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spk15: Good afternoon and welcome to the Republic Services fourth quarter 2021 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 one on your touchtone phone. To 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 Stacey Matthews, Vice President of Investor Relations.
spk00: Hello. I would like to welcome everyone to Republic Services' fourth quarter 2021 conference call. John VanderArk, our CEO, and Brian DelGaccio, our CFO, are joining me as we discuss our performance. I'd 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, you should be sensitive to the date of the original call, which is February 10th, 2022. 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 gap 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 our website. With that, I'd like to turn the call over to John.
spk07: Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. Our fourth quarter performance capped off a very strong year of financial results and operational execution. We outperformed expectations throughout the year and exceeded the high end of our upwardly revised guidance. During 2021, we generated adjusted earnings per share of $4.17, which increased 17% over the prior year, produced $1.52 billion of adjusted free cash flow, which increased 23% over the prior year, expanded EBITDA margin 60 basis points to 30%, improved free cash flow conversion 350 basis points to 44.8%, and increased customer retention rates to an all-time high of 95%. Profitable growth remains our strategic priority, and we continue to believe that investing in acquisitions is the best use of free cash flow to create long-term value. In 2021, we invested over a billion dollars in acquisitions to further enhance our market position and increase free cash flow. This is the highest level of acquisition investment in over a decade. Our acquisition pipeline remains robust with opportunities in recycling and solid waste and environmental solutions. Yesterday, we announced our agreement to acquire U.S. Ecology. This acquisition propels Republic into a leading position in the environmental solutions space and as a platform of high-quality assets and difficult to replicate infrastructure. I will discuss this strategic acquisition in more detail before we open up the call for Q&A. In addition to investing in acquisitions, we return $800 million to our shareholders through dividends and share repurchases. We delivered outsized growth and profitability by executing our strategy. Our strategy is supported by three differentiating capabilities, customer zeal, digital, and sustainability. With respect to customer zeal, our customer retention rates remain at a record-setting level of 95%, and NPS remains well above pre-pandemic scores. During the fourth quarter, we delivered outsized revenue growth throughout the business, Core price reached an all-time high of 5.4%, and average yield increased to 3.4%. Volumes increased 3.6% compared to the prior year, and acquisitions contributed an incremental 490 basis points to total revenue growth. Full-year combined yield and volume of 6.7% was the highest level in company history and over 200 basis points above the next highest year of performance. Turning to digital, we continue to make meaningful progress on the rollout of the next phase of the RISE platform. We have now implemented tablets in approximately 90% of our large and small container fleet. With these new capabilities, we generated operational efficiencies and delivered over 1 million automated proactive notifications to customers last year. We will begin deploying tablets to the residential fleet early this year and expect to be complete by mid 2023. Next, turning to sustainability. We continue to partner with developers to capitalize on landfill gas to energy opportunities. We expect four of these projects to be completed this year, with another 14 in our pipeline expected to be completed over the next couple of years. We see an opportunity for another 40 projects beyond the current pipeline. We are also making recycling investments beginning in 2022 to forward integrate in the plastics value chain. These investments will provide a platform for future revenue growth with attractive returns and drive a more sustainable world for future generations. We will absorb these investments within our normal level of capital spending. Our sustainability performance continues to be well regarded as Republic Services was named to the Dow Jones Sustainability Index for the sixth consecutive year. Additionally, our MSCI ESG rating was upgraded to an A, which is the highest rating in our industry. One of the primary factors leading to the upgrade was an increase in our human capital management score. This reflects our strong culture that embraces inclusion and diversity. These strong financial and operational results would not have been possible without our dedicated employees. In appreciation of their hard work throughout the pandemic, we paid each frontline employee $500 Committed to Serve award in the fourth quarter. Combined with the award paid in January of 2021, our frontline employees received an additional $1,000 during the year. This brings our total support provided through our Committed to Serve initiative to $50 million since the beginning of the pandemic. The strength of our 2021 results clearly demonstrates our ability to create sustainable value and provides the foundation from which we will continue to grow. That said, we expect another strong year of performance in 2022. Specifically, we expect to deliver adjusted earnings per share in a range of $4.58 to $4.65 and generate adjusted free cash flow in the range of $1.625 billion to $1.675 billion. This represents high single-digit to low double-digit growth over our 2021 performance. It's important to note that this guidance, as well as any assumptions we discussed in today's call, do not contemplate the impact from the pending acquisition of U.S. Ecology. We will provide updates to our guidance, if needed, once the transaction closes. I will now turn the call over to Brian.
spk06: Thanks, John. Core price during the fourth quarter was 5.4%, which included open market pricing of 7% and restricted pricing of 2.9%. The components of core price included small container of 8.6%, large container of 5.6%, and residential of 4.8%. Average yield was 3.4%, which represents a 20 basis point increase from our third quarter performance. In 2022, we expect average yield of approximately 3.4%. This is an increase of 50 basis points over our full year 2021 results. Fourth quarter volume increased 3.6%. The components of volume included an increase in small container of 4.6%, an increase in large container of 3.7%, and an increase in landfill of 6.7%. We expect organic volume growth in a range of 1.5% to 2% in 2022, which remains well above a long-term average. Moving on to recycling, commodity prices were $218 per ton in the fourth quarter. This compares to $110 per ton in the prior year. Recycling processing and commodity sales contributed 110 basis points to internal growth during the fourth quarter. We are assuming $187 per ton for recycled commodities in 2022, which is consistent with the full year 2021 average. Next, turning to our environmental solutions business. Fourth quarter environmental solutions revenue increased $65 million from the prior year. This was driven by organic growth from increased activity and the contribution from acquisitions. On a same-store basis, environmental solutions contributed 20 basis points to internal growth during the fourth quarter. Adjusted EBITDA margin for the fourth quarter was 28.1%. This compared to 29.9% in the prior year. Margin performance during the quarter was impacted by a 70 basis point headwind from higher incentive compensation expense. We expect incentive compensation expense will return to target levels. Margin performance also included a 50 basis point dilutive impact from recent acquisitions, which included deal and transition costs. It should be noted that we pulled forward certain integration costs originally planned for 2022. The remaining impact to margin was primarily driven by a 50 basis point increase in risk management costs. The current period includes a one-time true-up for an insurance captive that increased expense 20 basis points, in the prior year included a 30 basis point favorable reduction in reserves which did not repeat. We expect risk management expense in 2022 to be relatively flat with our full year 2021 performance. For reference purposes, fourth quarter margin performance at target levels of incentive compensation and excluding the one-time committed to serve payment would have been 29.4%. The remaining difference to prior year margin performance relates to the impact of recent acquisitions. SG&A during the fourth quarter was 10.6% of revenue. This represents an increase of 60 basis points over the prior year, which was driven by higher incentive compensation accruals previously discussed. Full year 2021 EBITDA margin of 30% expanded 60 basis points compared to the prior year. this resulting from pricing levels in excess of cost inflation and effective cost management, which demonstrates our ability to gain operating leverage in the business. To put our operating leverage into context, we estimate wage inflation, net of productivity, was approximately 3%. Our average yield of 3.4% more than covered this level of cost inflation, which is why labor and maintenance were both down as a percentage of revenue for the fourth quarter and for the year. In 2022, we expect EBITDA margin will continue to improve and are targeting margin expansion of 30 to 40 basis points over our full year 2021 performance. The components of expected margin expansion include pricing and excess of cost inflation adding 60 to 70 basis points and incentive compensation expense returning to target levels adding 50 basis points. Partially offset by acquisitions decreasing margin by 40 basis points and net fuel decreasing margin by 40 basis points. DD&A as a percentage of revenue was 11.2% for the year. We expect DD&A as a percentage of revenue of approximately 11.5% in 2022. Year-to-date adjusted free cash flow was $1.52 billion and increased $279 million, or 23%, compared to the prior year. This was driven by EBITDA growth in the business and a reduction in interest expense resulting from refinancing debt. Full-year 2021 free cash flow conversion increased 350 basis points to 44.8%. We are targeting high 40% level conversion within the next couple of years. Total debt was $9.6 billion and total liquidity was $2.8 billion. Our leverage ratio was 2.9 times. With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 24% during the fourth quarter. This was in line with our expectations and resulted in a 26% equivalent tax impact for the year. We expect an equivalent tax impact of 26% in 2022, made up of an effective tax rate of 21%, and approximately $120 million of non-cash charges from solar investments. Let me now turn it back over to John.
spk07: Thanks, Brian. Before I open up the call, let me provide a little more color on our recent announcement. With the addition of U.S. Ecology's national footprint of vertically integrated assets, leading disposal infrastructure, and comprehensive capabilities, we are better positioned to serve our customers with one of the most complete sets of products and services. This strategic acquisition provides a platform for additional organic and acquisitive growth with cross-selling opportunities for existing customers who want a single partner to manage their environmental services needs. We expect this acquisition to be immediately accretive to adjusted earnings and free cash flow and to create significant value with double-digit returns for our shareholders. We are excited to welcome U.S. Ecology's talented employees to the Republic team and expect the deal to close by the end of the second quarter this year. Expanding our environmental solutions business is a strategic priority, and this acquisition is a key addition. That said, the investments we are making are not limiting growth or reducing focus in the traditional recycling and solid waste businesses. This is not an either-or, but a both-and approach. We plan to make outsized investments in both businesses to accelerate growth and create lasting value. We remain disciplined allocators of capital and will only make investments in organic growth opportunities in M&A that increases intrinsic value and improves returns. With that, operator, I would like to open the call to questions.
spk15: 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 today. If your question has been answered and you would like to withdraw your request, you may do so by pressing star two. If you are using a speakerphone, please pick up your hands up before pressing the keys. Your first question comes from Noah K. with Oppenheimer. Please go ahead.
spk03: Thanks so much. I'm sure there'll be a bunch of questions about ethycology, but I'd like to focus on the core business for now. And starting with pricing, notice the yield, you know, was really strong, especially at a full year basis, but that core price you called out at an all-time high with noting. The yield was very strong in collection. Just what's your view on post-collection pricing and yield going into 2022? Do we start to see that nudge up as well? Because certainly there's, you know, rising operating expenses there, just like there is everywhere else.
spk07: Yeah, certainly you'll see some momentum in the first couple of quarters, and I think you'll see that momentum accelerate in the second half of the year. A lot of those customers are attached to CPI or something, a derivative of CPI. And like our collections business, there's a 12- to 18-month lag. So that elevated print from the last year will then start to flow through, and you'll see really nice economics on the yield side, especially in Q3 and Q4.
spk03: That's super helpful. And that feeds into the next question, which is really how to think about the ratability or the cadence of yield trends over the course of the year. I know you're not like some peers and you tend to do your PIs ratably through the year. So is the 3.4% full year number, since you're doing 3.4 here in the fourth quarter, is that fairly smooth and stable over the balance of the year or is there anything that you would call out?
spk07: Yeah, it's the same thing, which is the, you know, the portion of our book that's attached to CPI or something related to that. You will get more momentum in the second half. So I think you'll see really good pricing numbers here in Q1 and Q2. And then you'll see that start to accelerate in Q3 and Q4. You know, the open market side will end up being more ratable with the caveat that we're living in a very dynamic world, right? And if we see inflationary costs, inflationary pressure, The core thesis of this business is that we are going to price ahead of our cost. We did a great job of that last year as costs started to accelerate in pockets, and we'll do the same thing this year. Nothing broad-based. We look at every market uniquely and dynamically and make sure that our people are getting paid and that, again, we're pricing ahead of our cost.
spk03: Yep. And one more to sneak in. And, Brian, you called this out, but I want to go back to it because I think it's important. just around the margins and the impact from the higher incentive comp and the bonuses. I think you said it was 130 BIPs? Yes. So just A, with that, how much of that was anticipated? And B, when you talk about that sort of being a tailwind to margins next year, I guess how do you think about that in the context of continued support for the labor force given the tight labor market and, of course, you know, ongoing support amidst, you know, the COVID pandemic, which is still, although, easing with us.
spk06: Yeah, let me kind of talk about the incentive compensation piece first, and then we can talk about the Committed to Serve Award. So, you know, clearly, from an incentive compensation perspective, we put a plan together that assumes target, right? And as you've seen all year long, we've outperformed, and with that came additional incentive compensation accruals, which will be expensed or were expensed in 21, the cash for that will be paid in 22, which is one of the reasons, too, when you take a look at our free cash flow, the growth on a more normalized basis is actually even in excess of what we're presenting because we've got to absorb that extra cash payment in the first quarter. On the committed to serve, again, that was a discretionary item that we decided to do, certainly in recognition for the hard work that our frontline employees did during the pandemic. But we are not planning on making any of those additional or incremental awards going forward.
spk07: Largely, too, because that's baked into the plan, right? We've got elevated increases for all of our frontline people, given it's an inflationary environment. And, again, we're pricing ahead of that. And even with that plan, we're planning to expand margins. So that's why we assume that's it. And, again, as the situation moves and becomes dynamic, we'll adjust accordingly.
spk03: Dynamic is definitely the right word.
spk02: I'll turn it over. Thank you.
spk14: Our next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
spk16: Yes, hi. Good afternoon. Good afternoon, Jerry.
spk01: Can you talk about the cadence of the margin expansion that you folks are looking for over the course of the year? Obviously, you know, the fourth quarter will have the easy comp that you just mentioned. But what about as we head into the first quarter, you know, if we apply – normal seasonality, it looks like your margins might be starting the year, you know, down 50 to 100 basis points year over year in the first quarter unless we get outsized pricing contribution. Is that right? Can you just talk about the cadence of the year over year margin performance that you're looking for?
spk06: Yeah, you know, Jerry, you're on the right path there. I would say in 2022, we're expecting normal seasonality with respect to both the revenue as well as the EBITDA margin. I think when you look at the last two years, right, so 20 and 21, you had anything but normal, right? So you really have to go back and look at that seasonal cadence prior to that, which, again, when you think about seasonally, we tend to see our highest revenue and margin performance in the third and second quarters, Q4 thereafter, and then, you know, usually Q4 is a little bit, you know, the lightest for the year, really for two reasons. You've got the winter months, So you're not seeing that uptick in particular landfill volumes, as well as you've got the highest percentage of taxes in the first quarter. Payroll taxes.
spk02: Sure.
spk01: I appreciate it. And then, you know, separately on the acquisition announcement, can you talk about the path to get to double digit returns? You know, what? amount of bolt-on activity do we need or, you know, how much more do we have to go from a synergy standpoint to earn that double-digit return that, you know, I think typically for transactions this size takes most companies at least three to five years to get to?
spk07: Yeah, no, that double-digit return is based on the current pro forma, which again is on the $40 million of cost synergies, which don't include any of the revenue synergies, right, including cross-sells, or bolt-on acquisitions, which we have a number in the pipeline down the road. So that would all – all those things would be opportunities to accelerate, get to double digits more quickly, and then accelerate the overall returns to even a higher level.
spk02: Okay. Appreciate the discussion. Thanks.
spk14: Our next question comes from Tyler Brown with Raymond James.
spk15: Please go ahead.
spk10: Hey, good afternoon. Good afternoon. Hey, just real quick, Brian, but to be clear, the margins in 22 are assuming a normal like 100% incentive comp accrual?
spk05: That's correct.
spk10: Okay.
spk05: We hope it's higher. We'll take higher, but we're planning on 100%. That is correct.
spk10: Right. Okay. Okay. That's helpful. And then I know while we're on the talk of margin here, I know in the U.S. Ecology release you laid out that 47% free cash flow conversion by 24, but you didn't really make any mention of the margin targets. Now, I get it that U.S. ecology is probably, I'm going to say, 70, 80 basis points dilutive to margins. But does anything preclude you from achieving those, call it, 32% margins longer term? And is that something that investors should still think could be a reasonable expectation, like mid-decade?
spk07: Yeah, so it's absolutely in the solid waste and recycling side, right? We're on our marks, right? And we're going to get there. And you're right, this – Acquisition, right, in this space in general has a slightly different value creation formula, right? A little bit lower margins but less capital intensity, right? And so that starts to converge more into free cash flow conversion. You'll see us move later in the year to segment reporting, right, that calls those things out and really makes it clear to the investment community what kind of progress we're making on each front. And so just arithmetically, right, we'll get there just slightly slower than we would have otherwise. But our sites are still set toward that target over time.
spk10: Okay. Yeah, segment detail would be helpful. And then, John, I think it was only 90 days ago, though, you mentioned that you wanted to get environmental services up to a billion-dollar franchise over, I think, the next, like, three years. Clearly, pro forma, this is going to get you there. You mentioned a platform for deals in the release. You mentioned it again on this call. But, like, where do you envision the business longer term? Are you targeting... a certain percentage of sales that you maybe don't want to exceed or just big picture there?
spk07: No, listen, we're, you know, this deal, right, is a very unique set of assets, right? And, you know, gives us a really attractive position, right? And we don't think there's, you know, deal of the size or scale, right, out there in the future. We're certainly going to take this Should we be able to close it and, you know, integrate it, get our people connected, the systems, right, make sure that we're executing above the pro forma, right? And then along the way, of course, there's other deals that can fold into this while we're aggressively growing, right, the solid waste and recycling business. So we don't have any defined target of what percentage of the business this is, but, you know, the bulk of this business, just arithmetically, is going to be our traditional recycling and
spk10: solid waste business and we're going to continue to kind of grow both sides of that as we move forward okay and then my last one just real quick uh you talked about the 40 million dollars of synergies from the deal but you never really put a finer point there so where where exactly are these synergies coming from are they more sgna are they other operating costs are they even capex no it's uh
spk07: Two broad fronts. Think about half of it as just duplicative corporate costs, right? There's this cost of being a public company and IR treasury and all the normal things that you would think to take out. And then the other 20 would come more at the field level because you see we have a Gulf Coast region, right? We have a Northeast region in our environmental solutions business, right? They have a national footprint. And we'll obviously think about harmonizing and integrating those. Right, that's a relatively small number, right, when you think about it in terms of cost takeout because we think this is a huge platform for growth for us, right? We're not going into, you know, cut and flip. We're buying to, you know, keep and build. Now, as we go and we learn more, if there's more opportunities to do things a bit more efficiently, we'll certainly take advantage of that.
spk06: Okay. All right. Appreciate the time. And I think, Tyler, you know, the other thing, too, just, you know, The $40 million is exclusively cost synergies. There are no revenue synergies baked into the plan.
spk02: Okay. Okay. That's clear. Thank you.
spk14: Our next question comes from Michael E. Hoffman with Spiegel.
spk15: Please go ahead.
spk12: Thank you very much. I'm going to ask two questions and get 10 of them in it. You ended the year at 44% pre cash flow conversion, your guidance is up almost nine, but cash flow from ops are only up about five and a half capital spending is almost flat. So I'm trying to understand what's happening in capital spending. What do you think the cash conversion ratio does in 22? And is the cash flow from ops as a percentage of revenues kind of the same and 22 as it wasn't 21?
spk06: How does that work to find one question? Yeah, so Mike, let me kind of put it to you this way here. And I mentioned that we've got the additional cash incentive compensation that we're paying in 22 that's related to 21 performance. It's about $40 million of extra cash, which impacts free cash flow conversion by 100 basis points. So we think we're going to be able to, from an overall perspective, get to that 45% plus even absorbing cash that $40 million extra, that extra 100 basis points of free cash flow conversion.
spk12: Okay. And that'll show up in the cash flow from ops number. It's in cash from ops, correct.
spk06: It's in working capital where you see it.
spk12: Right. And then why is CapEx relatively flat year over year?
spk06: Well, remember, we talked about in the current year, right? So, again, if you take a look at our original guide and then what we ultimately spent, At the midpoint of that, we were kind of $90 million more of CapEx. So we had the ability, one, to fund additional growth. So again, if you take a look at our volume performance, so from an organic perspective, we had additional growth opportunities, as well as pulled forward some capital that was originally going to be spent in 22. So that's why it's relatively flat in 22 is because some of that spending actually happened in 21.
spk12: Got it. That's what I thought it was. Just wanted to make sure that was clear. And then, John, I think it is important for everybody to understand that don't focus on margins. Focus on the discipline of republics, cash on cash returns. And just to put it in perspective, I mean, you know, you now have about $1.3 billion of ES revenues. And what do you got? Maybe if you get the psychology closed, $2.5 billion invested in And on a like-to-like basis, the same investment is probably 2x on a per-revenue basis in garbage. So that's the way people ought to put it in perspective. Am I thinking about that correctly?
spk07: Well, I'd probably have to do a little of that math offline, Michael, to confirm or deny your thesis. But I think broadly speaking, you're in the right zone, which is, again, people get very caught up in the margin. And listen, we understand the margin as a way to measure the business, and we don't run away from that. We own that. And we've done a great job of expanding margins the last couple of years, kind of creeping up on 300 basis points as we get into next year. But we don't run the business for the core. We don't run it for any single metric. We run it for the long-term and intrinsic value. So that's where cash on cash returns. That's where value creation comes in. And so a business that might have slightly different optics, which is structurally a little lower margin, but less capital intensity, that free cash flow conversion is a better metric that starts to harmonize those two things and gets much closer to returns or a view toward returns. And listen, we think there's margin opportunity in this business, right? We think that we're going to continue to look for efficiencies and we're going to think about, you know, make sure that we take our mindset around revenue management and our skills and capabilities and our belief that we have to price out of our costs, right, and be expanding margins that allows us to reinvest in the business, right, and take care of our customers over time.
spk02: Okay. Thank you.
spk14: Our next question comes from Walter Spracklin with RBC Capital Markets.
spk15: Please go ahead.
spk13: Yeah, thanks very much. Good afternoon, everyone. So just touching on that, I know you just kind of said it, the answer to my question being, how do you grow margin and how do you take advantage of that margin opportunity in the environmental services business? You said both synergy and pricing, but if you were to kind of frame it, is it 50-50 or is it really a a business that needs to be repriced and properly priced to get those margins up? Or is it more on the cost energy side that you're looking to get those margins higher?
spk07: Yeah, I talked about the $40 million that we have right in front of us. And then, of course, as we go in, we'll look for opportunities. Now, we're acquiring not just assets, we're acquiring deep expertise. right, in the hazardous waste value chain and around compliance and operations and commercial capabilities. And so we're very, very mindful of that. And the last thing I want to do is, you know, step over a $20 bill to grab a nickel. So we're not going to be very short-term focused. We're going to think about long-term. And as we find more and learn more, right, we'll certainly report out on that. You know, on the revenue side, while we haven't put anything into the pro forma, right, we see opportunities across multiple fronts. I mean, strategically, the reason that we're into this business is because of the connectivity of solid waste and recycling. Customers have asked us to go here. They want a one-stop shop. They want somebody who we now think we will have the leading set of products and services in the environmental services space to serve our customers. So the cross-sell opportunities become immediate, and we've seen that with ACV and any other previous acquisition that we've done in this space. We talked about the follow-on acquisitions and that being a real opportunity. We think there are really interesting capital investment opportunities on the post-collection side of that business that allow us to compete more broadly across incineration, some other parts of the value chain we're excited about. And then we will bring our skill and capability of revenue management to the table, understanding that There is no work for free, so we'll look at every individual job that we do and make sure there's sufficient returns on that over time. Again, that becomes important to allow us to pay our people and to reinvest in the business. We haven't quantified any of those yet, right, because we're thinking concentrated on hopefully closing this transaction and integrating our colleagues, but we think there's a lot of upside over time.
spk13: That's a great color. And then my second question here is on – scalability of future acquisitions, you know, solid waste versus the environmental services side. Is environmental services, is that a much more scalable where integration of acquisitions, future acquisitions is better, it's easier to integrate, it's more upside? Is it, you know, rather that way on solid waste more so? I'm looking to gauge where your opportunity set and incremental dollar will be spent now if there's a lot bigger opportunity in one of the buckets through acquisitions than the other one.
spk07: Well, I think the great news is that we're not capital constrained, right? So that we don't have a dollar and choose where to put it. Again, we look strategically where is the fit and does it meet our discipline returns criteria? And then if it's both, we invest in both over time. I think This space looks very similar to what solid waste and recycling looked like, you know, a decade or more ago, where there's a lot of fragmentation, and we've already seen this rolling in smaller players, right, provides a ton of synergy. And we've got a pipeline that we see sometimes building out a regional footprint, sometimes it's adding, even further adding to our product and service offering that will be great fits. And our pipeline and acquisitions is robust on both fronts.
spk02: Okay, appreciate the time. Thank you.
spk14: Our next question comes from Sean Eastman with KeyBank Capital Markets.
spk15: Please go ahead.
spk09: Hi, team. Thanks for taking my questions. I just wanted to make sure I understand the price versus underlying inflation expectations over the course of the year. You know, if we're expecting 60 to 70 bps of margin expansion from pricing ahead of cost inflation, the average yield guidance is 3.4%. Does that mean we have 2.75% inflation kind of assumed? Or maybe just help me understand those assumptions.
spk06: Yeah. So, Sean, remember, one of the things you have to remember when we disclose average yields we're using total revenue as the denominator. So when you take a look about where we price and you look in that solid waste business, if you did it on related business, it actually would be 70 basis points higher than our 2021 performance and about 20 to 30 basis points higher than on total revenues. So that's the way you have to put it into context. So the 3.4, you got to make 3.6 or 3.7, you know, call it based on related revenues. and you look at that pricing in excess of cost inflation, that would imply closer to a 3% cost inflation. Okay, very helpful.
spk07: The actual kind of wage and benefit number there is probably slightly higher. Keep in mind, we're not talking a lot about it, but we're still getting a lot of productivity benefits to rise, and that's one of the great stories through the pandemic is it's allowed us to keep paying our people as their bills go up while managing the cost structure because we're just getting more efficient at the work.
spk09: Okay, great, great. Yeah, I'm glad we fleshed that out. Very helpful. And maybe just on U.S. ecology, in light of your comments around, you know, environmental solutions being less capital intensive, but also mentioning that there are some interesting CapEx opportunities around this particular acquisition. I mean... And then it seems like there's been a lot of noise around the U.S. ecology, capital spending historically. So, I mean, what should we expect as a baseline and sort of variability around CapEx from U.S. ecology?
spk06: Yeah, look, I think there's been some elevated capital with respect to building out, right, some landfills. So through the cycle – we would expect the CapEx to run circa 9% of revenue or so on that business. And again, it's going to be less than that in that 4% to 5% range on the field services piece and a little bit more on that waste solutions piece. But on average, call it about 9%. Okay.
spk02: All right. Excellent. Thanks, guys.
spk14: Our next question comes from Hamza Mazzari with Jefferies.
spk15: Please go ahead.
spk11: Hey, thank you very much. I just had a question around, as you think about synergies on revenue from has waste and solid waste, do you have a sense of how many customers can subscribe to sort of both services? And then also, you know, in the past, you know, there's been people that have looked at medical waste and solid waste together. and that hasn't quite worked out, what's different about this space? Do you have a lot of manufacturing customers that sort of are asking you to do both? Just give us a sense of revenue synergies. You don't have to quantify it. Just help us understand that.
spk07: Yeah, so I think versus your previous thesis, I think when you start with this sounds like an interesting bundle, let me try to go sell it, right? That may or may not work. We start with asking the customer what they want, what they need, and how they want to buy, and have worked our way back into this. So it's true certainly for our broad set of industrial customers who produce an ongoing recurring set of waste streams. And this really has accelerated over the last decade. They want fewer people into their plant. And second, they're taking a very hard look at the sustainability footprint of their supply base, right? That's a big part of their sustainability story. And so people who have the ratings we have, who have the record we have, become really meaningful for them. And keep in mind, we're still a very, very small percentage of their overall cost structure. So the idea that they'd be willing to pay a little bit more for somebody who can handle their needs compliantly and provide the speed they need That's the value proposition, and that's what we've seen proven out with the ACV transaction immediately, and we think we'll get that just at a much bigger scale with the U.S. ecology transaction. It also applies to some event-type work. You think about the infrastructure bill and brownfield sites, the same thing. You have a contractor there who really wants to understand speed, and a single provider that can handle all the different waste streams becomes a really big strategic advantage.
spk11: Got it. So, you know, can you give us a sense of post-U.S. ecology? What is your market share in has-waste, and where do you think it can go? And do you – I know U.S. ecology is heavy on landfills. They're heavy on event work. They have this NRG business that they're over-levered to buy. how are you thinking about the portfolio? Does incineration matter or not? Does has waste landfills mean more? Is NRG a good business? Just walk us through how you're thinking about the portfolio because they do have a few businesses. And has waste is obviously a very big market that has a number of other players and also their captive incinerators. It's very different than Solid Waste, as you obviously already know.
spk07: Yeah, sure. So, I mean, it starts with their historic business, which was really on the post-collection hazardous landfill side. And they have TSDFs and 10-day pads and other things around that. But those five sites, right, give them about a 36% market share position, right, in hazardous post-collection, right? That's been the strength of their business, really, really strong. And we're excited about that. They bought a company called NRC, which has largely field services, which is the thesis of which is getting close to the customer. We believe and agree with that thesis, and we've seen that and proved that out, that that works. We're there with the ACV deal, and we see that in our Gulf Coast region as well over time. That NRC transaction brought with it a couple of other types of businesses. They've got a little bit... business in Europe, and they've got some things, a marine standby business, which really focuses on oil spill recovery. But those are things that we'll go in and clearly take a look at and evaluate and understand, hey, what's the fit with the rest of the business? Is it connected from a customer standpoint, from an asset sharing standpoint? I take a very fair view of, is this something we think we can build and grow? We'll be excited about it. Or if this is something that might be a little more standalone and not very scalable and somebody else might be the more natural owner of that, we'll of course evaluate that as well.
spk16: Gotcha. That's very clear. Thank you so much.
spk14: Our next question comes from Kevin Chang with CIBC. Please go ahead.
spk08: Thanks for taking my question here. Maybe I could ask, you talked about some of these revenue synergies as you build up your environmental solutions, capabilities, the vertical integration. I guess you spoke a little bit about this, but what does a customer get out of it? It sounds like you might give them better service under one umbrella, and maybe it's just not clear to me why that would be. But do they also get a cost savings? Does a bundle... program, offer a level of pricing discount that they wouldn't get if they're using two different vendors. What else does a customer get out of this, having this all come out of Republic versus maybe dealing with U.S. Ecology and Republic separately, let's say?
spk07: Yeah, I know the thesis, and it's true in some industries where, hey, the more you put together, the more you bundle, the more price pressure you could be under. And we see this in our business today, actually, that the more products and services a customer buys, The average price per product or service goes up, not down. And keep in mind, waste and recycling broadly are a very, very, very small portion of a customer's cost structure. If you run a manufacturing facility, you think first about all of your direct costs. It could be steel or copper, anything else. And then you think about your labor. And then you think about your SG&A costs of IT and everything else. Waste and recycling, we're talking about basis points. of someone's overall cost structure. So a small price premium on a very small number is still a very, very small number. So for them, it's around compliance. Think about producer liability. When they produce a waste stream, especially more complex and complicated ones, they have the liability of that forever. So having somebody who is going to handle that in a sustainable and appropriate manner is of enormous value to them. The speed of being able to get things out of their facilities and keep the container empty because a full container can sometimes shut down the manufacturing process. So there's enormous value created by speed, ease of service, digital interface and billing, and those are all pieces that we start to put together for people. So that's the value proposition for customers.
spk08: No, that's a great clarification answer. And as you know, compliance has got to be a big part of the value proposition. My second question, maybe it's more of a philosophical question, but, you know, the industry, and you're seeing it yourself, you know, you're getting strong pricing, you're covering your inflation, you know, the churn is at record lows as well, so you kind of get best of both worlds. But I guess what churn level would force you to reevaluate your pricing strategy? So, you know, you said you had 95%, I guess, I think it was a Q4 number, like, At what point or at what level of churn would you rethink the pricing you're putting out into the market in order to maintain a certain level of market share or volume?
spk07: Well, we look at that all the time, right? We understand the – and we have a very sophisticated pricing, both pricing new customers as well as pricing existing customers. And the latter becomes more important for us, obviously, because we have such a long customer tenure. That's what that high customer retention drives or underneath that is long customer tenure. And so we have all kinds of experiences with customers around test and learn. We take A and B sampling in terms of understanding a price that customers are willing to pay and then at what price does that start to drive churn and start to drive defection. And there's an incredible amount of science underneath that process that's been developed over the last two decades. So It's really not the top-down number we look at, and if we go 92, we change pricing across the board or the opposite direction. It's much more surgical, almost at a customer-by-customer level, and that's what produces the pricing number while driving great volume growth.
spk08: That's clear, and that's helpful. Thank you very much for taking my question.
spk15: Our next question comes from David Manthe with Baird. Please go ahead.
spk04: Yeah, thank you very much. Two quick ones here. John, you mentioned at the beginning something about forward integrating into the plastic supply chain. Could you tell me what that means? I'm completely clueless about that. And second, on the ECO deal, it looks like margins, free cash flow, and returns are lower than Core Republic right out of the box here. organic growth may be a little bit more attractive, and the platform for bolt-on acquisition seems to be one of the best attributes of it. Could you just compare and contrast sort of the pipeline at eCall as you've gone through your due diligence, talk to them about deals versus what you know about the average MSW deal?
spk07: Yeah, sure. So on plastics, listen, the world has a single-use plastics problem, right? And you don't have to read too many websites or magazines or watch too many television shows to figure that out. Now, it's very different. Nature of those problems is very different across geography. But in the U.S., the problem is, right, circularity, right? We produce single-use water bottles or anything else, and we don't capture enough of those. And, you know, that plastic ultimately gets lost or gets downgraded, right? And there's huge pressure on the CPG companies to drive more reusable product rather than just using virgin plastic. And the constraint in all this is aggregation and supply. And so we are uniquely positioned in the value chain because we have that material. Today, that value chain isn't very well constructed. So you have product that moves very inefficiently. We sell that product for a relatively low value for what it's ultimately worth when it returns into the hands of the CPG companies. So a lot of dialogue, a lot of discussion going on across every stage of the value chain. But we think we've got an opportunity to take a next step and move forward with some pretty simple processing. that is going to allow us to capture a higher selling price and take more volatility out of those sales through longer-term contracting. I'm not going to get into any more detail right now than that, but stay tuned here because I think in the next few months you're going to hear far more color on that topic. And then on U.S. Ecology, listen, we have a really robust and capable business development team. both out and geographically dispersed, as well as here in Phoenix, that maintains a perspective on every company, big and small, and builds a pipeline. So we've been working on this for years on the environmental solution side of the business and have, you know, we're very disciplined buyers, very patient, but we've had discussions, right, with dozens of companies. So this isn't talking to you as a college and saying, what's in your pipeline? Of course, we'll do that. But we have our own robust pipeline that we know will fit in well to the U.S.
spk02: Ecology platform post-closing. Thank you very much.
spk14: At this time, there appears to be no further questions.
spk15: Mr. Van Der Ark, I'll now turn back over to you for closing remarks.
spk07: Thank you, Sarah. In closing, the strength of our 2021 performance demonstrates the power of our platform and the value our strategic investments are creating. We exceeded our upwardly revised financial goals by delivering double digit growth in revenue, EBITDA, EPS, and free cash flow. We continue to manage the business well to create long-term value for all stakeholders and expect continued profitable growth in 2022. I would like to thank all our employees for their continued hard work and commitment to our customers. Results like these are made possible by our team of dedicated employees.
spk02: Have a good evening and be safe.
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