Republic Services Q2 2024 Earnings Call Transcript

Participants

Corporate Executives

• Aaron Evans, Vice President of Investor Relations
• Jon Vander Ark, President and Chief Executive Officer
• Brian DelGhiaccio, Executive Vice President and Chief Financial Officer

Analysts

• Toni Kaplan, Morgan Stanley
• Tyler Brown, Raymond James
• Kevin Chiang, CIBC
• Noah Kaye, Oppenheimer Holdings Inc.
• Bryan Burgmeier, Smith Barney Citigroup
• Jerry Revich, The Goldman Sachs Group, Inc.
• Sabahat Khan, RBC Capital Markets
• David Manthey, Robert W. Baird
• Stephanie Moore, Jefferies Financial Group Inc.
• Brian Butler, Stifel Nicolaus
• Tobey Sommer, Truist Securities

Presentation

[Operator]

Good afternoon, and welcome to the Republic Services Second Quarter 2024 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. [Operator Instructions]

I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations.

[Aaron Evans, Vice President of Investor Relations at Republic Services]

I would like to welcome everyone to Republic Services' second quarter 2024 conference call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are on the call today to discuss our performance.

I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If, in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is July 24, 2024.

Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited.

I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with a recording of this call, are 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 Jon.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our strong second quarter results reflect the continued positive momentum in our business and are a direct outcome of executing our strategic priorities. We continue to successfully grow our business, while enhancing profitability by providing world-class service and solutions to our customers.

During the quarter, we achieved revenue growth of 9%, generated adjusted EBITDA growth of 13%, expanded adjusted EBITDA margin by 110 basis points, reported adjusted earnings per share of $1.61, and produced $1.15 billion of adjusted free cash flow on a year-to-date basis. The results we are delivering are made possible by executing our strategy, supported by our differentiated capabilities, customer zeal, digital and sustainability.

Regarding customer zeal, our commitment to delivering world-class essential services and sustainability offerings continues to drive customer loyalty and organic growth in the business. Our customer retention rate remained high at more than 94% and net promoter scores continued to improve. Customers value our comprehensive service offerings and the quality of our service delivery.

Organic revenue growth during the second quarter was driven by strong pricing across the business. Average yield on total revenue was 5.5% and average yield on related revenue was 6.6%. This level of pricing exceeded our cost inflation and drove 110 basis points of EBITDA margin expansion. Organic volume on total revenue declined 80 basis points, or 1% on related revenue. Volume losses were heavily concentrated to the cyclical portions of our business, including construction activity.

Turning to our expanding digital capabilities, the team continues to advance the implementation of digital tools that improves the experience for both customers and our employees. Our RISE digital operations platform is driving improved route optimization and safety performance and providing more predictable service delivery to our customers. MPower [Phonetic], our new fleet and equipment management system, was introduced to pilot locations earlier this month. MPower is expected to increase maintenance technician productivity and enhance warranty recovery. We expect to continue deploying the new system to all locations under a phased approach through the end of 2025. We estimate MPower will drive $20 million of annual cost savings once fully implemented.

We continue to benefit from innovative technology on recycling and waste collection routes. Our platform utilizes cameras to identify overfilled containers and contamination in recycling containers. This technology reduces contamination at our recycling centers and is expected to generate approximately $60 million in incremental annual revenue. To date, we have already achieved $45 million of benefit.

Moving on to sustainability, we believe that creating a more sustainable world is both our responsibility and a platform for growth. Earlier today, we released our latest sustainability report, highlighting the progress we are making toward our 2030 goals and the positive impact we're delivering to our customers and the communities we serve. Our 2030 goals are supported by investments we are making in Polymer Centers, the Blue Polymers joint venture, renewable natural gas projects, and fleet electrification.

Development of our Polymer Centers and Blue Polymers joint venture facilities continues to move forward. Major customers have certified the plastic flake produced at our Las Vegas Polymer Center. Production volumes continue to ramp, and we expect to achieve our run rate output targets in the fourth quarter of this year. Construction is progressing on our Indianapolis Polymer Center with equipment installation underway. The operation will be co-located with a Blue Polymers production facility. We expect construction on this facility to be complete by the end of the year with earnings contribution beginning in mid-2025.

The renewable natural gas projects we're developing with our partners continue to advance. One project came online during the second quarter. Additionally, we completed construction at our RNG project in Fort Wayne, Indiana. This will be the first project to come online in our joint venture with BP. We expect five additional projects to be completed in the second half of this year.

We continue to bring decarbonization solutions to the market, including our industry-leading commitment to fleet electrification. We currently have 16 electric collection vehicles in operation. We expect to have more than 50 EVs in our collection fleet by the end of the year. We now have nine facilities with commercial scale EV charging infrastructure, and we expect five additional new sites to be completed in 2024.

Customers are looking for solutions to support their sustainability goals. We recently announced an agreement with the City of Louisville, Colorado, making it the first municipality to adopt a fully electric residential collection service.

As part of our approach to sustainability, we continually strive to be the employer of choice in the markets we serve. Employee turnover continues to improve, with second quarter turnover rate improving 70 basis points compared to the prior year.

With respect to capital allocation, year-to-date, we have invested $68 million in acquisitions. Our acquisition pipeline remains supportive of continued activity in both recycling and waste and environmental solutions businesses. We currently have more than $300 million of transactions in advanced stages of diligence and are expected to close by the end of the year.

Year-to-date, we returned $504 million to shareholders through dividends and share repurchases. Additionally, we recently announced an increase to the dividend for the 21st consecutive year.

Strong results we produced through the first half of the year support a full year earnings outlook that exceeds our original expectations. We now expect revenue in the range of $16.075 billion to $16.125 billion, adjusted EBITDA in the range of $4.9 billion to $4.925 billion, adjusted earnings per share in a range of $6.15 to $6.20, and adjusted free cash flow in a range of $2.15 billion to $2.17 billion. Our updated financial guidance includes the contributions from acquisitions closed through June 30.

I will now turn the call over to Brian, who will provide more details on the quarters.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Thanks, Jon. Core price on total revenue was 6.8%. Core price on related revenue was 8.1%, which included open market pricing of 9.8% and restricted pricing of 5.4%. The components of core price on related revenue included small container of 11.8%, large container of 7.4% and residential of 7.8%.

Average yield on total revenue was 5.5% and average yield on related revenue was 6.6%. Second quarter volume on total revenue decreased 80 basis points and volume on related revenue decreased 1%. Our volume results included a decrease in large container of 3.3%, primarily due to continued softness in construction-related activity; and a decrease in residential of 2.5%, primarily due to municipal contracts lost in 2023 that anniversary in the fourth quarter of this year.

During the quarter, small container volume decreased 60 basis points, while landfill MSW increased 1.1%. Small container volume loss is a direct result of intentionally shedding broker-related business obtained through M&A transactions. We continue to adhere to our longstanding strategy of prioritizing direct relationships with our customers.

Moving on to recycling, commodity prices were $173 per ton during the second quarter. This compared to $119 per ton in the prior year. Recycling, processing and commodity sales increased revenue by 50 basis points during the quarter. Our updated full year guidance assumes commodity prices remain at approximately $170 per ton for the remainder of the year.

Now, turning to our environmental solutions business, second quarter environmental solutions revenue increased $74 million compared to the prior year, fueled by price-led organic growth and contribution from acquisitions. On a same-store basis, environmental solutions contributed 40 basis points to total Company internal growth during the quarter. Adjusted EBITDA margin in the environmental solutions business expanded 130 basis points to 23.8% in the second quarter. Environmental solutions EBITDA margin was 22.5% in the prior year.

Total Company adjusted EBITDA margin expanded 110 basis points to 31.1%. Margin performance during the quarter included margin expansion in the underlying business of 130 basis points and a 20 basis point increase from recycled commodity prices. This was partially offset by a 40 basis point decrease from acquisitions.

Year-to-date adjusted free cash flow was $1.15 billion. The decrease from the prior year is primarily due to the timing of capital expenditures. Year-to-date net capital expenditures of $767 million represent an increase of $234 million or 44% compared to the prior year. Capital spending is more ratable in 2024, whereas '23 was heavily weighted to the second half of the year. Prior-year capital expenditures were impacted by vendor-related delays in truck and equipment deliveries.

Total debt was $13.1 billion and total liquidity was $3.5 billion. Our leverage ratio at the end of the quarter was approximately 2.8 times.

With respect to taxes, our combined tax rate and impact from equity investments in renewable energy resulted in an equivalent tax impact of 25.5% during the quarter. We expect a full year equivalent tax impact of approximately 25.5%.

With that, operator, I'd like to open the call to questions.

Questions and Answers

[Operator]

[Operator Instructions] The first question comes from Toni Kaplan of Morgan Stanley. Please go ahead.

[Toni Kaplan, Analyst at Morgan Stanley]

Thanks so much. I was hoping to ask about sustainability projects in the wake of the Chevron decision. It sounds like you're still going strong with your projects. Just wondering if you think there will be any impacts affecting the market, for example, supply and demand for RINs, as a result of the decision. And then, maybe separately, in light of the US election coming up, would that impact timing of any projects, M&A or anything else not related to sustainability? Just anything in general that you'd call out? Thanks.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Sure. Yes. Listen, we feel good about the projects and our approach specifically on landfill gas to energy. As you know, we're in a joint venture model, and these are a series of independent decisions around projects. And so, to the extent that the RINs market changes and that takes some of those projects kind of below our returns threshold, those are projects that we won't do on that front. But keep in mind also that we had a very conservative set of assumptions on $2 RINs that we built out the initial set of assumptions and what we talked to you about financial impact. So we still feel really confident, which ties into the second point. There will be puts and takes, whether there's an administration change, and there will certainly be a new President, whether that's a party change or not. I think in general, the conventional wisdom is, the Republican administration is going to be more business friendly and a Democratic one maybe less business friendly. I think if you look at the last three years, our business has performed really well in the context of a Democratic administration. So I think in any environment, we feel confident. There will be some puts or takes on the margin, for sure, but our team will navigate that.

[Toni Kaplan, Analyst at Morgan Stanley]

Terrific. And then, as a follow-up, just want to ask about volume. Bit of a light quarter again. I think you called out the large container and then also some of the resi contracts from 2023 on the muni side. Are you still thinking that this year will be flat to modestly positive on volume? And just anything to flesh out the sort of slightly lower top line guide? Thanks.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes. I think from a volume standpoint, we'll be slightly below our original expectations, and that's a function of -- listen, the construction market is still pretty challenged with high interest rates. Commercial construction activity and residential construction activity have been very muted. And you see that in our volume numbers in [Indecipherable] large container. The great news is that pricing is holding up. And I think the industry is behaving very responsibly in that context. And I also am relatively optimistic that, that is somewhat of a short-term phenomenon. We need more housing stock in the United States. And I think you're starting to see rays of hope here on interest rates cuts, which I think will be the catalyst for that to happen. Whether that happens three months from now or six or nine months from now, I do think that's, again, more transitory versus permanent on that front. And then, there's also been -- we talked about -- you talked about the residential contracts. We've accelerated some of the broker exits that we acquired in our M&A deals. We always talk about -- we acquire somebody we never value the work on brokers because we know it's going to matriculate out of the system. We've accelerated that. So, that drove a little bit of outsized volume decline in the quarter.

And then, for the overall revenue guide, part of that is the volume outlook, which I just gave you. Part of that is the sustainability projects, landfill gas energy. We're going to hit our number. The timing of the starts of those is going to be a little bit later in the year. I think ourselves and the industry have faced a little bit of delays in terms of permitting, getting the equipment in place, etc. So that's not a big surprise. And then, our Polymer Center, while the team is executing phenomenally in terms of the product we're producing, we got to a little bit of a later start than we expected through all kinds of things ancillary to the system like permitting for the facility and other things. So, that caused a little delay in the timing on that front. Again, that's transitory, and we'll be at full run rate, as I discussed in my prepared remarks.

[Toni Kaplan, Analyst at Morgan Stanley]

Super. Thank you.

[Operator]

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

[Tyler Brown, Analyst at Raymond James]

Hi, good afternoon.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Afternoon.

[Tyler Brown, Analyst at Raymond James]

Hi, Brian. Any color on the shape of pricing into the back half? Should we expect it to sequentially decelerate in Q3 and Q4? Just any color on how that might impact margins because it does feel like the margin expansion is expected to slow. My hunch is that's largely in Q4, but any color there would be helpful.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. And Tyler, good observation. We talked about, in Q1, we thought that would be our highest level of pricing of this year, and then it would sequentially decline, in part just because of some of the index-based pricing and just the impact that has throughout the year. As you've seen, though, we've also seen costs moderate, cost inflation moderates. So our spread, we've maintained. So we have a similar level of margin expansion in Q1 and Q2. We would expect that spread to decrease a little bit as we move into the second half of the year, but again, if you take a look, driving outsized margin expansion and well above our initial expectations.

[Tyler Brown, Analyst at Raymond James]

Right. Okay. That's very helpful. So, I believe my math is correct. This was the first quarter that you guys have put up a 32% core solid waste margin, if my math is right. But if we go back, you guys have always said that this could be a 32% EBITDA margin business if price compounds, recycling normalizes, and both have. So, since 32% was the new 30%, just any high level thoughts on what the new 32% could be over the next few years? Is there any reason to believe that a mid-30% margin in core solid waste couldn't be achievable in time if price-cost dynamics cooperate?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. And Tyler, I think our words were that we saw that in the near term, we saw 32% as achievable. Really, what we're looking at is the consistent cadence of margin expansion across our business. And we've talked about that in the 30 basis points to 40 basis points of margin expansion in the recycling and waste business, and a little bit more in the environmental solutions, call it, 75 basis points plus, just given where it is and its maturity. And so, we continue to see that opportunity as we move forward. So we're not going to call what the theoretical cap is, but again, it's about pricing in excess of cost inflation. It's about realizing the benefits from our initiatives, including our digital initiatives, and driving cost out of the system. And we see that runway for years to come.

[Tyler Brown, Analyst at Raymond James]

Excellent. My last one, real quick. So Jon, there have been a number of deals in, call it, hazardous waste/industrial waste/nontraditional waste markets. Some are big, some are small. But can you just talk about your appetite specifically in that market? Will it be slow and steady? Or would you entertain something that would be much chunkier?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Listen, we look at everything. We have made a perspective on any type of transaction. And if it's going to create value for our shareholders and fits with us strategically, we'll certainly be at the table on that front. So look, the -- we do about 20 deals a year on average over the last decade. But most of those are the small tuck-ins, which we're great at. And we've got a good pipeline looking forward. And then, the bigger ones become more opportunistic just in terms of is it a fit for us time-wise? Does it create value? Are we the natural owner of that? And again, you'll see us be active in that space over time.

[Tyler Brown, Analyst at Raymond James]

Perfect. Thank you all.

[Operator]

Next question comes from Kevin Chiang with CIBC. Please go ahead.

[Kevin Chiang, Analyst at CIBC]

Hi, good afternoon. Thanks for taking my question. Maybe if I can follow up on that, just given some of the activity we've seen in kind of the hazardous waste environmental service space on the M&A front, are you seeing any changes in the transaction multiples or the type of assets coming to sale that might give you an opportunity to fill in service areas you want to pursue or white space on the map that might come available?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes, there's plenty of opportunities, no question. On the small tuck-ins on the environmental solutions side of the business, we've been intentionally a little bit slow on that this year because the team is doing a lot of integration work from an IT standpoint. And again, it's very analogous to recycling of waste. We create value in that space because we've got well-run systems, highly integrated, and we can take a smaller company and layer that operationally right into our density and just draft right off of our systems, right? Until we get that on the environmental solutions side, right, you're just adding your complexities. You're not getting that synergy. And so, you'll see us -- again, that pipeline is building. You'll see us be much more active next year in the space.

[Kevin Chiang, Analyst at CIBC]

Okay. And just anything on the transaction multiples you're seeing? Has that changed at all versus, let's say, 18 months to 24 months ago?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

I think it's consistent, which is, there's variation in deals that may be of a little lower quality from our perspective. I think the high-quality deals, right, you're going to pay certainly a higher multiple for. But then, I think we've done -- been a good example of that with the US Ecology acquisition, right? If you're buying something quality and you've got a plan against it, you can certainly drive value post acquisition.

[Kevin Chiang, Analyst at CIBC]

Okay. That's helpful. And maybe just on the EV comments you made in your prepared remarks, you talked about, I guess, the nine EV infrastructure sites you have. You'll have five new ones -- or five additional ones by the end of 2024, and you have, I guess, a target of 50 EVs. Are those -- when you think of those 14 sites at year-end, I guess, how many electric vehicles could you support based on, I guess, the exit rate [Phonetic] infrastructure platform you will have invested in? Is it significantly more than 50? Or is it kind of 50 is the right number? And if you want to grow more than that, you'd have to make more investments into your charging infrastructure?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes. No, it's hundreds. So think about putting in the initial infrastructure and getting connected to the grid. And then, you think about charging stations, which become modular once that infrastructure is put in, and so the strategy is we're going [Phonetic] a five-year out plan at each of these sites to understand that we'll be layering more vehicles in. And so, you're bearing the upfront cost right now, and then it's just an incremental cost to put in the charging station as the fleet grows in that space.

[Kevin Chiang, Analyst at CIBC]

Okay. That's what's happening. Okay, perfect. Thanks for the clarification there. That's all for me. Congrats on a good quarter.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Thank you.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Thanks.

[Operator]

The next question comes from Noah Kaye with Oppenheimer. Please go ahead.

[Noah Kaye, Analyst at Oppenheimer]

Hi, good afternoon. Thanks for taking the questions. Start with environmental services. Just on the organic performance of the business, a pretty big sequential improvement in the trends quarter-over-quarter. You had a headwind organically in the segment last quarter. And I know you called out some weather events and the like, but then to go to kind of the sort of mid-single-digit organic growth in the segment this quarter. Can you just maybe help us understand what you saw from the business on an organic basis and how to think about organic growth going forward through the balance of the year?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes, strongly. We're still in the growth mode in that business, right? And so -- where recycling and waste is a very mature business, and we could kind of give you a really clear and clean outlook, right? There's going to be a little more up and down in this business as we grow and build it out, and part of that is on the customer side. On one hand, we are churning out customers on one end of the business who weren't willing to pay returns and we're -- to beat our returns. And we're going to put upward pressure on industry pricing as we always do. And on the flip side, we're layering in cross-sell opportunities that we've talked about. And so, those don't all come in kind of ratably month-to-month. Those come in kind of a different timing and wave, so really pleased with the progress. I encourage you -- on that business, if you're measuring it by the quarter, right, you're probably not going to get the best signal quarter-to-quarter if that's over the next one to two years. Measuring it over the year, I think, gives you a much better view of the trajectory, and we're really pleased on both the top line and certainly bottom line performance of that business.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

And Noah, just based on when we put in our annual price increase, we didn't see the full impact of that until the second quarter. And so, I think that's also reflective of what you're seeing in EBITDA margin performance of that business at the same time.

[Noah Kaye, Analyst at Oppenheimer]

Very good points. Do you feel comfortable underwriting organic growth, thanks to the PIs for the balance of the year?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

I'm sorry? Do we expect organic growth...

[Noah Kaye, Analyst at Oppenheimer]

Are you expecting -- like, embedded in the outlook, are you expecting organic growth in ES for the balance of the year?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes, we are.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

And as you know, that -- this is just the nature of it. Because it's so mix sensitive, there isn't a very clear kind of unit versus price to kind of tear apart -- or peel apart volume versus price like we do in recycling and waste. And it hasn't been for lack of trying, but there's just too many variables that don't allow us to do that. But underlying organic unit growth will be there.

[Noah Kaye, Analyst at Oppenheimer]

Very helpful. Just on the margins, really strong performance here. I wondered if we could maybe unpack a little bit that underlying 130 bps, as you provided some nuggets in the past, that'd be helpful. And then, I think, to put additional color on the response to Tyler's question, it seems like we could be looking at kind of margins up maybe 100 bps or so year-over-year in 3Q and kind of flattish in 4Q. If there's any kind of nuance you would give in terms of how to shape that, that would be helpful for modeling purposes.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. Let me start with your -- the last part of your question first. I think the shape, you're on the right path there, maybe a little bit less in Q3 and a little bit more in Q4, but I think the shape, you're directionally correct. Looking at the performance in the underlying business, we saw 120 basis points in recycling and waste. We saw actually more than that in the environmental solutions business because for the 130 basis points for the Company taken as a whole, remember, we had to overcome 80 basis points to 100 basis points of dilution from acquisition we completed in the environmental solutions business in Q4 of '23. So, when you take a look at the underlying business within environmental solutions, it was close to 200 basis points.

[Noah Kaye, Analyst at Oppenheimer]

Very helpful. Thank you.

[Operator]

The next question comes from Bryan Burgmeier with Citi. Please go ahead.

[Bryan Burgmeier, Analyst at Smith Barney Citigroup]

Good afternoon. Thanks for taking the question. In the prepared remarks, I think you mentioned a little bit of intentional shedding in the small container business. So, I was maybe just wondering if you could expand on that, give us a sense of the size of the brokerage business you're running there. Maybe is it possible to say maybe what inning the volume shedding is in at this point?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Well, I'd say the good news is, from an ongoing standpoint, right, we had a bigger broker business a decade ago, and we made a very clear choice that we believe customers are people who generate recycling and waste, and we want to have direct relationships with them. So we're very intentional. What's happened is, over the last 4 or 5 years, as we've become much more acquisitive, we've seen that portion of the business increase because when we acquire companies, we see that 10% of their book, for example, might be serving brokers. And we don't value one nickel, right, when we -- in the purchase price of the deal because we know that business is going to come out of the system. Typically, we do that over the course of six to maybe even 12 or 18 months, honoring contracts in a very ratable fashion, right? In this case, we accelerated it because we felt like with one broker in particular, we had a receivables risk, and so we took more accelerated action. But there will always be a small portion of the business that's going to be a drag, right, on our revenue that we're shedding because it's coming in through M&A.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. And a point that I'd make there as well is that if you take a look at the volume decline in small container, it was almost exclusively due to these broker-related losses. If you take a look in the open market, we're actually seeing positive unit growth in that business.

[Bryan Burgmeier, Analyst at Smith Barney Citigroup]

Got it. That makes total sense. And just kind of last question for me is just on the guidance increase. Apologies if I missed this. Is it possible to maybe just bucket maybe what is going better on the net price side or just kind of touch on it anecdotally? Is it prices coming in higher, costs coming in lower? Is it labor? Is it repair? Just any finer points you can kind of put on what's really been better throughout the first six months? Thank you. And I'll turn it over.

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. I would say, overall, we're looking at price in a similar way that we did in the beginning of the year. I would say the spread between price and cost inflation is favorable. So that's one of the reasons why we're seeing the better-than-expected margin expansion. And then, I would say, the other big piece is really just favorable commodity prices and the flow-through that has to the bottom line. But an overwhelming majority, again, is going to be in that price-cost spread.

[Operator]

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

[Jerry Revich, Analyst at The Goldman Sachs Group]

Hi, good afternoon, everyone. I'm wondering if you could just talk about just talk about free cash flow conversion. So you folks are now up to the mid-40s in EBITDA to free cash flow conversion, and that's while making the growth investments that you spoke about earlier. As we think about what the free cash flow conversion will look like once the growth investments are producing EBITDA and cash flow, is it reasonable to think about free cash conversion ultimately rising to the high-40s? Or what kind of guideposts would you think about over the next couple of years as you complete those capex and get the cash flow coming in?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. What I would say, Jerry, is that, again, back to -- we're not looking at the theoretical cap. We're just looking for that consistent improvement in performance. So, our expectations is that just because, again, when you think about some of the things that we can do on the balance sheet, as far as improving working capital, being more efficient with the capex, start with the 30 basis points to 50 basis points of EBITDA margin expansion we expect, growing free cash flow conversion a little bit more. Now, that said, we've got to overcome things like the expiration of bonus depreciation and some other things that we've had to sit there and overcome that are a little bit outside of our control. So you got to overcome that from the base business, though, you can think of that, call it, 50 basis points to 75 basis points of improvement, and then you got to net out the impact of bonus depreciation, which is different by year.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Got it. Thanks, Brian. And then, on the US Ecol ERP rollout, it was an area of opportunity for you folks. Can you just update us on the timing and which point will we get the sort of route-level intelligence that you folks are used to for your overall business that could drive some further margin opportunities?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes, we'd see being on a common platform, right, on that business, on the environmental solutions business in early '25, then we can then iterate the system itself in order to be able to get smarter with respect to the information that we have, so we can be more strategic with respect to pricing, get better as far as productivity, and just become more profitable over time. But right now, we still have a number of systems that we're trying just first to consolidate. Then we can continue to enhance and improve the system that we're operating on.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Super. Thank you.

[Operator]

The next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

[Sabahat Khan, Analyst at RBC Capital Markets]

Hi. Great. Thanks and good afternoon. You provided a bit of color on sort of the M&A landscape. I guess, within this guidance, are you still sort of on pace for this $500 million for the full year? And maybe we can just talk about the availability of transactions at the right multiples. Obviously, some big transactions out there, but trying to see what you're facing out there on the smaller tuck-in acquisition types and just your pace for the rest of the year.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes, the pipeline looks good. Keep in mind, we don't operate the business for the quarter. We operate it forever. So we did $800 million of acquisitions in Q4 last year. So there's some natural lumpiness, especially in the M&A pipeline, so a little quieter for the first quarter. This year, listen, we could end up at $500 million. We could end up between, $400 million to $500 million, or we could end up north of $500 million if other stuff kicks in here. I think we'll be north of $400 million just based on what we have in front of us. And then, do we get closer to $500 million or above that, we'll see kind of what happens. Sometimes deals hit you there in an accelerated fashion most of the time. At this point, we're kind of looking at Q1 and Q2 for close for those transactions. So anything bigger would certainly be at a little bit of a longer timeframe in terms of a close in next year, wouldn't close this year, anything more substantial.

[Sabahat Khan, Analyst at RBC Capital Markets]

Okay, great. And then, maybe if you could just share a little bit of color on some of the cost line items as you think about the back end of this year and heading into '25. How are some of the costs that you're seeing on the ground level comparing to some of the headline inflation numbers maybe across labor and some of the other bigger line items? Thank you.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes, we certainly saw good sequential improvement from Q1 to Q2 across maintenance, transportation, labor that -- the cake is already baked on labor for the year, but the comp year-over-year is certainly improving on that. So, as Brian mentioned, that's certainly what's fueling, along with price, our margin expansion. And we seek a continued modulation of that in the second half of the year, so feel really good about the team's execution on cost control.

[Sabahat Khan, Analyst at RBC Capital Markets]

Great. Thanks very much.

[Operator]

Next question comes from David Manthey with Baird. Please go ahead.

[David Manthey, Analyst at Robert W. Baird]

Thank you. Good afternoon, everyone. I was hoping you'd give us an update on the $100 million digital opportunity that you previously outlined, and the MPower asset management system that you talked about, the $20 million benefit there, is that included or separate from the $100 million?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. So I think, David, I think you're talking about our RISE digital platform. So we said there was $100 million of opportunity. They're cumulative, and we've realized about $65 million to date. And we would expect to continue to sit there and realize those benefits in future periods, which is embedded in that 30 basis points to 50 basis points of margin expansion that we're calling for on a regular cadence. That would certainly be part of that over the next couple of years.

[David Manthey, Analyst at Robert W. Baird]

But the new asset management system, that's not in the $100 million, it's separate?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Sure. That's -- sorry, I think [Indecipherable] that's an additional $20 million. Now, it's going to be deployed in a phased approach. So we actually just hit our first pilot locations. We're going to be deploying that through the end of 2025. So we really don't expect to get that full run rate benefit until 2026.

[David Manthey, Analyst at Robert W. Baird]

Got it. Okay. And then, if I heard you right, on the margin improvement in environmental solutions, are there areas of the legacy US ecology business that you've leaned into or maybe de-emphasized over the past two years that have helped improve the mix of that business? Or is the pricing and efficiency that you're getting just by using the legacy systems and seeing some improvement there?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

No, it's all the above. It's certainly pricing for the value we're delivering. It is challenging then the mix, right? We make more money in certain -- especially in the field services side of the business, you make more money in certain areas and less in others, and then, even within some of those categories in field service, challenging each customer account, what isn't really earning their cost of capital, and therefore those are things we're pricing or replacing over time. And the team has done a great job of that. I'd say, as we get our IT systems in place, which Del talked about, that gives us an opportunity to get even more refined and drive even more value from a pricing standpoint.

[David Manthey, Analyst at Robert W. Baird]

Got it. Thank you.

[Operator]

The next question comes from Stephanie Moore with Jefferies. Please go ahead.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Hi, good afternoon. Thank you. I wanted to take maybe a high-level view here on, I think, the margin expansion opportunity over the next -- I think, this year, you've given color, but as we think about 2025 and maybe even early 2026. I think, if you put together everything that you've outlined, whether continuing nice price-cost spread on solid waste, nice ES expansion, some of your RNG or Polymer Centers coming online here at the end of the year, kind of makes it seem like we could see another outsized year of margin expansion, all things considered, for the foreseeable future beyond 2024. Is there anything I'm missing there? Or how would you kind of frame the margin opportunity here beyond 2024?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Well, I think Del highlighted earlier, think about recycling and waste 30 basis points to 50 basis points of margin expansion a year. We talked about environmental solutions getting to 25%. Now, again, we're reaching there, getting there probably a little quicker than we thought. But again, there'll be some ups and downs in any given quarter, but over the sequence, certainly have line of sight to 25% margin for the year in that category, and then that's not the ending point, right? We'll continue to move. I think in the long term, we would aspire to have EBITDA margins across the two different parts of our business that converge over time because we think there's that much opportunity and value that's delivered in the environmental solutions space. And again, that's a long-term target on that. But I've given you kind of a marker for kind of what kind of ratable improvement. And we're reticent to kind of choose an individual year because, again, we don't -- that's not how we run the business. We run it forever.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Great. That's helpful. And then, maybe as you think about just the pricing environment as the year progresses and more so next year, just kind of your mix across various index-based pricing, kind of your thoughts about potentially above historical average pricing, even as inflation comes down. Thanks.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes. So, again, we've talked about our initiative in order to move to those favorable indices, water, sewer trash, garbage trash, and those tend to run higher than CPI. So if you're going back and comparing to five or six years ago, yes, we would expect the restricted portion of our book to perform better than it had historically. But we've made really good progress and movement against that. So, again, we're close to 60% of that book that was historically linked to CPI now on a favorable index or a fixed rate increase. So that's already reflected in the numbers that you saw in -- or that you're seeing in 2024. But certainly, yes, we would expect to be better than where we were historically.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Thanks you so much.

[Operator]

The next question comes from Brian Butler with Stifel. Please go ahead.

[Brian Butler, Analyst at Stifel Nicolaus]

Hi, thanks for taking my questions. Let's start with just on the small container side. When you think about the service intervals, maybe some color on how that's trending and what you kind of have built into the back half of '24. Maybe if you were to exclude the brokerage piece, how positive was the small container volume side?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes. So, service increases continue to exceed decreases. And as I mentioned, for net new business within our open market, small container is positive. So if you just take the open market, it would have been modestly positive. I would sit there and say, in the quarter, which was completely offset by what we saw from the broker-related business.

[Brian Butler, Analyst at Stifel Nicolaus]

Okay. And then, my second question, when you think about the midpoint guidance kind of going up on EBITDA kind of $60 million, $65 million, and you break that out, you talked about price-cost being the biggest chunk of that. Can you give some color just on how big maybe the recycling is on a dollar amount for that kind of increase?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yes. So it's, call it, $25 million to $30 million with the balance all being in the underlying business.

[Brian Butler, Analyst at Stifel Nicolaus]

All right. And if I could squeeze one last one in there, is your sensitivity to the RIN prices really changed at all? RINs have been kind of elevated for a while now, but maybe just if you have any color on kind of where that sensitivity kind of stands?

[Brian DelGhiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Our sensitivity hasn't changed that much just because we haven't added that much to the portfolio. It will -- certainly, that sensitivity will increase over time as more projects come online. But right now, if you think about just rough math, a $0.10 change in RIN prices is approximately $1 million of operating income annual for us.

[Brian Butler, Analyst at Stifel Nicolaus]

Great. Thank you very much.

[Operator]

The next question comes from Tobey Sommer with Truist Securities. Please go ahead.

[Tobey Sommer, Analyst at Truist Securities]

Thanks. On the acquisition front, over time, is $500 million a good number for annual spend? Or does that change as we go out in the future because the Company clearly is growing and perhaps that needs increase to maintain the same impact?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes. We don't really have a target on the acquisition number. And so, we kind of give you a rough guide because it's helpful, I think, for your modeling purposes. But as we think about opportunities, right, we want to buy companies that can, first, fit our strategic filter, where we think we're the natural owner there and we can create value for our customers, and then, the financial filter, which is, are we going to exceed our cost of capital and create economic profit for our shareholders? Those are the two things we look at. And so, we're not opportunity -- we're not capital constrained in that respect. And so, if we find those opportunities, we're going to go do that. And so, we've spent as much as $3 billion in a given year, and this year is going to be a little more muted, obviously, partly, again, for the internal constraint of we want to make sure that we can digest and execute what we buy over time. So we'll give you an update as we go get into 2025, what we think the outlook is. But it's going to be more of a year-to-year look than some longer-term outlook of what we're going to spend.

[Tobey Sommer, Analyst at Truist Securities]

Thanks. On the employee attrition front, I know it's down from the peak of several years ago and that helps labor expense and margin expansion. But if I look at it from a different angle and say, how low has it gotten before during economic slowdowns and downturns, how far away are we from that at this juncture?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Well, I'd say, if you think about -- we're at, right, kind of our benchmark level, if you think about any normal run of period. Now, if you take a very short look, like, April and May of 2020, after COVID hit, right, it dropped near zero because everyone was just trying to hold on and figure out what's happening in the world. But if you think about any longer run across a set of quarters, we're certainly at our best performance, and we're not stopping. We think there's further opportunity for improvement, and obviously the rate of improvement will slow. Zero is never the right answer in this category, but we think we can get better.

[Operator]

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

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Thank you, Nick. I would like to thank the entire Republic Services team for their focus on exceeding customer expectations and commitment to driving value for all of our stakeholders. Have a wonderful rest of the summer and be safe.

[Operator]

[Operator Closing Remarks]