Republic Services Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2022

There are 10 speakers on the call.

Operator

Good afternoon and welcome to the Republic Services 4th Quarter 2021 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Stacy Matthews, Vice President of Investor Relations.

Speaker 1

Hello. I would like to welcome everyone to Republic Services' 4th quarter 2021 conference call. John Vander Aark, our CEO and Brian DelGachio, our CFO are joining me as we discuss our performance. I'd like to take a moment to remind everyone 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.

Speaker 1

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 the date of the original call, which is February 10, 2022. Please note that this call is the property of Republic Services Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of our public services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables, And a discussion of business activities along with a recording of this call are all available on Republic's website at republicservices.com.

Speaker 1

I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, Times and presentations are posted on our website. With that, I'd like to turn the call over to John.

Speaker 2

Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. Our 4th quarter performance capped off a very strong year of financial results and operational execution. We outperformed expectations throughout the year that exceeded the high end of our upwardly revised guidance. During 2021, we generated adjusted earnings per share $4.17 which increased 17% over the prior year produced $1,520,000,000 of adjusted free flow, which increased 23% over the prior year, expanded EBITDA margin 60 basis points to 30%, Improved free cash flow conversion 3.50 basis points to 44.8 percent and increased customer Retention rates to an all time high of 95%.

Speaker 2

Profitable growth remains our strategic priority And we continue to believe that investing in acquisitions is the best use of free cash flow to create long term value. In 2021, we invested over $1,000,000,000 in acquisitions to further enhance our market position and increase free cash flow. This is the highest level of acquisition investment in over a decade. Our acquisition pipeline remains robust with opportunities in recycling and solid waste and environmental solutions. Yesterday, we announced our agreement to acquire U.

Speaker 2

S. Ecology. This acquisition propels Republic into a leading position in the environmental solutions space and as a platform of high quality assets and difficult to replicate infrastructure. I will discuss this strategic acquisition in more detail before we open up the call for Q and A. In addition to investing in acquisitions, we returned $800,000,000 to our shareholders through dividends and share repurchases.

Speaker 2

We delivered outsized growth and profitability by executing our strategy. Our strategy is supported by 3 differentiating capabilities: Customer zeal, digital and sustainability. With respect to customer zeal, our customer retention rates remain at a record setting level of 95% and NPS remained well above pre pandemic scores. During the Q4, we delivered outsized revenue growth throughout the business. Core price reached an all time high of 5.4% And average yield increased to 3.4%.

Speaker 2

Volumes increased 3.6% compared to the prior year And acquisitions contributed an incremental 4.90 basis points to total revenue growth. Full year combined yield and volume of 6.7% was the highest level in company history and over 200 basis points above the next highest Year of performance. Turning to digital. We continue to make meaningful progress on the rollout of the next phase of the RISE platform. We have now implemented tablets in approximately 90% of our large and small container fleet.

Speaker 2

With these new capabilities, we generated operational and delivered over 1,000,000 automated proactive notifications to customers last year. We will begin deploying tablets to the residential fleet early this year and expect to be complete by mid-twenty 23. Next, turning to sustainability. We continue to partner with developers to capitalize on landfill gas to energy opportunities. We expect 4 of these projects to be completed this year with another 14 in our pipeline expected to be completed over the next couple of years.

Speaker 2

We see an opportunity for another 40 projects beyond the current pipeline. We are also making recycling investments beginning in 2022 To forward integrate in the plastics value chain, these investments will provide a platform for future revenue growth with attractive returns and drive a more sustainable world for future generations. We will absorb these investments with our normal level of capital spending. Our sustainability performance continues to be well regarded as Republic Services was named to the Dow Jones Sustainability Index for the 6th consecutive year. Additionally, our MSCI ESG rating was upgraded to an A, which is the highest rating in our industry.

Speaker 2

One of the primary factors leading to the upgrade was an increase in our human capital management score. This reflects our strong culture that embraces inclusion and diversity. These strong financial and operational results would not have been possible without our dedicated employees. In appreciation of their hard work throughout the pandemic, we paid each frontline employee $500 committed to serve award in the 4th quarter. Combined with the award paid in January of 2021, our frontline employees received an additional $1,000 during the year.

Speaker 2

This brings our total support provided through our Committed to Serve initiative to $50,000,000 since the beginning of the pandemic. The strength of our 2021 results clearly demonstrates our ability to create sustainable value and provides the foundation from which we will continue to grow. That said, we expect another strong year of performance in 2022. Specifically, we expect to deliver adjusted earnings per share in a range of $4.58 to $4.65 and generated adjusted free cash in the range of $1,625,000,000 to $1,675,000,000 This represents High single digit to low double digit growth over our 2021 performance. It's important to note that this guidance As well as any assumptions we discuss in today's call do not contemplate the impact from the pending acquisition of U.

Speaker 2

S. Ecology. We will provide updates to our guidance if needed once the transaction closes. I will now turn the call over to Brian. Thanks, John.

Speaker 2

Core price during the Q4 was 5.4%, which included open market pricing of 7% and restricted pricing of 2.9%. The components of core price included small container of 8.6%, large container of 5.6% and residential 4.8%. Average yield was 3.4%, which represents a 20 basis point increase from our 3rd quarter performance. In 2022, we expect average yield of approximately 3.4%. This is an increase of 50 basis points over our full year 2021 results.

Speaker 2

4th quarter volume increased 3.6%. The components of volume included an increase in small container of 4.6%, an increase in large container of 3.7% 2% in 2022, which remains well above the long term average. Moving on to recycling. Commodity prices were $2.18 per ton in the 4th quarter. This compares to $110 per ton in the prior year.

Speaker 2

Recycling processing and commodity sales contributed 110 basis points to internal growth during the Q4. We are assuming $187 per ton for recycled commodities in 2022, which is consistent with the full year 2021 average. Next, turning to our Environmental Solutions business. 4th quarter Environmental Solutions Revenue increased $65,000,000 from the prior year. This was driven by organic growth from increased activity and the contribution from acquisitions.

Speaker 2

On a same store basis, Environmental Solutions contributed 20 basis points to internal growth during the 4th quarter. Adjusted EBITDA margin for the 4th quarter was 28.1%. This compared to 29.9% in the prior year. Margin performance during the quarter was impacted by a 70 basis point headwind from higher incentive compensation We expect incentive compensation expense will return to target levels. Margin performance also included a 50 basis point diluted impact Recent acquisitions, which included deal and transition costs.

Speaker 2

It should be noted that we pulled forward certain integration costs originally planned for 2022. The remaining impact to margin was primarily driven by a 50 basis point increase in risk management costs. The current period includes a one time true up for an insurance captive that increased expense 20 basis points and the prior year included a 30 basis point favorable reduction in reserves which did not repeat. We expect risk management expense in 2022 to be relatively flat with our full year 2021 performance. For reference purposes, 4th quarter margin performance at target levels of incentive compensation and excluding The impact of recent acquisitions.

Speaker 2

SG and A during the Q4 was 10.6% of revenue. This represents an increase of 60 basis points over the prior year, which was driven by higher incentive compensation accruals previously discussed. Full year 2021 EBITDA margin of 30% expanded 60 basis points compared to the prior year. This resulted from pricing levels in excess Cost inflation and effective cost management, which demonstrates our ability to gain operating leverage in the business. To put our operating leverage into context, we estimate wage inflation net of productivity was approximately 3%.

Speaker 2

Our average yield of 3.4% more than covered this level of cost inflation, which is why labor and maintenance were both down as a percentage of revenue The Q4 and for the year. In 2022, we expect EBITDA margin will continue to improve and are targeting margin expansion of 30 to 40 basis points over our full year 2021 performance. The components of expected margin expansion include pricing in excess of cost inflation adding 60 to 70 basis points And incentive compensation expense returning to target levels adding 50 basis points, partially offset by acquisitions decreasing margin 40 basis points and net fuel decreasing margin by 40 basis points. DD and A as a The percentage of revenue was 11.2% for the year. We expect DD and A as a percentage of revenue of approximately 11.5% in 2022.

Speaker 2

Year to date adjusted free cash flow was $1,520,000,000 and increased $279,000,000 or 23% compared to prior year. This was driven by EBITDA growth in the business and a reduction in interest expense resulting from refinancing debt. Full year 2021 free cash flow conversion increased 350 basis points to 44.8%. We are targeting high 40% level conversion within the next couple of years. Total debt was $9,600,000,000 and total liquidity was $2,800,000,000 Our leverage ratio was 2.9 times.

Speaker 2

With respect to taxes, our Combined tax rate and non cash charges from solar investments resulted in an equivalent tax impact of 24% during the 4th quarter. This was in line with our expectations and resulted in a 26% equivalent tax impact for the year. We expect an equivalent tax impact of 26% in 2022, made up of an effective tax rate of 21% and approximately $120,000,000 of non cash With the addition of U. S. Ecology's national footprint of vertically integrated assets, leading disposal infrastructure And comprehensive capabilities, we are better positioned to serve our customers with one of the most complete sets of products and services.

Speaker 2

This strategic acquisition provides a platform for additional organic and acquisitive growth with cross selling opportunities for existing customers who want a single partner to manage their environmental services needs. We expect this acquisition to be immediately accretive to adjusted earnings and free cash flow And to create significant value with double digit returns for our shareholders. We are excited to welcome U. S. Ecology's talented employees to the Republic team and expect the deal to close by the end of Q2 this year.

Speaker 2

Expanding our Environmental Solutions business is a strategic priority And this acquisition is a key addition. That said, the investments we are making are not limiting growth or reducing focus in the traditional recycling and solid waste businesses. This is not an eitheror, but a bothand approach. We plan to make outsized investments in both businesses accelerate growth and create lasting value. We remain disciplined allocators of capital and will only make investments in organic growth opportunities in M and A that increases intrinsic value and improves returns.

Speaker 2

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

Operator

We will now begin the question and answer session. In the interest of time, we ask that you limit yourself to one question and one follow-up today. Your first question comes from Noah Kaye with Oppenheimer. Please go ahead.

Speaker 3

Thanks so much. I'm sure there'll be a bunch of questions about isecology, but I'd like Focus on the core business for now. And starting with pricing, I noticed the yield was really strong, especially on a full year basis, but That core price called out at an all time high worth noting. The yield is very strong in collection. Just what's your view on post collection pricing and yield Going into 2022, do we start to see that a nudge up as well?

Speaker 3

Because certainly there's rising operating expenses there just like there is everywhere else.

Speaker 2

Yes. Certainly, you'll see some momentum in the 1st couple of quarters and I think you'll see that momentum accelerate in the second half of the year. A lot of those customers are attached To CPI or something a derivative CPI and like our collections business there's 12 to 18 month lag. So that elevated print from the last year will then start to flow through and you'll see really nice economics on the yield side, Especially in Q3 and Q4.

Speaker 3

That's super helpful. And that piece into the next question, which is how to think about The ratability of the cadence of yield trends over the course of the year. I know you're not like some peers and you tend to do your PIs ratably through the year. So Is the 3.4% full year number since you're doing 3.4% here in the Q4, is that fairly Smooth and stable over the balance of the year? Is there anything that you would call out?

Speaker 2

Yes. It's the same thing, which is the portion of our book that's attached CPI or something related to that. You will get more momentum in the second half. So I think you'll see really good pricing numbers Q1 and Q2. And then you'll see that start to accelerate in Q3 and Q4.

Speaker 2

The open market side will end up being more ratable With the caveat that we're living in a very dynamic world, right? And we see inflationary cost, inflationary pressure, right? The core thesis of this business is that we are going to price ahead of our cost, right? We did a great job of that last year as costs start to accelerate in pockets and we'll do the same thing this year. Nothing broad based, right?

Speaker 2

We look at every market uniquely and dynamically and make sure that our people are getting paid and that again we're pricing ahead of our costs.

Speaker 3

Yes. And one more to sneak in. And Brian, you called this out, but I want to go back to because I think it's important Just around the margins and the impact from the higher incentive comp and the bonuses. I think you said it was 130 bps.

Speaker 2

Yes.

Speaker 3

So just A, was that I guess how much of that was anticipated? And B, when you talk about that sort of being a tailwind to margins next year, I guess, how do you think about that in the context of continued support for the labor force given the tight labor market and of course, Ongoing support amidst the COVID pandemic, which is still although easing with us.

Speaker 2

Yeah. Let me kind of talk about the incentive compensation piece first and then we can talk about the committed to serve award. Clearly, from an incentive compensation perspective, we put a plan together that assumes target, Right. And as you've seen all year long, we've outperformed and with that came additional incentive compensation accruals, which will be expensed We're expensed in 2021. The cash for that will be paid in 2022, which is one of the reasons too when you take a look at our free cash flow, the growth a more normalized basis, it's actually even in excess of what we're presenting because we've got to absorb that extra cash payment in the Q1.

Speaker 2

On the committed to serve, again, that was a discretionary item, right, that we decided to do certainly in recognition for the hard work that our frontline employees Did during the pandemic, but we are not planning on making any of those additional or incremental awards going forward. Largely, Tino, because that's baked into the plan, right? We've got elevated increases for all of our frontline people given it's an inflationary environment. And again, we're pricing ahead of that. And even with that plan, we're planning to expand margins.

Speaker 2

So that's why we assume that. And again, as the situation moves

Speaker 3

Dynamic is definitely the right word. I'll turn it over. Thank you.

Operator

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

Speaker 2

Yes. Hi. Good afternoon. Good afternoon, Jerry.

Speaker 4

Can you talk about the cadence of the margin expansion that you folks are looking over the course of the year, obviously, the 4th quarter will have the easy comp that you just mentioned. But what about as we head into the Q1, if we apply Normal seasonality, it looks like your margins might be starting the year down 50 to 100 basis points year over year in the Q1 unless we get Outsize pricing contribution, is that right? Can you just talk about the cadence of the year over year margin performance that you're looking for?

Speaker 2

Yes. Jerry, you're on the right path there. I would say in 2022, we're expecting normal seasonality with respect Both the revenue as well as the EBITDA margin. I think when you look at the last 2 years, right, so 2020 2021 you had anything but normal, So you really have to go back and look at that seasonal cadence prior to that, which again when you think about seasonally, we tend to see our highest Revenue and margin performance in the 3rd and second quarters, Q4 thereafter. And then usually Q4 is a little bit The lightest for the year really for two reasons.

Speaker 2

You've got the winter months, so you're not seeing that uptick in particular landfill volumes as well as you've got the highest percentage of taxes in the first Payroll taxes, Mark. Okay.

Speaker 4

Yes. Sure. Appreciate it. And Separately on the acquisition announcement, can you talk about the path to get to double digit Returns, what amount of bolt on activity do we need? Or how much more do we have to go from a synergy standpoint to Earn that double digit return that I think typically for transactions this size takes most companies at least 3 to 5 years to get to?

Speaker 2

No, that double digit return is based on the current pro form a, which again is on the $40,000,000 of cost synergies, which don't include Any of the revenue synergies, right, including cross sell or bolt on acquisitions, which we have a number in the pipeline down the road. So that would All those things will be opportunities to accelerate get to double digits more quickly and then accelerate the overall returns to even higher level.

Speaker 4

Okay. Appreciate the discussion. Thanks.

Operator

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

Speaker 5

Hey, good afternoon. Hey, just real quick Brian, but to be clear the margins in 2022 are assuming a normal like 100% incentive comp accrual?

Speaker 2

That's correct. Okay. We hope we hope we hope

Speaker 4

we hope we hope

Speaker 2

we hope we'll take our. But we're planning on 100%. That is correct. Right. Okay.

Speaker 2

Okay. That's helpful.

Speaker 5

And then I know while we're on the talk of margin here, I know in the U. S. Ecology release you laid out that 47% free cash conversion by 24, but you didn't really make any mention of the margin targets. Now I get it that U. S.

Speaker 5

Ecology is I'm going to say 70 basis points, 80 basis points dilutive to margins. But does that does anything preclude you from achieving those call it 32% margins Longer term and is that something that investors should still think could be a reasonable expectations like mid decade?

Speaker 2

Yes. So, Sal, absolutely in the solid waste and recycling side, right, we're on our marks, right? And we're going to get there. And you're right, this Acquisition, right, in this space in general has a slightly different value creation formula, a little bit lower margins, but less capital intensity, right, so segment reporting, right, that calls those things out and really makes it clear to the investment community what kind of progress we're making on each front. And so just arithmetically, right, we'll get there just slightly slower than we would have otherwise, but our sites are still set towards that target over time.

Speaker 5

Okay. Yes, segment detail would be helpful. And then John, I think it was only 90 days ago though you mentioned that you wanted to get environmental services is up to $1,000,000,000 franchise over I think the next like 3 years. Clearly pro form a this is going to get you there. You mentioned a platform for deals in the release.

Speaker 5

You mentioned it again on this call. But like where do you envision the business longer term? Are you targeting A certain percentage of sales that you maybe don't want to exceed or just big picture there?

Speaker 2

No. Listen, we're This deal right is a very unique set of assets right and gives us a really attractive position Right. And we don't think there's a deal of the size or scale out there in the future. We're certainly going to take this, Should we be able to close it and integrate it, get our people connected, the systems, right, make sure that we're executing above the pro form a, Right. And then along the way, of course, there's other deals that can fold into this, while we're aggressively growing, right, the solid waste and recycling business.

Speaker 2

So don't have any defined target of what percentage of the business this is. But the bulk of this business So, theoretically, it's going to be our traditional recycling and solid waste business and we're going to continue to kind of grow both sides of that as we move forward.

Speaker 5

Okay. And then my last one just real quick. You talked about the $40,000,000 of synergies from the deal, but you never really put a finer point there. So where exactly are these synergies coming from? Are they more SG and A?

Speaker 5

Are they other operating costs? Are they even CapEx?

Speaker 2

No. It's 2 broad fronts. Think about half of it is just duplicative corporate costs, right? This is cost of being a public company, IR Treasury and all the normal things that you would think to take out. And then the other 20 would come more at the field level, Because you see, we have a Gulf Coast region, right?

Speaker 2

We have a Northeast region in our Environmental Solutions business, right? They have a national footprint. And we'll obviously think about harmonizing and integrating those, right? That's a relatively small number, Right. When you think about it in terms of cost takeout, because we think this is a huge platform for growth for us, right?

Speaker 2

We're not going into We're buying to keep and build. Now as we go and we learn more, if there's more opportunities to do things a bit more efficiently, we'll certainly take advantage of that.

Speaker 5

Okay. All right. Appreciate the timing.

Speaker 2

And I think Tyler the other thing too just the $40,000,000 is Exclusively cost synergies, there are no revenue synergies baked into the plan.

Speaker 6

Okay. Okay.

Speaker 5

That's clear. Thank you.

Operator

Our next question comes from Michael E. Houghton with Stifel. Please go ahead.

Speaker 7

Thank you very much. I'm going to ask 2 questions and get 10 of a minute. You ended the year at 44% free cash flow conversion. Your guidance is up almost 9%, but Cash flow from ops are only up about 5.5 percent, capital spending is almost flat. So I'm trying to understand what's happening in capital spending?

Speaker 7

Do you think the cash conversion ratio does in 2022? And is the cash flow from ops as a percentage of revenues It's the same in 2022 as it was in 2021? How is that going to find one question?

Speaker 2

Yes. So Michael, let me kind of I mentioned that we've got the additional cash incentive compensation that we're paying in 2022 that's related to 2021 performance. About $40,000,000 of extra cash, which impacts free cash flow conversion by 100 basis points. So we think we're going to be able to from an overall perspective get to that 45% plus even absorbing that $40,000,000 extra that extra 100 basis points of free cash flow conversion.

Speaker 7

Okay. And that will show up in the cash flow from ops number?

Speaker 2

Cash from ops, correct. Yes. In working capital where you see Right.

Speaker 7

And then why is CapEx relatively flat year over year?

Speaker 2

Well, remember we talked about in the Current year, right? So again, if you take a look at our original guide and then what we ultimately spent, at the midpoint of that, we were kind of $90,000,000 More of CapEx. So we had the ability 1 to fund additional growth. So again if you take a look at our volume performance from an organic perspective, had additional growth opportunities as well as pull forward some capital that was originally going to be spent in 2022. So that's why it's relatively flat In 2022 is because some of that's been actually happened in 2021.

Speaker 8

Got it. That's what I

Speaker 7

thought it was. Just wanted to make sure that was clear. And then, John, I think it is important for everybody to understand that don't focus on margins focusing us on the discipline of Republic's cash on cash returns. And just to put it in perspective, I mean, you now have about $1,300,000,000 of ES revenues. And Woody, you got maybe 2 if you get use the psychology closed $2,500,000,000 invested.

Speaker 7

And on a like to like Basis, the same investment is probably 2x on a per revenue basis in garbage. So that's the way people Am I thinking about that correctly?

Speaker 2

Well, I'd probably have to do a little bit math offline, Michael, to confirm or deny your thesis. I think broadly speaking you're in the right zone, which is can people get very caught up in the margin. And listen, we understand the margin as a way to measure the business We don't run away from that. We own that. And we've done a great job of expanding margins the last couple of years, right, kind of creeping up on 300 basis points as we get into Next year?

Speaker 2

Right. But we don't run the business for the quarter. We don't run it for any single metric. We run it for the long term and intrinsic value. So That's where cash on cash returns, that's where value creation comes in.

Speaker 2

And so a business that might have a slightly different optics, which is structurally a little less lower little lower margin and then but less capital intensity that free cash flow conversion is a better metric that starts to harmonize Those two things and get much closer to returns or a view toward returns. And look, we think there's margin opportunity in this business, right? We think that we're going to continue to look for efficiencies and we're going to think about make sure that we take our mindset Around revenue management, our skills and capabilities and our belief that we have to price out of our costs, right, and the Expanding margins that allows us to reinvest in the business, right, and take care of our customers over time.

Speaker 7

Okay. Thank you.

Operator

Our next question comes from Walter Spracklin with RBC Capital Markets, please go ahead.

Speaker 2

Yes. Thanks very much. Good afternoon, everyone. So just touching on that, I know you just kind of said it, the answer My question being, how do you grow margin and how do you take advantage of that margin opportunity in the Environmental Services Business you said both synergy and pricing. But if you were to kind of frame it, is it fifty-fifty?

Speaker 2

Or is it really And a business that needs to be repriced and properly priced to get those margins up? And or is it more on the cost synergy side that you're to get those margins higher. Yes. I talked about the $40,000,000 that we have right in front of us. And then of course as we go in, we'll look for opportunities.

Speaker 2

Now We're acquiring not just assets. We're acquiring deep expertise, right, in the hazardous waste value Shane, around compliance and operations and commercial capabilities. And so we're very, very mindful of that. And the last thing I want to do is step over $20 bill to grab a nickel. So we're not going to be very short term focused.

Speaker 2

We're going to think about long term. And as we find more and learn more, right, we'll certainly report out on that. On the revenue side, while we haven't put anything into the pro form a, right, we see opportunities across multiple fronts. Strategically, the reason that we're into this business is because of the connectivity of solid waste and recycling. Customers have asked us to go here.

Speaker 2

They want a one stop shop. They want somebody who we now think we will have the leading set of products and services in the environmental services space to serve our So the cross sell opportunities become immediate and we've seen that with ACV and any other previous acquisition that we've done in this space. We talked about the follow on acquisitions and that being a real opportunity. We think there are really interesting capital investment opportunities on the post collection side of that business That allow us to compete more broadly, right, across incineration from other parts of the value chain we're excited about. And then, look, we will bring our skill and capability of revenue management to the table understanding that there is no work So we'll look at every individual job that we do and make sure there's sufficient returns on that over time.

Speaker 2

Again, that becomes important to allow us to Pay our people and to reinvest in the business. We haven't quantified any of those yet, right, because we're thinking concentrated and hopefully Closing this transaction and integrating our colleagues, but we think there's a lot of upside over time. That's great color. And then my second question here is on Scalability of future acquisitions, solid waste versus the environmental services side. Is environmental service is that a more scalable, where integration of acquisitions future acquisitions It's easier to integrate.

Speaker 2

It's more upside. Is it rather that way on solid waste more so? Looking to gauge where your opportunity set and incremental dollar will be spent now if there's a lot bigger opportunity in one of the buckets Through acquisitions than the other one. Well, I think the great news is that we're not capital constrained, right? So that we don't have a dollar and choose where to put it.

Speaker 2

Yes. We look strategically where is the fit and does it meet our disciplined returns criteria. And then if it's both, we invest in both over time. I think This space looks very similar to what solid waste and recycling looked like a decade or more ago, where there's a lot of fragmentation and we've already Seeing this rolling in smaller players, right, provides a ton of synergy. And we've got a pipeline That we see sometimes building on our regional footprint, sometimes it's adding even further adding to our product and service offering that will be great fits.

Speaker 2

And our pipeline and acquisitions is robust on both fronts. Got it. Okay. Appreciate the time. Thank you.

Operator

Our next question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Hi, team. Thanks for taking my questions. I just wanted to make sure I understand the price versus Underlying inflation expectations over the course of the year. So if we're expecting 60 bps to 70 bps Margin expansion from pricing ahead of cost inflation, the average yield guidance is 3.4%. Does that mean we have 2.75% inflation kind of assumed?

Speaker 6

Or maybe just help me understand that those assumptions?

Speaker 2

Yes. So Sean, remember one of the things you have to remember when we disclose average yields, we're using total revenue as the denominator. So when you take a about where we price and you look in that solid waste business, if you did it on related business, it actually would be 70 basis points higher than our 2021 performance and about 20 basis points to 30 basis points higher than on total revenues. So that's the way you have to put it into context. So the 3.4 you got to make 3.6 or 3.7 call it based on related revenues.

Speaker 2

And you look at that pricing in excess of cost inflation that would imply closer to a 3% inflation cost inflation. Okay. Very helpful. The actual kind of wage and benefit number in there is probably slightly higher. Keep in mind, we're not talking a lot about it, but we're still getting a lot of productivity benefits to RISE.

Speaker 2

And that's one of the great stories through the pandemic is it's allowed us to keep paying our people as their bills go up, while managing the cost structure because we're just getting more

Speaker 6

Okay, great. Great. Yes, I'm glad we fleshed that out very helpful. And Maybe just on U. S.

Speaker 6

Ecology in light of your comments around Environmental Solutions being Less capital intensive, but also mentioning that there are some interesting CapEx opportunities around this particular acquisition. I mean And then there's been it seems like there's been a lot of noise around the U. S. Ecology capital spending historically. So I mean what should we expect as a baseline And sort of variability around CapEx from U.

Speaker 6

S. Ecology?

Speaker 2

Yes. Look, I think there's been some elevated Capital with respect to building out, right, some landfills. So through the cycle, we would expect the CapEx to run circa 9 And again, it's going to be less than that in that 4% to 5% range on the field services piece and a little bit more on that waste solutions piece, But on average call about 9.

Speaker 6

Okay. All right. Excellent. Thanks guys.

Operator

Our next question comes from Hamzah Mazari with Jefferies. Please go ahead.

Speaker 9

Hey, thank you very much. Just had a question around as you think about synergies On revenue from haz waste and solid waste, do you have a sense of how many customers Can subscribe to sort of both services. And then also in the past, There's been people that have looked at medical waste and solid waste together and that hasn't quite worked out. What's different about this space? Do you have a lot of manufacturing customers that sort of are asking you to do both?

Speaker 9

Just give us a sense of revenue synergies. You don't have to quantify it. Just help us understand that.

Speaker 2

Yes. So I think versus your previous thesis, I think when you start with this sounds like an interesting bundle, let me try to go sell it, right? That may or may not work, Right. We start with asking the customer what they want, what they need and how they want to buy and have worked our way back into this. So Yes, it's true certainly for our broad set of industrial customers, right, who produce an ongoing recurring set of waste streams.

Speaker 2

And this really has accelerated over the last decade. They want fewer people into their plant. And second, they're taking very hard look at the sustainability footprint of their supply base, right? That's a big part of their sustainability story. And so people who have The ratings we have, who have the record we have become really meaningful for them.

Speaker 2

And keep in mind, we're still a very, very small percentage of their overall cost structure. So the idea that they'd be willing to pay a little bit more for somebody who can handle their needs compliantly and provide the speed they need, right, that's The value proposition and that's what we've seen proven out with the ACD transaction immediately, right? And we think we'll get that just at a much bigger scale With the U. S. Ecology transaction, it also applies to some event type work.

Speaker 2

When you think about the infrastructure bill and brownfield Size remediation, the same thing. You have a contractor there, but who's really wants to understand speed and a single provider that can handle all the different waste streams Becomes a really big strategic advantage.

Speaker 9

Got it. So can you give us a sense of Post U. S. Ecology, what is your market share and has wished? And where do you think it can go?

Speaker 9

And Do you I know U. S. Ecology is heavy on land sales. They're heavy on event work. They have this NRG business That they over levered to buy.

Speaker 9

How are you thinking about the portfolio? Does incineration matter or not? Does haz waste Land sales mean more. Is NRG a good business? Just walk us through like how you're thinking about the portfolio because They do have a few businesses.

Speaker 9

And hazardous waste is obviously a very big market that has a number of other players and also Innovators, it's very different than solid waste as you obviously already know.

Speaker 2

Yes, sure. So I mean it starts with their Historic business, which is really in the post collection hazardous landfill side and they have TSCS and Fendi FAS and other things around that. But those five sites, Right. Give them about a 36% market share position, right, in hazardous post collection, right? That's been the strength of their business, Really, really strong and we're excited about that.

Speaker 2

They bought a company called NRC, which has largely field services, Which the thesis of which is getting close to the customer. We believe and agree with that thesis, right? And we've seen that and proved that out that that works, Right. We're there with the ACV deal and we see that in our Gulf Coast region as well over time. That NRC transaction brought with it A couple of other types of businesses.

Speaker 2

They've got a little bit business in Europe and they've got some things marine standby business, which really focus Oil is still recovery. Brett, those are things that we'll go in and clearly take a look at and evaluate and understand, hey, what is the what's the With the rest of the business, is it connected from a customer standpoint, from an asset sharing standpoint? I take a very fair view of this is something we think we can build and grow, we'll be excited about it. Or if this is something that might be a little more standalone and not very scalable and somebody else might be the more natural owner of that, we'll of course evaluate that as well.

Speaker 9

Got you. That's very clear. Thank you so much.

Operator

Our next question comes from Kevin Chiang with CIBC. Please go ahead.

Speaker 8

Thanks for taking my question here. Maybe I could ask you talked about some of the revenue synergies as you build up your Environmental Solutions capabilities, the vertical integration, I guess you spoke a little bit about this. What does the customer get out of it? It sounds like you might give them better service under one umbrella and maybe it's just not Clear to me why that would be but do they also get like a cost savings like is there a bundle program Offer a level of pricing discounts that they wouldn't get if these are 2 different vendors. Just what else does the customer get out of this Having this all come out of Republic versus maybe dealing with U.

Speaker 8

S. Ecology and Republic separately, let's say.

Speaker 2

Yes. I know the thesis and it's true in some industries where, hey, the more you put together, the more you bundle, the more price pressure you could be under. And we see this in our business today actually that the more products the customer and services the customer buy, the average price per product and service goes up It's not down. And keep in mind, waste and recycling broadly are a very, very, very small portion Of a customer's cost structure. If you run a manufacturing facility, you think first about all of your direct costs, could it be steel or copper, Anything else?

Speaker 2

And then you think about your labor and then you think about your SG and A cost of IT and everything else. Waste and recycling, right, we're talking about basis points, Right. On someone's overall cost structure. So a small price premium on a very small number is still a very, very small number. So for them, It's around compliance, right?

Speaker 2

Think about producer liability, right? When they produce a waste stream, especially more complex and They have the liability of that forever. So having somebody who is going to handle that in a sustainable and appropriate manner is of Enormous value to them. The speed, right, of being able to get things out of their facility and keep the container empty because a full container can sometimes Shut down the manufacturing process. So there's enormous value created by speed, ease of service, Right.

Speaker 2

Digital interface and billing and those are all pieces that we start to put together for people. So that's the value proposition for customers.

Speaker 8

No, that's a great clarification answer. And as you know the compliance has got to be a big part of The value proposition. My second question maybe is more of a philosophical question. But the industry you're seeing it Yourself, you're getting strong pricing, you're covering inflation, the churn is at record lows as well. So you kind of get Best of both worlds.

Speaker 8

But I guess what trend level would force you to reevaluate your pricing strategy? You said you had 95 I guess, I think it's a Q4 number. Like at what point or at what level of churn would you rethink The pricing you're putting out into the market in order to maintain a certain level of market share or volume?

Speaker 4

Well, we look at that all the

Speaker 2

time, right? We understand the and we have a very sophisticated pricing, both pricing new customers as well as pricing existing customers. The latter becomes more important for us obviously because we have such a long customer tenure, right? That's what that high customer retention drives Underneath that is long customer tenure. And so we have all kinds of experiences with customers around test and learn, right?

Speaker 2

We take A and B sampling In terms of understanding a price that customers are willing to pay and then at what price does that start to drive churn, right, and start to drive defection. And there's an

Speaker 8

incredible amount of science

Speaker 2

underneath that process that's been developed over Pricing across the board or the opposite direction, right? It's much more surgical almost at a customer by customer level, right? And that's what produces the Pricing number well driving great volume growth.

Speaker 8

That's clear and that's helpful. Thank you very much for taking my question.

Operator

Our next question comes from David Manthey with Baird. Please go ahead.

Speaker 2

Yes. Thank you very much. Two quick ones here. John, you mentioned at the beginning something about forward integrating into the plastic Supply chain, could you tell me what that means? I'm completely clueless about that.

Speaker 2

And second, on the ECO deal, It looks like margins, free cash flow and returns are lower than Core Republic right out of the box here. Organic growth maybe a little bit more attractive and the platform for bolt on acquisition Seems to be one of the best attributes of it. Could you just compare and contrast Sort of the pipeline at eCall as you've gone through your due diligence talk to them about deals versus what you know about the average MSW deal? Yes, sure. So on plastics, listen, the world has a single use plastics problem, right?

Speaker 2

And you don't have to read too many Websites or magazines or watching television shows to figure that out. Now it's very different. Nature of those problems is very different across geographies. In the U. S, the problem is right circularity, right?

Speaker 2

We produce single use water bottles or anything else and we don't capture enough of those. And that plastic ultimately gets lost or gets downgraded, right? And there's huge pressure on CPG companies to drive more reusable product rather than just using virgin plastic. And the constraint in all this is aggregation and supply. And so we are uniquely positioned in the value chain because we have that material.

Speaker 2

Today that value chain isn't very well constructed. So you have product that moves very inefficiently. We Sell that product for a relatively low value for what it's ultimately worth when it returns into the hands of the CPG companies. So A lot of dialogue, a lot of discussion going on across every stage of the value chain, right? But we think we've got an opportunity to take a next step And move forward with some pretty simple processing that is going to allow us to capture a higher selling price And take more volatility out of those sales through longer term contracting.

Speaker 2

I'm not going to get in any more detail Right now than that, but stay tuned here because I think in the next few months you're going to hear far more color on that topic. And then on U. S. Ecology, listen, we have a really robust and capable business development team, Both out and geographically dispersed as well as here in Phoenix. That maintains a perspective on every company big and small and Builds a pipeline.

Speaker 2

So we've been working on this for years on the Environmental Solutions side of the business And have we're very disciplined buyers, very patient, but we've had discussions right with dozens of companies. So This isn't talking to U. S. Ecology and saying what's in your pipeline, of course, we'll do that. But we have our own robust pipeline, Right.

Speaker 2

That we know will fit in well, right, to the U. S. Ecology platform, right, post closing. Thank you very much.

Operator

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

Speaker 2

Thank you, Sarah. In closing, the strength of our 2021 performance demonstrates the power of our platform and the value our strategic investments are creating. We exceeded our upwardly revised financial goals by delivering double digit growth in revenue, EBITDA, EPS and free cash flow. We continue to manage the business well to create long term value for all stakeholders and expect continued profitable growth in 2022. I would like to thank all our employees for their continued hard work and commitment to our customers.

Speaker 2

Results like these are made possible by our team of dedicated employees. Have a good evening and be safe.

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Earnings Conference Call
Republic Services Q4 2021
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