Republic Services Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 27, 2022

Key Takeaways

  • Strong Financial Performance: Q3 revenue grew 23% (including 12% from acquisitions) and adjusted EPS rose 20%, while year-to-date free cash flow increased 23% to $1.6 billion.
  • Record Pricing and Volume Growth: Achieved a record 6.9% floor price with 5.6% average yield and delivered 2.2% organic volume growth across all verticals and geographies.
  • Value-Creating Acquisitions: Invested $2.6 billion in acquisitions year-to-date, including U.S. Ecology, with an expected $40 million in cost synergies and a robust pipeline for future deals.
  • Digital and Sustainability Initiatives: Fully deployed RISE tablets on large/small container routes, launched TrackMyTruck GPS customer updates, and advanced RNG projects and polymer center investments with BP partnership.
  • Margin and Cash Flow Headwinds: Anticipate a $75 million EBITDA drag from lower recycling commodity prices and an estimated $70 million increase in annual interest expense due to rising rates, keeping leverage near 3.2×.
AI Generated. May Contain Errors.
Earnings Conference Call
Republic Services Q3 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Afternoon, and welcome to the Republic Services Third Quarter 2022 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen only mode. Questions. Please note this event is being recorded.

Operator

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

Speaker 1

I would like to welcome everyone to Republic Services' 3rd quarter 2022 conference call. John Van Der Aert, our CEO and Brian Delgaccio, our CFO are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward looking statements, which involve risks and uncertainties and may be materially different from our actual results. Our SEC filings discuss factors that cause actual results that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive.

Speaker 1

If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 27, 2022. Please note that this call is property of Republic Services Inc. Any redistribution, Retransmission or rebroadcast of this call in any form without the expressed 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 When events are scheduled, the dates, times and presentations are posted on our website. With that, I would like to turn

Speaker 2

the call over to John. Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our strong results in the Q3 demonstrate our ability to profitably grow the business and effectively manage our cost structure even with increased volatility in the broader marketplace. Cost pressures remain elevated and more persistent than we originally anticipated.

Speaker 2

In the face of those cost headwinds, we are leveraging our tools and technology to price ahead of cost inflation and drive margin expansion in the underlying business. From our perspective, customer demand remains strong and supportive of continued volume growth. The sound fundamentals in our business, together with a laser focus on the customer, position us well to capitalize on growth opportunities in the market. During the Q3, we delivered revenue growth of 23%, including over 12% from acquisitions, Generated adjusted earnings per share of $1.34 which is a 20% increase over the prior year and produced more than $1,600,000,000 of adjusted free cash flow on a year to date basis, a 23% increase over the prior year. We remain confident that investing in value creating acquisitions is the highest and best use of our cash flow.

Speaker 2

Year to date, we invested $2,600,000,000 in acquisitions, which includes the acquisition of U. S. Ecology. The integration of U. S.

Speaker 2

Ecology is progressing as planned, and we remain confident that we will achieve at least $40,000,000 of cost synergies. Our initial pricing actions have been successful. We will continue to increase prices to ensure that all stages of the value chain earn an appropriate return. We're also gaining traction cross selling our products and services, achieving over $25,000,000 in new sales to date. Apart from musicology, we have invested over $400,000,000 in acquisitions this year.

Speaker 2

Substantially, all of these deals are in the recycling and solid waste space. Our robust acquisition pipeline continues to support outsized levels of activity over the coming years. Year to date, we returned $640,000,000 to our shareholders through dividends and share repurchases. We continue to invest for the future and advance our strategic initiatives to build distinctive capabilities in customers' deal, digital and sustainability. With respect to customer zeal, we delivered organic volume growth of 2.2% during the 3rd quarter.

Speaker 2

Volume growth was broad based across our market verticals and geographies. We also demonstrated our ongoing ability to price in excess of underlying cost inflation. Floor price increased to 6.9% and average yield increased to 5.6%. This is the highest level of pricing in company history. Moving on to our digital capabilities.

Speaker 2

The team continues to advance the implementation of digital tools that improve the experience for both customers and employees. Our proprietary Rise tablets have been fully deployed across our large and small container route and deployment to residential route is 26% complete. The remaining residential routes are on track for completion by mid-twenty 23. We have also launched TrackMyTruck. This technology connects the customer to their large and small container truck utilizing a GPS enabled Ryze tablet.

Speaker 2

This is a major milestone that serves as a foundation for further digital offerings to our customers. As it relates to sustainability, development of our renewable gas projects remains on track. We expect the first tranche of these projects related to our joint venture to come online beginning in late 2023. We are pleased to work with BP on these RNG projects, who recently announced its intent to acquire Arkeus. This provides additional opportunities to work together on decarbonization and environmental services initiatives.

Speaker 2

Regarding Polymer Centers, we are accelerating the development of these projects and now expect to invest an additional $40,000,000 of capital this year to start working on future locations. Finally, our company values guide everything we do. I'm proud of our recent certification as a great place to work for the 6th consecutive year. This is a significant achievement as employee retention and recruiting remains a top priority in today's market. I will now turn the call over to Brian, who will provide details on the quarter.

Speaker 2

Thanks, John. Floor price during the Q3 was 6.9%, which included open market pricing of 8.7% and restricted pricing of 4%. The components of Core Price included small container of 10.7%, Large container of 7.6 percent and residential of 6.7 percent. Average yield on total revenue was 5.6%, an increase of 60 basis points when compared to our 2nd quarter performance. Average yield unrelated revenue was 6.3%.

Speaker 2

The team continues to dynamically adjust price on new and existing business to offset higher levels of inflation in our operating costs and capital expenditures. 3rd quarter volume increased 2.2%. The components of volume included an increase in small container of 2.3%, An increase in large container of 1.7 percent and an increase in landfill of 6.8%. Our customer retention rate remains strong at over 94%. Moving on to recycling.

Speaker 2

Commodity prices were $162 per ton in the quarter. This compares to $2.30 per ton in the prior year. Recycling, processing and commodity sales We're a 130 basis point headwind to internal growth during the quarter. We are now forecasting 4th quarter commodity prices Next, turning to our Environmental Solutions business. 3rd quarter Environmental Solutions revenue increased $343,000,000 over the prior year, which primarily relates to the acquisition of U.

Speaker 2

S. Ecology. On a same store basis, Environmental Solutions contributed 60 basis points to internal growth during the quarter. Adjusted EBITDA margin for the Environmental Solutions business was 18.7%, a sequential increase of 160 basis points. This includes our existing operations in the Gulf and Northeast together with the addition of U.

Speaker 2

S. Ecology. Total company adjusted EBITDA margin for the Q3 was 29.2%. This compares to 30.5% in the prior year. Margin performance during the quarter included a 150 basis point decrease from acquisitions, including 90 basis points related to U.

Speaker 2

S. Ecology and a 40 basis point headwind from lower commodity prices. These margin headwinds were partially offset by a 10 basis point increase from net fuel and underlying margin expansion of 50 basis points. Adjusted EBITDA margin in the Recycling and Solid Waste business was 30.5%. SG and A expenses excluding transaction costs from U.

Speaker 2

S. Ecology were 9.8% of revenue. This is a 30 basis point improvement over the prior year and reflects continued cost management as we grow the business. Year to date adjusted free cash flow was $1,670,000,000 an increase of $309,000,000 or 23% compared to the prior year. This was driven almost exclusively by EBITDA growth in the business.

Speaker 2

Similar to prior years, we expect to spend a disproportionate amount of our full year CapEx and cash taxes during the Q4. Year to date net capital expenditures of $808,000,000 represents a little more than half of our projected full year spend. And year to date adjusted cash taxes of $115,000,000 represents 50% of our projected full year spend. Total debt was $11,800,000,000 and total liquidity was $1,900,000,000 Variable interest rates on our debt increased 1% during the Q3 and an additional 50 basis points in October. As a reminder, a 1% increase in interest rates results $36,000,000 of additional annual interest expense.

Speaker 2

Our leverage ratio at the end of the quarter was approximately 3.2 times. We expect to revert to 3 times leverage by mid-twenty 23. With respect to taxes, our combined tax rate and non cash charges from Solar Investment resulted in an equivalent tax impact of 25.1 percent during the Q3 and 24.8% on a year to date basis. We expect an equivalent tax impact in a range of 28% to 29% in the 4th quarter and an equivalent tax impact of just under 26% for the year. I will now turn the call back over to John.

Speaker 2

We are proud of the results we delivered during the Q3, which exceeded our expectations. Stronger contribution from price more than offset persistent cost inflation, which we have seen stabilize but not retreat from elevated levels. That said, we remain comfortable with our full year financial guidance we provided in July even with the recent drop in recycled commodity prices and increase in interest rate. Looking forward to 2023, the fundamentals of our business remain strong. Recent decreases in recycled commodity prices, Increased interest rates and rising fuel costs will have a direct impact on our business.

Speaker 2

While these headwinds may modulate our performance expectations, We remain confident in our ability to price ahead of cost inflation. We still expect to deliver above average levels of growth in revenue, EBITDA and free cash flow. We plan to provide detailed 2023 guidance on our Q4 earnings call in February. With that operator, I would like to open the call to questions.

Operator

We will now begin the question and answer session. One follow-up question today. And our first question will come from Tyler Brown of Raymond James. Please go ahead.

Speaker 3

Hey, good afternoon guys. Hello. Hey, John, I just wanted to start on U. S. Ecology.

Speaker 3

Curious how things are progressing there? It sounds like your September price type Can you just talk about how that action was received in the market? And did that cover both disposal and field services?

Speaker 2

Yes. Integration broadly is going well. Really happy with what we purchased in terms of certainly the asset quality and also the We're able to do a lot of the integration planning work Ahead of the close, so that we've got a team that's hit the ground running and I think the results are certainly showing that. Yes, we did put in the pricing action, and that was on the disposal side of the business. We always start there.

Speaker 2

We've certainly taken some more tactical pricing actions on the field services side. And we've seen no degradation in volume from that. So the market's been very receptive to that. I think it fulfills our These assets and services have a lot of value to customers and if you provide great work, they're willing to certainly pay a fair price and We'll be continuing with pricing actions into 2023 beyond to make sure that we're getting positive returns in every stage of the

Speaker 4

Okay. Good deal. Yes, that's helpful.

Speaker 3

And then on the pricing side, obviously, another good print, but I'm curious about a couple of things. Number 1, Do you think that the 6.9% that you posted this quarter could be the high watermark? And as we look to 2023, What do you think the 50% of the book that's restricted, what do you think that you'll see on pricing in that piece as we look to 2030?

Speaker 2

Yes. I think the we'll get a little momentum here in the second half. It should be tied in the first half of next year. That'll be 4.5% or North of 4.5% we think. Just based on the roll through of where the all the different indices that we have at this point start to hit.

Speaker 2

Yes. And Tyler, just to put that into context, in the Q3, the restricted pricing was 4% And in Q2 that number was 3.5 percent. So you can see the nice acceleration as we move forward.

Speaker 3

Yes, perfect. Okay. And then last one, just on the acquisition drag, I think Brian, did you say 150 basis points? Why was that so big?

Speaker 2

We have a combination of U. S. Ecology was 90 of the 1 50. We also have some of the environmental solutions transactions that we did late Q3 of last year. So most of that, The other 60 starts anniversarying in the 4th quarter.

Speaker 3

Okay. All right. Perfect. Thank you, guys.

Operator

The next question comes from Toni Kaplan of Morgan Stanley. Please go ahead. Thanks so much. First, I wanted

Speaker 5

to ask about the Strong volume that we've been seeing this year. I want to ask about your view on the sustainability of that. I think it's been progressively maybe coming down, but I think overall fairly good. So Just wanted to ask about that.

Speaker 2

Yes, volume remains strong, certainly in our more recurring sides of the business, but Also in the places that are more transactional like special waste and temporary large container, we're still supply constrained there and that's still broad based. Now as we think into next year, right, we're planning on those growth rates modulating a bit just because we're reading the same things you all are around Some economic pullback, but frankly, I would have expected to see some of that already. We remain very, very positive in that Volume environment right now. And all the demand signals that we watch as far as new business, new business And the small container business continues to exceed loss business and service increases are exceeding service decreases. So the demand is definitely there.

Speaker 5

Terrific. And on the OCC, I know you mentioned the expectation for, I should say, commodity basket. You mentioned the $90 a ton for 4Q. Is the sensitivity that you give in the filings, the dollars 10,000,000 impact to revenue and profitability for $10 a ton. Is that a fair like is that And still hold for this or is there a sensitivity on certain levels of where it is?

Speaker 5

And also if you could help us think about the main components within the basket? Thanks.

Speaker 2

Yes. No, that sensitivity will hold, Right. So right now, if we were to sit there and look at $90 a ton, if that held true for all of 'twenty three compared to the one $165 average that we're projecting for 2022, that would be a decrease of about $75,000,000 of both revenue and EBITDA On the commodity line item.

Speaker 5

Terrific. Thank you.

Operator

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

Speaker 6

Hey, thanks for taking the question. Can I follow-up on that one? So the $75,000,000 theoretically of revenue flowing right to EBITDA on the commodity line item, Can you talk about offsets to that in terms of processing fees or other structures you have? I know you've done a lot of work to de link the commodity exposure. So Any clarification you can provide there would be helpful.

Speaker 2

Yes. No, that's a net number. So if you remember, if you go back and look at our filings a couple of years ago, the sensitivity to And dollar change was $20,000,000 So we've cut that in half and that's by being able to go in and actually share, right, in that volatility with the customer. So that's where you really see that change. When we talk about that $10 equaling about $10,000,000 worth of EBITDA, that is a net number.

Speaker 6

$10,000,000 of EBITDA, but not $10,000,000 of revenue, just to clarify?

Speaker 2

It's both. It's $10,000,000 of revenue and EBITDA. Yes. Because again, if you think about what we did is that when we actually went in and changed the structure of the recycling contract, We basically just put that into the base rate. So that's how we actually wound up offsetting some of that volatility.

Speaker 2

So That's why when you look at the sensitivity now, the $10 change is $10,000,000 to both revenue and EBITDA because it's just isolating the commodity impact. The service fee that we're charging to actually either process the material or to collect that material is going to stay unchanged, Regardless of what the commodity price is.

Speaker 6

Yes, very helpful. There's been some discussion of You mentioned interest expense looking at next year, but also bonus depreciation stepping down. Can you talk about that and any other Puts and takes you think about for free cash flow conversion as we look to next year?

Speaker 2

Yes. Look, if you just from an interest expense perspective, If you take a look at year over year and if this is assuming 125 basis point hike in the 4th quarter, That would be about $70,000,000 increase to interest expense year over year, which in isolation, it's about 100 basis point headwind to free cash flow conversion. That said though, we had a plan that called for pricing in excess of cost inflation And to drive very strong growth. So even though these are some new headwinds that are presenting Into our plan for next year, we still expect very strong growth in revenue, EBITDA and free cash flow.

Speaker 6

Yes. I mean, and in reiterating, I just want to make this point right and please nuance it as it makes sense. But In saying you're comfortable with this year's guidance and point to above average growth for next year, I mean it's really pricing and operating leverage and solid waste That's making up some of these headwinds, if you will. And I just want to get your view on Whether or not there's incremental pricing that you can put through looking at 2023 to shore up some of those gaps?

Speaker 2

Well, I'd also say it's also growth and margin expansion in Environmental Solutions that's helping offset it, right? We've got Plans there to continue to cross sell, continue to price, right, and drive our cost synergy numbers there. So you'll see nice margin expansion in that part of the business as well. We're committed to price ahead of cost inflation under almost any scenario, obviously, right? In a Black Swan area where we get into Crazy levels of interest rate, Brett will come back and talk then, but we've been in a pretty high interest rate environment And lower interest rate environment, and we've done a pretty good job of in both scenarios or both cases, pricing ahead of cost inflation.

Speaker 2

And we're doing that playing a long game, right? We have customers. This is a loyalty business. So we're always going to do things that maximize the lifetime value of the business and therefore drive value versus doing anything on natural in a quarter that might drive short term results, but aren't really good for the shareholder longer term.

Speaker 6

All right. Appreciate all the color. Thank you.

Operator

The next question comes from Kevin Chiang of CIBC. Please go ahead.

Speaker 7

Hi, good evening. Thanks for taking my question. Maybe just On the comments you made on the small container yield improvement, it continues to be outsized, well, I mean, you're going to get good pricing everywhere, but Especially seems to be outside. Just if you can just explain to me why that is? Why are you seeing Even stronger pricing of small containers relative to your other collection business?

Speaker 2

Yes. I think it's a combination of things, Kevin. I think it's certainly customer mix. We want to be with customers who are willing to pay more. We've got pretty sophisticated tools And our sales and marketing teams to identify those customers and present them with an offering where they're willing to pay more, More transactional parts of the business, for example, brokers, we've just pushed that out of our portfolio because they're renters.

Speaker 2

We're renting those customers. They're not going to be with us for a Long time. And so the mix certainly helps us. And then the offering we put in front of customers in terms of digital tools, the sophistication of our pricing that allows us to give very targeted pricing to a customer and understanding willingness to pay. All of those things drive yield, Which is the ultimate pricing metric.

Speaker 2

Core price is a means to an end. The ultimate metric which tied to the P and L and margin expansion

Speaker 3

is yield.

Speaker 7

Okay. No, that's very helpful. And then just my second one, the 160 basis point sequential improvement In EBITDA Margin and Environmental Solutions, you talked about some of the early wins in terms of pricing and cross selling and cost cutting. Just As you think about that $160,000,000 like is there a bucket that primarily drove that? Would it be primarily the cost cutting and Can you build off on this as some of the other synergies roll through?

Speaker 7

Or was it kind of a mix of things that drove that 160?

Speaker 2

No, it's a mix of things. All contributed and that really that balanced approach is what we look for going forward. As we look to take a business again that was in the mid to high teens and over a longer period of time, We think there's no reason that business can't be in the mid- to high-20s, right? That's where over a period of years we think we can take the Yes. Remember too, there's obviously seasonality in that business just like there is in the recycling and solid waste business.

Speaker 2

And so Q3 seasonally tends to be That highest quarter. So I think as we get more quarters as well, you'll start to see the growth year over year. But I think you're definitely going to see, as John mentioned, You're going to see a combination of pricing actions. You're going to see some of the cost takeout that we've done as we've realized some of the synergies and benefit from some of the cross selling.

Speaker 7

Thank you for taking my questions and congrats on some good results here.

Speaker 2

Thanks. Thank you.

Operator

The next question comes from Michael Hoffman of Stifel. Please go ahead.

Speaker 8

So I went back here as fast as I could do this while we're on the call. I think for 10 years, you all have given Some kind of indication of what the next year is going to be in the Q3. So this is like the first time you're not in 10 years. And yet then you say sales EBITDA and free cash flow will be up. So can you help us a little bit of how to understand what's the messaging?

Speaker 8

What's up mean? Up a little, up a lot, up like how do we make sure we get the right Place the land on 23.

Speaker 2

Yes, we had talked about last quarter, we thought we potentially had line of sight to double digit revenue growth, Right. We're probably off that a little bit in terms of what our expectations are for a couple of reasons. One is commodity price. Those coming down, they obviously have a revenue impact and a margin impact. The second is some of the acquisitions that we had hoped to close in the Q4 are getting pushed out.

Speaker 2

So feel very confident that those are going to be deals that close, but they're going to roll into the Q1, in one case the 2nd quarter, which just Pushes the rollover effect of that revenue benefit. And then the market, I think, is getting a little more uncertain as you see from Broader macro standpoint, all that being said, Michael, we feel really good about high single digit revenue growth, right, kind of in line with that EBITDA growth and free cash flow growth. So and those if you think about getting back to a 10 year period, right, those are certainly above average numbers In a very challenging environment, so we're very optimistic about the rate. I'd say the reason why we're not Giving some more formal type of indication, if you go back 5 years, the pretty predictable recurring revenue business where you got a lot of visibility, We're living in very dynamic and different times in terms of what's happening with interest rates and labor tightness And inflation and all those things, so I think that just and coming out of commodity prices. Given all those uncertainties, Look, we're going to be in better position 3 months from now to provide more clarity.

Speaker 8

Fair enough. But at least we've got some guardrails we can live in based on what you just shared. So Thank you for that. And then you did give us a sense of restricted price first half, 4.5%, but the rate of inflation can be accelerating in the second half. So the Sumption would be that restricted price in the second half would be greater than the 4.5% if the current trend holds.

Speaker 8

Is that the right observation?

Speaker 2

Yes. I don't know that's going to be significantly different, Michael, throughout the year. I would kind of put again in 4.5% to 5% range, right, for the full year. Again, we're exiting Q3 at 4%, so you'll see some acceleration, But I think it will be moderate acceleration throughout the year.

Speaker 8

And one last thing on price, is your starting open market price your exit rate from 4Q?

Speaker 2

Yes, for the most part. I mean, look, if you look at what we're saying right now with a 5.6 percent average yield on total revenue call it around 6% on related revenue in total. If you think about the open market portion of that, We would see that participating next year or contributing relatively in line with what we got this year. Okay. That's very helpful.

Speaker 8

And then one just tweak because you're getting asked about the volume. I mean, you're getting you're still seeing your good correlation, household formation, new business formation. You alluded to positive Interval changes, new business exceeding loss business, but the rate of change will start to narrow because we were off of a pretty healthy Recovery in second half of twenty twenty one into the first half of twenty twenty two, but we're going to start normalizing into a more narrow rate of change, but the trend underlying it still positive?

Speaker 2

Absolutely, Michael. That's our expectation when we think about 2023, that starts to modulate. Yes. And we think you start seeing that we think you start Seeing that in the Q4, Michael, and then again getting to a more normalized level of growth. Right.

Speaker 2

Okay, that's great. Thank you.

Operator

The next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.

Speaker 4

Yes, thanks very much. Thank you for taking my question here. Let me start on the cross selling opportunities. I think John you mentioned earlier $75,000,000 to $100,000,000 eventually. You're at the $25,000,000 mark now.

Speaker 4

Are you still on track from a timing perspective in achieving that full run rate of Cross selling or if it's changed, can you comment on that as it's been pulled forward or pushed back at all and why?

Speaker 2

Yes. We said we'd achieve that by 2024. That's the time frame that we said to be at 25 already given that we're still Working through some integration, rolling this thing out, we have not touched many of our customers yet. We're really, really pleased about our progress. And I would say quite optimistic about hitting both the level and the timing of that goal.

Speaker 2

Perfect.

Speaker 4

On the OCC prices, your peer yesterday earlier mentioned that your contracts or their contracts are Structured so that the further OCC goes down, the negative impact that sensitivity that you highlighted kind of contracts the lower OCC goes. I just want to make sure your contract design similarly that that plays out in your contract as well so that It's not a strict, you mentioned $10 but does that $10 contract when OCC prices go down, the further that OCC prices go down? Yes.

Speaker 2

And that's what in the guidance itself and that we put out there, I would sit there and say on the way up and the way down that $10 equating to $10,000,000 of revenue in both EBITDA is good sensitivity to use from a modeling perspective. So again, the type of work that you're doing can dictate that whether or not you're brokering work, that sort of thing. Those sort of things can be different company to company, but that's our

Speaker 4

Okay. And last question here is, you mentioned BP's purchase of archaea there that you're optimistic working with them and all that. Anything that you can add?

Speaker 9

Have you spoken to the folks at BP at all? What kind of

Speaker 4

to the folks at BP et al, what kind of new ways would you look at partnering with them? Or is it just What you had before is pretty much what you have now and expect to have going forward Or is there something additional now that you have a new owner? Or they have a new owner?

Speaker 2

Yes. We've spoken to them at many levels, including Talking to their CEO, they have they've got big, bold, ambitious plan around sustainability and decarbonization. And we think there's a number of ways we can work together. Certainly, in the core JV itself, and they're fully committed to that, and we're getting the best of both worlds Because the colleagues from Arcia, they are going to acquire, are going to stay. So we feel really excited about that team, but bringing more resources to bear That will certainly help us hit our marks and maybe move a little faster on that front.

Speaker 2

And then they have a big business. So they've got a big environmental services business. So there's ways to partner together there. They have a Major network of gas stations and gas stations actually have major place that plastic leak out of the value chain and don't get recycled. So there's ways to pilot innovate there and We've done nothing formal together on those fronts yet obviously, but have like minded ambitions in terms of making the world We're environmentally sustainable and doing that in a way that drives growth for our shareholders as well.

Speaker 4

Yes. So the opportunity to get creative And advanced that initiative. That's great. Okay. Appreciate the time.

Speaker 4

Thank you very much.

Operator

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

Speaker 10

Hi, good afternoon and good evening everyone. I'm wondering if you can talk about for the recycling line of business at the commodity price that you mentioned For the Q4, do you anticipate the business being in a net profit position? Kate, can you just Comment on that and then nice to hear about the reiteration of guidance despite that headwind of 20 $30,000,000 from recycling. Can you just talk about what part of the guidance has evolved ahead of expectations? It sounds like it might be yield, but Would love it if you could flesh that out.

Speaker 10

Thanks.

Speaker 2

Yes. So just your first question there at The $90 commodity price, yes, that portion of the business would remain profitable at that level. And then the second part, when you talk about the evolving guide, you're talking about with respect to 2022? Correct. Yes.

Speaker 2

So you're talking about just the puts and takes?

Speaker 10

That's right. Yes. So you're it sounds like you're able to overcome the recycling headwinds. It feels like yield has accelerated ahead of expectations, but I'm wondering if

Speaker 2

I could just get you to expand on that, if you

Speaker 10

don't mind, Brian?

Speaker 2

Yes, better overall yield, better volume performance was we were able to overcome the commodity headwind as well as the higher interest rates in the Q3. As we now look in the Q4, the big drop really happened recently, so September into October. So again, that's why we've maintained the guide because the out Performance from Q3 is basically funding what we expect now for Q4, and we feel pretty good about the full year guide.

Speaker 10

And then conceptually as you think about pricing for the long term into At 23, obviously, you don't want to drive churn, but it sounds like based on your prior comments that we're going to think about pushing Pricing in municipal solid waste to essentially fund the recycling headwinds Is what I think I'm hearing from you, but can I trouble you to put a finer point on that, please?

Speaker 2

Yes. We think we're always going to try to price ahead of our cost inflation, Jerry, and obviously, commodities are a headwind on that front. But how we don't think about it is because now there's a short term headwind that we're going to go out And go put a bunch of price in the market that we could be destructive from a long term value creation with our customers on that front. So we feel good, like I said, into 2023 and even with these headwinds that we're going to have high single digit growth on revenue, EBITDA and free cash flow, given that we're overcoming that commodity headwind, I think speaks to the strength of the business. Yes.

Speaker 2

I mean we talked about the fact that we've seen elevated cost We see that rolling into 2023. And right now we are making our plan as if that cost inflation stays in the business for the full year. So that's where the pricing ahead of cost inflation, that's where that comment is. Now look, if inflation is lower than we think or it starts to abate, then that Could be some upside to our current plan, but that's not how we're going into it. So we do versus our original expectations, we do expect The impact of both lower recycled commodity prices and higher interest rates have an impact on where we thought we were headed as of 9 days ago.

Speaker 2

As we just kind of talked about with Michael, we still think the outcome is going to be very strong, especially in the context when you look at an average growth rate Revenue, EBITDA, free cash flow, free cash flow conversion, we think they're all very strong metrics, all growing.

Speaker 10

Super. And lastly, I'm wondering, can you just talk about the evolution for offtake agreements in Landfill gas, in addition to capital deployed by BP, Kinder Morgan has obviously bought some assets As well, can you just provide an update on offtake agreement visibility? It sounded like the market was moving into the 20s per MMBtu on a Multi year basis, I'm not sure if you feel comfortable commenting on that and how the shape of the market has Well, since the last public update a quarter ago? Thanks. So we're

Speaker 2

still on track And still the same view that we are going to fix a portion of this and play spot on the market with the rest of it, which is going to probably we think the best Balance between maximizing returns as well as predictability over the cycle and managing risk on that. Certainly have alignment with BP on that same philosophy on the back end of these facilities.

Speaker 10

Okay. Thanks.

Operator

The next question comes from Sean Eastman of KeyBanc Capital Markets. Please go ahead.

Speaker 11

Hi, team. Thanks for taking my questions. I wanted to come back to the comment about the couple of those acquisitions that slid to the right a little bit. I'm curious, could you help us With the annualized revenue associated with those, I think we've got 300 basis points kind of locked For rollover with eCall, but just trying to flesh out what that number could ultimately look like?

Speaker 2

Yes. From a rollover perspective right now, that's what we're planning is the 300 basis points of rollover, as John mentioned. There were a couple of deals that We're in the hopper. They still are. They put where we thought they might close in Q4.

Speaker 2

They're now looking like they could be early to mid-twenty 23. So we'll keep you updated on that progress. But right now, we're building the plan with 300 basis points of acquisition rollover. Okay, got it.

Speaker 11

So you don't want to give any hints on the magnitude of those acquisitions that are in the hopper? No.

Speaker 2

We'll tell you when they're closed.

Speaker 11

Got it. Okay. Fair enough. Fair enough. And then I just wanted to make sure I understand The eCall contribution within that bridge to 2023, obviously, we get a full year of revenue.

Speaker 11

But I'm just curious how you guys are thinking roughly about the Growth rate in eCall's top line and I think we've got a lot of different pieces to work with here, but In terms of where we're going to end up on eCall margins this year, what you guys think that will be for the full year next year?

Speaker 2

Yes. So of that 300 basis points of rollover, call it 250 of it is related to U. S. Ecology. If you just think about in the context of Our consolidated company margin, we look at that additional 4 months of rollover having about a 30 basis point headwind on total company margin in 2023.

Speaker 11

Okay, got it. And does that assumes status quo margins for eCall year on year?

Speaker 2

A slight step up as we realize a portion of the synergies again, but for the most part that's going to be in the zip code.

Speaker 11

Okay. Very helpful. Thanks guys.

Operator

The next question comes from Kyle White of Deutsche Bank. Please go ahead.

Speaker 9

Hey, thanks for taking the question. I wanted to go back to pricing. Just curious, are you starting to see any kind of pushback from customers? It seems like everyone 6 months ago was willing to pay higher prices. And now the environment has changed somewhat.

Speaker 9

So curious how those dialogues have gone and if you've seen any kind of pushback that you would you'd mention?

Speaker 2

No, we're still like you said, we put out the highest in our open portion of the business, put out the highest gross price we ever have and have the highest realization rate as a We ever have, which is an astounding number on that back. So pricing is certainly sticking at elevated levels. The only place we've had challenges in small micro markets where we've had some challenges with turnover given labor constraints, Obviously, when you that you're not providing the service that you want in a given market, right, you're going to cause the customers to reconsider and go elsewhere. And so that's why we're into 2023 still planning on relatively elevated inflation levels Because we're running the business forever. We want to make sure that we provide customers world class service and that will keep them staying and staying longer.

Speaker 9

Got it. That's helpful. And then on that, you've talked about this a little bit, Pat. So you think about 2023 and kind of underlying solid waste expansion margins, I think this year you're probably running about 60 basis points 50 basis points to 60 basis points. And so if you're pricing at these elevated levels for inflation Today and that carries into 2023, would that equate to again 50 to 60 with the potential to go Even higher if we're in a more moderate inflationary environment next year?

Speaker 2

Yes. We set across the cycle 30 to 50 basis points Is what we think about doing in recycling solid waste and we'll do that over time right at an elevated level in environmental solutions. Could that creep higher next year if pricing sticks and inflation comes down in the back half? It certainly could. We're not expecting that in terms of building a plan around it, but that would cause that gap to widen and allow for a little more margin expansion in the second half and

Operator

The next question comes from David Manthey of Baird. Please go ahead.

Speaker 12

Yes. Thank you. You previously outlined that your revenues have about a 90% correlation with housing starts on a 1 year lag. Is it correct to say that you believe that this very strong pricing and maybe some environmental solutions can change that historical correlation? And Just either way as starts have clearly been declining and mortgage rates continue to surge, are there any incremental actions that you're eyeing relative to the back half of next

Speaker 2

You're? Eying as far as because again, look, that's been a historical correlation. But again, I think that's been in a, Call it a relatively stable macro environment. And we're we've been in anything but kind of had these puts and takes with So again, at this point, as John mentioned, we're going to continue to price in excess of cost inflation. From an overall demand perspective, again, we've actually seen the demand very strong throughout 2022.

Speaker 2

We're not really seeing any signs of that abate. So again, that's how we're building our plan. Growth levels probably won't be as strong as they were or certainly won't be as strong as they were in 2022 just Because we were still recovering units from the pandemic, but we still expect underlying unit growth in 2023 year over year.

Speaker 12

Got it. So maybe directionally you still think there's some correlation there, but not necessarily of

Speaker 2

the magnitude depending on start This is what I'm hearing.

Speaker 12

Could we talk about the interest rate? You said 1% change in rate is $36,000,000 in interest What was the reference rate in the Q3 from which to build to the Q4 in 2023 then?

Speaker 2

Yes. So again, right now, what we're expecting is another 125 basis point increase, right, in the Q4. That's how we built Our plan and then that being relatively stable throughout 2023. If you think about what that means relative to where we were Exiting Q3, that's a good 125 basis points for the when we think about where we are in Q4, a good 100 and 5 basis points from where we were exiting Q2. So the impact of that as we think about year over year is the $70,000,000 Increased in total interest expense, which is about a $50,000,000 increase to cash flow, once you net out the related taxes.

Speaker 2

Okay. Thank you.

Operator

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

Speaker 13

Hi, good afternoon.

Speaker 2

Good morning, Stephanie.

Speaker 13

I wanted to touch on your tech investments in digital tools. I appreciate the update on the RISE platform. It would be helpful if you could share, I don't know, any KPIs There are benefits that you're seeing from the early rollout of those tools on the efficiency side. And as we think to 20 3, kind of what's in the pipeline from the digital tools and some investments that might be

Speaker 5

in the works?

Speaker 2

Yes. We've certainly seen over the last 18 months productivity benefit, which allows us to get more work done in the same amount of time With great customer service and doing it safely primarily our primary value for our drivers. So we probably from a cost standpoint, think we've taken out almost $50,000,000 at this point and we think over the next 18 months we've got another $50,000,000 that we can take out of the business as we get full Deployment and full utilization of this and then when you connect it back to the customer, all that information allows us to communicate with the customer. With this TrackMyTruck we talked about, that allows the customer to see where we are and when the pickup is going to occur. And it not only allows in some cases And to look for themselves, right, where the vehicle is and when the pickup is coming.

Speaker 2

But even if they decide to use a different channel and call our customer service center, And we're able to have our agent look up there and give the customer not it will be there tomorrow or arranged, but give them a far more precise time That the truck is on the way and gets the customer assurance. So a lot of what we get is that, right? We run so precise that we are there within A half hour, 45 minute window every week or multiple times a week for a customer. And so when we miss that window, even if we're going to be there that day, The customers call and their concerns, so this allows us to provide better information, take cost out of the system and we're not going to talk about those today, but you're going to see more innovations come off that

Speaker 13

Great. Thank you. And then just touching on the M and A side, maybe on the traditional waste, are you Any changes in demand or interest levels in this environment?

Speaker 2

No, I think the pipeline is certainly strong and there's significant willingness to sell. We're obviously maintaining a lot of discretion, right? Some companies don't fit us from a profile standpoint. From a value standpoint, they might not be a good fit for us, so we remain very discriminating in terms of what we buy, but the pipeline is Very, very strong. It's getting harder to do business.

Speaker 2

If you think about the digital investments we just talked about, right, that's becoming a second moat, Not just the post collection infrastructure. All of those investments we make are very expensive. They take a lot of time. They take a lot of expertise. That makes it tough.

Speaker 2

Or the current labor environment makes it more challenging. The current supply chain being constrained, We're only slightly delayed in deliveries of equipment because we're a great customer for our suppliers, right? We buy trucks year in and year out, Where some of the smaller players will go years without buying and try to buy in the spot market, well now they're locked out. Those factories are full and they're at the end of the line. And so you property at labor and those people you hire have to drive old equipment that's in need of repair and or replacement, That's a big advantage for us to take over those businesses.

Operator

Understood. Well, thank you so much.

Speaker 3

Yes.

Operator

The next question comes from Michael Spinegar of Bank of America. Please go ahead.

Speaker 3

Hey guys, thanks for squeezing me in. Brian, you guys just did on a year to date basis, adjusted free cash flow of 1.67, really strong. I think your guide is 1.7 or so. You might have touched on it earlier. Is there anything I'm missing On the Q4 that we should be aware of why you're not raising the free cash flow outlook?

Speaker 2

Yes. So, Mike, I had actually mentioned it in the remarks. So the CapEx that we spent year to date, so through 3 quarters And the cash interest represents only about half of our expected full year spend. So in the Q4, we expect portion amount of both CapEx and cash taxes relative to the average you've seen. So that's why you see a relatively modest Q4 contribution and why we've maintained the guide as it is on free cash flow.

Speaker 2

Some of that, as John mentioned, Accelerating some of the investments in Polymer Center throughout the year, some of the things we've done in order to fund this outsized growth. Right. So you can reasonably expect a little bit more CapEx than we originally anticipated, partially being offset by a little bit less cash taxes than we originally anticipated.

Speaker 3

And I guess, yes, Brian, just a follow-up with that and to put a finer point, do you plan to grow your free cash flow next year? Will that Growth be in line to EBITDA growth, because obviously in the context of where you guys are kind of targeting your free cash flow conversion over time? Thank you.

Speaker 2

Yes. First question, yes, we definitely expect to grow our free cash flow. And yes, it should be relatively in line with the growth in EBITDA. We would have expected to grow it a little bit more. Obviously, the impact of interest expense and recycled commodity prices impacts that, but we are fully expecting

Operator

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

Speaker 2

Thank you, Andrea. I would like to thank the entire Republic Services team for their efforts and commitment to driving lasting value for all of our stakeholders. Have a good evening and be safe.

Operator

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

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