&A. But with respect to environmental services, there's been some high multiples paid for some of these targets, 14, 15, 16x EBITDA multiples have been paid. Are you seeing, as you look at takeover targets that a lot of these sellers are trying to really up their asking price? And are you seeing like a widening of the bid-ask spread in the ES market with respect to M&A?

I don't think we're seeing a widening of the spread. I do think that if you look across the last years, multiples have absolutely gone up. They've gone up in Recycling & Waste too, but they've gone up faster in ES in large part because there's been so much value that's been driven in that part of the business. So the business are becoming more valuable on a forward-looking basis. And the multiple is totally dependent on what you're buying. If you're buying something with limited infrastructure, more field services based, that multiple is going to be a fraction of what you mentioned. If you're buying something with great permitting and great infrastructure, that could be a very value-creating deal on that. And again, we're going to look at unlevered cash-on-cash returns, the multiple ends up becoming an output.

At this time, there appears to be no further questions. Mr. Vander Ark, I'll turn the call over to you for closing remarks.

Thank you, Chuck. As we close out today's call, I want to thank the entire Republic Services team for their unwavering focus on safety, sustainability and customer service. Their commitment, energy and ingenuity are solving today's challenges and positioning us for continued success. Have a good evening and be safe.