Republic Services, Inc.

And welcome to the Republic Services fourth quarter 2019 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Nicole Giannotto, Senior Vice President of Finance and Treasurer. Please go ahead.

Thank you. I would like to welcome everyone to Republic Services' fourth quarter 2019 conference call. Don Slager, our CEO, John Van Der Ark, our president, and Chuck Sirianni, 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 discussed 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 February 13, 2020. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the 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 a recording of this call, are all available on Republic's website at republicservices.com. 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 their website. With that, I would like to turn the call over to Dawn.

Thank you, Nicole. Good afternoon, everyone, and thanks for joining us. We are very pleased with our strong finish to 2019. The hard work, passion, and commitment from our 36,000 employees enabled us to outperform our upwardly revised EPS and free cash flow guidance, despite continued headwinds from lowered recycled commodity prices. By successfully pricing in excess of cost inflation and In 2019, we expanded underlying EBITDA margin by 70 basis points and generated over $1.2 billion of adjusted free cash flow. For the full year, we invested over half a billion dollars in acquisitions and returned the remaining cash flow to our shareholders through dividends and opportunistic share repurchases. we continue to believe that disciplined investment acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value. Our strong finish to 2019 sets us up for continued success in 2020. Given the underlying momentum in our business, we are well positioned to deliver approximately 5% top-line revenue growth and nearly 6% EBITDA growth. On top of that, We are entering 2020 with one of the strongest acquisition pipelines we've seen in years. We will achieve our 2020 guidance by continuing to prioritize the safety of our people and communities above all else, attracting value-oriented customers to drive profitable volume growth, leveraging technology to empower our employees, increase connectivity with our customers, and drive operational excellence. And finally, continue to make disciplined acquisition investments to grow free cash flow and drive sustainable long-term value. These priorities represent the continued execution of our profitable growth through differentiation strategy. We believe our 2019 results clearly demonstrate the effectiveness of our strategy and our team's ability to consistently execute against it. For example, the most critical component to successfully executing our strategy is is our people. We believe that engaged and diverse workforce is the greatest indicator of our success. We know that our business units with higher employee engagement have fewer safety incidents, better customer service, and better financial performance. In 2019, we improved our overall employee engagement score by over 100 basis points to 86%, which is well above national norms and is high-performing for the industry. We also reduced driver turnover by 130 basis points versus the prior year. Moreover, the team continued to receive notable national awards and recognition of the inclusive culture we are building here at Republic. These results reflect the cumulative benefit of the investments we've made in our people over the last decade. We will continue to invest in our people and culture, which will further enhance our reputation as an employer of choice. Our strategy also includes investments to improve the customer experience, drive operational excellence, and enhance our leading market position. I'll turn the call over to John to walk you through our 2019 results in each of those strategic areas. John?

As Don mentioned, we've been investing in the customer experience for several years now. Having a passion for our customers is core to our strategy. We know by offering differentiated products, services, and experiences designed to meet our customers' wants and needs, we drive customer loyalty and increase willingness to pay. In 2019, we continued to invest in and enhance our customer-facing technology, including our website and mobile app. We also attained our highest level of pricing in the last 10 years, while maintaining our industry-leading customer churn of 7%. Another key component of our strategy is delivering durable operational excellence. This enables us to deliver consistent, high-quality service to our customers while lowering our operating costs. In 2019, we successfully managed our cost inflation and drove solid operating leverage in the business. We also began to roll out our new RISE platform to our dispatch operations. This new technology equips our dispatchers with more real-time routing information and enhanced data visualization tools. It also supports additional mobile and NCATS technology, which we will begin rolling out in our large container business later this year. Over time, this platform will further empower our employees, transform our operations, improve productivity, and increase connectivity with our customers. Additionally, in 2019, we raised the bar with our latest long-term sustainability goals. These goals address our most critical sustainability risks and opportunities and are aligned with the United Nations Sustainable Development Goals. We believe each new goal has the potential to significantly benefit the environment and society while enhancing the foundation and profitability of our business over the long term. Finally, in 2019, we further strengthened our leading market position by strategically investing over $525 million in value-enhancing acquisitions. Through these investments, we increased our operating density in existing markets, entered new geographical markets, and increased the scale of our downstream environmental services offerings. As you can see, the investments we've made over the years in our people, the customer experience, operational excellence, and our market position are delivering tangible results. They also provide a solid platform for continued growth in the business. Next, I'd like to discuss our fourth quarter operating performance. During the quarter, a pricing environment remained favorable, and we continued to price in excess of our cost inflation. Core price, which represents price increases to our same store customers, net of rollbacks was 4.8%. This included open market core price of 5.8%, and restricted core price of 3.2%. Our restricted core price reflects the significant progress we've made in repricing and restructuring our municipal recycling collection contracts. Restricted core price also reflects the continued benefits of moving away from CPI-based pricing to an alternative pricing mechanism. To date, including both collection and disposal-related contracts, We've converted $780 million, or 31%, of our CPI-based book of business. This represents a $120 million increase over the prior year. Next, average yield for the quarter was 2.6%. Average yield measures the change in average price per unit and contemplates the impact of customer churn. Average yield was strongest in our small container collection and landfill MSW businesses. Small container average yield was 4.1%, and landfill MSW average yield was 3.4%. This is the fourth straight quarter landfill MSW pricing has been greater than 3%. Looking forward in 2020, we expect average yield of approximately 3%. We will achieve this by continuing to focus on enhancing the customer experience and delivering superior service, partnering with our municipal recycling customers to build more durable, economically sustainable recycling programs, and pricing our products and services to ensure we earn an appropriate return on our capital investment. Turning to volume. Total volume in the quarter decreased 20 basis points versus the prior year. We continue to intentionally shed certain volumes, which we view as non-regrettable losses. These included residential collection contracts that did not meet our return criteria and work performed on behalf of brokers in our small container business. Normalizing for these non-regrettable losses, underlying volumes increased 30 basis points. On the collection side of the business, large container volumes increased 80 basis points versus the prior year. And underlying small container volumes increased approximately 60 basis points after normalizing for broker-related losses. As expected, residential collection volumes decreased 2.2% due to non-regrettable contract losses. On the disposal side of the business, in the fourth quarter, MSW volumes increased 40 basis points, and C&D volumes increased 16% versus the prior year. As anticipated, special waste volumes were relatively flat versus the prior year. Looking forward, overall in 2020, we expect total volume growth of approximately 75 to 100 basis points. Turning to recycling. In the fourth quarter, our average commodity price per ton was $66. This represented a $6 sequential decrease from the third quarter and a $40 per ton decrease versus the prior year. Importantly, we continue to make progress transforming recycling into a more durable, economically sustainable business model. As a result of the team's efforts, our expected earnings sensitivity to changes in commodity prices has decreased by over 25%. Every $10 change in our average price per ton is now equal to approximately 3 cents of annual EPS, or $13 million of EBITDA. For purposes of our 2020 guidance, we're assuming commodity prices remain at Q4 levels of approximately $65 per ton. This represents a decrease of $12 per ton versus 2019 and will result in an EBITDA headwind of approximately $15 million. Any recovery in recycling commodity prices would be upside to our 2020 guidance. Next, turning to our environmental services business. In the fourth quarter, U.S. rig counts and associated drilling activity continued to decline. As expected, revenues in the upstream portion of our environmental services business decreased versus the prior year. In the fourth quarter, this resulted in a 50 basis point headwind to total revenue growth. Relative to our preliminary outlook, we're now taking a more conservative view regarding drilling activity and are assuming it will remain lower for longer. Finally, turning to margins. Our adjusted EBITDA margin in the fourth quarter was 28.8% and increased 140 basis points versus the prior year. This included a net benefit from C&G tax credits of 60 basis points and a headwind for lower commodity prices of 50 basis points. After normalizing for these two items, underlying EBITDA margin expanded 130 basis points. By effectively executing our operating plan, we successfully managed our cost inflation and drove operating leverage across nearly all cost categories. With that, I will now turn the call over to Chuck to discuss our 2019 financial results and 2020 guidance in greater detail.

Thanks, John. Adjusted EPS for the full year was $3.34 and included the $0.06 net benefit associated with C&G tax credits. In December, C&G past credits were enacted retroactively to 2018 and will be available through 2020. Our adjusted EBITDA margin for the four-year was 28.3% and increased 30 basis points versus the prior year. This included underlying margin expansion of 70 basis points. This is partially offset by a 40 basis point headwind from lower recycled commodity prices. The CNG tax credit did not impact the year-over-year change in margin. Adjusted free cash flow for the full year was $1.2 billion. Adjusted free cash flow was favorable relative to our expectations, primarily due to lower cash taxes. Cash taxes were favorably impacted in the fourth quarter by acquisition-related bonus depreciation. At year-end, leverage was three times, and within our optimal range, of 2.5 to 3 times. Next, turning to our 2020 guidance. The current economic backdrop remains supportive of continued growth. Consumer sentiment is strong, unemployment is low, and housing starts are up year over year. Given this favorable backdrop for the year, we expect total revenue growth of approximately 4.25 to 5%. and adjusted EBITDA margin expansion of 20 to 40 basis points. We expect this level of margin expansion despite approximately 30 basis points of headwind going into 2020. These headwinds include lower recycled commodity prices, a decrease in upstream environmental services revenues, and an additional workday. Relative to our preliminary outlook, we increased our adjusted EPS guidance range by 2 cents to $3.48 to $3.53. The increase is due to a 4-cent benefit from C&G tax credits, which is partially offset by an additional 2-cent headwind from our upstream environmental services business. We also increased our adjusted free cash flow guidance by $25 million to $1.175 to $1.225 billion. The increase is due to a $30 million benefit from C&G tax credits, partially offset by an additional $5 million headwind from our upstream environmental services business. Keep in mind our adjusted pre-cash flow guidance for 2020 includes $100 million of CapEx associated with the reinvestment of tax reform savings. These funds represent continued investments in updated locker rooms, break rooms, and training facilities, and equipment for the benefit of our frontline employees. This $100 million capital investment will not reoccur in 2021. Normalizing for this capital investment, our pre-cash flow baseline exiting 2020 will be approximately $1.3 billion. With that, operator, I'd 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 1 on your touchtone phone. In the interest of time, we ask that you limit yourself to one question and one follow-up question today. If your question has been answered and you would like to withdraw your request, you may do so by pressing star 2. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question comes from Hamza Mazzari with Jefferies. Please go ahead.

Hey, good afternoon. Thank you. The first question is just around the volume on commercial small container. Do you see that sort of turning positive at some point? I guess we've been pruning low-margin business for three years, and so just any thoughts as when that inflects positive?

Yeah, absolutely, Hamza. You're right. We've been shedding some of that work. And, well, there will always be a little bit of that work to shed because as we acquire companies, we find that in the book of business. We don't value that when we pay for those companies. But we certainly can – at the bottom of that trend, you're going to see positive growth in that line of business.

Thank you. And then just on – On the M&A sort of pipeline, how are you guys thinking about deal flow this year, you know, where the balance sheet leverage is at? I guess there's a lot of private company revenue up for sale ahead of the election plus the ADSW divestitures. You know, any thoughts on, you know, how aggressive you want to be there?

Sure. This is Don. As I said in my remarks, we've got the most robust pipeline we've seen in years going into the year. And, you know, we spent over half a billion dollars in 19. While, you know, our guide only has 200 million spend in it, you know, I personally wouldn't be surprised if we matched or exceeded last year's performance. There's a good pipeline of really good companies. And we've got a really good team that is across the nation looking at deals. And as I always say, we look at everything. And we sort out what we're most attracted to, you know, and we're out there talking to a lot of people. We've got a lot of interest right now, so we feel pretty confident. As far as the leverage, and we talk about leverage being, you know, sort of sweet spot, you know, two and a half to three. We have at times, you know, gone over three times leverage to buy really good cash flow. And as I said in my remarks, the very best use of our cash flow is to buy more good cash flow at the right multiple. So we could lever up a little bit, and then we'll pay that debt down over time. But as long as we're buying good cash flow, that's a good recipe for success.

Gotcha. And just last question, I'll turn it over. Just on SG&A, I realize there was, you know, sort of corporate function build out at the company. And in your SG&As, you know, run rate is higher than, you know, your largest competitor by a bit, at least this quarter. Do you see that coming down? Is SG&A at peak levels today, or does it go further up from here? Thank you.

Yeah, Hamza, this is Chuck, and we do see SG&A trending down from here. I would say into 2020, we're projecting that it will be flat to slightly down.

Okay, great.

Thank you so much. And Hans, I'll add to that. We have done a great job of building really strong foundational capability within the business over the last several years, and we are at a good inflection point to leverage that scale. And believe me, we're having a lot of conversations about that. We've got a really good, talented group of people here that, frankly, can run a bigger company without having to constantly add people and resources. So you're exactly right.

Great.

Thank you very much. Have a good evening. The next question is from Brian McGuire with Goldman Sachs. Please go ahead.

Hey, good afternoon. Just a follow-up question on the volume outlook. You know, the volumes were down a little bit in 4Q, but the guidance for 2020 implies about 100 basis point pickup from where we were in kind of 4Q. So, just wondering, you know, where or what quarter we might expect to see that inflection to positive growth come, and what kind of visibility do you have into that volume turning? after a couple of years of it being down a little bit or kind of flattish?

Yeah, I think you'll see that in Q1. And please keep in mind, volume and price are related. And we've had really, really strong pricing over the last couple of years, in part because we think about returns at every level. When we acquire a company, every customer we sell to, we want to have the appropriate return on the investment we make. And so that's caused us to shed some of that work as we've taken price up. We feel like we're off a really good base to price, and I think you're going to see that volume growth for forecast, and you're going to see that consistent across the four quarters of 2020.

Let me add to that. We have a very consistent approach for price volume. There's no zigging and zagging with our thinking on that, and so there's a lot of moving parts to this story, but as John said, everything has to contribute, and we feel like we're getting our fair share of organic growth, But we are doing some intentional things, right, to make sure that we're not doing this for practice.

Got it. And the 3% yield guidance for 2020, that would be, I think, the highest in over a decade for you guys. Do you think that's a sustainable level going forward, or should we just view this as sort of a one-year level given what's gone on in recycling and the need to kind of recoup that in other parts of the business?

Yeah, no, I think I would see that as sustainable, and the reason is it's years in the making. It's not an event. We've always gotten that or above that in the open market part of the business, and the drag has been the CPI-related part of the business. And we've worked very, very hard on alternative index and getting everybody to pay their fair share. And as you're seeing us continually push that, the market is changing on that front. Those RFPs change, and that is becoming the norm of the pricing index in a lot of those municipal contracts. And when everybody contributes to pricing, that allows us to sustain that 3% over time.

Yeah, and let me add to that. You know, we posted landfill pricing, really strong landfill pricing. 3.4% MSW pricing is a backdrop. If you look at just the open market landfill and transfer pricing, pricing is actually 4.5% to 5.5%. So when open market post-collection pricing is moving in the right direction as it should, that also provides sort of underlying economics that make the market more rational.

Okay, great. I'll turn it over. Thanks.

The next question is from Noah Kay with Oppenheimer. Please go ahead.

Thanks. Just to follow up on the pricing theme, thinking about the drivers for 2020, you mentioned tailwinds from reworking the Munich contracts. both with CPI migration to alternative index, and then also recycling, landfill, just driving higher collection willingness to pay. That kind of covers most of your business lines. So should we expect fairly broad-based improvement in yield across business lines? Any lines you would expect to be leaders on the yield front?

Yeah, I mean, small container is usually our flagship, along with, you know, large container perm. Historically, I would expect them to continue to lead the way. But I think the bottom thing you're hearing is every part of the business needs to contribute, right? We don't just accept some people are not willing to pay their fair share, right? And to Don's point, it's got to start from the landfill, right? And that emanates into the collection side of the business. And, you know, when those two things work in the right direction, we get it across the board.

Yeah, sure. Look, and also, I mean, housing starts. Housing starts remain up. There's a supply and demand environment that contributes to higher pricing, right? So we've been open top. Our open top business should improve as well.

Makes sense. Perhaps a question on 2020 margins, guides for 20 to 40 bps expansion. It seems like recycling, if I got your guide right, is maybe 15 bps or so impact to margin. What are some of the other offsets that might offset solid waste margin expansion, you know, dilutive acquisitions, the E&P softness, C&G? I guess just are there any other considerations we should keep in mind, or is there some deceleration of margin expansion and solid waste?

No. So the headwinds that we face in 2020, one is commodity prices, about 10 basis points. I talked about the upstream environmental services. That's about another 10 basis points of margin headwind that we face. And then I mentioned the extra workday that we have in 2020. That's another 10 basis points. Net all that out, and what you end up with is about 50 to 70 basis points in underlying margin expansion just due to the base business.

Now, remember, commodity prices were still high in the first half of 2019. That's really what we're talking about. We think they've stabilized, and they'll remain stable through the year, but we still have to sort of overcome that first half of 2019 where they were stronger.

And while we have that commodity price side wind, we're taking pricing actions over all of recycling that more than offset that.

And so the acquisitions you've done there, you did a lot this past year. They're margin neutral or margin accretive?

That's right.

Okay. Okay. And, you know, if I could sneak one more in. You mentioned in the prepared remarks some of the technology levers you're deploying, you know, over the course of this year in the large container caps. I guess, you know, without kind of giving the game away on what you're doing, just how to think about some of the areas of focus there and what you see as the key benefits there.

Yeah, broad-based, we start with the customer. The first thing is to deliver an even better customer experience. We're 99.9% reliable in our delivery. We want to think about a zero-defect environment, so how do we improve the customer experience? How do we make the employee experience better? And they want to be dealing with a digital environment, making it easier for them to do their job. And then we think we take some costs out of the business. We make it more productive or more efficient, right, and we can get more pulls in this case. into the large container system because we've got the tools available to do that.

And so think about the size of our business, you know, 5 million transactions a day, 5 million pickup points a day. And, you know, you can get a little just incrementally better across 5 million pickup points, right? From all the points John said, you know, there's leverage there.

Great. Thanks very much. The next question is from Kyle White with Deutsche Bank. Please go ahead.

Hey, good afternoon. Thanks for taking my question. Congrats on the CDP climate A-list recognition, and obviously we're seeing a lot more interest in ESG investing here. Curious how you think Republic should be viewed from this lens, and maybe what are some specific initiatives you're doing on this front? Further, just curious, are you seeing pressure from shareholders, and what particular metrics do you think they're focused on on this?

Well, I'll let John give you some detail, but we've seen a lot more, I wouldn't say pressure, but interest from shareholders. ESG is on the tip of the tongue and top of mind of our investors today. Certainly, we spend a lot more time on these issues in the boardroom. We have a corporate responsibility sustainability committee on our board that spends significant time working with management on all of the goals we set and issues we have in place. And so ESG isn't going anywhere, and we'll see more and more interest in it as time goes by. And, of course, you can see just by the rating system, by the grades we get, and then by the goals we set, how committed we are. John?

Yeah, and I think the more important thing is these aren't disconnected or these aren't just aspirations. These are deeply connected in our business. And we believe to be environmentally sustainable, you have to be economically sustainable. So these are things that are great for the broader community as a whole, the smaller community and municipalities, and they're going to be good for our business. So safety, for example, is one of our goals. Our number one priority, we want all of our colleagues to go home to work every night. So a huge priority for us. By doing that, we also lower our risk expense and improve the profitability of the business. Employee engagement. By getting them more engaged, we lower our turnover and lower the cost of operating the business. By adding to our recycling capacity, we meet our customers' need, doing it in a sustainable business model where they're going to be willing to pay their fair share for those investments. Engaging our community in our national neighborhood promise is a way that we give back to the community, but it entrenches us with our most important customers and allows us to maintain and extend those contracts over time.

Gotcha. And then just a quick one. I think you mentioned your average recycle commodity basket was $6,600. $66 per ton here in Q4. I'm just kind of curious what you're seeing in 1Q on the average basket there.

Yeah, so 1Q is a little bit higher right now, a few dollars higher right now, but not significantly different than our guidance level, which is at $65.

Yeah, I think the long-term outlook is that it's pretty flat all year.

All right, thank you. Good luck in the year. Thanks.

The next question is from Tyler Brown with Raymond James. Please go ahead.

Hey, good afternoon. Good afternoon, Tyler. Hi, Tyler. Hey, Chuck. Congrats on the margin momentum here in 19, which looks like it's expected to continue into 2020. But I was hoping if you could give us some help on the cadence of margin improvement as the year progresses. I mean, I'm assuming you still have some dilutive impacts from recycling and the workday specifically in Q1. So would Q1 margins maybe be down year over year or maybe more flatty? And then they kind of build steam as the year progresses, and then maybe a little bit of a tougher comp in Q4, given the C&G. Is that the right way to think about it?

Yeah, you're right about that, Tyler. So, you know, a little bit more of a headwind in Q1. Keep in mind that that's where we have the additional workday, right? So you've got that phenomenon in there. And Don already mentioned the fact that you've got the commodity price headwind that hits us in Q1. And then we accelerate there from there, right, you know, a good Q2, a good Q3. And then, you know, Q4 right now we're thinking is going to be kind of flattish.

We're going to start to get the roll-up of benefit pricing and all the great work the team's doing on converting contracts to the right index, to the fair share arrangement. All those things are building speed and, you know, sort of compound through time. you know, the full pipeline, you know, when we first integrate these businesses, you know, we don't see a lot of extra cash flow because of integration costs. But as they get fully tucked in, everything gets converted, they build, right? So you'll see all that build through time.

Okay. That's helpful. And then, Don, so obviously you guys have done a really good job on the yield front. But if I look at the spread between core price and average yield, it actually continues to widen out. I think it's actually as wide as it's been in, say – five years. But I'm just curious if you could speak to why that is. It would indicate that either churn is picking up or the spread between new and lost businesses widening. But I really don't get the sense that that's the case. So I'm having a hard time squaring that.

Well, there's a lot of mix, right? And then again, when we intentionally shed business, we're shedding business that, you know, that is lower price per unit, right? And when we're intentional and unregrettable, then, you know, that's just a change. So I'll tell you this. You know, we have a pricing plan, of course. You know, Tyler, we have a pricing group here that works very closely with all our field leaders. And we know what kind of pricing actions we're going to be taking throughout the year. And we have a pretty good feeling for what willingness to pay is in the markets. You know, and then it's just, you know, the power of the portfolio. You know, we're number one or number two across these markets. We've got good penetration. You know, the field team's doing a better job every month on customer experience and service, and that all drives willingness to pay. You know, the team's doing a great job in educating customers on the way to recycle correctly, and people are starting to, you know, buy in more, really willing to pay their fair share. I mean, all those things create pricing opportunity for us. So we're pretty confident in that. in the direction we're headed and in the stability and attraction of the pricing group.

Okay. Okay. And then maybe my last one. So I love maybe asking you guys a strange question after a long day of earnings. And I'm going to go ahead and throw this out to any of you. But if I was to set aside your property insurance, say, related to the landfills, and I just looked at your vehicular insurance, Are you guys seeing any unusual inflation in your premiums, particularly in the upper layers of your insurance tower?

You know, what we're seeing, Tyler, and it's not just us, it's, you know, all of corporate America right now, the insurance markets are really, really hard. They're really tight right now. And that has to do with a lot of the natural disasters that the insurance companies have been dealing with. Having said that, you know, considering the fact that we are a Fortune 300 company, you know, given our size and all that, we're able to mitigate those cost increases through other cost initiatives that we have within our system. Okay. All right. That is very helpful, actually.

Thank you. And, of course, right, we're self-insured, right? So, you know, we're really just talking about insurance. Yeah. Yeah, I was looking at the upper layers of the power. Right. Right. You bet.

The next question is from Sean Eastman with KeyBank Capital Markets. Please go ahead.

Hi, team. Compliments on closing out a strong year. Thank you. Thanks. So just a quick housekeeping one for me first. Just on the CNG, you guys gave a pretty clear contribution number on EPS, but just curious on EBITDA for 4Q and for 2020. what's reflected on the CNG piece.

Yeah, so EBITDA in 19 and Q4 was $17 million of a benefit. Yep. And then we're expecting it to be similar to that in 2020.

Okay, got it. That's helpful. And the flat to down 25 bps in environmental services, Could you just help me frame kind of the upper end, lower end there? I mean, in the prepared remarks, you guys point to the upstream piece being the swing factor. But I'm just curious, you know, is that just it, just kind of drilling activity? Or, you know, is there, you know, something else that could frame the upper end or lower end?

Yeah, it really is just drilling activity. That's what's driving that variance right now. So... That could be anywhere, like we said, from zero to 25 basis points of a negative.

Okay. And then on the $525 million of acquisitions completed in 2019, how much of that was environmental services versus traditional solid waste?

Yeah, the majority was solid waste. And frankly, the majority will continue to be solid waste, right? I mean, as I said in my remarks earlier, there's a great pipeline of really good quality companies. There's still plenty of good business for us to look at and consolidate, tuck in and bolt on, and even maybe in a few new markets that we can look at geographically. That's where the focus will continue to be. But, you know, there'll be some great opportunities, you know, as our core capability expands with key customers who want us to do a few more things for them.

Got it. And last quick one for me. Can you just talk about the runway on the solar investment opportunity? Is the vision here longer term to start utilizing the capped landfills with these solar buildouts?

Well, I'll start, and Chuck can add in. We have, as you know, quite a few closed landfills, so we've got a big real estate portfolio. And, yes, I mean, ultimately, depending on the economics, depending on the tax incentives, depending on the advancement of solar technology, of course, and the ability to connect to the grid, all those things are in flux. But, you know, just like you've seen advancements in EV, you know, there will probably be more advancements in solar than we can even imagine today. But we're well positioned with a great deal of real estate. We've got good partners in the solar space. The investments we've made have been great investments with good returns. And, you know, as the opportunity exists, we'll continue to do it. And we'd like to certainly see asset utilization in this new way from our landfills if that's possible. That's why we started down this road in the first place.

Yeah, and according to the statutes right now, solar credits actually start to phase out. I believe it's this year, and I think it may phase out over a five-year period. Now, you know, there's debate right now whether or not they'll be extended similar to what happened with CNG. But to Don's point, that remains a great investment alternative for us. It's something that we would like to do on our fully depreciated closed landfills.

I appreciate the time. Thank you.

The next question is from Jeff Silber with BMO Capital Markets. Please go ahead.

Thank you so much. In your prepared remarks, you talked about the percentage of your contract that you've shifted to alternate inflation targets. I'm just wondering if we can get the same kind of color on how much of your contracts have been shifted on the recycling side to fee-for-service, and where do you think that goes over time? Thanks.

Yeah, so on the processing side, a little further ahead on that front, so we're over 50% on that side of the business. On the recycling collection side, we've got about 36% converted, and that's across a portfolio of 1,300 contracts, and we're not stopping. We continue to walk through City Hall and tell the message around a model that needs to be economically sustainable to be environmentally sustainable over time. And I can tell you we're seeing momentum shift. First, it was trying to convince staff, and now staff is saying to us, hey, listen, we've got to work together to convince the electeds because they understand the issue and they have a strong desire to keep their recycling programs. One, because it's the right thing to do. Second, because the residents deeply want them to keep it, and we've got to work together to make it economically sustainable.

And besides the cost impact, what other pushback, if any, do you get?

Some is the cost. Some is the volatility impact, right? There's the volatility aspect of recycling is the commodity prices. And historically, we've borne most of that. And some cities say, well, I don't want to, you know, bear that either because I don't like the idea of moving residential recycling pricing month to month to month. And we've innovated together with them thinking about, hey, let's get a price that's sustainable for residents over the cycle and do things like when commodities are up, you can put that in an enterprise fund. And so you could take the volatility there, and when value prices are high, that creates some upside to get the new fire truck, put in the new playground, and do things to enhance the community.

Yeah, the other thing that gets uncomfortable is just the discussion around contamination. So we focus greatly now on contamination levels, and that could include just glass, which is highly recyclable but, of course, has no value. And some geographies, the trucking cost to get glass to an end user just takes the whole thing upside down. So we've got to have those honest discussions with generators about whether the material really does have real sustainable environmental value at the end of the day, or are we just basically, you know, burning more rubber and more fuel, you know, to make ourselves feel good. And then I just – the contamination level of, you know, educating, you know, the end users, the consumers on how to do it right. So, again – You know, we've done a great deal of work in creating tools and training to point people to the right place to learn how to do it right. But frankly, municipalities, consumers, customers have to take responsibility for this contamination because, you know, when they deliver us stuff that's, you know, 8% contaminated, we call it garbage, right? So we're working through that. So we're having great, to John's point, great honest discussions about how we make recycling sustainable and and good for everybody, and we think we can do it. So we're well aware of that.

Thanks so much. If I could just sneak in some quick modeling questions. What should we be expecting for depreciation and amortization interest expense in taxes for 2020? Thanks.

Yeah, we'll follow up with you sometime after the call.

Okay, we'll do it. Thank you. The next question is from Michael Hoffman with Stiefel. Please go ahead.

Hey, guys, thanks for taking the questions. Chuck, on the free cash flow, can we bridge to the exit run rate given there's some one-timers off the midpoint? So I think the midpoint's 117, X the C&G credit. What's the bridge at exiting?

Yeah, Michael, so, you know, think about – $1.2 billion, kind of as the midpoint on the exit. We've got $100 million of tax reform capital included in that number, as we had talked about, which doesn't roll over into 2021. So that's really how you get to that exit of $1.3 billion.

And obviously, in 2021, you'd have the growth on top of that. And isn't there some working capital timing? There was like $40 million of working capital timing that

Yeah, there is, Michael, that we had talked about, $40 million of working capital timing, but that is offset now by the $30 million of a benefit that we get associated with CNG.

Got it. Okay. All right. So the exit rate is 1.3, and then you've got underlying growth greater than whatever your EBITDA growth is going to be.

Yeah, that's exactly right.

Yeah, and again, this is based on the $200 million target for M&A.

Right. Could you share what your year-end for all of 19, the open market price was versus restricted to get to your 2.8 for yield in 19? And then I'd be curious what you think those look like to get to the 3 in 20.

So you want the – I'm sorry, Michael. You want the restricted?

Open – yeah, so your open market – yield and your restricted yield for 19, for the full year? You gave us for the fourth quarter, or maybe you gave it for the year. I thought it was the fourth quarter. And then what do you think those pieces are to get to the 3% in guidance?

Michael, we don't have that detail in front of us as the quarterly amounts, but not the full year. But if you think about it, we should do somewhat the same of what we did this year. You're going to have CPI is going to be a benefit in the first half of 2020, but it'll flip to a slight headwind. So for the year, it kind of – it'll wash its way out. So, again, think of core price and restricted price kind of looking a lot like it does today.

Well, one of them's got to get better to get to 3% or it turns coming down.

Yeah, and it's probably going to be the open market piece of it, Michael. We think that that's going to get a little bit better.

Okay. And then – Housekeeping question, the 15 million of model Edwin from recycling doesn't give you any benefit for your continuing to work through the 55% that's MRF processing and the 36% on contracts, right? You could, in fact, offset some of that if you make some progress on contracts.

Yeah, just to clarify, Michael, 15 is just the pure commodity impact. The actions that we already have, you know, baked into the plan more than offset that. Except we make additional progress that's just icing on top of that cake. Perfect.

And we will make additional progress.

Yeah. And remember, Michael, as we increase recycling collection pricing, that flows through the yield.

Got it. And then one, just subtly, because there's a slightly different messaging around this from another player, and I think you have the same answer. Sure. 100% of your open market customer at your MRF has been repriced, but you have some contracted work, and that's why the aggregate MRF is 55.

Correct. Right. Yeah. Any open market customer has long since been repriced, you know, more than a year ago. Yeah.

And that's open market at the facilities. That's open market collection. All the open market recycling has been repriced.

Great. And then, if I could, how's the progress in Plano in the context of lessons learned, and is it going to be transferable into other operations? And as you think of, you know, recapitalization through the MRF fleet, have you been happy with what you're seeing, that we've hit on something and this is something worth pushing in other places?

Yeah, we've been very happy. Obviously, it's a, you know, it's a CapEx, OpEx trade-off. which is, you know, we've got state-of-the-art equipment in there and it allows us to cut the labor about in half, right, in the overall process and produce a cleaner product on the back end. So, we think that's really attractive and, again, as you know, we always think about an anchor tenant and a community that's willing to partner with us in order to do that and, you know, over time, I think you'll see continued investment as we go forward and build out that product line. Terrific.

Thanks a lot. And I'll just make one comment. This press release is really useful, the way it's been laid out. Thanks for doing that.

You're welcome, Michael. Have a good day.

I think you had six questions in there, man.

Yeah, I know.

Well, everybody else had four or five.

I had to jump in.

Okay.

The next question is from Michael Fenninger with Bank of America. Please go ahead.

Hey, guys. Just on the 3% yield number, is that – Chuck, is that, like, even through the year? Do we accelerate off this Q4 number, or do we just build through the year to end up averaging 3% for the full year?

Yeah, it's relatively evenly distributed throughout the year.

Okay. And then, Chuck, I think you made a comment about, like, SG&A flat to down. That's on a percent of sales basis, or is that on an absolute basis? That's on a percent of sales. That's as a percent of revenue. All right. All right, perfect. Yeah, I just wanted to clarify that. And then just on the acquisition you guys have completed already, like if we just take that number, what's the revenue lift on that if you just – with everything that's been completed by year-end so far for 2020?

Yeah, they're all over revenue benefit at $68 million. Okay.

Okay, and then just on the acquisitions you guys completed in 19, is there any, you know, obviously in the overall sector we've seen multiples expand. I'm just curious if you can kind of touch on, you know, you mentioned, Don mentioned, you know, leveraging up to buy good cash flow. I'm just curious if you can kind of help us on what you've seen in the private market with multiples for some of these businesses.

Yeah, multiples are still very good. You know, we will, of course, and have and will continue to. You know, we pay more. for businesses that, you know, have, you know, infrastructure that's critical, permits that are impossible to replicate, you know, those types of things. You know, we discount purchase prices, you know, when, you know, there's a little bit too much temporary work or too much broker work, we don't pay for that. So, you know, each deal is different, but on a blended basis, when you look at the whole portfolio of M&A that we're doing, we would tell you that multiples are still pretty stable.

Thank you. The next question is a follow-up from Brian McGuire with Goldman Sachs. Please go ahead.

Thanks for taking the follow-up. Did I hear you say that of the 1% contribution to sales growth in 2020 from acquisitions, which I guess would be $103 million, you've already got kind of 68 of it completed from last year, or were there some offsets from investments in there? And I guess so, like is there anything you've closed so far in one queue that we kind of already get you to that 103 number? Yeah.

Yeah, we said the $68 million is the right number. That's already included in our 1% growth guidance for 2020.

Some of those deals were deals we thought we'd close at year end, and they just didn't get done. They rolled into the new year.

Okay, but you're effectively kind of at almost two-thirds of the way through hitting that 1% number already.

Yeah, that's right.

That's correct.

Okay, and last one for me, just I think – some of the cost breakouts you give, which are very helpful. Looks like on the landfill side, those costs were actually down for the first time in a while. I know maybe it was an unusually high number a year ago. But I was wondering if you're finally seeing maybe a little bit of a light at the end of the tunnel or some, you know, leveling off of the inflationary pressure you've been seeing on the landfill side.

Yes and no. Listen, landfills are, you know, important assets to Don's point. Very, very tough to permit. And, you know, we, environmental compliance is something we take very, very seriously. So, and we price accordingly to more than cover our cost of inflation. That being said, we work on both sides of the equation, not just pricing, but also on the cost. And we work very, very diligently and have an incredible team here that looks at all our landfills from a centralized basis. And every month we're monitoring every element of the landfill. Is it producing the right level of leachate, right? Any elevated heat sources? And we're getting in quickly and we're mitigating small problems so that those small problems don't become big ones. And that's really helped us mitigate our costs over time. And I think across the category, you're seeing that in labor, you're seeing that in maintenance. If you take out the commodity impact on the revenue, really, really good leverage on the business and the cost side. We feel like that's a great foundation that takes us into 2020, which is helping drive that margin expansion.

All right, great. Thanks so much.

At this time, there appear to be no further questions. Mr. Slater, I'll turn the call back over to you for closing remarks.

Thank you, Gary. You've done a great job for us today. In 2019, through the relentless efforts of our people working together at all levels of the company, we outperformed the financial goals we set at the beginning of the year. We achieved strong pricing. We expanded EBITDA margins, generated $1.2 billion of free cash flow, and invested over half a billion dollars in acquisitions. Our strong finish to 2019 sets us up for continued success in 2020. Given the underlying momentum in our business, we are well positioned to deliver approximately 5% top line revenue growth and nearly 6% EBITDA growth. On top of that, we are entering 2020 with one of the strongest acquisition pipelines we've seen in years. We will achieve our 2020 guidance by pricing our products and services to ensure we earn an appropriate return. partnering with our municipal recycling customers to build more durable, economically sustainable recycling programs, tightly managing our costs and increasing productivity through the rollout of a RISE platform, as John described, and leveraging the current momentum in our business from the investments we've made in our people, the customer experience, operational excellence, and our strong market positions. As always, we will continue to manage the business to create long-term value for all of our stakeholders. I would like to thank everyone on the Republic team for their hard work, commitment, and dedication to operational excellence, and, of course, creating the Republic way. Thank you for spending time with us today. Have a good evening, and please be safe out there.

Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.