Q3 2022 Republic Services Inc Earnings Call
Good afternoon, and welcome to the Republic services third quarter 2022, Investor Conference call.
Services is traded on the New York stock exchange under the symbol our S. G.
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Please note. This event is being recorded I would now like to turn the conference over to Erin Evans, Vice President of Investor Relations. Please go ahead.
I would like to welcome everyone to Republic Services' third 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 involve risks and uncertainties and may be materially different from our actual results.
Our SEC filings discuss factors that cause actual results that could cause actual results to differ materially from expectations.
The material that we discuss on discuss today is time sensitive.
If in the future you listen to a rebroadcast or recording of this conference call you should be sensitive to the date of the original call, which is October 27 2022.
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I want to point out that our SEC filings our earnings press release, which includes GAAP reconciliation tables.
And the discussion of business activities, along with a recording of this call are available on Republic's website at Republic services Dotcom.
I want to remind you that republic's management team routinely participates in investor conferences.
When events are scheduled the dates times and presentations are posted on our website.
With that I would like but I would like to turn the call over to John .
Thanks, Aaron Good afternoon, everyone and thank you for joining us.
Our strong results in the third quarter demonstrate our ability to profitably grow the business and effectively manage our cost structure, even with increased volatility in the broader marketplace.
Cost pressures remain elevated and more persistent than we originally anticipated.
The pace of those cost headwinds, we are leveraging our tools and technology to price ahead of cost inflation and drive margin expansion in the underlying business.
From our perspective customer demand remains strong and supportive of continued volume growth.
It sound fundamentals in our business together with a laser focus on the customer position us well to capitalize on growth opportunities in the market.
During the third quarter, we delivered revenue growth of 23%, including over 12% from acquisitions.
Generated adjusted earnings per share of $1 34, which is a 20% increase over the prior year.
It produced more than $1.6 billion of adjusted free cash flow on a year to date basis, a 23% increase over the prior year.
We remain confident that investing in value, creating acquisitions as the highest and best use of our cash flows.
Year to date, we invested $2 $6 billion of acquisitions, which includes the acquisition of USA College.
The integration of use psychology is progressing as planned and we remain confident that we will achieve at least $40 million of cost synergies.
Our initial pricing actions have been successful we will continue to increase prices to ensure that all stages of the value chain earn an appropriate return.
We're also gaining traction cross selling our products and services achieving over $25 million in new sales to date.
Apart from U S ecology, we've invested over $400 million of acquisitions this year.
Essentially all of these deals are in the recycling and solid waste space.
Our robust acquisition pipeline continues to support outsized levels of activity over the coming years.
Year to date, we returned $640 million to our shareholders through dividends and share repurchases.
We continue to invest for the future and advance our strategic initiatives to build distinctive capabilities and customers deal digital and sustainability.
With respect to customer zeal, we delivered organic volume growth of 2.2% during the third quarter.
Volume growth was broad based across our market verticals and geographies.
We also demonstrated our ongoing ability to price in excess of underlying cost inflation.
Core price increased to six 9% and average yields increased to five 6%.
This is the highest level of pricing in company history.
Moving on to our digital capabilities.
Team continues to advance the implementation of digital tools that improve the experience for both customers and employees.
Our proprietary rise tablets have been fully deployed across our large and small container routes and deployment to a residential route is 26% complete.
The remaining residential routes are on track for completion by mid 2023.
We have also launched track my truck this technology can extra customer to their large and small container truck utilizing a GPS enabled rise tablet. This is a major milestone that serves as a foundation for further digital offerings to our customers.
As it relates to sustainability.
Development of our renewable gas projects remains on track.
We expect the first tranche of these projects related to our joint venture to come online beginning in late 2023.
We are pleased to work with BP on these LNG projects, who recently announced its intent to acquire archaea.
This provides additional opportunities to work together on de Carbonization and environmental services initiatives.
Regarding polymer centers, we are accelerating the development of these projects and now expect to invest an additional $40 million of capital this year to start working on future locations.
Finally, our company values guide everything we do.
I'm proud of our recent certification as a great place to work for the sixth consecutive year.
This is a significant achievement as employee retention and recruiting remains a top priority in today's market.
I will now turn the call over to Brian who will provide details on the quarter. Thanks.
Thanks, John core price during the third quarter was six 9%, which included open market pricing of eight 7% and restricted pricing of 4%.
The components of core price included small container of 10, 7%.
Large container of seven 6% and residential up six 7%.
Average yield on total revenue was five 6% an increase of 60 basis points when compared to our second quarter performance.
Average yield unrelated revenue was six 3%.
The team continues to dynamically adjust price, our new and existing business to offset higher levels of inflation in our operating costs and capital expenditures.
Third quarter volume increased two 2%.
Components of volume included an increase in small container of two 3% an increase in large container up one 7% and an increase in landfill up six 8%.
Our customer retention rate remained strong at over 94%.
Moving on to recycling.
Commodity prices were $162 per ton in the quarter. This compares to $230 per ton in the prior year.
Cycling processing and commodity sales were a 130 basis point headwind to internal growth during the quarter.
We are now forecasting fourth quarter commodity prices to be approximately $90 per ton.
This would result in a full year average commodity price of $165 per ton.
Next turning to our environmental solutions business.
Third quarter environmental solutions revenue increased $343 million over the prior year, which primarily relates to the acquisition of U S ecology.
On a same store basis, environmental solutions contributed 60 basis points to internal growth during the quarter.
<unk> EBITDA margin for the environmental solutions business was 18, 7% a sequential increase of 160 basis points.
This includes our existing operations in the Gulf and northeast together with the addition of U S ecology.
Okay.
Total company adjusted EBITDA margin for the third quarter was 29, 2%. This compares to 35% in the prior year.
Margin performance during the quarter included a 150 basis point decrease from acquisitions, including 90 basis points related to U S ecology.
And a 40 basis point headwind from lower commodity prices.
These margin headwinds were partially offset by a 10 basis point increase from net fuel and underlying margin expansion of 50 basis points.
Adjusted EBITA margin in the recycling and solid waste business was 35%.
SG&A expenses, excluding transaction cost from U S ecology, or nine 8% of revenue.
This is a 30 basis point improvement over the prior year and reflects continued cost management as we grow the business.
Year to date adjusted free cash flow was $167 billion, an increase of $309 million or 23% compared to the prior year.
This was driven almost exclusively by EBITDA growth in the business.
Similar to prior years, we expect to spend a disproportionate amount of our full year capex and cash taxes during the fourth quarter.
Year to date net capital expenditures of $808 million represents a little more than half of our projected full year spend and.
And year to date adjusted cash taxes of $115 million represents 50% of our projected full year spend.
Total debt was $11 $8 billion in total liquidity was $1 $9 billion.
Variable interest rates on our debt increased 1% during the third quarter and an additional 50 basis points in October .
As a reminder, a 1% increase in interest rates results in $36 million of additional annual interest expense or.
Our leverage ratio at the end of the quarter was approximately three two times, we expect to revert to three times leverage by mid 2023.
With respect to taxes, our combined tax rate and noncash charges from solar investments resulted in an equivalent tax impact of 25, 1% during the third quarter and 24, 8% on a year to date basis.
We expect an equivalent tax impact in a range of 28% to 29% in the fourth quarter and an equivalent tax impact of just under 26% for the year I will now turn the call back over to John .
We are proud of the results we delivered during the third quarter, which exceeded our expectations.
Stronger contribution from price more than offset persistent cost inflation.
Which we have seen stabilized, but not retreat from elevated levels.
That said, we remain comfortable with our full year financial guidance, we provided in July even with the recent drop in recycled commodity prices and increase in interest rates.
Looking forward to 2023.
On the metals of our business remains strong.
Recent decreases in recycled commodity prices increased interest rates and rising fuel costs will have a direct impact on our business.
While these headwinds may modulate our performance expectations, we remain confident in our ability to price ahead of cost inflation.
We spelunks is still expect to deliver above average levels of growth in revenue EBITDA and free cash flow.
We plan to provide detailed 2023 guidance on our fourth quarter earnings call in February .
With that operator, I would like to open the call to questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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And our first question will come from Tyler Brown of Raymond James. Please go ahead.
Hey, good afternoon guys.
Oh, Hey.
Hey, John I, just wanted to start on U S. Oncology curious how things are progressing there it sounds like you're a September price hike stuff, but can you just talk about how that actually was received in the market and did that cover both disposal and field services.
Yeah.
Broadly, it's going well really happy with.
What we purchased in terms of certainly the asset quality and also the people and culture and capabilities and get them and we're able to do a lot of the integration planning work are ahead of the close so that we've got a team that's hit the ground running and I think the results are certainly.
Showing that yes, we did put it in the pricing action that was on the disposal side of the business, where we start there we certainly taken some more tactical pricing actions on the field services side.
And we've seen no degradation in volume so the market's been very receptive to that I think it fulfills our thesis that these assets and services have a lot of value to customers and if you provide great work are willing to certainly pay a fair price and.
We will be continuing with you know pricing actions into 2023 and beyond you know to make sure that we're getting positive returns in every stage of the value chain.
Okay. Good deal it yeah. That's helpful and then on the pricing side, obviously, another good print, but I'm curious about a couple of things number one.
Do you think that the six nine.
That you posted this quarter could be the high watermark.
As we look to 'twenty three what do you think that 50% of the book that's restricted.
What do you think that Youll see.
On pricing in that piece as we look to 'twenty three.
Yeah, I think the we'll get a little momentum here in the second half I thought in the first half of next year.
That'll be four and a half or north of four and a half we think just based on the roll through you know where the all the different indices that we have at this point are starting to hit.
Yes, Tyler just to put that into context in the third quarter that.
Restricted pricing was 4% and in Q2 that number was three and apps you can see the nice acceleration as we move forward.
Yeah perfect. Okay, and then last one just on the acquisition drag I think Brian did you say 150 basis points and why was that so big.
Well you have a combination of.
U S. Oncology was 90 150, we also have some of the environmental solutions transactions that we did late Q3 of last year. So most of that but the other 60 starts anniversarying in the fourth quarter.
Okay, Alright, perfect. Thank you guys.
The next question comes from Toni Kaplan of Morgan Stanley . Please go ahead.
Thanks, so much I, firstly I wanted to ask about the strong volume that we've been seeing this year I wanted to ask about your view on the sustainability of that.
It's it's been progressively Ah you know maybe coming down, but I think overall you know fairly good so I'm trying to ask about that.
Yeah volume remained strong certainly in our.
Or recurring side of the business, but all also in the places that are more transactional like special waste and temporary large container.
We're still supply constrained there and that's still broad based alloys, we think into next year right. We're planning on those growth rates modulating a bit just because we're reading the same things you are around some economic pullback, but I you know frankly, I would've expected to see some of that already we remain very very positive.
Yeah.
Volume environment, right now and all the demand signals that we watch as far as.
New business new business in the small container business continues to exceed loss business and service increases are exceeding service decreases so the demand is definitely there.
Terrific.
And on the OCC I'm I know you mentioned the expectation I should take commodity basket you mentioned the $90 a ton for forecast is.
What is the sensitivity that you give in the filings that $10 million impact to revenue and profitability for $10. A ton is that is that a fair like is that gonna still hold for for this or is there a sensitivity on on certain levels of of you.
You know where we're at is and all stuff that can help us think about the main components within the basket.
Yeah, no that that sensitivity will hold right. So right now if we were to sit there and look at it at $90 a ton if that held true for all of <unk> 23, compared to the 165 dollar average that we're projecting for 'twenty two that would be a decrease of about $75 million.
Revenue and EBITDA on the on the commodity line item.
Perfect. Thank you.
The next question comes from Noah Kaye of Oppenheimer. Please go ahead hey.
Thanks for taking the question kind of follow up on that one so you know.
$75 million theoretically of of revenue flowing right to EBITDA in the commodity line item can you talk about offsets to that in terms of our processing fees or other structures. You have I know you've done a lot of work to de link the commodity exposure. So any clarification can provide there would be helpful.
Yeah, no. That's a that's a net number so if you remember if you go back and look at our islands of couple of years ago. The sensitivity to a $10 change was $20 million. So we've cut that in half and that's by being able to go in and actually share right in that volatility with the customer. So that's where you really see that change when we talk about that.
$10 equaling about a $10 million worth of EBITDA that is a net number.
And 10 million of EBIT, but not but not $10 million of revenue just to clarify.
It's it's both it's it's $10 million of revenue and EBITDA because again, if you think about what we did is that when we actually went in and changed the structure of the recycling contract. We basically just put that into the base rate.
Right. So that's how we actually wound up offsetting some of that volatility. So that's why when you look at the sensitivity now it's a $10 change is $10 million to both revenue and EBITDA.
Isolating the commodity impact that the service fee that we're charging to actually you don't need to process the material or to collect that material is going to stay unchanged, regardless of what the commodity prices.
Yep very helpful Theres been some discussion of.
You mentioned interest expense are looking at next year, but also bonus depreciation stepping down can you talk about that and any other you know puts and takes you think about for free cash flow conversion as we look to next year.
Yeah look if you just from an interest expense perspective, if you take a look at year over year and if this is you know.
Assuming 125 basis point hike in the fourth quarter that'd be about $70 million increase the interest expense year over year, which you know in isolation, it's about 100 basis point headwind to free cash flow conversion.
That said, though we had a plan that called for pricing in excess of cost inflation.
And to drive very strong growth so even though these are some new headwinds.
Our presenting our into our plan for next year, we still expect very strong growth in revenue EBITDA and free cash flow.
Yeah, I mean, and then reiterating I just Wanna make this point right in and please nuance of that is as it makes sense, but you know in saying you're comfortable with this year's guidance and point to above average growth for next year, I mean, it's really pricing and operating leverage and solid waste you know that that's making up some of these.
These are these headwinds if you will and and I just wanted to get your view on.
Whether or not theres incremental pricing that you can put through you know looking at 'twenty three to to shore up some of those gaps.
Well I'd also say, it's also a growth and margin expansion in environmental solutions are helping offset that we've got.
Plans are to continue to cross sell to continue to price right and drive our cost synergy numbers. There. So you'll see nice margin expansion in that part of the business as well.
We're committed to price ahead of cost inflation.
Under almost any scenario, obviously right in a black sponsor it where we get into <unk>.
Crazy levels of interest rates right, we'll come back and talk then but we've been in a pretty high interest rate environment.
And lower interest rate environment that we're in a pretty good job of it.
Both scenarios are both cases pricing ahead of cost inflation, and we're doing that playing a long game right. We have customers. This is a loyalty business. So we're always going to do things that maximize the lifetime valuable business, and therefore drive intrinsic value versus doing anything unnatural in a quarter that might drive short term results, but arent really good for that.
Shareholder longer term.
I appreciate all the color. Thank you.
Yeah.
The next question comes from Kevin Chiang of CIBC. Please go ahead.
Hi, good evening, Thanks for taking my question.
Just on the on the comments you made on the small container yield improvement.
To be outsized relative I mean, you got it.
The pricing everywhere, but especially it seems.
It seems to be outsized.
Just explain to me why that is why are you seeing.
Yes.
Even stronger pricing in small container.
Relative to your other classes.
Yeah, I think it's a combination of things Kevin I think it's certainly customer mix right.
We want to be with customers, who are willing to pay more and we've got pretty sophisticated tools.
Our sales and marketing teams to identify those customers and present them with an offering where they're willing to pay more.
More transactional parts of the business for example, brokers, we've just pushed that out of our portfolio because their renters renting those customers, they're not going to be with us for a long long time and so the mix certainly helps us and then the offering we put in front of the customers in terms of digital tools. The sophistication of our pricing that allows us to give you know very targeted.
<unk> to a customer and understanding volumes to pay all of those things drive yield which is the ultimate pricing metric core price as a means to an end the ultimate metric, which tied to the P&L on margin expansion is yield.
Okay. No. That's that's that's that's very helpful. And then just my second 160 basis point sequential improvement.
EBITDA margin and environmental.
Solutions, you talked about some of the early wins in terms of pricing and cross selling and cost cutting.
You think about that 116.
Is there a bucket that primarily drove that what would it be part of any of the cost cutting and then you know you can build off of some of the other synergies roll through or or or was it kind of a mix of things that drove that 116.
So it makes us think golf contributor isn't that really the balance that balanced approach is what we look for going forward as we look to take a business again that was.
In the mid to high teens and over a longer period of time, we think there's no reason that business can't be in the.
Mid to high 20, right, that's where over a period of years. We think we can take the business can't remember too. There's obviously seasonality in that business just like there is in the recycling and solid waste business and so you know Q3 seasonally it tends to be at highest quarter. So I think as we get more quarters as well you'll start to see the growth year over year, but I think you are.
Definitely they see it as John mentioned Youre going to see a combination of pricing actions youre going to see some of the cost takeout that we've done is we've realized some of the synergies and benefit from some of the cross selling.
Thank you for taking my questions and congrats on some good results here.
Thank you.
The next question comes from Michael Hoffman of Stifel. Please go ahead.
So I went back here as fast as I could do this why we're on the call I think for 10 years, you all have given some kind of indication of what the next year is going to be in the third quarter. So it looks like the first time, you're not in 10 years.
And yet then you say sales EBITDA and free cash flow will be up so can you help us a little bit on how to understand what's the messaging.
With Whatsapp me up a little up a lot up like it.
Okay.
Make sure we get the right place to land on 23.
Yeah, we had talked about last quarter, we thought we'd potentially a line of sight to double digit revenue growth right, we're probably off that a little bit in terms of what our expectations are for a couple of reasons one is commodity price.
It's coming down and they obviously have a revenue impact in our margin impact. The second is some of the acquisitions that we had hoped to close in the fourth quarter are getting pushed out so very feel very confident that those are.
Gonna be deals that close, but theyre going to roll into the first quarter or in one case, the second quarter, which just pushes the rollover effect of that revenue benefit.
And then the market I think is getting a little more uncertain as you see from a broader macro standpoint, all of that being said, Michael we feel really good about high single digit revenue growth right kind of in line with that you know EBITDA growth and free cash flow growth. So and those if you think about getting back to a 10 year period right. Those are certainly.
[noise] above average numbers for the performance in a very challenging environment. So we're very optimistic about 2023.
The reason why we're not giving some more formal type of indication. If you go back five years Theyre pretty predictable recurring revenue business right you got a lot of visibility.
Living in very dynamic in different times in terms of what's happening with.
Interest rates and labor tightness, and you know inflation and all those things. So I think that just come out commodity prices given all those uncertainties.
Gonna be a better position three months from now to provide more clarity.
Fair enough, but at least we've got some guardrails, we can live and based on what you just shared so thank you for that and then you did give us a sense of restricted price first half four and a half but the rate of inflation accelerating in the second half. So the assumption would be that restricted price in the second half.
Would be greater than the four and a half if the current trend holds but that's the right observation.
Yeah, you know I I don't know, if that's going to be significantly different Michael throughout the year I would kind of put again in that 4.5% to 5% range right for the full year again, we're exiting Q3 at four so you'll see some acceleration, but I think it'll be moderate acceleration throughout the year.
One last thing on price as you're starting open market price your exit rate from <unk>.
Yeah for the most part I mean look if you look at you know, where we're saying right now with a 5.6% average yield on total revenue call. It around 6% on an related revenue in total if you think about the open market portion of that we would see that participating next year are contributing.
Relatively in line with what we got this year.
That's very helpful. And then one just tweak because you're getting asked about a volume I mean, you're getting you're still seeing your good correlation household formation and new business formation, you alluded to positive service interval changes new business exceeding loss business, but the rate of change will start to narrow because we were off of a pretty healthy.
Recovery in second half of 'twenty, one into the first half of 'twenty. Two so we're gonna start normalizing into a more narrow a rate of change, but the trend underlying it's still positive.
Absolutely Michael that's our expectation when we think about 'twenty three that starts to modulate.
We think you start seeing that we think you start seeing that in the fourth quarter, you know, Michael and then again getting to a more normalized level of growth.
Okay. That's great. Thank you.
The next question comes from Walter Spracklen of RBC capital markets. Please go ahead.
Yeah. Thanks very much. Thank you for taking my question here.
Let's start on the cross cross selling opportunities I think I think John you mentioned earlier 75 to 100 million eventually you're at the 25 million Mark now are you still on track from a.
From a timing perspective in achieving that full run rate of cross selling or or if it's changed can you comment on that as it's been pulled forward or pushed back at all and why.
Yeah. We said we did achieve that by 2024, that's the timeframe, we said to be at 25 already given that we're still.
Working through some integration of rolling this thing out we have not touched.
Many of our customers yet, we're really really pleased about our progress and I would say quite optimistic about hitting both the level and the timing of that.
Perfect perfect.
On the OCC prices are.
Your peer yesterday.
Earlier, you mentioned that your contracts or their contracts are structured so that the the further OCC goes down the negative impact that sensitivity that you highlighted kind of contracts the lower OCC goes I just want to make sure of your contract design. Similarly.
That that plays out in your contracts as well so that it's not a strict you know you mentioned $10, but does that $10 contract when OCC prices go down further.
Further that OCC prices go down.
And that's why you know in the guidance itself in that we've put out there I would sit there and say on the way up and the way down that that $10 equating to $10 million of revenue in both EBITDA is.
Good sensitivity to use from a modeling perspective. So you know again the type of work that you're doing can dictate that whether or not you're brokering work that sort of thing those sorts of things can be different company to company, but that's our sensitivity.
Okay and last question here is on you mentioned bp's purchase of archaea, there that you're optimistic working with them and all of that anything that you can add have you spoken to the folks at B P. At all you know.
What kind of new ways would you you would you look at partnering with them.
Or is it just you know.
What what you had before is pretty much what you have now and expect to have.
Going forward or is there something additional now that now that you have a new owner.
They opened in yeah. We've spoke yeah, we're talking about many levels, including smoking to their CEO , there, but you could probably see they've got big bold ambitious plans around sustainability.
And de Carbonization, and we think Theres a number of ways. We can work together certainly.
Oh in the core JV itself and they are fully committed to that we're getting the best of both worlds because the colleagues from.
They are going to acquire gonna stay so we feel really excited about that team, but bringing more resources to bear that will certainly help us hit our marks and maybe move a little faster on that front.
And then they have a big business. So they've got a big environmental services business. So there's ways to partner together, they're there they have a.
Major network of gas stations, some gas stations actually a major place that plastic leak out of the value chain and don't get recycled. So there's ways to pilot innovate there and we've done nothing formal together on those fronts, yet, obviously, but likeminded ambitions in terms of making the world or environmentally sustainable and doing that.
In a way that drives growth for our shareholders as well.
Yeah, so the opportunity to get creative and and advent that initiative that's great. Okay. I. Appreciate the time, thank you very much.
The next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Hi, good afternoon, and good evening everyone.
I'm wondering if you can talk about for the recycling line of business at the commodity price that you mentioned for the fourth quarter do you anticipate.
Our business being in a net profit position.
Can you just comment on that and then you know nice to hear about the reiteration of guidance despite that.
Headwind of $20 million to $30 million from recycling can you just talk about.
What part of the guidance has evolved ahead of expectations sounds like it might be yield, but we would love. It if you could flush that out thanks.
Yeah. So just.
Your first question there at the $90 commodity price, yes that that portion of the business would remain profitable at that level and then the second part when you talk about the evolving guide you're talking about with respect to 'twenty two.
Correct.
Yeah. So you talked about just the puts and takes.
That's right. Yeah. So you were it sounds like you were able to overcome the recycling headwinds it feels like yield has accelerated for patients, but I'm wondering if I could just get you to expand on it.
Yeah, Brian .
Yeah, better overall yield better volume performance was you know we were able to overcome the commodity headwind as well as the higher interest rates in the third quarter as we now look in the fourth quarter of another big drop really happened recently so September into October . So again, that's why we've maintained the guide because the outperformance from Q3 is basically.
Funding, what we expect now for Q4, and we feel pretty good about the full year guide.
And then you know conceptually as you think about.
Pricing for the long term into it.
23.
Obviously, you don't want to drive churn, but it sounds like based on your prior comments that we're going to think about pushing pricing and municipal solid waste to essentially fund the.
Recycling headwinds.
It is what I think I'm hearing from you, but can I trouble you to put a finer point on that place.
Yeah, We think we're always going to try to price ahead of our cost inflation.
Jerry and obviously commodities are a headwind on that front, but.
We don't think about it is because now there is a short term headwind that we're going to go out and go put a bunch of price in the market that we could be destructive from a long term value creation with our customers on that front. So we feel good like I said in the twenty-three, but even with these headwinds that we're going to have high single digit growth.
Revenue EBITDA and free cash flow, which given that we're overcoming that commodity headwind I think speaks to the strength of the business I mean, we talked about the fact that we've seen elevated cost inflation in the business.
We see that rolling into 'twenty, three and right. Now we are we are making our planet if that cost inflation stays in the business for the full year.
So that's where the pricing ahead of cost inflation, that's where that comment is that look if inflation.
<unk> is lower than we think or it starts to abate then that could be some upside to our current plan, but that's not how we're going into it. So we do versus our original expectations. We do expect the impact of both lower recycled commodity prices and higher interest rates have an impact on where we thought we were headed as of 90 days ago.
But as we just kind of talked about with Michael We still think the outcome is going to be very strong, especially in the context. When you look at an average growth rate revenue EBITDA free cash flow free cash flow conversion, we think they're all very strong metrics all growing.
And lastly, I'm wondering can you just talk about the evolution for off take agreements and landfill gas you know in addition to capital deployed by BP Kinder Morgan has obviously bought some assets.
As well can you just provide an update on our offtake agreement visibility it sounded like the market was moving into the Twenty's per M. B to you on a multiyear basis I'm not sure if you feel comfortable commenting on that and how the.
Shape of the market has evolved since.
The last public update a quarter ago.
No we're still on track and still the same view that we're going to fix a portion of this and you don't play spot on the market with the rest of it which is going to provide what we think the best balance between maximizing our returns as well as predictability over the cycle and managing the risk on that.
Certainly have alignment with BP on that same philosophy on the back end of these facilities.
Okay. Thanks.
Yeah.
The next question comes from Sean Eastman of Keybanc capital markets. Please go ahead.
Hi team thanks for taking my questions.
I wanted to come back to the comment about the you know a couple of those acquisitions that slid to the right a little bit I'm curious could you could you help us with the.
Annualized revenue associated with those I think are I think we've got 300 basis points kind of locked for rollover with E call, but just trying to flesh out what what that number could ultimately look like.
Yes.
Yeah from a rollover perspective right now that's what we're planning is that the 300 basis points of rollover as John mentioned there were there were a couple of deals that were in the offer and they still are they put where we thought they might close in Q4, they're now looking like they could be early to mid 'twenty three.
So we will keep you updated on that progress, but right now we're building the plane with 300 basis points of acquisition rollover.
Okay got it so you don't want to give any hints on you know the the magnitude of those those acquisitions that are in the hopper.
I will tell you when they're closed.
Okay Fair enough fair enough and then.
I just wanted to make sure I understand the.
The E call contribution within that bridge to 'twenty to 'twenty three obviously, we've got a full year of revenue.
But I'm just curious.
How are you guys are thinking roughly about the.
Growth rate and because topline and.
I think we've got a lot of different pieces to work with here, but just in terms of where we're going to end up on E call margins. This year. What you guys think that will be for the full year next year.
Yeah, so of that 300 basis points of rollover of call. It 250 of it is related to U S. Ecology, if you're just thinking about in the context of a consolidated company margin. We look at that additional four months of rollover, having about a 30 basis point headwind on total company margin in 'twenty three.
Okay.
Got it and it does that is that assumes status quo margins for E call year on year.
A slight step up as we.
Realized a portion of the synergies again, but for the most part that's going to be in the Zip code.
Okay very helpful. Thanks, guys.
The next question comes from Kyle White of Deutsche Bank. Please go ahead.
Hey, Thanks for taking the question I wanted to go back to pricing.
I'm just curious are you starting to see any kind of pushback from customers. You know it seems like everyone's six months ago was willing to pay higher prices and now the environment has changed somewhat so I'm curious how those dialogues have gone and if you've seen any kind of pushback that you would you'd mentioned.
No. We're still like I said, we put up the highest in our open a portion of the business put up the highest gross price we ever have and have the highest utilization rate as a percentage that we ever have which is an astounding.
Number on that back so pricing is certainly a sticking at elevated levels is the only place we've had challenges and you know small micro markets, where we've had some challenges with turnover given labor constraints.
Obviously, when you you know that you're not providing the service that you want in a given market right you're going to cause the customers to reconsider and go elsewhere and so that's why we're into 2023.
Still planning on you know relatively elevated inflation levels, because we're running the business forever and we want to make sure that we can provide customers world class service and that that will keep them staying in paint longer.
Got it that's helpful and then on that you've talked about this a little bit, but as we think about 2023 and kind of underlying solid waste expansion margins. I think you know this year, you're probably running about 60 basis points 50 to 60 basis points and so if you're pricing that is L. O L. A elevated level of inflation that you're seeing today and that carries into 2020.
Three would that equate to again 50 to 60 with a potential to go even higher if we're in a more moderate inflationary environment next year.
Yeah, we spent across the cycle 30 to 50 basis points is what we think about doing recycling and solid waste.
We will do that overtime right at the elevated level of environmental solutions, you know could that creep higher next year, if pricing sticks and inflation comes down in the back half, but it certainly could.
But we're not expecting that in terms of building a plan around it but that would cause that gap to widen allowed for a little more margin expansion in the second half and certainly then going into 2024.
Got it thank you I'll turn it over.
The next question comes from David Manthey of Baird. Please go ahead.
Yeah. Thank you.
You previously outlined that your revenues have about a 90% correlation with housing starts on a one year lag is it correct to say that you believe that this is very strong pricing and maybe some environmental solutions can change that historical correlation and just either way as starts have clearly been declining in mortgage.
Rates continue to surge are there any incremental actions that you're eyeing relative to the back half of next year.
As far as because again it look that's been a historical correlation but again I think that's been in a call. It a.
A relatively stable macro environment.
And where we've been in anything but kind of had these puts and takes with inflation. So again at this point.
As John mentioned, we're going to continue to price in excess of cost inflation from an overall demand perspective again, we've actually seen the demand very strong throughout 'twenty, two and we're not really seeing any signs of that abate.
So again, that's how we're building our plant growth levels, probably won't be as strong as they were or certainly won't be as strong as they weren't in 'twenty. Two just because we were still recovering units from the pandemic, but we still expect underlying unit growth in 'twenty three year over year.
Got it so maybe directionally you still think theres, some correlation there, but not necessarily of the magnitude depending on starts is what I'm hearing.
<unk>.
Could we talk about the interest rate you you said, 1% change in rate is $36 million in interest expense what was the reference rate in the third quarter from which to build for the fourth quarter in 2023 then.
Yeah.
Yeah. So again right now what we're expecting is another 125 basis point increase.
And in in the fourth quarter, that's how we built our plan and then that being relatively stable throughout 2023. If you think about what that means relative to where we were exiting Q3.
That's a good 125 basis points for the when we think about where we are in Q4, a good 125 basis points from where we were exiting Q2. So.
The impact of that as we think about year over year is $70 million increase in total interest expense, which is about $50 million increase to cash flow.
Once you net out the related taxes.
Okay. Thank you.
Yeah.
The next question comes from Stephanie more of Jefferies. Please go ahead.
Hi, good afternoon.
Thanks, Stephanie.
I wanted to touch on your tech investments in digital tools I appreciate the update on the rice platform. It would be helpful. If you could share I don't know any kpis are all benefits that you're seeing kind of in the early rollout of those tools.
Seaside yeah.
We think that 2023, you know kind of what's in the pipeline from.
The digital tools and some investments that might be in the work.
Yeah, we've certainly seen over the last 18 months productivity benefits, which allows us to.
Get more work done in the same amount of time with great customer service and doing it safely.
Our primary.
Value for our drivers so we probably from a cost standpoint, we think we've taken out you know almost $50 million at this point and we think over the next 18 months. We've got another $50 million that we can take out of the business as we get full deployment and full utilization of this and then when you connect it back to the customer.
All of that information allows us to communicate with the customer there's track my truck we talked about that allows the customer to see where we are and when the pickup is going to occur.
And it not only allows in some cases than to look for themselves right, where the vehicle is I wanted to pick up is coming but even if they decide to use a different channel and call our customer service Center and then we're able to.
Have our agent look up there and give the customer not it'll be there tomorrow, a range, but give them a far more precise time that the truck is on the way and get to the customer sure. So there's been a lot of what we get is that right. We'll rerun, so precise that where they're within a path. Our 45 minute window every week or multiple times a week.
For a customer and so when we miss that window, even if we're gonna be there that day the customers call in they are concerned. So this allows us to provide better information and take cost out of the system.
I'm not going to talk about those today, but you're going to see more innovations come off that that make the customer offering differentiated that'll be to get directly hits the P&L in terms of customers staying longer.
Great. Thank you and then just touching on the M&A side, maybe in the traditional way yeah are you any changes in demand or interest levels that in this environment.
No I think the pipeline is certainly strong and so there's no.
Significant willingness to sell.
Obviously, maintaining a lot of discretion right some companies don't.
Fit us from a profile standpoint.
From a value standpoint, they might not be a good fit for us. So we remain very.
Discriminating in terms of what we buy but the pipeline is very very strong it's getting harder to do business.
Do you think about the digital investments, we just talked about or that's becoming a second vote. It is not just the post collection infrastructure.
All of those investments we make are very expensive they take a lot of time, they take a lot of expertise.
That makes it tough or the current labor environment makes it more challenging the current supply chain being constrained.
We're only slightly delayed in deliveries of equipment, because we're a great customer for our suppliers, where we buy trucks year in year out where some of the smaller players won't go years about buying and try to buy in the spot market will now they're locked out.
Factories are full and then at the end of the line and so you know tougher to get labor and those people you hire have to drive all the equipment that's in need of repair and replacement, but that's a big advantage for us to take over those businesses.
Understood well thank you so much.
Yep.
The next question comes from Michael Fine <unk> of Bank of America. Please go ahead.
Hey, guys. Thanks for squeezing me in Bryan that just did on a yearly basis adjusted free cash, though 1.67 really strong I think your guide is is one seven or so you might touch on it earlier is there anything I'm missing.
The fourth quarter that we should be aware of why you're not raising the free cash flow outlook.
Yeah, So Mike I had actually mentioned it in the remarks, so that the capex that we spent year to date, so three through three quarters.
And the cash interest represents only about half of our expected full year spend.
So in the fourth quarter, we expect a disproportion amount of both capex and cash taxes relative to the average you've seen so that's why you see a relatively modest Q4 contribution and why we've maintained the guide as it is on free cash flow.
Some of that as John mentioned and accelerating some of the investments in polymers center throughout the year. Some of the things we've done in order to fund this outsized growth, but so you know you can reasonably expect a little bit more capex than we originally anticipated partially being offset by a little bit less cash taxes than we originally anticipated.
And I guess, yeah, Brian just to follow up with that and to put a finer point do you plan to grow your free cash flow next year, it will that growth be in line to EBITDA growth.
Because obviously in the context of where you guys are kind of targeting your free cash flow conversion over time. Thank you.
Yes first question, yes, we definitely expect to grow our free cash flow and yes. It should be relatively in line with the growth in EBITDA. We would have we would've expected to grow at a little bit more obviously the impact of interest expense and recycled commodity prices impacts that but we are fully expecting to grow.
Thank you.
Uh huh.
At this time there appear to be no further questions. Mr. Vander Ark I'll turn the call back over to you for closing remarks.
Thank you Andrea I would like to thank the entire Republic services team for their efforts and commitment to driving lasting value for all of our stakeholders.
Have a good evening and be safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending and you may now disconnect.
Mhm.
Yes.
Hum.
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