Q4 2022 Republic Services Inc Earnings Call
Good afternoon, and welcome to the Republic services fourth quarter, and full year 2022 Investor Conference call.
Services is traded on the New York stock exchange under the symbol <unk>.
All participants in today's call will be in listen only mode.
You need assistance.
Our specialist.
RK followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I'll ask a question you May press Star then one on your Touchtone phone.
Withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Erin oven Vice President of Investor Relations. Please go ahead.
I would like to welcome everyone to Republic services fourth quarter and full year of 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 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 recording of this conference call.
Can be sensitive to the date of the original call, which is February 15th 2023.
Please note that this call is property of Republic services, Inc. Any redistribution retransmission or rebroadcast of this call in any form without the express written consent of Republic services is strictly prohibited.
I want to point out that our SEC filings our earnings press release, which includes GAAP reconciliation tables, and a discussion of business activities.
Along with the reporting 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 to turn the call over to John .
Thanks, Darren good afternoon, everyone and thank you for joining us.
Public team finished the year strong by executing our strategy designed to profitably grow the business.
We outpaced expectations throughout the year delivering results that exceeded our full year guidance, even in the face of increased volatility in the broader marketplace.
During 2022.
We achieved revenue growth of 20%, including a 10% from acquisition.
Delivered adjusted EBITDA growth of 16%.
<unk> generated adjusted earnings per share of $4 93, which is an 18% increase over the prior year.
It produced $1.74 billion of adjusted free cash flow, a 15% increase over the prior year.
We continue to believe that investing in value, creating acquisitions is the best use of our free cash flow.
We invested $2 7 billion in acquisitions in 2022 which includes the acquisition of U S ecology.
The integration of U S ecology is going well with cost synergies tracking ahead of plan.
Revenue contribution from U S ecology outperformed our expectations by nearly $50 million for the year with almost all of the over performance occurring in the fourth quarter.
We continue to adjust prices related to U S ecology, and a broader environmental solutions business to better align with our capital invested in resources deployed.
Pricing actions taken to date have been successful as our customers recognize the high value of service we provide.
Additionally, we are building momentum cross selling our complete set of products and services with approximately $40 million of new sales to date.
Aside from U S ecology, we invested $500 million in value, creating acquisitions during the year.
All of these deals were in the recycling and solid waste space.
As part of our balanced approach to capital allocation, we returned nearly $800 million to shareholders through dividends and share repurchases.
Regarding customer zeal.
We continue to enhance our culture of delivering a world class customer experience to win new business and drive customer loyalty.
Our customer retention rate remained strong at 94%.
And we exited 20, showing two with our highest NPS scores of the year.
We delivered outsized organic revenue growth during the fourth quarter with simultaneous growth in both price and volume.
Core price unrelated revenue increased to eight 4%.
And average yield unrelated revenue increased to six 7%.
This is the highest level of pricing in company history.
Organic volume growth was one 5%.
Volume growth was broad based across our market verticals and geographies.
Moving to digital in early 2022, we implemented a finance and procurement modules of our new ERP system, which streamline back office activities and provided our local leaders with enhanced data.
Currently we are building a new asset management system, which is expected to increase maintenance technician productivity and drive better warranty recovery.
We expect to implement the new asset management system beginning in 2024.
We continue to make progress on deploying rise tablets in our collection business.
We finished the implementation for all large container and small container out during 2022 and completed 37% of residential routes by the end of the year.
The remaining residential routes are scheduled to be complete by mid 2023.
This is a key component, enabling further connectivity with our customers, including real time service notification.
The adoption of rise has helped drive operational efficiencies and cost savings worth approximately $50 million annually.
Sustainability is core to our strategy and one of our differentiating capabilities.
We believe Republic services is in a unique position to leverage sustainability as a platform for profitable growth, while making a positive impact on the environment.
For example, our polymer centers are advancing circularity of plastics.
This is the first time, a single U S company will manage the plastic stream from curbside collection to delivery of high quality recycled content for consumer packaging.
Development of the first center in Las Vegas is on track and is slated to come online in late 2023.
Development of our second polymer centers already underway.
The facility will be located in the Midwest and will serve as a hub for aggregating and processing recover plastics in the region.
This center should come online in late 2024.
The investments we are making to develop these palmer centers being absorbed through our normal capital expenditure process.
Additionally, the development of a renewable natural gas projects is progressing well.
57 of these projects are being co developed with partners, where the majority of structured as a joint venture.
We expect four of these projects to come online by mid 2023.
As part of our approach to sustainability, we continually strive to be a workplace, where the best people from all backgrounds come to work.
Employee engagement improved to a score of 85 with 97% participation.
Turnover rates in the fourth quarter improved to the lowest level, we have experienced in nearly two years. As a result, we are better staffed to capitalize on growth opportunities in the market.
Our comprehensive sustainability performance continues to be widely recognized as Republic services was named to the Dow Jones sustainability index for the seventh consecutive year.
Our 2022 results clearly demonstrate our ability to create sustainable value and strengthens the foundation from which we will continue to grow our business.
Looking forward, we expect to deliver high single digit growth in revenue EBITDA and free cash flow in 2023, even with the headwinds from lower recycled commodity prices and higher interest rates.
More specifically.
We expect 2023 revenues in a range of $14 six 5 billion to $14 $8 billion.
This represents high single digit growth compared to the prior year.
Adjusted EBITDA is expected to be in the range of $4 75 to 4.325 billion. This represents high single digit to low double digit growth compared to the prior year.
We expect to deliver adjusted earnings per share in the range of $5 15 to $5.23.
And generate adjusted free cash flow in the range of $1 $86 billion to $1 $9 billion.
Our acquisition pipeline continues to support outsized levels of activity in both recycling and solid waste and environmental solutions we.
We are targeting at least $500 million of investment and value, creating acquisitions in 2023.
Our 2023 financial guidance includes the rollover contribution from acquisitions that closed in 2022.
I will now turn the call over to Brian who will provide details on the quarter and year.
Thanks, John core price on total revenue was 7.4% for the fourth quarter core price on related revenue was eight 4%, which included open market pricing of 10, 4% and restricted pricing of five 1%.
The components of core price unrelated revenue included small container of 11, 8% large container of eight 6% and residential up seven 8%.
Average yield on total revenue was five 9%.
Average yield unrelated revenue was six 7% an increase of 40 basis points when compared to our third quarter performance.
In 2023, we expect average yield on total revenue of approximately five 5%.
We expect average yield unrelated revenue of approximately six 5%.
This is an increase of 80 basis points over our full year 2022 results.
Fourth quarter volume increased one 5%.
The components of volume included an increase in small container up one 6% an increase in large container of 60 basis points, an increase in residential of one 2% and an increase in landfill up three 9%.
For 2023, we expect organic volume growth in a range of 50 basis points to 1%.
Moving on to recycling commodity prices were $88 per ton in the quarter as compared to $218 per ton in the prior year.
Recycling processing and commodity sales decrease revenue by 180 basis points during the quarter.
2022 full year commodity prices were $170 per ton this compared to $187 per ton in the prior year.
Current commodity prices are approximately $95 per ton.
We believe that current commodity prices are temporarily depressed due to our global supply demand imbalance and that prices will recover in the second half of the year.
Accordingly, we are assuming average recycled commodity prices up $125 per ton in 2023 with prices starting at $95 per ton in the first quarter and steadily increasing throughout the year.
At $125 per ton. This would result in a decrease in full year 2023 revenue and EBITDA of $45 million when compared to the prior year and a 30 basis point headwind to EBITDA margin.
In the first quarter of 2023. This would result in a year on year decrease of nearly $30 million in revenue and EBITDA and a 70 basis point headwind to EBITDA margin.
Next turning to our environmental solutions business.
Fourth quarter environmental solutions revenue increased approximately $320 million over the prior year, which primarily related to the acquisition of U S ecology.
On a same store basis, environmental solutions contributed 60 basis points to internal growth during the quarter.
Fourth quarter adjusted EBITDA margin was 27, 3%.
This compares to 28, 1% in the prior year.
Margin performance during the quarter included a 130 basis point decrease from acquisitions, which included 100 basis points related to U S oncology.
And an 80 basis point headwind from lower recycled commodity prices.
These margin headwinds were partially offset by a 20 basis point increase from net fuel and margin expansion in the underlying business up 110 basis points.
Fourth quarter adjusted EBITDA margin in the recycling and solid waste business was 28, 7%.
This compares to 28, 6% margin in the prior year or 10 basis points of margin expansion.
Margins improved in the recycling and solid waste business, even with an 80 basis point headwind from lower recycled commodity prices.
Fourth quarter SG&A expenses, excluding transaction costs from U S. Oncology were 10, 9% of revenue this.
This included 40 basis points from additional incentive compensation expense due to full year financial outperformance.
Full year SG&A expenses were 10, 2% of revenue.
This was favorable 20 basis points compared to the prior year and reflects continued cost management as we grow the business.
In 2023, we expect EBITDA margin to be approximately 29, 2%.
10 basis points of expected margin expansion include a 40 basis point decline related to acquisitions, primarily related to U S ecology, and a 30 basis point headwind from lower recycled commodity prices. These headwinds are more than offset by margin expansion in the underlying business of 80 basis points.
While we expect full year expansion compared to the prior year margins are expected to be down in the first half due to the impact of acquisition rollover and recycled commodity prices.
This is most notable in the first quarter, where these headwinds impact margin by a combined 210 basis points.
Depreciation amortization and accretion was 10, 7% of revenue in 2022 and.
And is expected to be relatively consistent at 10, 8% of revenue in 2023.
Full year 2022, adjusted free cash flow was $1 $74 billion, an increase of 15% compared to the prior year. This was driven by EBITDA growth in the business.
For 'twenty three we are projecting adjusted free cash flow in a range of $1.86 billion to $1 9 billion or approximately 8% growth at the midpoint.
We believe this level of performance is very strong given the expected impact from lower recycled commodity prices higher interest rates and higher cash taxes as bonus depreciation begins to unwind.
Total debt at the end of the year was $11 $9 billion in total liquidity was $1 $7 billion.
Floating debt interest rates consistently increase throughout 2022, and we now expect net interest expense of approximately $480 million in 2023.
This is an increase of approximately $90 million compared to the prior year.
As a reminder, a 1% increase in interest rates resulted in approximately $33 million of additional interest expense.
Our leverage ratio at the end of the year was approximately three one 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 26, 1% during the fourth quarter and 25, 1% for the full year.
This lower than anticipated tax rate resulted in a 6% benefit to our full year 2022 E. P. S.
We expect an equivalent tax impact of approximately 26% in 2023 made up of an adjusted effective tax rate of 20% and approximately $170 million of noncash charges from solar investments.
We expect a majority of EPS growth in 2023 to be backend loaded.
This results from having the toughest prior year comparisons on recycled commodity prices interest rates and taxes during the first half of the year.
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.
In the interest of time, we ask that you limit yourself to one question and one follow up.
If your question has been answered and you would like to withdraw your request you may do so by pressing Star then two.
If youre using a speakerphone please pick up your handset before pressing Nicky.
And our first question will come from Tyler Brown of Raymond James. Please go ahead.
Hey, Hey, guys.
Hey, Tom.
Right. So obviously, you know pricing really strong here.
All year pricing in the open market with just over 9% in the restricted piece Paul Horne.
But I am curious if you when you kind of decompose that next year.
Those numbers would look when we kind of see a convergence in those two I don't think we actually see the restricted pricing we will all be CPI look backs.
No we would actually expect the restricted pricing to increase from the levels, where it is in the fourth quarter. So again on related revenue was five 1% restricted in the fourth quarter and we would expect that to improve 50 to 100 basis points in 'twenty three but we do expect the <unk>.
Our pricing to be driven by the open market similar to what you've seen in 'twenty, two and for that matter in the prior years as well.
Okay. Okay. That's helpful and then on the sheet.
How the yields will put walls, well, we have a more.
Historically normal cadence, where pricing and I'm talking to.
Total price you can say about it.
Hello, Paul.
Well.
Yeah listen I guess, you are talking about them on total revenue. So I'll give you that piece. So yeah. It starts highest actually our high watermark as in the first quarter based on our expectations and then it sequentially declines from there, but we're expecting that pricing remains above 5% in all quarters.
Okay. That's helpful and just real quick how much M&A rollover is in the guide and just to be Crystal clear the half a billion that you expect to spend notable items included in guidance.
Yes, So I'll answer your second question first that is correct. We have not included that so what is included there are deals that closed by the end of the year.
$440 million worth of revenue or 300 basis points of growth.
That's the rollover most of that being U S ecology.
Okay. Thank you very much.
Yeah.
The next question comes from Noah Kaye of Oppenheimer. Please go ahead.
Thanks for taking the question so with the U S oncology outperformance of 50 million I cant give us a breakdown of how much of that outperformance what was price versus volume and then maybe you can tell us what you're expecting in terms of Es segment growth specifically for 2023.
Yeah. It was a mix of both price and volume, but more pricing to come right. We've taken a lot of pricing action, but we still have some contracted portion of that business.
Fully seen that so you know youre seeing both the cross sell that we talked about and you're seeing the pricing hit with a really strong performance in <unk>.
The plans for 2023 of that business is performing ahead of our plan more broadly both used to college acquisition in the broader space I think there's going to be a very positive contributor.
Yeah.
Yes, so if you think about it.
No I was just going to add you know a good portion of the growth that you're going to see Europe , Europe's coming vis a via the acquisition rollover, but if you think about total contribution from an organic perspective, right. We're expecting 50 basis points on total revenue. So that's about call it $70 million and that would be just at the point when.
U S ecology anniversaries forward.
That's still kind of a high single digit type organic growth.
That's very helpful. Thanks, and then since you mentioned that the synergies. We're tracking ahead of plan can you quantify that for us and I guess any chance you could give us an updated cost synergies number as to where you think this will get to within the timeframe.
Yeah. So just to give you an idea of when when when we actually provided the guidance when we close the deal. We said, we thought we'd get about $5 million worth of synergies.
In 2022, and we actually got closer to 13 $14 million. So you can see nice outperformance there and.
And a lot of that was just actually getting the integration activities done quicker than we originally anticipated. We said total synergies would be $40 million cost synergies of $40 million I think that number will end up closer to 50 million.
Perfect I'll just give it back thanks.
The next question comes from Walter <unk> of RBC capital markets. Please go ahead.
Yeah. Thanks, very much good afternoon, everyone I Wonder if you just focus on the M&A. They are in the 500 million got what what what drives your.
Your target for $500 million is that on a on a leverage basis that you'd like to keep ourselves close to or is it more just youre. Your best guess as to what kind of deals in your in the target areas that you want to do are available in in 2023.
Yeah, well I'd say it is based on our.
Passionate view about intrinsic value right and driving intrinsic value over time.
And conservatism right. So we never want to put out a number that people go out and they have to hit and therefore, we start chasing deals I want the team to feel comfortable at any point in time, passing it on a given deal because it doesn't meet our return criteria or there's a set of terms or business conditions or practices that we're not going to want to be owners of overtime.
And so I think we've always put out a number over the last three or four years I think you've seen a pretty steady beat against that number my expectation.
Expectations for the team I think are likely higher than that but we always want again put out a conservative numbers the team feels no pressure to reach.
And has there been any shift in valuations, albeit with higher interest rates be it with.
More deals having been done is there more difficulty is there. It has valuations come off has the availability change in other words the pipeline that you look at <unk>.
Into 2023 is a very much different than what you saw in 2022, excluding obviously U S ecology.
Our pipeline is very strong we've got a mix of small and medium sized deals across the cycling solid waste add yes, right and that's kind of different stages in the process and feel good about that.
Yeah, but you know the premiums are the multiples are still kind of hanging in the same ZIP code because we're looking at premium assets right. We're not just buying revenue were very particular buyers and we want to get something.
That's quality and one of the first question you always ask is why would we do this ourselves and if it's something like a residential subscription business or temporary roll off business. We should go get that with our sales team not pay a premium for that so we're looking for infrastructure. We're looking for you know route based businesses with customer contracts that we know that we all integrated in the business in <unk>.
High value overtime.
Okay, and just a last one here just on your guidance I know you had you had had a double digit in there you kind of walked it back last quarter, you've kind of brought it back again, you know confidently here this quarter, just what's changed your view here that that.
That gives you the confidence behind this guide that you perhaps kind of it.
Got it didn't happen.
Third quarter report.
Well, maybe a slightly different view of the history right. We never gave an official guidance. We said we have line of sight at one point the double digit alright that was in a different commodity price environment.
So given the commodity market being depressed for six to nine months that certainly gave us a different outlook right just based on the math of a commodity prices and I think we've talked about here a high single digit number going forward now if we end up doing more M&A early in the year and that has in your impact when we get to them.
We certainly could but I think we've been pretty consistent with how we've approached it and the other thing I would just add to that as well is that on the.
October to call.
We said that we've got a perspective that we're going to achieve high single digit growth and if you look at the mid point of everything we put out there it's high single digit growth.
So to John's point, I would sit there and say it is exactly in line with where we thought we would be in October .
Fair enough. Okay. That's all my questions. Thank you very much.
The next question comes from Toni Kaplan of Morgan Stanley . Please go ahead.
Terrific.
Wanted to ask first on capital expenditures I know for Q is usually sometimes seasonally high and this quarter seem maybe particularly high I was wondering if that was related to the asset management system and the polymer centers or or if there was something else in there and how we should be thinking about capex for 'twenty three.
Yes, it certainly investing to grow the business right we're always.
Disciplined, but never afraid to spend that money one of the bigger drivers of that was the second polymer center.
That we're putting in the Midwest, we just we've seen so much demand for the offtake of our first one.
You still have a lot of confidence that the market is really getting value and need that product and the returns in our business case, we think are going to be north of what we originally pro forma so that gave us the confidence to accelerate that investment before yeah and the other thing is we talk that there were some supply chain disruptions throughout the year impact of things like trucks and some.
The heavy equipment and we actually were able to take take receipt take title of those assets in the fourth quarter. So as you think about building that the 'twenty three plan, most likely will be more backend loaded like you've seen in the last couple of years, but maybe not to the extent that you saw in 'twenty two.
Super helpful and I wanted to ask on volumes I know you gave the 50 to 100 basis points for 'twenty three our volume I wanted to just ask sort of what you're seeing with regard to <unk>.
Commercial and industrial I know some of your competitors talked about like a little bit of a softness in our Q, but maybe a little bit better in January .
Carrier experience on that.
Yeah, there's different moving pieces for sure obviously theres been a little bit of a slowdown in the construction market as you've seen housing starts kind of pull back in the second half of last year, and we certainly baked in some.
Softening of that into the 2023 environment, but listen the industrial market is very very strong right. Now you saw the consumer number. This morning, I mean, the consumers engaged so we still see.
Lots of economic activity travel and leisure right as you know.
And are busting at the scenes. So we remained mindful right that theres certainly recession talk on the environment, but we're a pretty broad based barometer of the economy and we're seeing a lot of strength right now and even though we're seeing a little bit of softness on some of the construction activity. We're still seeing above average price. If you take a look in the temporary large container.
Business were nearly 9% price during the fourth quarter.
Perfect. Thanks for the color.
The next question comes from Kevin Chiang.
Please go ahead.
Thank you operator, and good afternoon everybody.
Just wondering when you talk about the pricing initiatives within within yet.
I'm just wondering what percentage of the new revenue do you think you need to be priced.
So to get to the levels you want it and how long do you think it takes to kind of get through go through all of that.
Well, we will look at every dollar of revenue and every customer and really try to understand okay.
When we look at pricing two lenses, one is from a customer and an insight standpoint, what does the market there and what is our offer half from a value standpoint versus our competitors and then we also want to look on the internal side and say what is our cost, including a capital charge and make sure that we're getting a fair return on that.
So you know we're going to go systematically through every customer and every dollar of revenue and I think the encouraging thing is we put out double digit price increases and we're seeing it stick right customers are really valuing the integrated offering and keep in mind whatever they spend with us is a very small percentage of their cost structure.
And so safety and speed sustainability in our digital tools and all the things that we're investing in but those are big differentiators that allow that pricing to stick.
Okay that makes a ton of sense and then I apologize if you've given this number before but when you look out longer term and you go through some of the cost synergies and some of the revenue upside opportunities.
Do you have a targeted.
Adjusted EBITDA margin, but you're thinking about that.
17, 5% 10 or roughly 17% in 2022.
Just got a note to the mid twenties, when when you're kind of through many of these initiatives.
Yes, I think what we're listen over time long term, but I think these businesses converge in terms of returns I think you'll get free cash flow conversion to get there first because this is a slightly different opex capex tradeoff in this part of the business and then over time I think over a longer period of time I think getting the market to convert I don't think is.
Out of sight are out of reach as well no that's not going to happen overnight, but we are going to kind of ratably right systematically taking this up so I think all you know in the next four or five years to get that in the mid Twenty's is very reachable.
Excellent I'll leave it there thank you very much.
Our next question comes from Michael Hoffman of Stifel. Please go ahead.
Alright, Thank you very much John and Brian Erinn for taking the questions.
Yeah, Brian or we had about a $1 6 billion run rate in E. S revenues when I roll in the M&A and then what does that one six grow organically I'm just trying to put all the pieces together from your transcript I think I had myself a little confused.
They were probably closer Michael too in the one five range a little over one five but organically like I said earlier you know we're thinking that's a seven 8% organic type grower here in the near term and with opportunities for even some of the additional cross sell opportunities to be additive to that.
So okay. So the the following that then in your margin for the whole year 'twenty nine two.
What do you think the solid waste business and the environmental services business do individually to merge together.
So and the recycling and solid waste business, we're expecting overall about 30 basis points of margin expansion right.
And in that business, we have to overcome the 30 basis point headwind from commodity prices. So the underlying business is growing kind of 60 to 70 basis points.
Now in the environmental solutions business, we're expecting 100 basis points of margin improvement and there is the acquisition roll over U S ecology, which is.
A negative 70 on that portion when you compare it to what we had in the Gulf. So we're expecting margin expansion the underlying business. There of 170 basis points. The reason why that only comes to 10 basis points. Overall, so we have a greater mix of greater percentage of Es business in 'twenty three than we did in 'twenty two.
Yep Yep, I get that and then.
Can you bridge for us.
7172, 4 billion of free cash in 'twenty, two to get to the midpoint of your guide.
What is the cash insurance the cash tax the incentive comp above plan.
I am assuming everything else is made up by.
Organic growth.
Productivity yeah.
Yeah, Let me give you a couple of pieces of that certainly so interest and I'm going to give you some pre tax numbers and for argument's sake. You can just sit there and take you know call it 70% of it after.
After you do the after tax interest up $90 million right. So, it's a and increased outflow there.
Incentive comp is about a $35 million outflow compared to target levels.
And then bonus depreciation you wouldn't tax effect the impact of bonus depreciation, but that's about a $35 million increase in cash taxes.
Okay.
When you take those pieces by creates.
Now I'm going to kind of flip a little bit to converge and that creates a you know call. It about a 300 basis point headwind to conversion all of which being offset by just the EBITDA growth in the business as well as some benefits in working capital some of those benefits being unlocked, we talk about finishing the finance and procurement modules.
During 'twenty two when we think that there's an opportunity in particular on the GPO side to drive improvements in working capital Okay.
Okay, and then squeezing one in sorry, the $125 per ton.
How much of that has to rely on OCC moving and what would your target be for OCC to make the $1 25 in.
In your guide.
Well I mean, just to put in perspective, right OCC fiber right represents about 70% of our basket of goods right. So most of this we are expecting to come more on the OCC side, but even just to put it into.
All of it into perspective, if you take a look at what we're expecting from a guide perspective compared to current prices. So relatively modest recovery right, that's $30 million worth of EBITDA and about 20 basis points to margin $20 million of free cash flow if things were to stay at current levels.
Okay. Thank you very much.
Yeah.
Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Good afternoon, and good evening everyone.
Hum.
Brian If we just go back to your margin cadence discussion you know the headwinds in the first quarter and really the first half.
That implies we're gonna be exiting fourth quarter of 'twenty, three with margins up something like 150 basis points year over year.
Heading into 'twenty four or so I'm wondering are we setting up for 24 to be an outsized margin expansion here, because we're essentially making up for it.
A last year from the.
Commodity price impact in 'twenty, three if anything that you'd add to that.
Rich as we think about what the.
The margin progression might look like.
And a couple of things Jerry I mean, you've got two variables right. When you take a look that you have the what we're expecting in 'twenty three but also what happened in 'twenty two.
Right. So we're expecting commodity prices in 'twenty three to be at the highest point of the year. They were at the lowest point in 22. So you can't just go to the margin expansion, but yes exiting the year in 'twenty four we think it's going to be you know kind of a nice jump off point heading into 'twenty four.
But I wouldn't just look at the overall margin expansion because you've got two years in your math, there that you've got to take into consideration.
Sure, but youre going to have the same comp benefit in the first half of 'twenty four.
Hopefully.
And if we think about the profitability of the recycling business in the fourth quarter with this ultra low recycled cardboard prices can you just update us on what was the margin profile of the business roughly just so we can get a feel for where its trough in this cycle given all the work you've done there.
You're talking about on the recycling side of the business.
Yes.
No it's still a profitable business at these levels and still an attractive return.
So.
Again, we would expect through the cycle, we talked about we expect these these depressed prices to be somewhat transitory.
And again returned closer in line to a 10 year average not even back to the levels. It was when it was over $200 a ton on our basket of goods.
And can I ask around gas part of the business you know nice little bonus we got from the EPA in terms of your rents how much gas to electric power do you folks generate in terms of your share of the power that you generate.
What's your take on what's a reasonable value capture opportunities for you and your peers.
Yeah, all of our existing projects and the vast majority of our gas electricity.
Now the where rins have gone all of the new projects in the pipeline were contemplated to be.
Gastar under methane to LNG the.
The great news with our partnership with BP, We've got option value when he runs coming online and we're both very open minded to understanding where those markets move and local geography. It even places where we may power owned fleet to figure out whether we want to convert some of those opportunities rather than RMG to go to electricity as well, but we see it as.
Over time, a benefit for us because it will have two pathways.
I'll leave it there thank you.
Yes.
The next question comes from David Manthey of Baird. Please go ahead.
Thank you very much my question is regarding residential volumes that have inched up here the last couple of quarters.
Is that a trend we expect to continue this year.
When you look at that 1% overall mid point volume outlook does that contemplate commercial container volumes being flat or negative at any point in 2023.
No I mean, what you're seeing mostly on the residential is some relatively larger contracts youre seeing that in the numbers. So that's expected to anniversary in 'twenty. Three so we don't expect that to continue throughout the year and yeah. When you take a look at our volume cadence, we expect that that small container will remain positive throughout 'twenty three.
When you take a look at overall volumes, we think to have our highest volume performance early in the year and again that to step down drought, but remaining positive in all four quarters, let's say residential.
Over the last decade, the most disappointing part of the business in terms of where margin return has gone and that Hasnt expanded at the same rate as the other businesses and there's a lot of reasons for that with commodity prices and inflation and everything else, but oh listen we don't do work for free right. We put upward pressure on all of those contracts and look at those contracts just like we wouldn't.
Acquisition, right, we're going to put capital into it and what type of return that we get against that and if we can meet our return thresholds on that we won't do the work.
I appreciate it thank you.
The next question is from Kyle White of Deutsche Bank. Please go ahead.
Hey, good afternoon. Thanks for taking the questions I'm, just curious what you're seeing on open market pricing heading into 2023 as inflation starts to come down and maybe there's a bit more uncertainty regarding the economy and volumes going forward, you're seeing any change in behavior from maybe some of the smaller competitors in this environment relative to last year.
Well last year, we put out the highest level of pricing we ever have in small container in the open market and we had the highest percentage of retention of that price that we've ever had in our history, which is really a staggering number I think it speaks to the value of our service that we're providing it also speaks to the broader context with everyday.
Els inflating.
That those numbers were quite consistent across the quarters right in terms of our ability to retain price right and we're seeing strength here in the early part of the year on that so we're mindful of the environment, but listen all of these smaller competitors that have truck costs that are going up they need to buy new equipment. After some supply chain challenges right and labor.
Costs that are going up so they need to price to cover their cost, which I think is supportive of a broader pricing environment.
Yeah that makes sense and then on leverage how are you thinking about leverage in this environment. What is the right target for you before investors should expect meaningful capital return through buybacks.
Yeah, we've talked about kind of that sweet spot for us being right around three times or a little bit over that right now, but we expect to be there in the next call. It six months.
You know at which point then we would look to kind of return to that.
At normal level of up looking at repurchases and so on and so forth.
Sounds good I'll turn it over.
Our next question comes from Stephanie more of Jefferies. Please go ahead.
Hi, good afternoon. Thank you.
Yep.
I certainly appreciate that the level of detail for 2023 excellent patients I think a lot of puts and takes us environment. So it might be helpful. If you could just outline the areas, where you kind of see the greatest source of upside you know inflation moderating from tech investments and then on the flip side, you know where you see the greatest threat.
These targets as well thanks.
Yeah from an upside perspective.
Mentioned this earlier is that we are expecting inflation to remain persistent throughout 'twenty three.
And so you know again, John just talked about the fact that we're pricing at higher levels in 'twenty three and early in 'twenty three than we did even in 'twenty two because we expect inflation to remain sticky.
So if that does come down that is certainly an opportunity.
In order to sit there and to.
Drive better performance than we anticipated, but you do have to remember some of that inflation of wages and wages typically go in annually. So once you put that wage out in the marketplace, you're not pulling that back. So there are there is some stickiness to the inflation, but certainly as it relates to some third party costs and some of the maintenance related expenses transportation expenses if those.
Come in that would certainly be a source of upside.
Great and then on the downside.
Oh, sorry can we just talk a little bit about recycled commodity prices again, we've expected a recovery, but we've also dimensionalize. It for you. So you realize it's a relatively.
Modest recovery.
We're expecting but if they stay at current levels.
That would be a little bit some downside relative to our expectations and then I'd just say the broader macro environment, obviously, we've been through a pandemic and.
We're at the doorstep of Europe , and China, virtually shutting down and supply chain challenges inflation. So.
I think we're prepared for uncertainty in a dynamic environment, we're running the business not just for the quarter of the year running it through the cycle and making decisions accordingly, but.
We're mindful that we may have to adjust.
The business of new things emerge.
Absolutely and then just on the second polymer center going up starting to go up this year, maybe you could talk a little bit about some of the initial.
You know kpis or returns, you're seeing or expect to see just given the demand for your first center and kind of what drove you to decide to open up a second here.
Yeah across we think we're gonna have for at least four centers across the U S. We think when they all get up and running at scale, but it's kind of a 250 million dollar incremental revenue business for us. We think the EBITDA margins are going to be certainly north of north of 30% right very attractive.
Our hours on those investments and I think we're going to beat that pro forma right and we know from our conversations we've had and the pricing that we're getting right now we're starting to take off.
Orders, obviously for the center in Las Vegas.
I'm very confident we're going to beat those numbers in the pro forma.
Great. Thank you so much.
The next question comes from Michael Feniger of Bank of America. Please go ahead.
Okay.
Yes. Thanks for taking my question I understand that you guys have been pricing incentives.
Cost and Theres been a lot more discipline in the industry, but theres not a step function change in terms of how Republic as pricing from a few years ago and you guys want to do some years of intentional shedding some business I'm just wondering if the quality of the business now you feel that you can have a wider price versus cost.
Red and maybe the Republic services.
Years ago.
Yeah, No I think it's a good question Michael certainly you highlighted certainly customer mix is a hidden element or hidden factor in being able to get price and we went through some intentional shed any REIT, which had some neck.
Negative drag on our volumes for a few quarters. When you look at futures back the quality of our revenue is much higher than it was historically and we feel good about that and that's all the way across national accounts too.
Small container to getting out of the last remaining broker work out of the system to municipal and getting a fair escalator into those contracts. So I think the overall health of our pricing across the portfolio, while not perfect of course is much much better than it was a few years ago and then you combine that with the capture on the tools.
We have to really start taking a grind out a few extra bits here and there across our 13 million customers are understanding willingness to pay and then on the other side of that or the right platform driving productivity and changing our cost position of the business. So when you've got a healthier customer mix right and you know better ability to price with a cost structure that.
I think as healthy and getting healthier I think that does create the context for continued margin expansion over time.
Great and Brian you touched on it with the question earlier, but just to dig a little deeper can you actually talk about the cost inflation, how that kind of trended through the fourth quarter and what youre seeing in early 2023. What you guys are kind of embedding there because I think youre, saying youre not really embedding.
Rollover there just curious what you actually saw through the quarter in early 2023, and we would kind of expect or what you guys are at least embedding in the guidance there. Thanks.
Yes, if you think about for the for the full year for 'twenty three we're in that call. It five to five 5% inflation type range and again when you take a look at the six 5% expected yield unrelated revenue. That's how we're driving that 80 basis points or so of expansion in the underlying business. That's one.
About the level, we saw exiting the fourth quarter and we expect it to remain relatively consistent throughout 2020.
Thank you.
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 our 40000 employees for their efforts that enabled our strong 2022 results.
The success of our strategic investments is made possible due to their hard work and commitment to serving our customers.
Good evening and be safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending and you may now disconnect.
Okay.
Yeah.
[music].
Yeah.
Yeah.
Yes.
Yeah.