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spk08: Good afternoon and welcome to the Republic Services Third 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 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 Aaron Evans, Vice President of Investor Relations. Please go ahead.
spk14: I would like to welcome everyone to Republic Services' third quarter 2022 conference call. John van der Ark, our CEO, and Brian DelGaccio, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements which involve risks and uncertainties and may be materially different from our actual results. Our SEC filings discuss factors that cause actual results that could cause actual results to differ materially from expectations. The material that we discuss on 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 October 27, 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 GAAP reconciliation tables, and a discussion of business activities, along with a recording of this call, are available on our 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 would like to turn the call over to John.
spk04: Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our strong results in the third quarter demonstrate our ability to properly grow the business and effectively manage our cost structure, even with increased volatility in the broader marketplace. Cost pressures remain elevated and more persistent than we originally anticipated. In the face of those cost headwinds, we are leveraging our tools and technology to price ahead of cost inflation and drive margin expansion in the underlying business. From our perspective, customer demand remains strong and supportive of continued volume growth. The sound fundamentals in our business, together with a laser focus on the customer, position us well to capitalize on growth opportunities in the market. During the third quarter, we delivered revenue growth of 23%, including over 12% from acquisitions, generated adjusted earnings per share of $1.34, which is a 20% increase over the prior year, and produced more than $1.6 billion of adjusted free cash flow on a year-to-date basis, a 23% increase over the prior year. We remain confident that investing in value-creating acquisitions is the highest and best use of our cash flows. Year-to-date, we invested $2.6 billion in acquisitions, which includes the acquisition of U.S. Ecology. The integration of UDS Ecology is progressing as planned, and we remain confident that we will achieve at least $40 million of cost energy. Our initial pricing actions have been successful. We will continue to increase prices to ensure that all stages of the value chain earn an appropriate return. We are also gaining traction cross-selling our products and services, achieving over $25 million in new sales to date. Apart from musicology, we have invested over $400 million in acquisitions this year. Substantially, all of these deals are in the recycling and solid waste space. Our robust acquisition pipeline continues to support outsized levels of activity over the coming years. Year-to-date, we return $640 million to our shareholders through dividends and share repurchases. We continue to invest for the future and advance our strategic initiatives to build distinctive capabilities in customer zeal, digital, and sustainability. With respect to customer zeal, we delivered organic volume growth of 2.2% during the third quarter. Volume growth was broad-based across our market verticals and geography. We also demonstrated our ongoing ability to price in excess of underlying cost inflation. Poor price increased to 6.9%, and average yield increased to 5.6%. This is the highest level of pricing in company history. Moving on to our digital capabilities. The team continues to advance the implementation of digital tools that improve the experience for both customers and employees. Our proprietary RISE tablets have been fully deployed across our large and small container routes, and deployment to residential routes is 26% complete. The remaining residential routes are on track for completion by mid 2023. We have also launched TrackMyTruck. This technology connects the customer to their large and small container truck utilizing a GPS-enabled RISE tablet. This is a major milestone that serves as a foundation for further digital offerings to our customers. As it relates to sustainability, development of our renewable gas projects remains on track. We expect the first tranche of these projects related to our joint venture to come online beginning in late 2023. We are pleased to work with BP on these RNG projects, who recently announced its intent to acquire Arceus. This provides additional opportunities to work together on decarbonization and environmental services initiatives. Regarding polymer centers, we are accelerating the development of these projects I now expect to invest an additional $40 million of capital this year to start working on future locations. Finally, our company values guide everything we do. I'm proud of our recent certification as a great place to work for the sixth consecutive year. This is a significant achievement as employee retention and recruiting remains a top priority in today's market. I will now turn the call over to Brian, who will provide details on the quarter. Thanks, John. Core price during the third quarter was 6.9%, which included open market pricing of 8.7% and restricted pricing of 4%. The components of core price included small container of 10.7%, large container of 7.6%, and residential of 6.7%. Average yield on total revenue was 5.6%, an increase of 60 basis points when compared to our second quarter performance. Average yield on related revenue was 6.3%. The team continues to dynamically adjust price on new and existing business to offset higher levels of inflation in our operating costs and capital expenditures. Third quarter volume increased 2.2%. The components of volume included an increase in small container of 2.3%, an increase in large container of 1.7%, and an increase in landfill of 6.8%. Our customer retention rate remained strong at over 94%. Moving on to recycling. Commodity prices were $162 per ton in the quarter. This compares to $230 per ton in the prior year. Recycling, processing, and commodity sales were a 130 basis point headwind to internal growth during the quarter. We are now forecasting fourth quarter commodity prices to be approximately $90 per ton. This would result in a full-year average commodity price of $165 per ton. Next, turning to our environmental solutions business. Third quarter environmental solutions revenue increased $343 million over the prior year, which primarily relates to the acquisition of U.S. Ecology. On a same-store basis, environmental solutions contributed 60 basis points to internal growth during the quarter. adjusted EBITDA margin for the environmental solutions business was 18.7%, a sequential increase of 160 basis points. This includes our existing operations in the Gulf and Northeast, together with the addition of U.S. Ecology. Total company adjusted EBITDA margin for the third quarter was 29.2%. This compares to 30.5% in the prior year. Margin performance during the quarter included a 150 basis point decrease from acquisitions, including 90 basis points related to U.S. ecology, and a 40 basis point headwind from lower commodity prices. These margin headwinds were partially offset by a 10 basis point increase from net fuel and underlying margin expansion of 50 basis points. Adjusted EBITDA margin in the recycling and solid waste business was 30.5%. SG&A expenses, excluding transaction costs from U.S. ecology, were 9.8% of revenue. This is a 30 basis point improvement over the prior year and reflects continued cost management as we grow the business. Year-to-date adjusted free cash flow was $1.67 billion, an increase of $309 million, or 23%, compared to the prior year. This was driven almost exclusively by EBITDA growth in the business. Similar to prior years, we expect to spend a disproportionate amount of our full-year CapEx and cash taxes during the fourth quarter. Year-to-date net capital expenditures of $808 million represents a little more than half of our projected full-year spend. And year-to-date adjusted cash taxes of $115 million represents 50% of our projected full-year spend. Total debt was $11.8 billion, and total liquidity was $1.9 billion. Variable interest rates on our debt increased 1% during the third quarter and an additional 50 basis points in October. As a reminder, a 1% increase in interest rates results in $36 million of additional annual interest expense. Our leverage ratio at the end of the quarter was approximately 3.2 times. We expect to revert to three times leverage by mid-2023. With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 25.1% during the third quarter and 24.8% on a year-to-date basis. We expect an equivalent tax impact in a range of 28% to 29% in the fourth quarter and an equivalent tax impact of just under 26% for the year. I will now turn the call back over to John. We are proud of the results we delivered during the third quarter, which exceeded our expectations. Stronger contribution from price more than offset persistent cost inflation, which we have seen stabilize but not retreat from elevated levels. That said, we remain comfortable with our full-year financial guidance we provided in July, even with a recent drop in recycled commodity prices and increase in interest rates. Looking forward to 2023, the fundamentals of our business remain strong. Recent decreases in recycled commodity prices, increased interest rates, and rising fuel costs will have a direct impact on our business. While these headwinds may modulate our performance expectations, we remain confident in our ability to price ahead of cost inflation. We still expect to deliver above-average levels of growth in revenue, EBITDA, and free cash flow. We plan to provide detailed 2023 guidance on our fourth quarter earnings call in February. With that, operator, I would like to open the call to questions.
spk08: 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 then 2. If you are using a speakerphone, please pick up your handset before pressing the keys. And our first question will come from Tyler Brown of Raymond James. Please go ahead.
spk05: Hey, good afternoon, guys. Hey, John, I just wanted to start on U.S. ecology. Curious how things are progressing there. It sounds like your September price hiked up. But can you just talk about how that action was received in the market? And did that cover both disposal and field services?
spk04: Yeah, integration broadly is going well. Really happy with what we purchased in terms of certainly the asset quality and also the people and culture and capabilities. We're able to do a lot of the integration planning work ahead of the close so that we've got a team that's hit the ground running, and I think the results are certainly showing that. Yes, we did put in the pricing action. That was on the disposal side of the business. We always start there. We've certainly taken some more tactical pricing actions on the field services side. And we've seen, you know, no degradation in volume from that. So the market's been very receptive to that. I think it fulfills our thesis that, you know, these assets and services have a lot of value to customers. And if you provide great work, they're willing to certainly pay a fair price. And we'll be, you know, continuing with, you know, pricing actions into 2023 and beyond. you know, to make sure that we're getting positive returns in every stage of the exchange.
spk05: Okay, good deal. Yep, that's helpful. And then on the pricing side, obviously another good print, but I'm curious about a couple things. Number one, do you think that the 6.9 that you posted this quarter could be the high watermark? As we look to 23, what do you think that 50% of the book that's restricted, what do you think that you'll see on pricing in that piece as we look to 23?
spk04: Yeah, I think we'll get a little momentum here in the second half on the restricted side in the first half of next year. You know, that'll be, you know, four and a half or north of four and a half, we think, just based on the roll through, you know, where all the different indices that we have at this point start to hit. Yeah, and Tyler, just to put that into context, in the third quarter, the restricted pricing was 4%. And in Q2, that number was 3.5%. So you can see the nice acceleration as we move forward.
spk05: Yeah, perfect. Okay, and then last one, just on the acquisition drag, I think, Brian, did you say 150 basis points? Why was that so big?
spk04: Well, yeah, the combination of, you know, U.S. ecology was 90 of the 150 basis points. We also have some of the environmental solutions transactions that we did late Q3 of last year, so most of that, the other 60, starts anniversaring in the fourth quarter.
spk05: Okay. All right, perfect. Thank you, guys.
spk08: The next question comes from Toni Kaplan of Morgan Stanley. Please go ahead.
spk00: Thanks so much. First, I wanted to ask about the strong volume that we've been seeing this year. I wanted to ask about your view on the sustainability of that. You know, I think it's been progressively, you know, maybe coming down, but I think overall, you know, fairly good. So I just wanted to ask about that.
spk04: Yeah, volume remains strong, certainly in our recurring sides of the business, but also in the places that are more transactional, like special waste and temporary large containers. We're still supply constrained there, and that's still broad-based. Now, as we think into next year, right, we're planning on those growth rates modulating a bit just because we're reading the same things you all are around some economic pullback. But, you know, frankly, I would have expected to see some of that already. We remain very, very positive in the volume environment right now. And all the demand signals that we watch as far as, New business, new business in the small container business continues to exceed lost business, and service increases are exceeding service decreases. So the demand is definitely there.
spk00: Terrific. And on the OCC, I know you mentioned the expectation, or I should say commodity basket. You mentioned the $90 a ton for 4Q. Is the sensitivity that you give in the filings, the $10 million impact to revenue and profitability for $10 a ton, is that a fair, like, is that going to still hold for this? Or is there a sensitivity on certain levels of, you know, where it is? And also, if you could help us think about the main components within the basket. Thanks.
spk04: Yeah, no, that sensitivity will hold, right? So right now, if we were to sit there and look at $90 a ton, if that held true for all of 23 compared to the $165 average that we're projecting for 22, that would be a decrease of about $75 million of both revenue and EBITDA on the commodity line.
spk00: Terrific. Thank you.
spk08: The next question comes from Noah K. of Oppenheimer. Please go ahead.
spk02: Thanks for taking the question. Can I follow up on that one? So, you know, $75 million theoretically of revenue flowing right to EBITDA on the commodity line item. Can you talk about offsets to that in terms of processing fees or other structures you have? I know you've done a lot of work to de-link the commodity exposure. So any clarification you can provide there would be helpful.
spk04: Yeah, no, that's a net number. So if you remember, if you go back and look at our filings a couple years ago, the sensitivity to a $10 change was $20 million. So we've cut that in half, and that's by being able to go in and actually share, right, in that volatility with the customer. So that's where you really see that change. When we talk about that $10 equaling about $10 million worth of EBITDA, that is a net number.
spk02: Ten million of EBITDA, but not ten million of revenue, just to clarify?
spk04: It's both. It's ten million of revenue and EBITDA. Because, again, if you think about what we did is that when we actually went in and changed the structure of the recycling contract, we basically just put that into the base rate. So that's how we actually wound up offsetting some of that volatility. So that's why, you know, when you look at the sensitivity now, the $10 change is $10 million in both revenue and EBITDA because it's just isolating the commodity impact. The service fee that we're charging to actually, you know, either process the material or to collect that material is going to stay unchanged, regardless of what the commodity price is.
spk02: Yep, very helpful. There's been some discussion of, you mentioned interest expense looking at next year, but also bonus depreciation stepping down. Can you talk about that and any other, you know, puts and takes you think about for free cash flow conversion as we look to next year?
spk04: Yeah, look, if you, just from an interest expense perspective, if you take a look at year over year, and if this is, Assuming 125 basis point hike in the fourth quarter, that would be about $70 million increase to interest expense year over year, which in isolation is about 100 basis point headwind to free cash flow conversion. That said, though, we had a plan that called for pricing in excess of cost inflation to and to drive very strong growth. So even though these are some new headwinds that are, you know, presenting into our plan for next year, we still expect very strong growth in revenue, EBITDA, and free cash flow.
spk02: Yeah. I mean, and in reiterating, I just want to make this point, right, and please nuance it as it makes sense. But, you know, in saying you're comfortable with this year's guidance and pointing to above-average growth for next year, I mean, it's really – pricing and operating leverage and solid waste, you know, that's making up some of these headwinds, if you will. And I just want to get your view on whether or not there's incremental pricing that you can put through, you know, looking at 23 to shore up some of those gaps.
spk04: Well, I'd also say it's also growth and margin expansion in environmental solutions that's helping offset it, right? We've got plans there to continue to cross up, continue to price, right, and drive our cost energy numbers there. So you'll see nice margin expansion in that part of the business as well. We're committed to price ahead of cost inflation under almost any scenario, obviously, right? In a black swan scenario where we get into, you know, crazy levels of interest rates, right? We'll come back and talk then. But we've been in a pretty high interest rate environment and lower interest rate environment, and we've done a pretty good job of Both scenarios or both cases, pricing ahead of cost inflation, and we're doing that playing a long game. We have customers. This is a loyalty business. So we're always going to do things that maximize the lifetime value of the business and therefore drive intrinsic value versus doing anything unnatural in a quarter that might drive short-term results but aren't really good for the shareholder longer term.
spk02: I appreciate all the color. Thank you.
spk08: The next question comes from Kevin Chang of CIBC. Please go ahead.
spk11: Hi. Good evening. Thanks for taking my question. Maybe just on the comments you made on the small container yield improvement, it continues to be outside as well. I mean, you're getting good pricing everywhere, but this especially seems to continue to be outside. If you can just explain to me why that is, why you're seeing even more stronger pricing in small containers relative to your other collections?
spk04: I think it's a combination of things, Kevin. I think it's certainly customer mix. We want to be with customers who are willing to pay more. We've got pretty sophisticated tools in our sales and marketing teams to identify those customers and present them with an offering where they're willing to pay more. More transactional parts of the business, for example, brokers, we've just pushed that out of our portfolio because they're renters. for renting those customers. They're not going to be with us for a long time. And so the mix certainly helps us. And then the offering we put in front of customers in terms of digital tools, the sophistication of our pricing that allows us to give, you know, very targeted pricing to a customer and understanding what we have to pay, all of those things drive yield, which is the ultimate pricing metric. Core price is a means to an end. The ultimate metric which ties to the P&L and March expansion is yield.
spk11: Okay. No, that's very helpful. And then just my second one, you know, the 160 basis points, sequential improvement in EBITDA margin and environmental solution. You talked about some of the early wins in terms of pricing and cross-selling and cost cutting. Just as you think about that 160, like is there a bucket that primarily drove that? Would it be primarily the cost cutting and then, you know, we can build off of this as some of the other synergies roll through? or was it kind of a mix of things that drove that 160?
spk04: No, it's a mix of things. All it's contributed, and really that balanced approach is what we look for going forward. As we look to take a business, again, that was in the mid to high teens, and over a longer period of time, we think there's no reason that business can't be in the mid to high 20s. That's where over a period of years we think we can take the business. Yeah, remember, too, there's obviously seasonality in that business, just like there is in the recycling and solid waste business. And so, you know, Q3 seasonally tends to be that highest quarter. So I think as we get more quarters as well, you'll start to see the growth year over year. But I think you're definitely going to see, as John mentioned, you're going to see a combination of pricing actions. You're going to see some of the cost takeout that we've done as we've realized some of the synergies and benefit from some of the cross-stones.
spk11: Thank you for taking my questions, and congrats on some good results here.
spk04: Thank you.
spk08: The next question comes from Michael Hoffman of CIFL. Please go ahead.
spk13: So I went back here as fast as I could do this while we were on the call. I think for 10 years you all have given some kind of indication of what the next year is going to be in the third quarter. So this is like the first time you're not in 10 years. and yet then you say sales, EBITDA, and free cash flow will be up. So can you help us a little bit of how to understand what's the messaging? What's up mean? Up a little? Up a lot? How do we make sure we get the right place to land on 23?
spk04: Yeah, we had talked about last quarter, we thought we potentially had line of sight to double-digit revenue growth. We're probably off that a little bit in terms of what our expectations are. for a couple of reasons. One is commodity price. Those coming down, they obviously have a revenue impact and a margin impact. The second is some of the acquisitions that we had hoped to close in the fourth quarter are getting pushed out. I feel very confident that those are going to be deals that close, but they're going to roll into the first quarter, in one case the second quarter, which just pushes the rollover effect of that. Revenue benefits. And then the market, I think, is getting a little more uncertain, as you see, from a broader macro standpoint. All that being said, Michael, we feel really good about high single-digit revenue growth, kind of in line with that EBITDA growth and free cash flow growth. And those, if you think about getting back to a 10-year period, those are certainly above-average numbers for the performance in a very challenging environment. So we're very optimistic about that. I'd say the reason why we're not giving some more formal type of indication, if you go back five years, it's a pretty predictable recurring revenue business. You've got a lot of visibility. We're living in very dynamic and different times in terms of what's happening with interest rates and labor tightness and inflation and all those things, and commodity prices. Given all those uncertainties, I think we're going to be in a better position three months from now to provide more clarity.
spk13: Fair enough. But at least we've got some guardrails we can live in based on what you just shared. So thank you for that. And then you did give us a sense of restricted price first half, four and a half, but the rate of inflation can be accelerating in the second half. So the assumption would be that restricted price in the second half would be greater than the four and a half if the current trend holds. That's the right observation?
spk04: Yeah, you know, I don't know that's going to be significantly different, Michael, throughout the year. I would kind of put, again, in that 4.5% to 5% range, right, for the full year. Again, we're exiting Q3 at 4, so you'll see some acceleration, but I think it'll be moderate acceleration throughout the year.
spk13: And one last thing on price is your starting open market price, your exit rate from 4Q?
spk04: Yeah, for the most part. I mean, look, if you look at what we're saying right now with a 5.6% average yield on total revenue, call it around 6% on related revenue in total. If you think about the open market portion of that, we would see that participating next year or contributing relatively in line with what we got this year.
spk13: Okay. That's very helpful. And then one just tweet because you're getting asked about a volume. I mean, you're getting – You're still seeing your good correlation, household formation, new business formation. You alluded to positive interval changes, new business exceeding lost business. But the rate of change will start to narrow because we were off of a pretty healthy recovery in the second half of 21 and the first half of 22. So we're going to start normalizing into a more narrow rate of change, but the trend underlying it is still positive.
spk04: Absolutely, Michael. That's our expectation. When we take about 23, that starts to modulate. Yeah, we think you start seeing that in the fourth quarter, you know, Michael, and then again getting to a more normalized level of growth. Right. Okay.
spk13: That's great. Thank you.
spk08: The next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.
spk15: Yeah, thanks very much. Thank you for taking my question here. Let me start on the cross-selling opportunities. I think, John, you mentioned earlier 75 to 100 million eventually. You're at the 25 million mark now. Are you still on track from a timing perspective in achieving that full run rate of cross-selling? Or if it's changed, can you comment on that? Has it been pulled forward or pushed back at all and why?
spk04: Yeah, we said we'd achieve that, you know, by 2024. That's the timeframe that we said to be at 25 already, given that we're still, you know, working through some integration, rolling this thing out. We have not touched, you know, many of our customers yet. We're really, really pleased about our progress. And I would say quite optimistic about hitting both the level and the timing of that.
spk15: Perfect. Perfect. On the OCC prices, yeah, Your peer earlier mentioned that their contracts are structured so that the further OCC goes down, the negative impact, that sensitivity that you highlighted kind of contracts the lower OCC goes. I just want to make sure your contract design similarly, that that plays out in your contract as well so that it's not a strict, you mentioned $10, but does that $10 contract contract when OCC prices go down, the further that OCC prices go down.
spk04: And that's what, you know, in the guidance itself and that we put out there, I would sit there and say on the way up and the way down, that $10 equating to $10 million of revenue in both EBITDA is, you know, good sensitivity to use from a modeling perspective. So, you know, again, The type of work that you're doing can dictate that, whether or not you're brokering work, that sort of thing. You know, those sort of things can be different company to company, but that's our sensitivity.
spk15: Okay. And last question here is you mentioned BP's purchase of Arkea there that, you know, you're optimistic working with them and all that. Anything that you can add? Have you spoken to the folks at BP at all? You know, what kind of new ways would you look at partnering with them? Or is it just, you know, what you had before is pretty much what you have now and expect to have going forward, or is there something additional now that you have a new owner, or they have a new owner?
spk04: Yeah, we've spoken to them at many levels, including talking to their CEO. They've got big, bold, ambitious plans around sustainability and decarbonization, and we think there's a number of ways we can work together. Certainly, in the core JV itself, and they're fully committed to that. We're getting the best of both worlds because the colleagues from Archaea, they are going to acquire, are going to stay, so we feel really excited about that team, but bringing more resources to bear, that will certainly help us hit our mark and maybe move a little faster on that front. And then they have a big business, so they've got a big environmental services business, so there's ways to partner together there. They have a major network of gas stations. And gas stations actually have a major place that plastic leak out of the value chain and don't get recycled. So there's ways to pilot and innovate there. And we've done nothing formal together on those fronts yet, obviously, but have like-minded ambitions in terms of making the world more environmentally sustainable and doing that in a way that drives growth for our shareholders as well.
spk15: Yeah, so it's an opportunity to get creative and advance that initiative. That's great. Okay, appreciate the time. Thank you very much.
spk08: The next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
spk01: Hi, good afternoon and good evening, everyone. I'm wondering if you can talk about for the recycling line of business at the commodity price that you mentioned for the fourth quarter, do you anticipate the business being in a net profit position? Kate, can you just comment on that? And then, you know, nice to hear about the reiteration of guidance despite that headwind of, you know, $20, $30 million from recycling. Can you just talk about what part of the guidance has evolved ahead of expectations. Sounds like it might be yield, but we would love it if you could flesh that out. Thanks.
spk04: Yeah, so just your first question there, at the $90 commodity price, yes, that portion of the business would remain profitable at that level. And then the second part, when you talk about the evolving guide, you're talking about with respect to $22,000. Yeah, so you're talking about just the puts and takes?
spk01: That's right. Yeah, so it sounds like you're able to overcome the recycling headwinds. It feels like yield has accelerated ahead of expectations, but I'm wondering if I could just get you to expand on that.
spk04: Yeah, better overall yield, better volume performance. We were able to overcome the commodity headwind as well as the higher interest rates in the third quarter. As we now look in the fourth quarter, the big drop really happened recently, so September into October. So, again, that's why we've maintained the guide, because the outperformance from Q3 is basically funding what we expect now for Q4, and we feel pretty good about the full-year guide.
spk01: And then, you know, conceptually, as you think about pricing for the long-term into Q4, At 23, obviously, you don't want to drive churn, but it sounds like, based on your prior comments, that we're going to think about pushing pricing in municipal solid waste to essentially fund the recycling headwinds is what I think I'm hearing from you. But can I trouble you to put a finer point on that, please?
spk04: Yeah, we think we're always going to try to price ahead of our cost inflation. Jerry, and obviously commodities are a headwind on that front. But how we don't think about it is because now there's a short-term headwind that we're going to go out and put a bunch of price in the market that we could be destructive from a long-term value creation with our customers on that front. So we feel good, like I said, into 23, that even with these headwinds, that we're going to have high single-digit growth on revenue, EBITDA, and free cash flow, given that we're overcoming that commodity headwind that I think speaks to the strength of the business. Yeah. I mean, we talked about the fact that we've seen elevated cost inflation in the business. We see that rolling into 23. And right now we are, we are making our plan as if that cost inflation stays in the business for the full year. So that's where the pricing ahead of cost inflation. That's where that comment is. Now look, If inflation is lower than we think or it starts to abate, then that could be some upside to our current plan, but that's not how we're going into it. So we do, versus our original expectations, we do expect the impact of both lower recycled commodity prices and higher interest rates to have an impact on where we thought we were headed as of 90 days ago. But as we just kind of talked about with Michael, we still think the outcome is going to be very strong, especially in the context when you look at an average growth rate and revenue, EBITDA, free cash flow, free cash flow conversion. We think they're all very strong metrics, all growing.
spk01: Super. And lastly, I'm wondering, can you just talk about the evolution for offtake agreements in landfill gas in addition to capital deployed by BP. Kinder Morgan has obviously bought some assets as well. Can you just provide an update on offtake agreement visibility? It sounded like the market was moving into the 20s per MMBPU on a multi-year basis. I'm not sure if you feel comfortable commenting on that and how the shape of the market has evolved since the last public update a quarter ago. Thanks.
spk04: No, we're still on track and still the same view that we are going to, you know, fix a portion of this and, you know, play spot on the market with the rest of it, which is going to probably think the best balance between maximizing returns as well as predictability over the cycle and managing risk on that. Certainly have alignment with BP on that same philosophy on the back end of these facilities.
spk01: Okay. Thanks. All right.
spk08: The next question comes from Sean Eastman of KeyBank Capital Markets. Please go ahead.
spk12: Hi, team. Thanks for taking my questions. I wanted to come back to the comment about a couple of those acquisitions that slid to the right a little bit. I'm curious, could you help us with the... annualized revenue associated with those. I think we've got 300 basis points kind of locked for rollover with e-call, but just trying to flesh out what that number could ultimately look like.
spk04: Yeah, from a rollover perspective right now, that's what we're planning is the 300 basis points of rollover, as John mentioned. There were a couple of deals that We're in the hopper. They still are. Where we thought they might close in Q4, they're now looking like they could be early to mid-23. So we'll keep you updated on that progress, but right now we're building the plan with 300 basis points of acquisition roll over.
spk12: Okay, got it. So you don't want to give any hints on the magnitude of those acquisitions that are in the hopper?
spk04: No, we'll tell you when they're closed.
spk12: Got it. Okay, fair enough, fair enough. And then... I just wanted to make sure I understand the ECOL contribution within that bridge to 2023. Obviously, we get a full year of revenue, but I'm just curious how you guys are thinking roughly about the growth rate in ECOL's top line and you know, I think we've got a lot of different pieces to work with here, but just in terms of where we're going to end up on e-call margins this year, what you guys think that will be for the full year next year?
spk04: Yeah, so of that 300 basis points of rollover, call it 250 of it is related to U.S. ecology. If you just think about the context of A consolidated company margin, we look at that additional four months of rollover, having about a 30 basis point headwind on total company margin in 2023.
spk12: Okay. Got it. And that assumes status quo margins for e-call year on year?
spk04: A slight step up as we, you know, realize, you know, a portion of the synergies again. But for the most part, that's going to be in the zip code.
spk12: Okay, very helpful. Thanks, guys.
spk08: The next question comes from Kyle White of Deutsche Bank. Please go ahead.
spk10: Hey, thanks for taking the question. I wanted to go back to pricing. Just curious, are you starting to see any kind of pushback from customers? You know, it seems like everyone six months ago was willing to pay higher prices. And now the environment has changed somewhat. So curious how those dialogues have gone and if you've seen any kind of pushback that you would mention.
spk04: No, we're still, like you said, we put out the highest in our open portion of the business, put out the highest gross price we ever have and have the highest realization rate as a percentage that we ever have, which is an astounding number on that back. So pricing is certainly sticking at elevated levels. The only place we've had challenges in, you know, small micro markets where we've had some challenges with turnover given labor constraints. Obviously, when you're not providing the service that you want in a given market, you're going to cause the customers to reconsider and go elsewhere. And so that's why we're into 2023 still planning on relatively elevated inflation levels because we're running the business forever. We want to make sure that we provide customers world-class service and that that will keep them staying and staying longer.
spk10: Got it. And then on that, you've talked about this a little bit, but as we think about 2023 and kind of underlying solid waste expansion margins, I think, you know, this year you're probably running about 60 basis points, 50 to 60 basis points. And so if you're pricing at these elevated levels for inflation that you're seeing today and that carries into 2023, you know, would that equate to, again, 50 to 60 with the potential to go even higher if we're in a more moderate inflationary environment next year? Yeah, we've set across the cycle 30 to 50 basis points is what we think about doing in recycling solid waste.
spk04: And we'll do that, you know, over time, right, at the elevated level in environmental solutions. You know, could that creep higher next year if pricing sticks and inflation comes down to the back half? It certainly could. We're not expecting that in terms of building a plan around it, but that would cause that gap to widen and allow for a little more margin expansion in the second half and certainly then going into 2024.
spk10: Thank you. I'll turn it over.
spk08: The next question comes from David Manthe of Baird. Please go ahead.
spk03: Thank you. You previously outlined that your revenues have about a 90% correlation with housing starts on a one-year lag. Is it correct to say that you believe that this very strong pricing and maybe some environmental solutions can change that historical correlation? Just either way, as the starts have clearly been declining and mortgage rates continue to surge. Are there any incremental actions that you're eyeing relative to the back half of next year?
spk04: Eyeing as far as, because again, look, that's been a historical correlation, but again, I think that's been in a, call it a, you know, a relatively stable macro environment. And we're, you know, we've been in anything but, kind of had these puts and takes with inflation. So again, at this point, As John mentioned, we're going to continue to price in excess of cost inflation. From an overall demand perspective, again, we've actually seen the demand very strong throughout 22, and we're not really seeing any signs of that abating. So, you know, again, that's how we're building our plan. Growth levels probably won't be as strong as they were, or certainly won't be as strong as they were in 22, just because we were still recovering units from the pandemic. But we still expect underlying unit growth in 23 year over year.
spk03: Got it. So maybe directionally you still think there's some correlation there, but not necessarily of the magnitude, depending on starts, is what I'm hearing. Could we talk about the interest rate? You said 1% changing rate is $36 million in interest expense. What was the reference rate in the third quarter from which to build to the fourth quarter in 2023 then?
spk04: Yeah, so again, right now what we're expecting is another 125 basis point increase, right, in the fourth quarter. That's how we've built our plan, and then that being relatively stable throughout 2023. If you think about what that means relative to where we were exiting Q3, You know, that's a good 125 basis points, you know, for the – when we think about where we are in Q4, a good 125 basis points from where we were exiting Q2. So the impact of that, as we think about year over year, is a $70 million increase in total interest expense, which is about a $50 million increase to cash flow once you net out the related taxes.
spk14: Okay. Thank you.
spk08: The next question comes from Stephanie Moore of Jefferies. Please go ahead. Hi, good afternoon.
spk04: Hi, Stephanie.
spk09: I wanted to touch on your tech investments and digital tools. I appreciate the update on the RISE platform. It would be helpful if you could share, I don't know, any KPIs or benefits that you're seeing from the early rollout of those tools on the efficiency side and You know, as we think of 2023, you know, kind of what's in the pipeline from the digital tools and some investments that might be in the works?
spk04: Yeah, we've certainly seen over the last, you know, 18 months productivity benefit, which allows us to get more work done in the same amount of time with, you know, great customer service and doing it safely, primarily, primarily. value for our drivers. So we probably from a cost standpoint, we think we've taken out, you know, almost $50 million at this point. And we think over the next 18 months, we've got another 50 million that we can take out of the business as we get full deployment and full utilization of this. And then when you connect it back to the customer, uh, all that information allows us to communicate with a customer, right? With this track, my truck, we talked about that allows the customer to see where we are and when the pickup is going to occur. And it not only allows, in some cases, them to look for themselves, right, where the vehicle is and when the pickup is coming, but even if they decide to use a different channel and call our customer service center, then we're able to have our agent look up there and give the customer not, it'll be there tomorrow or arranged, but give them a far more precise time that the truck is on the way and gives the customer assurance. So a lot of what we get is that, right? We run so precise that we're there within minutes a half-hour, 45-minute window every week or multiple times a week for a customer. And so when we miss that window, even if we're going to be there that day, the customers call and they're concerned. So this allows us to provide better information, take costs out of the system. And we're not going to talk about those today, but you're going to see more innovations come off of that that make the customer offering differentiated than we think can directly hit the P&L in terms of customers staying on.
spk09: Great. Thank you. And then just touching on the M&A side, maybe on the traditional waste, are you seeing any changes in demand or interest levels in this environment?
spk04: No. I think the pipeline is certainly strong, and there's significant willingness to sell. We're obviously maintaining a lot of discretion, right? Some companies don't fit us from a profile standpoint, from a value standpoint. They might not be a good fit for us, so we remain very discriminating in terms of what we buy, but the pipeline is very, very strong. It's getting harder to do business. Think about the digital investments we just talked about. That's becoming a second moat, not just the post-collection infrastructure. All of those investments we make are very expensive. They take a lot of time. They take a lot of expertise. So that makes it tougher. The current labor environment makes it more challenging. The current supply chain being constrained. We're only slightly delayed in the delivery of equipment because we're a great customer for our suppliers. We buy trucks year in and year out where some of the smaller players will go years without buying and try to buy on the spot market. Well, now they're locked out. Those factories are full and they're at the end of the line. And so it's tougher to get labor and those people you hire have to drive old equipment that's in need of repair and or replacement. That's a big advantage for us to take over those business.
spk08: Understood. Well, thank you so much. The next question comes from Michael Feiniger of Bank of America. Please go ahead.
spk06: Hey, guys. Thanks for squeezing me in. Brian, you guys just did On a year-to-date basis, adjusted free cash flow of 1.67, really strong. I think your guide is 1.7 or so. You might have touched on it earlier. Is there anything I'm missing on the fourth quarter that we should be aware of of why you're not raising the free cash flow outlook?
spk04: Yeah. So, Mike, I had actually mentioned it in the remarks. So the CapEx that we spent year-to-date, so through three quarters – and the cash interest represents only about half of our expected full year spent. So in the fourth quarter, we expect a disproportionate amount of both capex and cash taxes relative to the average you've seen. So that's why you see a relatively modest Q4 contribution and why we've maintained the guide as it is on free cash flow. Some of that, as John mentioned, accelerating some of the investments in Polymer Center, throughout the year some of the things we've done in order to fund this outsized growth. So you can reasonably expect a little bit more CapEx than we originally anticipated, partially being offset by a little bit less cash taxes than we originally anticipated.
spk06: And I guess, Brian, just to follow up with that and to put a finer point, do you plan to grow your free cash flow next year? Will that growth be in line with the EBITDA growth? because obviously in the context of where you guys are kind of targeting your free cash flow conversion over time. Thank you.
spk04: Yes. First question, yes, we definitely expect to grow our free cash flow. And, yes, it should be relatively in line with the growth in EBITDA. You know, we would have expected to grow it a little bit more. Obviously, the impact of interest expense and recycled commodity prices impacts that, but we are fully expecting to grow.
spk10: Thank you.
spk08: At this time, there appear to be no further questions. Mr. Van der Ark, I'll turn the call back over to you for closing remarks.
spk04: Thank you, Andrea. I would like to thank the entire public services team for their efforts and commitment to driving lasting value for all of our stakeholders. Have a good evening and be safe.
spk08: Ladies and gentlemen, this concludes the conference call. Thank you for attending and you may now
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