Republic Services, Inc.

Good afternoon and welcome to the Republic Services second quarter 2022 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in a 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 Aaron Evans, Vice President of Investor Relations.

I would like to welcome everyone to Republic Services' second quarter 2022 conference call. John Vander Art, our CEO, and Brian DelGaccio, our CFO, for joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involves risk 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 a recording of this conference call, you should be sensitive to the date of the original call, which is August 4, 2022. Please note that this call is property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings Our earnings press release, which includes gap reconciliation tables and a discussion of business activities, along with the recording of this call, are 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 and times, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to John.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our second quarter results continue to demonstrate the value created by our differentiated capabilities and ability to harness the positive momentum in our business. We delivered outsized revenue growth both organically and through acquisitions while generating underlying margin expansion. This was achieved by pricing in excess of our internal cost inflation and continued savings from productivity initiatives. The fundamentals in our business remain strong, and we remain well positioned to capitalize on additional growth opportunities in the marketplace. During the second quarter, we delivered revenue growth of 21%, generated adjusting earnings per share of $1.32, which is a 21% increase over the prior year, and produced more than $1.1 billion of adjusted free cash flow on a year-to-date basis. which is a 14% increase over the prior year. We continue to effectively allocate capital by investing in value-creating acquisitions and returning cash to our shareholders. Year-to-date, we invested $2.5 billion in acquisitions, which includes the acquisition of U.S. Ecology. The integration of U.S. Ecology is well underway and progressing as planned. We are encouraged by early cross-selling results and remain confident that we will achieve at least $40 million of cost synergies. We have one of our most robust acquisition pipelines ever with opportunities to close transactions this year and into 2023. We now expect to invest over $600 million in acquisitions apart from U.S. Ecology for the year. Substantially, all of these deals are in the recycling and solid waste space. Year-to-date, we returned $495 million to our shareholders through dividends and share repurchases. Additionally, we recently announced an increase to the dividend for the 19th consecutive year. During the second quarter, we reported organic volume growth of 2.4%, which was broad-based across geographies and market verticals. Simultaneously, we demonstrated our ability to price. Core price reached an all-time high of 6.2%, and average yield increased to 5%. This is the highest level of pricing in company history. At the same time, we are experiencing higher-than-expected inflationary pressures that continue to persist. That said, we expect to continue to price more than our internal cost inflation, ultimately leading to full-year results that are projected to exceed original expectations. We now expect adjusted EPS in a range of $4.77 to $4.80 and adjusted free cash flow in a range of $1.7 billion to $1.725 billion. This represents an increase of approximately 4% from the midpoint of the prior guidance. Finally, we believe creating a more sustainable world is both our responsibility and a platform for growth. We recently published our latest sustainability report, highlighting the progress we are making toward our most significant opportunities to positively impact key stakeholders and the environment. We reported a 9% decrease in greenhouse gas emissions from our 2017 baseline, which keeps us well positioned to achieve our interim target of a 10% reduction by 2025. We also highlight progress made on climate leadership goals, including circular economy, and renewable energy. These goals are supported by investments we are making in polymer centers and landfill gas projects, which are progressing as planned. In addition to having a positive impact on the environment, these innovative solutions are a platform for growth. Our efforts continue to be recognized externally, as Republic was recently named to 3BL Media's 100 Best Corporate Citizens list for the third consecutive year. I will now turn the call over to Brian, who will provide details on the quarter.

Thanks, John. Core price during the second quarter was 6.2%, which included open market pricing of 7.8% and restricted pricing of 3.5%. The components of core price included small container of 9.7%, large container of 6.9%, and residential of 5.6%. Average yield on total revenue was 5%. represents an increase of 80 basis points when compared to our first quarter performance. Average yield on related revenue was 5.4%. As John mentioned, we continue to dynamically adjust price on new and existing business to offset higher levels of cost inflation we see in our operating costs and capital expenditures. Second quarter volume increased 2.4%. The components of volume included an increase in small container of 2.8%, an increase in large container of 2%, and an increase in landfill of 5.7%. Our customer retention rate remained stable at 95%. Moving on to recycling. Commodity prices were $218 per ton in the second quarter. This compares to $170 per ton in the prior year. Recycling, processing, and commodity sales contributed 20 basis points to internal growth during the second quarter. Next, turning to our environmental solutions business. Second quarter environmental solutions revenue increased $260 million from the prior year, which primarily relates to the acquisition of U.S. Ecology. On the same short basis, environmental solutions contributed 50 basis points to internal growth during the second quarter. Adjusted EBITDA margin for the environmental solutions portion of our business was 17.1% during the quarter. This includes our existing operations in the Gulf and Northeast together with the addition of U.S. Ecology. Total company adjusted EBITDA margin for the second quarter was 29.6%. This compared to 30.6% in the prior year. Margin performance during the quarter included a 140 basis point decrease from acquisitions, of which 60 basis points relates to U.S. ecology, and a 110 basis point headwind from net fuel. It's important to note that even though net fuel was dilutive to margin, we recovered over 95% of the dollar change in fuel expense through fuel recovery fees. These margin headwinds were partially offset by a 30 basis point increase from recycled commodity prices, a 60 basis point contribution from relatively higher incentive compensation expense in the prior year, and most importantly, underlying margin expansion of 60 basis points. Adjusted EBITDA margin in the solid waste and recycling business was 30.8%. SG&A expenses, excluding transactions costs from U.S. Ecology, were 10% of revenues. The 70 basis point improvement demonstrates our ability to effectively manage costs and gain leverage while growing the business. With respect to our outlook, our guidance implies sequential growth in adjusted EBITDA dollars of 5 to 5.5% in the second half of the year compared to our first half performance. This would continue to drive double-digit EBITDA growth on a year-over-year basis. As a result, we now expect full-year 2022 adjusted EBITDA margin to be approximately 29.3%. The change in margin from our initial expectations relates to the impact of U.S. ecology and fuel. Year-to-date adjusted free cash flow was $1.15 billion and increased $143 million, or 14%, compared to the prior year. This was driven exclusively by EBITDA growth in the business. Year-to-date capital expenditures of $505 million represents 35% of our projected full year spent. And year-to-date cash taxes of $79 million represents approximately 25% of our projected full year spent. We now expect full year capital expenditures in a range of $1.45 billion to $1.47 billion. This represents an increase of $130 million from the midpoint of our prior expectations. The increase includes $75 million related to U.S. ecology. The remainder of the increase relates to investments to support growth and higher than anticipated costs for trucks, equipment, and landfill cell development. Total debt was $12 billion and total liquidity was $1.6 billion. Our leverage ratio at the end of the quarter was approximately 3.3 times. We expect to revert to three times leverage within the next 12 months. With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 23.9% during the second quarter and 24.6% on a year-to-date basis. The lower than anticipated tax rate was mostly timing related. and provided a five cent EPS benefit during the first half of the year. We expect this timing benefit will flip in the second half, resulting in an equivalent tax impact of 29% in the third quarter and 26% in the fourth quarter. We still expect a full year equivalent tax impact of approximately 26%. With that, operator, I would like to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone 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 then 2. If you are using a speaker phone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble our roster. The first question today comes from Tony Kaplan with Morgan Stanley. Please go ahead. Thanks so much.

I was hoping you could give a little bit of extra color on the expectation for how pricing plays out. I know you gave some great detail in terms of where the open market versus restricted was in the quarter, but Just how do you think that plays out during the rest of the year?

Yeah, strong. We clearly have momentum on the pricing side. Obviously, you know, we're putting out more price than we ever have on the open market side and retaining at a higher percentage than we ever have, which I think is both a macro economy and inflation and all costs going up for customers, as well as the fact that we continue to differentiate our service offering and provide something unique in the marketplace and I don't see that changing for the remainder of the year. And then we'll get a nice pickup the second half of the year on the restricted side of the business as those contracts kick in with underlying escalators, something tied to CPI or CPI derivatives like garbage trash or water sewer trash. That will provide some momentum there as well.

Terrific. And then in terms of U.S. Ecology, just any additional color on surprises versus, you know, now that you've started the integration, versus what your expectations were before?

Generally, I'm planned. Very excited about the people. I think maybe one surprise is we've been able to retain even a higher percentage of people than we expected. Again, there's good natural synergies in the deal. We've talked about that. But the reason we bought this is it's a platform for growth, and we really respect their compliance culture, their expertise, and obviously a very unrivaled set of assets. And their team has been absolutely energized to get connected with us. Very strong cultural alignment. And we did a lot of work pre-merger in terms of organization structure and model and design. And I've got those teams staffed up and ready to go. And we're out moving in the marketplace.

So I'd say on balance, it's got a little more momentum than I expected at this point.

Terrific.

Thank you so much. The next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

Thanks very much. Good afternoon, everybody. And just on the pricing question, I guess a lot of your contracts, and just as you alluded, are coming in the back half pretty strong. I guess that sets you up very nicely for 2023 in terms of carryover of any pricing you're doing through the year and in the back half of the year. So when we look out to 2023, is there any reason why we shouldn't kind of see a continued elevated pricing rate for 2023? Obviously lapping some tougher compares as we get through the back half of 2023. But tell me if I'm wrong, but shouldn't it remain elevated given the late in-year pricing this year remain elevated through the first half of next year?

Yeah, I guess the one cautionary note, obviously, is we're living in very unique and uncertain times. And I think in the last 36 months have taught all of us some dose of humility. All that being said, the outlook from what we see right now is very, very positive. And so you're right, right? The restricted portion of that book will continue to flow through. We're not going to change our stripes on the open market side of this business, right? We start and we lead with price. our people deserve a fair wage increase. And that profit allows us to reinvest in the business and drive sustainability and all the things that we care about. So that won't change. And listen, I think we've got momentum on all three fronts. We've got momentum on the pricing side of the business. We've got momentum on the volume side of this business. And obviously the acquisition activity, right, has also been very strong. And the rollover effect in the next year sets us up for, you know, what we think will end up being probably a double-digit revenue year in 2023.

That's great color. On acquisitions, that dovetails into my next question, actually, is just how you're looking at acquisitions now in two ways. First of all, taking a fairly large one here with the U.S. ecology, does that in any way kind of delay you from the cadence of acquisition or the pace and cadence of acquisitions at all? And secondly, related to that, does it Does U.S. Ecology now shift your attention a little bit to perhaps examining different types of acquisitions, some in hazardous, some in solid waste? Or do you kind of refocus, recenter on solid waste for opportunities going forward?

Yeah, I think we talked about when we did the deal, this wasn't either or, it was both and. And the timing of the deal was predicated on all the momentum we had in, you know, the traditional recycling solid waste side of the business. And our outlook has never been stronger and more positive there for deals, right? Thoughts about what we're going to close this year and a strong pipeline into next year. And, you know, that's where we start. And the bulk of our acquisition spend will certainly come in that space. Now, the benefit is we've got a, you know, a second platform with which we can pursue further, you know, follow on and tuck in acquisitions. And certainly we have a pipeline there. I think it's – the only thing I think is very unlikely in the near term is we do another deal of scale in the environmental solutions side of the business because we think we've got a great platform. We'll do a psychology. We're building that out. Again, we'll be able to tuck in pieces along the way in a very analogous way to the solid waste and recycling space of getting great, you know, post-closure synergies, right, on those deals as we fold those right in.

Makes a lot of sense.

Thanks for the time, as always.

The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Hi, good afternoon, and congratulations on the strong quarter. I'm wondering if you could just talk about, you know, as we think about the pieces for 23, you alluded to top line. Can you just talk about the tailwinds that you folks are going to have from your investments in landfill gas and in the – MRF facilities, how many facilities do we have coming online over the next 12 months as we just layer on additional tailwinds to the business as we think about what 23 might look like at this point?

Yeah, Jerry, specifically around some of the landfill gas projects and polymer centers and things of that nature, anything that's going to come online is really going to be in the latter part of 23. So the contributions to 23 is pretty limited with respect to those projects. Now, obviously, setting up 24 and beyond, right, that's where it starts to get more exciting with respect to those investments. Really, next year is more about, you know, pricing and excess of cost inflation and the realization of the synergies with the U.S. ecology deal.

And, you know, on that note, obviously, really strong margin performance this year, but given the high inflationary Environment overall certainly limits how aggressive we can get on pricing ahead of cost. What's the opportunity to make up for that next year as, you know, hopefully inflation slows from high singles to mid singles? Could we see a, you know, 60, 70, 80 base point margin expansion versus, you know, half that that you would typically target?

I think the thing you have to remember, you know, Jerry, is that on that restricted portion of our business and those indices that those contracts are tied to, they tend to lag. So, again, when you take a look at what we're doing with the inflationary environment that we're experiencing today, and we're seeing that across our book, and we're able to drive underlying margin expansion this year, as we start to get those relatively higher price increases next year, we think that actually, you know, sets us up very well for continued margin expansion into 2023.

So just to be clear, it doesn't sound like we should be thinking about commercial and industrial lines of business pricing slowing significantly, so we're just going to get the additional kicker from the restricted business kicking in and continued level of pricing that we've seen in CNI this year. Is that right?

Yeah, Joe, the only caveat I'd say is, I mean, the labor market remains constrained. And, you know, we do see some signs of that easing. And I would hope that that would continue to ease throughout the year and create the opportunity in the next year. But we will do whatever. We run this business forever. So we'll do whatever we need to do to retain our people. So the level of margin expansion that we have in 2023 will be predicated on exactly how tight the labor market is and what we need to do with wages.

Super. I appreciate the discussion. Thanks.

The next question comes from Hamza Mazari with Jefferies. Please go ahead.

Good afternoon. My first question is just around the restricted book and then also as part of that just cost inflation. So when you look at your cost buckets, do you sort of believe most of those buckets have peaked, labor included? And then as part of that, when you look at your restricted book, how much of that book is on indices that are not CPI? And when they reset, do they kind of cover cost inflation that you're seeing? I know they lag. Or does it not even matter because the open market is so strong that it will help you recover whatever you're not currently?

Yeah, let me start on the wage piece. Listen, we're seeing inflation right in the high fours. And we feel good about that number in part because going into this high inflationary period, we thought we had a very healthy cost structure. Healthy meaning not too high, but also not too low, right? Our team does a really good job of understanding local market dynamics, and we want to be the employer of choice in those markets. Now, obviously, we've had to take up, you know, put wages into the market this year beyond our initial plan, just given the dynamic environment. And I would say, listen, we see that certainly flattening, right, and kind of ending the year right into the high fours on that front. assuming that inflation comes down, that will start to modulate as we go forward. So I think we are past the peak of this thing, again, with the caveat of we're living in an uncertain environment.

So, Hamza, within that 50% book that has a contractual pricing restriction, 34% of those are directly linked to CPI. 18% are some form of alternative index. So think just over 50% as some inflationary component, you know, baked into it. And then the other 48% is some other pricing mechanism. So it could be a fixed rate. It could be a rate review, a cost plus contract, but that's basically the composition of that, that 50% of our book.

Got it. And just my follow-up question. Um, On U.S. ecology, you mentioned early signs of cross-selling. Could you just remind us what you sized up revenue synergies at? And at the same time, is the sales cycle different than solid waste? Or maybe just give us some examples of the early success of cross-selling. Thank you.

Sure, yeah. Keep in mind, we value the deal, obviously, based on the standalone intrinsic value plus $40 million of cost synergies. That being said, we think they're the revenue synergies over time. We'll help pace that. Part of that is on the revenue synergies. So we've said $75 to $100 million of cross-sell realized over three years. We've already gotten 15 of that. So very good early momentum on that front. And it's cutting both ways, right? Customers at U.S. Ecology have that we're bringing in our services, but even more so customers that we have, we're now selling a broader set of services, too. And early days on that, we haven't really done a full rollout across all of our sales teams. So very excited about the momentum to hit that number. And then on pricing, we believe these are scarce assets. And, again, you need to price to be able to reinvest in these assets over time and grow. And so we put out a double-digit pricing. price increase earlier this week that will go into effect in early September into the marketplace because it's imperative that we do that. It's an inflationary environment, right? We're going to reinvest in the business and we're going to expand these margins over time.

Got it. Thank you.

The next question comes from Michael Hoffman with People. Please go ahead.

Thank you all. So many things to think about and choose from. So I'm going to pick free cash flow. If the old midpoint's $1.65 billion, you subtract $130 million for more capex, that means there's about $193 million of upside from performance between solid waste and environmental services. Can you split between them where that came from?

Yeah, that's all solid waste, Michael.

It's all solid waste. Okay, so that just shows just how dramatic the leverage of this price has been. to convert that into cash. That's the other observation.

Agree.

Okay. Margins. So the U.S. ecology margins or the EES margins, which is basically mostly U.S. ecology, came out better than if you were looking at old models for that business coming into 2Q. How much of that is it was a really good market for those kind of services and everybody had a really good quarter, all the peers? versus anything that you all did to affect change? And then how do I look at your combined margin of 29.3 and convert that into what's the dollars of EBITDA?

Well, yeah, let me start with the latter part first when you want to talk about the dollars of EBITDA. So we talked for the full year about or I'm sorry, in the second half of increasing EBITDA 5 to 5.5% over our first half performance. So think first half was $1.913 billion. Second half, that would imply $2 billion to $2.2 billion for a full year of 3.91 to 3.93. So when you take a look at that 5 to 5.5% sequential growth, About 3.5% of that is just the additional amount from U.S. Ecology, just for having that for longer in that period of time. And then the rest of the business, 1.5% to 2%. When you think about that 1.5% to 2% on a like-for-like basis, that's relatively consistent what we would see in a normal year. And then on your margin question, so when you take a look at the 17.1% for the environmental solutions business, That's, you know, again, I would say there wasn't much that we were able to affect in that period of time. It was only two months. So most of the synergy capture that we expect, the cross-selling opportunities that John mentioned, and then, again, the pricing opportunities, that's more on the come. So, again, I would say that was more just the strength in the business from U.S. ecology, which could also be just reflective of strength in that industrial market.

Yeah, it was very good across their peer groups. So it doesn't surprise me that it was good. I just was wondering how much you were able to influence already. Okay, thanks.

Thanks, Michael.

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

Hi, guys. Thanks for taking my questions. I might have missed it, but just the updated yield and volume guidance for 2022 seems like both are going up here.

Yeah, so we expect with the 5% that we just reported here in the second quarter, we would expect, as we talked about that, to accelerate in the second half of the year for the reasons we discussed. So we expect to stay over 5% for the balance of the year. So full year, that would average to right around 5% on a full year basis for average yield. And right now when we take a look at volume, we're expecting that to be at the high end of our original guidance range, so right around 2%.

Okay, got it. Very helpful. And updated margin guidance, 29.3%. I believe it was 30.3% to 30.4% before. I think e-call was supposed to be 70 basis points of that gap. Is that what it ended up being in there? And that leaves maybe 35 basis points of fuel, but I assume... fuel was actually more than that, and you're actually covering a lot of what the incremental fuel drag was with price. So if we could just flesh that out, that would be helpful. Sure.

Yeah, you actually had a couple of those numbers there. So U.S. ecology is 70 basis points, 70 basis point drag from our original expectations. Net fuel is actually 50 basis points worse than we originally thought. We actually have 120 basis point drag between the two, and we're making that up with the rest of the business. Get to that 29.3 for the year.

Got it. Nice work. Thanks for the help.

The next question comes from Michael furniture with bank of America. Please go ahead.

Yeah. Thanks guys. Um, just when we think about the acceleration that you mentioned, the back half with the yield, obviously you call it, can you help us find just like the roll over of what that would look like for 2023? just based on really where we're exiting the year at and what we see with USC call after two months.

And, Mike, were you talking about just overall revenue or are you just talking about specifically around yield?

Both, if you could, just because of, you know, the core price as you accelerate. I mean, you're putting these price increases through this year, so there must just be some rollover benefit just by even not even increasing next year just by run ratings from the end of this year. And also, for U.S. e-call, I'm curious if there's any change in terms of the 12-month impact that we were thinking of when you originally guided.

So just a couple things I want to clarify. So when we're talking about core price and yield, that is on the solid waste business. That's what's included in those numbers. I want to point that out because any change in environmental solutions revenue, whether it be price or volume, is on a single line item when we sit there and reconcile the change in revenue. So as we're talking about 5% yield, as you think about the sequential improvement from the CPI-linked contracts, we think to the second half of the year, that's probably about a 20 basis point increase or so in yield second half versus our second quarter performance within a further step up, probably somewhere in that kind of mid fives as we sit there and look at 23 today. Got it.

Brian and John, I'm curious, if we look back at your historical peak margin of 31% EBITDA range in 2010-11, I know one of the main factors why margins were below that over the last decade was the low CPI. So if we move into a CPI range of 3%, let's say, on a multi-year basis, which was consistent with prior cycles, How different is the business set up today in terms of streamlined operations, routing, cost? Like, how different is this business today for a CPI 3, 3.5% just long-term compared to where we were in prior cycles? Thank you.

Yeah, stronger on both fronts. We're certainly stronger on the customer side, which leads to revenue on all fronts. It's a healthier customer mix. Again, I don't think that we talk enough about the economics of loyalty in this business. Not every revenue dollar is equal. Some customers are willing to stay with you longer. That's why core price is interesting, but yield becomes the ultimate pricing metric. And that's the one that really connects to the P&L because it factors in the customer that you gain and lose. And you gain and lose those customers at very different rates with the same cost structure. So yield becomes very important. So we've got the healthier customer base. we've got better tools, right, and better technology that help us work with our local teams and price very dynamically across all of our 300-plus markets. So we feel better about that. And then we're more efficient. The RISE digital platform has been a big game-changer for us. We've taken out $40 million of costs, and we think over the next 18 to 24 months we've got another $60 million to take out just in terms of driving efficiency and getting the same amount of work done in a shorter period of time. And so... You know, where CPI goes, listen, we've lived in all kinds of different environments here. I can tell you, you know, it being really low, right, doesn't work very well for the industry, and we've seen that period. The current number obviously isn't great either, even though our results are good. We're out of balance as an economy, right, with, you know, labor constraints and in an unsustainable way where it's impacting consumer spend and everything else. So modulating something into a 2%, 3%, 4%, I think you're going to find very healthy dynamics for our business and really good performance.

Thank you.

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

Hey, good afternoon, guys. Hey, Tyler. Hey, Brian. So I just want to clarify and be clear on the modeling question here. But what is the expected revenue contribution in 22 from M&A based on the guide?

Yeah, so if you take a look at the total contribution from acquisitions, it's about 9.3% for that which has closed, and that includes U.S. Ecology. If you were to exclude U.S. Ecology, that would be about 300 basis points.

Okay. And then is there – you mentioned a benefit and a rollover in 23. Can you just size based on what's closed what rolls over?

Yeah, so including U.S. ecology, that would also be about 300 basis points. Or, again, U.S. ecology plus deals close to date.

Yeah, perfect. Okay. And then going back to the prior question, did you say that you think your restricted book will be up circa mid-5% next year? No.

Overall, when we kind of talk about the cadence of average yield – And so, you know, again, with a 5% average yield in the second quarter, we see second half improving, you know, 15 to 20 basis points compared to our second quarter performance. And then as we look forward into 23, again, assuming that things stay relatively stable on the open market portion of our business, that's where we think of average yield right now in kind of that mid-5% overall.

Yield. Okay. That helps. Okay. You talked about just over 3.9 billion in EBITDA for this year. If I do that calculation, it kind of implies, call it a 43 to 44% free cash conversion. I think last quarter you re-endorsed that 47% for 24. So can you kind of build that bridge, that 3 to 400 basis point uplift and conversion? I mean, is that lower leverage? Is it better closure, post-closure, cash taxes, CapEx? Just how do we get there?

Yeah, a majority of that would be as we revert to that three times leverage, right? So we're going to reduce the interest expense. At the same time, though, capturing the synergies, that's all going to be accretive to both EBITDA margin as well as to free cash flow conversion. So the combination, really, of the U.S. ecology integration, the reduction in interest expense over time is that line of sight to that 47% free cash flow conversion.

Okay, okay, that's helpful. And then I think we're 100 days in on U.S. ecology. Any high-level thoughts about portfolio rationalization? Do all the lines make sense?

Yeah, listen, there's a couple things that are under strategic review, all right, and we'll announce those when we've taken a decision on those items. The vast majority of what we bought we like and we're going to keep and operate, and there's a couple of things that we're taking a look at that might not be the best fit. Somebody else might be the natural owner.

Okay, okay, last one I promised. And this is a bit of a strange question, but is there an extra workday in Q3 because of how 4th of July fell?

I think Q3 is relatively flat year over year. Q4, there might be a quarter of a workday difference.

Okay. Thank you. That's helpful.

The next question comes from Stephanie Yee with J.P. Morgan. Go ahead.

Hi, good afternoon. I wanted to ask about how you're thinking about capital allocation in terms of debt repayment versus acquisitions. Is the leverage ratio coming down really just coming from EBITDA going up, or are you planning to repay debt? And also, how are you thinking about share repurchases?

Yeah, I would say that reverting the three times leverage is most likely a combination of both. So, you know, again, the debt that we assumed as a result of the U.S. ecology acquisition paying down, probably not all of it, but a portion of that, as well as just the, you know, the growth in the underlying EBITDA dollars is certainly going to help the leverage calculations. But think of it as a combo of both.

Okay.

Go ahead. You had a follow-up question?

Oh, sorry. I think you're going to comment on the share repurchases.

Yeah, as far as share repurchases, so again, we were a buyer in the first quarter. We said that we are going to prioritize at this point the debt repayment, relatively short-term outlook on that as far as 12 months or less. But we always remain opportunistic on repurchasing shares, and we will continue to do so.

Okay. And if I can just ask one more question. I know you provided that free cash flow conversion target in 2024. You didn't really outright state an adjusted EBITDA margin target, but if we add in kind of the $40 million of cost synergies, are we looking at total company EBITDA margin kind of getting close to or above 30% over that same timeframe?

Yeah, and I think that that's a realistic, you know, goal for us as we think about just through the cycle being able to expand EBITDA margin, you know, 30 to 50 basis points per year. So over the, you know, that two-year period, you can see that that 30% is a realistic target.

Okay, perfect. Thank you. The next question comes from Noah Gay with Oppenheimer. Please go ahead.

Thanks for taking the questions. First one is sort of a guidance housekeeping item. Does guidance contemplate the reinstatement of the CNG tax credit? And if you're not including it, if that were to be renewed, would the contribution be incremental in terms of EBITDA?

No, we did not include that in the guide. We're going to wait until that's actually law at this point. For us, that's about a $15 million annual impact if it were to be fully reinstated.

Okay, great. And then, you know, you mentioned pricing succeeding internal cost inflation. Just looking at some of these cost line items, I mean, you're getting leverage, you know, in labor and maintenance and repairs. I wonder if you could give us some color on how you're seeing the rate of internal cost inflation, you know, from 1Q to now 2Q and where you think it goes in the back half of the year.

Yeah, we certainly, we come out with an annual wage increase the first part of the year, obviously, for our people. And as the market, you know, inflation has persisted and these markets have remained challenged, we've been going into select markets, right, and putting in additional wages, right, where we need to. And, again, we'll do whatever we need to do to retain our people. We run the business forever, not for the quarter, not for the year. on that front. So, you know, that's certainly gone up from the first quarter to the second quarter. We now see kind of what we're doing, right, that flatlining throughout the rest of the year, kind of ending the end of the year with, you know, wage inflation and the high fours.

Okay, perfect. Thank you.

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

Thank you, Betsy. We are proud of our second quarter performance. We continue to manage the business to create long-term value for all stakeholders. I would like to thank our 39,000 employees for their continued hard work and commitment to providing our customers with first-class service to create a more sustainable world. Have a good evening and be safe.

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