Q2 2022 Republic Services Inc Earnings Call
Good afternoon, and welcome to the Republic services second quarter 2022, Investor Conference call.
Republic services is traded on the New York stock exchange under the symbol R. S. G.
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I'd now like to turn the conference over to Erin oven, Vice President of Investor Relations.
I would like to welcome everyone to Republic services second quarter 2022 conference call.
Jon Vander Ark, our CEO and Brian Delguercio, 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 involves risks and uncertainties and may be materially different from actual results are.
Our SEC filings discuss factors that could cause actual results to differ materially from expectations.
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When events are scheduled the dates and times the dates times and presentations are posted on our website.
With that I would like to turn the call over to John .
Thanks, Aaron Good afternoon, everyone and thank you for joining us our second quarter results continue to demonstrate the value created by our differentiated capabilities and ability to harness the positive momentum in our business.
We delivered outsized revenue growth, both organically and through acquisitions, while generating underlying margin expansion.
This was achieved by pricing in excess of our internal cost inflation.
Continued savings from productivity initiatives.
The fundamentals in our business remains strong and we remain well positioned to capitalize on additional growth opportunities in the marketplace.
During the second quarter.
We delivered revenue growth of 21%.
Generated adjusting earnings per share of $1 32, which is a 21% increase over the prior year.
And produce more than $1 $1 billion of adjusted free cash flow on a year to date basis, which is a 14% increase over the prior year.
We continue to effectively allocate capital by investing in value, creating acquisitions and returning cash to our shareholders.
Year to date, we invested $2 5 billion in acquisitions, which includes the acquisition of U S ecology.
The integration of U S ecology is well underway and progressing as planned.
We are encouraged by early cross selling results and remain confident that we will achieve at least $40 million of cost synergies.
We have one of our most robust acquisition pipeline ever with opportunities to close transactions this year and into 2023.
We now expect to invest over $600 million in acquisition apart from U S ecology for the year.
Substantially all of these deals are in the recycling and solid waste space.
Year to date, we've returned $495 million to our shareholders through dividends and share repurchases. Additionally.
Additionally, we recently announced an increase to the dividend for the 19th consecutive year.
During the second quarter, we reported organic volume growth of two 4%.
Which is which was broad based across geographies and market verticals.
Simultaneously, we demonstrated our ability to price.
Core price reached an all time high of six 2% and average yield increased to 5%.
This is the highest level of pricing in company history.
At the same time, we are experiencing higher than expected inflationary pressures that continue to persist.
That said, we expect to continue to price more than our internal cost inflation.
Ultimately leading to full year results that are projected to exceed original expectations.
We now expect adjusted EPS in the range of $4 77 to $4 80.
And adjusted free cash flow in a range of $1 $7 billion to $1 $75 billion.
This represents an increase of approximately 4% from the midpoint of the prior guidance.
Finally, we believe creating a more sustainable world is both our responsibility and a platform for growth.
We recently published our latest sustainability report highlighting the progress we are making toward our most significant opportunities to positively impact key stakeholders and the environment.
We reported a 9% decrease in greenhouse gas emissions from our 2017 baseline.
Which keeps us well positioned to achieve our interim target of a 10% reduction by 2025.
We also highlight progress made on climate leadership goals, including circular economy and renewable energy.
These goals are supported by investments, we are making in polymer centers and landfill gas projects, which are progressing as planned.
In addition to having a positive impact on the environment. These innovative solutions our platform for growth.
Our efforts continue to be recognized externally as Republic was recently named to <unk> Medias 100, best corporate citizens list for the third consecutive year.
I'll now turn the call over to Brian who will provide details on the quarter.
Thanks, John core price during the second quarter was six 2%, which included open market pricing of seven 8% and restricted pricing of three 5%.
The components of core price included small container of nine 7% large container of six 9% and residential of five 6%.
Average yield on total revenue was 5%, which represents an increase of 80 basis points when compared to our first quarter performance average yield on related revenue was five 4%.
As John mentioned, we continue to dynamically adjust price on new and existing business to offset higher levels of cost inflation, we see in our operating costs and capital expenditures.
Second quarter volume increased two 4%.
<unk> volume included an increase in small container of two 8% an increase in large container of 2% and an increase in landfill of five 7% or.
Our customer retention rate remained stable at 95%.
Moving on to recycling.
Commodity prices were $218 per ton in the second quarter. This compares to $170 per ton in the prior year.
Recycling processing and commodity sales contributed 20 basis points to internal growth during the second quarter.
Next turning to our environmental solutions business.
Second quarter environmental solutions revenue increased $260 million from the prior year, which primarily relates to the acquisition of use psychology.
On a same store basis, environmental solutions contributed 50 basis points to internal growth during the second quarter.
Adjusted EBITDA margin for the environmental solutions portion of our business was 17, 1% during the quarter.
This includes our existing operations in the Gulf and northeast together with the addition of U S ecology.
Total company adjusted EBITDA margin for the second quarter was 29, 6%. This.
This compared to 36% in the prior year.
Margin performance during the quarter included a 140 basis point decrease from acquisitions of which 60 basis points relates to the us ecology, and a 110 basis point headwind from net fuel.
It's important to note that even though net fuel was dilutive to margin we recovered over 95% of the dollar change in fuel expense through fuel recovery fees.
These margin headwinds were partially offset by a 30 basis point increase from recycled commodity prices.
A 60 basis point contribution from relatively higher incentive compensation expense in the prior year and most importantly underlying margin expansion of 60 basis points.
Adjusted EBITDA margin in the solid waste and recycling business was 38%.
SG&A expenses, excluding transaction cost from U S ecology or 10% of revenue.
The 70 basis point improvement demonstrates our ability to effectively manage costs and gain leverage while growing the business.
With respect to our outlook our guidance implies sequential growth in adjusted EBITDA dollars of five to five 5% in the second half of the year compared to our first half performance. This.
This would continue to drive double digit EBITDA growth on a year over year basis.
As a result, we now expect full year 2022, adjusted EBITA margin to be approximately 29, 3%.
The change in margin from our initial expectations relates to the impact of U S oncology and fuel.
Year to date adjusted free cash flow was one $1 $5 billion and increased $143 million or 14% compared to the prior year.
This was driven exclusively by EBITDA growth in the business.
Year to date capital expenditures of $505 million represents 35% of our projected full year spend and year to date cash taxes of 70 $79 million represents approximately 25% of our projected full year spend.
We now expect full year capital expenditures in a range of $1 45 billion to.
For $147 billion. This represents an increase of $130 million from the midpoint of our prior expectations.
The increase includes $75 million related to U S ecology.
The remainder of the increase relates to investments to support growth and higher than anticipated cost for trucks equipment and landfill cell development.
Total debt was $12 billion in total liquidity was $1 6 billion our leverage ratio at the end of the quarter was approximately three three times.
We expect to revert to three times leverage within the next 12 months.
With respect to taxes, our combined tax rate and noncash charges from solar investments resulted in an equivalent tax impact of 23, 9% during the second quarter and 24, 6% on a year to date basis.
The lower than anticipated tax rate was mostly timing related and provided a five cent EPS benefit during the first half of the year.
We expect this timing benefit will flip in the second half, resulting in an equivalent tax impact of 29% in the third quarter and 26% in the fourth quarter.
We still expect our full year equivalent tax impact of approximately 26%.
With that operator, I would like to open the call for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Okay.
The first question today comes from Toni Kaplan with Morgan Stanley . Please go ahead.
So much.
If you could give a little bit of extra color on the expectation for how pricing plays out I know you gave some great detail in terms of where the open market versus restricted was in the quarter, but just how do you think that plays out during the rest of the year.
Yes, it's strong.
Momentum on the pricing side obviously.
Putting out more price than we ever have on the open market side and retaining at a higher percentage than we ever have.
Which I think is a function of both the macro economy and inflation all costs going up for customers as well as the fact that we continue to differentiate our service offering and provide something unique in the marketplace.
I don't see that changing for the remainder of the year and then we'll get a nice pick up the second half of the year on the restricted side of the business and as those contracts kick in with underlying escalators, something tied to CPI or CPI derivatives like average trash a water sewer trash that will provides momentum there as well.
Terrific and then in terms of U S ecology.
Just any additional color on surprises versus now.
Now that you've started the integration.
Versus what your expectations were before.
Generally on plan and very excited about the people I think maybe one surprises we've been able to retain even a higher percentage of people than we expected.
Then there's natural synergies in the deal we've talked about that but the reason we bought this as a platform for growth and we really respect their <unk>.
<unk> culture of their expertise and obviously, a very unrivaled set of assets.
And their team has been absolutely energized to get connected with us very strong cultural alignment.
And we did a lot of work pre merger in terms of organization structure and model and design and have got those teams staffed up and ready to go when we're all moving in the marketplace. So.
I'd say on balance it's got a little more momentum than I expected at this point.
Terrific. Thank you so much.
Yeah.
The next question comes from Walter Bachman with RBC capital markets. Please go ahead.
Yes, thanks, very much good afternoon, everybody and just on the pricing question I guess, a lot of your contracts and just as you alluded to.
Coming into the back half pretty strong I guess that sets you up very nicely for 202023.
In terms of carryover of those price any pricing youre doing through the year and in the back half of the year.
So when we look out to 2023.
Is there any reason why we shouldnt.
Kind of see.
Our continued elevated pricing right for 2023, obviously lapping some.
Tougher compares.
As we get through the back half of 2023, but.
Tell me, if I'm wrong, but you shouldnt it remained elevated.
Given that the law.
Late late in the year pricing this year remain elevated through the first half of next year.
Yes, I guess the one cautionary note obviously that we're living in very unique in uncertain times and I think in the last 36 months of ton all of US some dose of humility, all that being said the outlook from what we see right now is very very positive.
And so you're right the restricted portion of that book will continue to flow through we're not going to change our stripes on the open market side of this business right, we start and we lead with price.
People deserve a fair.
Wage increase and that profit allows us to reinvest in the business and drive sustainability and all things that we care about so that won't change and listen I think we've got momentum on all three fronts. We got momentum on the pricing side of the business. We've got momentum on the volume side of this business and obviously the acquisition activity has also been very strong in the rollover effect into next year.
Sets us up for.
What we think will end up being probably a double digit revenue and year end 2023.
Okay.
That's great great color.
On acquisitions that dovetails into my next question actually is.
Just how youre looking at acquisitions now in two ways first of all taking a fairly large one here with U S. Ecology does that in any way kind of delay you from the cadence of acquisition.
Pace and cadence of acquisitions at all and secondly related to that does it does the us ecology.
No.
<unk> your attention a little bit to perhaps examining different types of acquisition. Some hazardous some solid waste or do you kind of refocus recenter on solid waste for opportunities going forward.
Yeah.
Yes, I think we talked about when we did the geophysical isn't either or it was all a band and the timing of the deal was predicated on all the momentum we had in.
The traditional recycling and solid waste out of the business and our outlook has never been stronger more positive there for deals and talked about what we're going to.
Close this year and a strong pipeline into next year, and that's where we started the bulk of our acquisition spend will certainly come in that space now.
The benefit is we've got a second platform with which we can pursue further follow on in tuck in acquisitions.
And so we have a pipeline there I think it's the only I think its very unlikely in the near term as we do another deal of scale in the environmental solutions side of the business. Because we think we've got a great platform with US ecology. We're building that out again, we will be able to tuck in pieces, along the way and in a very analogous way to solid waste.
Recycling space of getting great post closure synergies right on those deals as we pulled those right.
It makes a lot of sense. Thanks for the time as always.
Thank you.
The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Hi, good afternoon, and congratulations on the strong quarter.
I'm wondering if you could just talk about.
As we think about the pieces for 'twenty three you alluded to the top line can you just talk about the tailwind that you folks are going to have from your investments in landfill gas.
<unk>.
Okay.
<unk> facilities.
How many facilities do we have coming online over over the next 12 months as we just layer on additional tailwind to the business as we think about what 23 might look like at this point.
Yes, Jerry when you specifically around some of the landfill gas projects.
Polymer centers and things of that nature anything thats going to come online is really going to be in the latter part of 'twenty three so the contribution to 'twenty three is pretty limited.
With respect to those projects now, obviously setting up 24 and beyond right, that's where it starts to get more exciting with respect to those investments really next year is more about pricing in excess of cost inflation and the realization of the synergies with U S College deal.
Okay.
On that note, obviously really strong margin performance this year, but given the high inflationary.
Environment overall.
Really limits.
How aggressive we get on pricing ahead of cost whats the opportunity to make up for that next year is hopefully inflation slows from high singles to mid singles could we see a <unk>.
60, 70, 80 basis point margin expansion versus half that that you would typically target.
Well I think the thing you have to remember Jerry is that on that restricted portion of our business in those indices that those contracts are tied to they tend to lag.
So again when you take a look at what we're doing with the inflationary environment that we're experiencing today and we're seeing that across our book and we're able to drive underlying margin expansion. This year as we start to get those relatively higher price increases next year, we think that actually sets us up very well for continued margin expansion into 'twenty three.
So just to be clear it doesn't sound like we should be thinking about commercial and industrial lines of business pricing slowing significantly. So we're just going to get the additional kicker for the restricted business kicking in.
Continue.
Continued.
Level of pricing that we've seen in C&I this year.
Is that right, yes. They are the only the only caveat I'd say is I mean, the labor market remains constrained.
And we think we do see some signs of that easing right and I would hope that that would continue to ease throughout the year and create the opportunity in the next year, but we will do whatever we run this business forever. So we will do whatever we need to do to retain our people. So the level of margin expansion that we have in 2023 will be predicated on exactly how the type of local market is and what we need to do.
Wages.
Super I appreciate the discussion thanks.
Sure.
The next question comes from Hamzah <unk> Macquarie with Jefferies. Please go ahead.
Hey, good afternoon.
My first question is just around the restricted book and then also as part of that just cost inflation. So when you look at your cost bucket do you sort of believe it's most of those buckets have peaked the labor included and then and then as part of that when you look at your restricted book.
Much of that book is on indices that are not CPI and when they reset do they kind of cover cost inflation that you're seeing I know the lag or does it not even matter because the open market is so strong that it will.
Help you recover whatever youre not currently.
Yes, let me start on the wage piece.
Listen, we're seeing inflation rate in the high fours.
Yes, we feel good about that number in part because going into this high inflationary period, we thought we had a very healthy cost structure healthy meaning not.
Too high but also not too low right. Our team does a really good job of understanding local market dynamics, and we want to be the employer of choice in.
In those markets now obviously, we've had to take up put wages in the market. This year beyond our initial plan just given the dynamic environment and I would say listen we see that certainly flattening right and kind of ending the year right into the high fours on that front.
Assuming that inflation comes down that will start to modulate as we go forward. So I think we are.
Past the peak of this thing again with the caveat of we are living in uncertain environment.
Yeah, So hamzah within that 50% book that has a contractual pricing restriction, 34% of those are directly linked to CPI.
18% or some form of alternative index. So think just over 50% at some inflationary component baked into it and then the other 48% is some other pricing mechanism. So it can be a fixed rate it could be a rate review a cost plus contract, but thats basically the composition of that 50% of our book.
Got it and just my follow up question.
On U S. Ecology, you mentioned early signs of cross selling.
Could you just remind us.
What you sized it up revenue synergies.
And at the same time.
Is the is the sales cycle different than solid waste or just maybe just give us. Some examples of the early success of cross selling thank you.
Sure, Yes, chemo, we value the deal obviously based on the Standalone intrinsic value plus $40 million of cost synergies that being said, we think they are the revenue synergies over time.
Outpace that part of that is on the revenue synergies. So we've said $75 million to $100 million of cross sell realized over three years, we've already gotten 15 of that very good early momentum on that front and it is cutting both ways right customers that U S ecology have that we're bringing our services, but even more so.
Customers that we have we're now selling with broader set of services to so we're in early days on that we haven't really done a full rollout across all of our sales teams.
Very excited about the momentum to hit that number and then on pricing right. We believe these are scarce assets and again, you need to price to be able to reinvest in these assets over time and grow and so we put out a double digit price price increase earlier. This week that will go into effect in early September .
And to the marketplace because it is imperative that we do that in this inflationary environment right, we're going to reinvest in the business and we're going to expand these margins over time.
Got it thank you.
The next question comes from Michael Hoffman with Stifel. Please go ahead.
Thank you all so many things to think about and choose from so I wouldn't pick free cash flow.
If the old midpoint to $1 65, subtract $130 million for more capex that means there's about 193 million of upside from performance between solid waste.
In environmental services can you split between them where that came from.
Yes, that's all solid waste, Michael it's all solid waste okay. So.
That's just shows just how dramatic the leverage of this price has been.
To convert that into cash so that's the other observation.
Great Okay.
<unk>, so the U S oncology margins or the Es margins, which is basically mostly U S oncology.
Came out better than if you were looking at old models for that business coming into <unk>. How much of that is it was a really good market for those kinds of services and everybody had a really good quarter all the peers versus anything that you all did to effect change and then how do I look at your.
<unk> margin of 29, 3%.
Bert that into what's the dollars of EBITDA.
Well, yes, let me start with let me start with the latter part first when you want to talk about the dollars of EBITDA. So we talked for the full year.
Or I'm, sorry in the second half of increasing EBITDA five to five 5% over our first half performance. So think first half was $1 91, three second half that would imply 2 billion to $2 billion $20 million for a full year of $3 nine 1% to $3 93.
So when you take a look at that five to five 5% sequential growth.
Three 5% of that is just the additional amount from U S oncology just for having that for longer than that period of time and then the rest of the business one 5% to 2% when you think about that one 5% to 2% on that.
On a like for like basis, that's relatively consistent what we would see in a normal year.
And then on your margin question. So when you take a look at the 17, 1% for the environmental solutions business.
Again, I would say there wasn't much that we were able to affect in that period of time, there's only two months. So most of the synergy capture that we expect the cross selling opportunities that John mentioned, and then again the pricing opportunities thats more on the come so again I would say that was more of just the strength.
In the business from U S oncology, which could also be just reflective of strength in that industrial market.
Yeah. It was a very good cross their peer groups. So it doesn't surprise me that was good I just was wondering how much you were able to influence already okay. Thanks.
Thanks, Michael.
The next question comes from Sean Eastman with Keybanc capital markets. Please go ahead.
Hi, guys. Thanks for taking my questions.
I might have missed it but just the updated yield and volume guidance for 2022 seems like both are going up here.
Yes, so we expect with the.
5% that we just reported here in the second quarter, we would expect as we talked about that to accelerate in the second half of the year for the reasons. We have discussed we expect to stay over 5% for the balance of the year. So full year that would average to right around 5% on a full year basis for average yield and right now when we take a look at.
Volume, we're expecting that to be at the high end of our original guidance range, so right around 2%.
Okay got it very helpful and.
Updated margin guidance 29, 3% I believe it was 33% to 34 before.
I think E call was supposed to be 70 basis points of that gap is that what it ended up being in there.
That leaves, maybe 35 basis points of fuel, but I assume.
Fuel was actually more than that in Europe , you are actually covering a lot of what the incremental fuel drag was with price. So if we could just flesh that out that'd be helpful.
Sure, Yes, you actually had a couple of those numbers there. So U S. Oncology is 70 basis points 70 basis point drag from original expectations net fuel is actually 50 basis points worse than we originally thought we actually have a 120 basis point drag between the two and we're making that up with.
The rest of the business yes.
Get to that $29 three for the year.
Got it nice work thanks for the help.
Thank you.
The next question comes from Michael Feniger with Bank of America. Please go ahead.
Yeah. Thanks, guys.
When we think about the acceleration that you mentioned the back half.
Yield obviously you call. It can you help us just like the roll over of what.
That would look like for 2023.
Based on really where we're exiting the year at and what we see with USC call. After a few months.
And while you're talking about just overall revenue or are you just talking about specifically around yield.
Both.
You could just because of that.
Core price.
Accelerate I mean, you're putting these price increases through this year. So there must be some rollover benefit just by even not even increase in next year just by run rating at the end of this year and also for your E call I'm curious if there's any change in terms of the 12 month impact that we were thinking about when you originally guided.
Yes, so just a couple of things I want to clarify so when we're talking about core price and yield that is on the solid waste business.
That's what's included in those numbers I wanted to point that out because any change in environmental solutions revenue, whether it be price or volume is on a single line item when we sit there and reconcile the change in revenue.
So as we're talking about 5% yield as you think about the sequential improvement from the CPI linked contracts, we think to the second half of the year, that's probably about a 20 basis point increase or so in yield second half versus our <unk>.
Second quarter performance within a further step up probably somewhere in that kind of mid fives as we sit here and look at 'twenty three today.
Got it and Brian and John I'm curious, if we look back at your historical peak margin at 31% EBITDA range in 2010 11.
One main factor is wide margins were below that over the last decade blood the low CPI. So as we move into a CPI range of 3%, let's say on a multiyear basis, which was consistent with prior cycles. How different is the business set up today in terms of streamline opt.
<unk>, while holding cost like how different is this business today with <unk>.
Epi, 335%.
Long term compared to where we were in prior cycles. Thank you.
Yes stronger on both fronts, we're certainly stronger on the customer side.
Which leads to revenue on all fronts, it's a healthier customer mix.
Don't think that we've talked enough about the economics of loyalty in this business every revenue dollar is equal some customers are willing to stay with you longer.
That's why core price is interesting, but yield becomes the ultimate pricing metric and that's the one that really connects to the P&L because it factors in the customer that you gain and lose and you gain and lose those customers at very different rates with the same cost structure. So youll becomes very important so we've got the healthier customer base.
We've got better tools and better technology to help us work with our local teams in price very dynamically across all of our 300 plus market. So we feel better about that and then we're more efficient arise digital platform has been a big game changer for us we've taken out.
$40 million of cost and we think over the next 18 to 24 months, we've got another $60 million to take out just in terms of driving efficiency and getting the same amount of work done in a shorter period of time and so.
Where CPI goes listen we've lived in all kinds of different environments. Here I can tell you it being really low right doesn't work very well for the industry and we've seen that period. The current number obviously isn't great either even though our results are good we are out of balance as an economy right with labor constraints and.
And in an unsustainable way, where it's impacting consumer spend and everything else. So modulating something into a two or three 4% I think youre going to find very healthy dynamics of our business and really good performance.
Thank you.
The next question comes from Tyler Brown with Raymond James. Please go ahead.
Hey, good afternoon guys.
Hey, Brian So I, just want to clarify and be clear on modeling question here, but what is the expected revenue contribution in 'twenty two from M&A based on the guide.
Yes, so if you take a look at the total contribution from acquisitions, it's by nine 3%.
Or that which is closed has closed and that includes U S. Oncology. If you were to exclude U S oncology that would be about 300 basis points.
Okay, and then is there you mentioned a benefit and the rollover in 'twenty three.
Can you just size based on what's closed what what rolls over.
So including U S oncology that would also be about 300 basis points.
Or again U S oncology plus deals close to date.
Yeah, Okay, Okay, and then going back to the prior question did.
Did you say that you think you're restricted book will be up circa mid 5% next year.
So overall, when we kind of talk about the cadence of average yield.
So again with a 5% average yield in the second quarter, we see second half improving 15% to 20 basis points compared to our second quarter performance and then as we look forward into 'twenty three again, assuming that things stay relatively stable on the open market portion of our business, that's where we think of average yield right now in kind of that.
Mid 5% overall.
Okay that helps.
You talked about just over $3 9 billion in EBITDA this year.
I do that calculation it kind of implies call. It a 43% to 44% free cash conversion I think last quarter, you re endorsed that 17, 47% for 24.
So can you kind of build that bridge that three to 400 basis point uplift in conversion I mean is that is that lower leverage with a better closure post closure cash taxes Capex is how do we get there.
Yes, a majority of that would be as we revert to that three times leverage right. So we're going to reduce the interest expense at the same time, though capturing the synergies that's all going to be accretive to both EBITDA margin as well as to free cash flow conversion. So the combination really of the U S ecology integration the reduction in interest.
Expense over time, if that line of sight to that 47% free cash flow conversion.
Okay. Okay. That's helpful. And then I think we're 100 days in on U S ecology, any high level thoughts about portfolio rationalization to all the lines makes sense.
Yes, so there's a couple of things that are strategic review right.
Announce those when we've taken a decision on those those items.
The vast majority of what we bought we like and we're going to keep and operate and Theres. A couple of things that we're taking are taking a look at that might not be the best fit somebody else might be the natural owner.
Okay. Okay last one I promise and there's a bit of a strange question, but is there an extra workday in Q3, because we have fourth of July fell.
And in Q3 is relatively flat year over year.
Q4, there might be a quarter or a difference.
Okay. Thank you that's helpful.
The next question comes from Stephanie <unk> with Jpmorgan. Please go ahead.
Hi, good afternoon.
I wanted to ask about how you're thinking about capital allocation in terms of debt repayment versus acquisitions.
The leverage ratio coming down really just coming from EBITDA going up.
I need to repeat that and also how are you thinking about share repurchases.
Yes, I would say that on the.
Reverting to three times leverage is most likely a combination of both.
So again the.
Debt that we assumed as a result of the U S oncology acquisition paying down probably not all of it but a portion of that.
As well as just the.
Growth in the underlying EBITDA dollars is certainly going to help the leverage calculation, but think of it as a combo of both.
Okay.
Got it.
Okay.
But you had a follow up question.
Oh, sorry.
Youre going to comment on the share repurchases.
Yes, as far as share repurchases. So again, we were a buyer in the first quarter.
We said that we are going to prioritize at this point.
The debt repayment relatively short term outlook on that as far as 12 months or less.
But we always remain opportunistic on repurchasing shares and we will continue to do so.
Okay, and if I can just ask one more question.
You provided that free cash flow conversion target and 2024, you didn't really outright speed and adjusted EBITA margin target, but if we add in kind of a $40 million of cost synergies are we looking at total company EBITDA margin kind of getting close to 30% over that same timeframe.
Yes, and I think that that's a realistic.
Goal for us as we think about just through the cycle being able to expand EBITDA margin 30 to 50 basis points per year. So over that two year period, you can see that that 30% is a realistic target.
Okay perfect. Thank you.
Got it.
The next question comes from Noah Kaye with Oppenheimer. Please go ahead.
Thanks for taking the questions first one is sort of a guidance housekeeping item does guidance contemplate the reinstatement of the <unk> tax credit.
And if youre not including it what if that were to be renewed what would the contribution be incremental in terms of EBITDA.
Yes, no. We did not include that in the guide we're going to wait until that actually by law at this point for US that's about a $15 million annual impact if it were to be fully reinstated.
Okay great.
Then you mentioned pricing exceeding internal cost inflation, just looking at some of these cost line items, I mean youre getting leverage.
And labor and maintenance and repairs I Wonder if you could give us some color on how youre seeing the rate of internal cost inflation.
From <unk> to <unk>, and where you think it goes in the back half of the year.
Yes, we certainly we come out with the annual wage increase in the first part of the year, obviously for our people.
And as the market places persisted in these markets have remained challenge, we've been going into select markets and putting in additional wages right, where we need to.
Then we will do whatever we need to do to retain our people who run the business forever not for the quarter not for the year on that front. So that has certainly gone up from the first quarter. The second quarter. We now see kind of what we're doing right that flatlining throughout the rest of the year kind of ending.
End of the year with wage inflation in the high fours.
Okay perfect. Thank you.
At this time there appear to be no further questions. Mr. Vander Ark I will turn the call back over to you for closing remarks.
Thank you Betsy we are proud of our second quarter performance, we continue to manage the business to create long term value for all stakeholders I would like to thank our 39000 employees.
For their continued hard work and commitment to providing our customers with first class service to create a more sustainable world.
Good evening and be safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending you may now disconnect.
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