Republic Services Inc (RSG) — Q4 2020 Earnings Call Transcript

Hello. I would like to welcome everyone to Republic Services' fourth quarter and full year 2020 conference call. Don Slager, our CEO; Jon Vander Ark, our President; and Brian DelGhiaccio, 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 actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 22, 2021. 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 Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with the recording of this call are all available on the Republic website at republicservices.com. I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to Don.

Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. We are extremely proud of our strong finish to 2020. We further proved our ability to overcome adversity and execute in a challenging environment. 2020 tested the company’s foundation and the team repeatedly stepped up to the task at hand and demonstrated the strength and resiliency of our business. Through their hard work, dedication, and commitment, we delivered record-setting operational and financial results. We outperformed expectations for the year and even exceeded the high-end of the original guidance we provided last February. During 2020, we delivered adjusted earnings per share of $3.56, which represents an 8% increase over the prior year, generated $1.24 billion of adjusted free cash flow, even after repaying all deferred payroll taxes, expanded EBITDA margin 130 basis points to 29.4%, improved free cash flow conversion to over 41%, increased customer retention rates to an all-time high at just above 93%, and achieved record-setting safety performance. Profitable growth remains our number one strategic imperative, and we continue to believe that investing in acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value. We prioritize acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles. In 2020, we invested more than $600 million in acquisitions. Our acquisition pipeline remains full and we expect 2021 will be an equally robust year of activity. We anticipate the year will start strong with Santek expected to close by the end of the first quarter. As part of our balanced approach to capital allocation, we returned $620 million to our shareholders through dividends and share repurchases. Turning to 2021, we expect another year of record-setting performance. Specifically, we expect to deliver adjusted earnings per share in a range of $3.65 to $3.73 and generate adjusted free cash flow in a range of $1.3 billion to $1.375 billion. We believe our strong results exiting the year provide the momentum to further grow in 2021 and clearly demonstrate our ability to create lasting shareholder value.

Thanks, Don. Throughout the fourth quarter, we continued to see improvement in the business and reported positive combined growth from average yield and volume for the first time since the beginning of the pandemic. During the quarter, total core price was 4.6%. This includes open market pricing of 5.4% and restricted pricing of 3.3%. For the full year, core price was 4.8%, which represents the highest level of pricing in the last 10 years. Average yield for the fourth quarter was 2.5%. Average yield measures the change in average price per unit, which considers the impact of customer churn. Looking forward, we expect average yield to remain strong at approximately 2.5% in 2021. During the fourth quarter, volume decreased 1.8%. This compares favorably to the 3.4% volume decrease we experienced in the third quarter with all lines of business showing an improvement from Q3 levels. Fourth quarter small container volume decreased by 3.5%, which is a 130-basis-point improvement from the third quarter. Fourth quarter large container volume decreased 3.4%. Volume performance was relatively consistent between the permanent and temporary portions of this business. Total landfill volume decreased 2.4% versus the prior year. This included an increase of 1.7% in MSW and a 1% increase in C&D, which was offset by a 9.8% decrease in special waste. Our pipeline for special waste volume remains strong. Looking forward, we expect the gradual improvement in the economy that we saw during the second half of last year to continue, leading to the volume growth of 1.5% to 2% in 2021. Next, turning to our environmental solutions business. Fourth quarter environmental solutions revenue decreased $22 million from the prior year. This resulted in a 90-basis-point headwind to total revenue growth. This was primarily due to a decrease in drilling activity and delays in in-plant project work. Looking ahead, we believe our environmental solutions business can experience above-average growth rates. We are particularly focused on the downstream business where customers are looking for integrated solutions, and we can leverage our broad capabilities and sustainability platform. Turning to recycling, recycled commodity prices increased 67% to $110 per ton in the fourth quarter. This compared to $66 per ton in the prior year. The benefit from higher recycled commodity prices was partially offset by a 3% decrease in inbound recycling volume. Next, turning to margin. Our adjusted EBITDA margin in the fourth quarter was 29.9% and increased 150 basis points versus the prior year. We successfully managed our costs for changes in underlying demand and more than offset the decline in revenue due to the pandemic. This was enabled in part by the implementation of our RISE dispatch platform, which was a critical tool to adjust our costs for rapid changes in volume. We are accelerating the use of technology to drive productivity improvements and efficiencies as well as improve the customer and employee experience. I'm especially proud of our safety results. During the quarter, we achieved record-setting safety performance by reducing safety incidents 21% versus the prior year. This drove a 14% decrease in risk management costs. For the year, EBITDA margin expanded 130 basis points to 29.4%. We believe we have found a new level of performance and plan to further expand our margin from here. We expect an EBITDA margin of approximately 29.5% in 2021. Finally, in 2020, we published our first year of progress to our latest long-term sustainability goals. These goals address our most critical sustainability risks and opportunities and are aligned with the UN sustainable development goals. We believe these goals have the potential to significantly benefit the environment and society, while enhancing the foundation and profitability of our business over the long term. As part of our commitment to reduce carbon emissions, we have taken a leadership position in the industry to embrace electrification. We believe this emerging technology will be the preferred choice to power recycling and solid waste trucks and equipment in the future. In addition to our ongoing electric vehicle pilots, we recently made a minority investment and entered into a strategic alliance with Romeo Power to further explore electric solutions for our fleet. We remain committed to making further progress against all our sustainability goals in 2021 and beyond. Our sustainability performance continues to be well-regarded, as Republic Services was named to the Dow Jones Sustainability World and North America indices for the fifth consecutive year. Additionally, we were named to Barron's 100 most sustainable companies list for the third time. I will now turn the call over to Brian.

Thanks, Jon. Adjusted EPS for the fourth quarter was $1. This represents an increase of $0.12 or 14% from the prior year. Adjusted EPS for the year was $3.56. This performance was $0.16 above the high-end of our guidance range. Approximately $0.07 from this resulted from operational outperformance and $0.09 was due to favorable tax items. Our adjusted EBITDA margin for the fourth quarter was 29.9% and increased 150 basis points versus the prior year. This included underlying margin expansion of 130 basis points and a 20 basis point benefit from net fuel and recycled commodity prices. SG&A expense for the fourth quarter was 10% of revenue, an improvement of 110 basis points from the prior year. This level of spending reflects our effective management of discretionary costs, while continuing to make investments to drive growth and generate efficiencies in future periods. Adjusted EBITDA for the year was 29.4%, an increase of 130 basis points versus the prior year. The outsize margin expansion is a direct result of pricing and excess of our cost inflation and dynamically flexing costs to optimize our cost structure. We are leveraging new ways of working in utilizing new tools and technology to be more efficient and agile. We also continue to make progress on converting our municipal contract structures to drive increased profitability and ensure an appropriate return on the assets we deploy. Adjusted free cash flow for the year was $1.24 billion and increased $62 million or 5.3% compared to the prior year. Adjusted free cash flow exceeded our expectations due to better-than-expected EBITDA growth and favorable contribution from working capital. Working capital included a one-and-a-half-day improvement in DSO and a two-and-a-half-day improvement in DPO. The benefit we realized from positive working capital added approximately $100 million compared to our expectations, which enabled us to repay all previously deferred payroll taxes. Full year 2020 free cash flow conversion was 41.3%, a 70 basis point improvement compared to the prior year. We expect free cash flow conversion to further improve in 2021 and are planning to achieve mid-40% level performance within the next couple of years. As Jon mentioned, we expect combined average yield and volume growth of 4% to 4.5% in 2021. We expect average yield to remain relatively consistent with our 2020 results even with lower CPI-based pricing. From a timing perspective, we expect average yield to be relatively lower than the full year average in the first quarter. We also expect volumes to improve sequentially, but remain negative during the first quarter. Both expected outcomes are due to the tough prior year comparison. During the quarter, total debt was $8.9 billion and total liquidity was $2.8 billion. In 2020, we refinanced debt to capitalize on the low-interest rate environment and extend maturities. These activities reduced annual interest by approximately $60 million. About half of this benefit was realized during 2020. Our leverage ratio was 3.1 times. We have plenty of capacity to fund outsized acquisition growth while maintaining leverage within an optimal range. With respect to taxes, our adjusted effective tax rate was slightly negative during the fourth quarter and approximately 16% for the year. When you further consider non-cash charges from solar investments, we had an equivalent tax impact of 20% during the fourth quarter and 23% for the year. We expect an equivalent tax impact of 26% in 2021, made up of an effective tax rate of approximately 22% and approximately $90 million of non-cash charges from solar investments. If you normalize for the expected increase in taxes, our 2021 EPS guidance represents high single-digit to low double-digit growth. With that operator, I would like to open the call to questions.

Good afternoon. Thank you for taking my question. You mentioned various points in your prepared remarks, but could you elaborate on the underlying trends you are observing, particularly regarding service increases and the recovery of revenue impacted by COVID? Additionally, how do you see this positioning you for 2021 and beyond? One of your competitors mentioned that waste management is a reopening play, though the market doesn't seem to recognize that. Could you provide some insight into the underlying trends and your long-term positioning?

Sure, Hamzah, thanks for the question. We're feeling really positive about the trends we're observing. You mentioned service increases, and we’re seeing more increases than decreases. The business is recovering, and people are returning to work. We continue to discover new ways to work more efficiently, and we plan to implement those approaches into 2021, anticipating steady growth throughout the year. The pipeline remains strong, which has us feeling optimistic about the business. As we mentioned at the end of last year, we expect to retain some of the efficiency gains from 2020. When it comes to pricing, it has remained stable, with the market maintaining a rational approach. The underlying fundamentals are solid, our market position is stronger than ever, our foundation is robust, and our team is more capable than before. As the market rebounds, we're positioned to capture our fair share. Service increases are consistently rising, and pricing is stable as well. There’s been some talk about inflation, which can be beneficial for our business as it may contribute to a rise in CPI. We're observing significant year-on-year improvements in our operations. Jon mentioned RISE, and we are still experiencing its positive effects as we move through 2021 and beyond. Overall, on the revenue and customer sides, we see all indicators as positive right now. It's a matter of pace, and we will be updating that recovery pace throughout the year. Looking ahead, we anticipate double-digit growth in EPS and cash flow, and we believe we have a strong year ahead.

Hey, good afternoon guys.

Hi, Tyler.

Good afternoon.

Hey, Brian. So, in the implied guidance, how much of a rollover benefit from M&A you have baked in there?

Yeah. From a top-line perspective, Tyler, we've got about 150 basis points of top-line rollover in the guide.

Okay. And to be clear, that incorporates what you spent late in 2020, and what you expect to spend in early 2021, just so to be clear?

But that's just what’s actually closed through the end of 2020.

Okay. Perfect. That's helpful. And then Brian, I know you guys did such a good job on managing margins in 2020. I think you're maybe only guiding to say a 10 basis point improvement. My hunch is, there's quite a bit moving in there. So, can you kind of talk about some of the puts and takes there, maybe recycling to the benefit, core expansion, and then maybe what are some of the takes like maybe healthcare or M&A dilution? Just any help there.

Yeah. Look, I'll give you the puts and takes there in a second, but just kind of to further Don's comment, one of the things I think you have to appreciate is when you take a look at our 2020 performance, we're coming off of triple-digit margin expansion, which I think really differentiates us from our peers, and we're talking about furthering its margin expansion from here, and we don't think we're done after we get through 2021. But if you take a look at the puts and takes what's underlying that 29.5%, we're looking at underlying expansion of call it somewhere in the 50 basis point range. The things that are offsetting that, we've kind of aggregated net fuel and commodity prices together to your point, commodity is a slight tailwind. Actually, the headwind is more on fuel, and that's just really more of a timing thing than anything else. The combination of those two is about a 20-basis-point headwind to margin. And then on the acquisition front, we've got about 20 basis points of dilution in year one. That's predominantly just from the integration and the transaction in the deal costs that we experienced in the first year. So, while it's diluted in year one, we expect those acquisitions to actually be accretive to our average margin performance year two and beyond.

Yeah. No, core expansion, that's kind of the message though.

The core expansion was 50 basis points, and the key point is that this follows significant margin expansion in 2020.

And then the underlying story is that 30% is right there in our sights, Tyler.

Yeah. Yeah. I'm aware of that. Hey, Jon really quick. Do you have any specific thoughts about 2021 MSW landfill yield trends? Do you expect that to maybe step up? And I am curious how much of that line is indexed to CPI? Is it quite a bit?

We are approximately six or seven quarters into a significant increase in landfill average yield, achieving over 3.2% for the quarter, and we anticipate continued strength in 2021. A portion of that volume is indeed linked to contracted business and influenced by some inflation-based index. As the Consumer Price Index rises, we experience inflation, which should create upward pressure on pricing. Additionally, it's become clear that operating landfills is costly, so we need to adjust our prices to reflect the investments made in those assets. This has resulted in upward pressure on municipal solid waste pricing or landfill pricing more broadly in recent years, and I do not expect that trend to change.

Okay. Yes. Appreciate the time. Thanks guys.

Hey, good afternoon. Hope everyone's doing well. Thanks for taking the questions. Just want to talk about on contract now that we're basically a year from when this pandemic started, has any of the terms or contract structures changed as a result as you kind of approach new renewals, maybe particularly on the resi side?

We have successfully revised the terms for over a hundred customers, mainly concerning municipal residential contracts, due to increased weights. Back in April, during the initial shock when everyone was staying home, weights rose by about 10%. This has since decreased to around 5%. However, these contracts are based on time and weight, so as weights increase, we need to adjust our pricing accordingly. As the situation stabilizes and more people return to work, we expect to see more pricing renewals occur during the normal contract cycle rather than outside of it. It's important to note that this aspect of the business operates at a low margin for us and for the industry as a whole. Therefore, we must ensure we are compensated fairly for the work we perform.

Kyle, I think if you actually take a look at the overall average yield performance, you've seen in that residential business, 3% plus pricing the last two quarters, and that's where you're going to see as we renegotiate and change the structure of those contracts, that's where you're going to see it.

Got it. That makes sense. And then on electrification of vehicles, you touched on it a bit in your prepared remarks. Maybe you can just talk a little bit more about your strategy and how it's different from some of your competitors. And then also, I know you had the partnership in the quarter that ended, and I'm curious if there's any kind of ramifications from that? And then just maybe the rationale of the partnership with Romeo.

We believe electrification is an exciting technology for several reasons. It's the only true zero-emission technology available. While CNG offers slight improvements over diesel, it's not significantly better. Electrification is the right long-term choice for us, particularly because our application fits well with this technology; our trucks return to the same location each night, allowing for overnight charging and eliminating range anxiety, which is a common concern in trucking. We are enthusiastic about this technology and remain committed to advancing it. While there may be various paths and uncertainties in achieving our goals, our destination is clear. We're engaged in several relationships and pilots with multiple manufacturers, including the investment in Romeo. Regarding the specific partnership we exited, while it was disappointing, it did not result in any financial loss for us since the contract was structured to be performance-based. Although we were hoping for better outcomes, we support everyone working towards this goal because it's beneficial for the environment. We're confident in our partners and look forward to sharing updates on our progress.

Got it. I'll turn it over. Good luck in there.

Thank you.

Thanks.

Thank you very much. Good afternoon, everyone. Regarding the M&A guidance of $600 million, you mentioned that it could involve tuck-in acquisitions or new growth areas. Can you provide some insight into what the rollover looks like? I'm not sure if you covered that already, but if you could repeat it, that would be helpful. Additionally, are you noticing any changes in the seller pipeline as we progress? Is it evolving on a daily basis in terms of seller availability, or are there specific targeted areas or markets that are becoming more accessible? I'm interested in how the situation is shifting day-to-day regarding seller availability.

Sure, let me start with the numbers regarding the rollover. The rollover, as defined, pertains to what was closed in 2020, which is approximately 150 basis points. The actual revenue contribution from the $600 million will depend on the timing of the deals we plan to close in 2021. Our guidance on top line organic growth combines yield and volume, and for the $600 million, the revenue we generate in 2021 will largely depend on timing.

The pipeline remains strong and well-balanced across our core markets in the recycling and solid waste sectors, which are central to our acquisition strategy. These tuck-in acquisitions are highly beneficial. We are also exploring new geographic areas and have entered different regions over the past two to three years, creating new growth opportunities. Additionally, we are expanding into new areas of the business, such as environmental solutions, which are core to our customer base. We have worked with these clients for an extended period, and they have requested us to broaden our product offerings. They seek a provider that can deliver digital solutions and has a solid reputation for safety and sustainability. We find it appealing to expand our product range through acquisitions in this area as well.

Okay. My follow-up is about capital allocation. Your business has shown remarkable resilience, which is clear. You mentioned three times leverage, and that looks good. There has been a spectrum of approaches from more aggressive to less aggressive. How do you feel you've managed to navigate this pandemic, and what actions can you take to perhaps accelerate growth, especially with the balanced and full pipeline you just mentioned? Is there a possibility of higher leverage now that it appears you can manage it to seize M&A opportunities?

We are navigating the pandemic with optimism that we will emerge from it soon. Regarding leverage, we have consistently communicated our optimal level, which has been maintained around three times over the past few years. The positive aspect is that by acquiring strong cash flow, solid EBITDA, and reliable recurring revenue, we can continue to grow while managing our overall debt level and keeping leverage stable. This approach has been fundamental to building our business. In the past, we have slightly increased leverage for the right acquisition with the intention of quickly reducing it back to the optimal level within 12 to 24 months, and we have demonstrated our ability to do so. If a suitable opportunity arises, we would consider it. We are not looking to overlap with our competitors, but we have ample resources and capabilities, and our team has a proven track record in executing deals, managing transactions through regulatory bodies, and integrating assets. With the evolving market, some competitors may face challenges or regulatory changes that could prompt them to sell. Many times, this coincides with individuals considering retirement after years in business. We aim to be ready to acquire these businesses. We seek to secure a leading position in the market. As mentioned, we have explored new markets where we initially have a smaller share but intend to ascend to the top positions. Our pipeline is robust, our ability to execute and integrate deals is strong, and our balance sheet is solid, positioning us very well for the future.

Yeah. Shows like excellent strategy. Appreciate the time.

Thanks for taking my question and good evening everyone. I would like to follow up on the electric vehicle strategy. Regarding the investment in Romeo, can you remind me whether any technology developed there is proprietary to them, or can it be shared with other manufacturers as you plan to transition your fleet over time? Additionally, you mentioned in your prepared remarks that electric vehicles might be the only zero-carbon propulsion system. How do you view hydrogen fuel cells? It seems they are gaining some traction in Europe for waste-to-vehicle applications. Are you testing anything in that area, or is electric the primary focus for you right now?

Let me start with the second part and then work back to the first part. Yes, there’s a lot of work happening in Europe and elsewhere. Innovation will attract many people to explore different options over time. The investment in electrification by global OEMs is significantly greater than in hydrogen. Most of our hydrogen investments have focused on long-haul applications. We need to remain open-minded as technologies develop. We believe electrification is the right technology for our needs. We're collaborating with Romeo, but they won't be an exclusive supplier for us; that wasn’t the intent of our partnership. However, we are working on proprietary projects together, including a pilot to retrofit one of our vehicles for electrification. Scaling this will require commitment, innovation, trial and error, and testing. Over time, we will adjust and overcome challenges to achieve scalability with the technology.

That sounds like a solid strategy and makes a lot of sense. I have a housekeeping question regarding your comment that environmental should see above-average growth. I realize it's a small part of your revenue stream, but could you provide any insights into what that might look like? Currently, the quarterly revenue has been around the mid-20s for the past couple of quarters. Should we anticipate something like mid-30s moving forward, or any guidance would be appreciated?

Yeah. The comment was a little bit more, I would say, on the top line as it relates. And again, back to the commentary was really that focused on the downstream portion of that business. So, again, as Jon mentioned, that's an area where we really feel like we can leverage our core capabilities. It's what we do already. So it's really just expanding that addressable market to those customers that are really looking for an integrated solution and really from a provider of someone like us. So, that's where we just feel like a combination of both organic growth opportunities, as well as through acquisition that we can see above-average growth rates relative to what we may see on the solid waste side expressed as a percentage.

Thank you. I appreciate the color. Have a great evening, everybody.

Thanks.

Thank you. In your prepared remarks, you discussed the increased use of technology. I assume that this extends beyond what you mentioned regarding EVs. You've previously spoken about the digital platform. Could you elaborate on how you foresee technology impacting your business in the coming years?

We started with our dispatch function, which is the team responsible for building routes and directing trucks each morning, making adjustments during the day to better serve our customers. We've implemented a visual mapping structure that enhances the efficiency and effectiveness of route building, ultimately improving delivery times. Currently, we are rolling out technology across all our vehicles, enabling two-way communication between dispatch and the vehicle. This will enhance the employee experience, reduce costs through increased efficiency, and link to our customer-facing investments that offer service notifications, verification, and reporting. We believe these advancements will help differentiate our services in the marketplace.

Okay, great. That's helpful. My follow-up is regarding the M&A contribution. You mentioned it's 150 basis points from the closed deals, but I assume that does not include Santek. Can you confirm that? Additionally, can you remind us how Santek is performing and what the purchase price for the business was? Thank you.

Yeah. So, you're correct. Right, the 150 basis points that only includes acquisitions, which have closed. So that specifically excludes Santek. And we're not giving any sort of details on what we pay for Santek or for that matter any other deals.

Okay. Fair enough. Thanks so much.

Hey, good evening guys. Looking at your average yield guidance next year of 2.5%. How should we think about potential upside to that figure? Does it mostly revolve around increasing inflation? Is it around more success in your resi and renegotiations? Is it more commercial coming back online? Just what would be the most likely source of upside and looking at that estimate?

There's a variety of factors that affect yield. The Consumer Price Index (CPI) certainly influences our business, particularly as it rises. We have an automatic escalator in our residential sector that will take effect, which we have discussed for the last couple of years as we've adjusted the indices for these escalators to better reflect the solid waste industry. This change has proven successful. Even as CPI improves, we continue to move towards an escalator that is more sensible. We also have ongoing work in recycling. Overall, it's a combination of elements at play, rather than a single factor. However, if CPI exceeds two or two and a half, that would provide a helpful boost for us.

There are two things I would highlight about our construction sector, which appears strong and is likely gaining momentum. This could lead to some upside in the large container segment of our business. We are also very optimistic about our special waste pipeline. We have mentioned that an election year can cause some jobs to slow down due to uncertainty, but our pipeline has remained strong through 2020 and those delayed jobs are now coming through. As our special waste operations increase, we should see some upward pressure on landfill pricing.

Look, on top of that, you think about kind of best ever service levels, right, that speaks well for extending customer loyalty. And that means better pricing and all the rest of it. So, there's just a lot of factors.

Yeah. I was going to say, the one thing to remind you of, of how CPI works through our business, is it lags, right? So the CPI print from 2020 is impacting our pricing in 2021. And even with that lower CPI based pricing, we're talking about margin expansion, strong EPS, strong cash flow growth, as well as improvements of free cash flow conversion. As we start to see inflation, right, that's only going to benefit 2022 and beyond. So, as you start to see those inflation prints, and if you see anything kind of north of two, right, because this year was only 120 basis points, anything north of two is only going to be a solid tailwind going forward.

That was very helpful, thank you. You mentioned last quarter that overtime had decreased by 10% year-over-year. Could you provide an update on that? As we move into 2021, do you anticipate overtime will rise again due to compensation, or have you found ways to manage it more efficiently?

We are still around the 10% range for overtime. I anticipate that over time we will mostly settle into a reduction of 5% to 10% compared to pre-pandemic levels. We have improved our efficiency by adjusting our routes, moving some Saturday and Sunday routes into the weekday routine, which is a more effective way to meet customer needs. Additionally, we constantly monitor our income statement and balance sheet to make the best asset trade-offs. While it’s possible to operate a truck without any overtime at 40 hours a week, that wouldn't represent a good capital trade-off. We believe that running a truck around 50 hours a week is the ideal balance, ensuring we maintain customer service, safety, and employee experience. We plan to retain some of the savings from reduced overtime, which I expect will ultimately settle between a 5% to 10% decrease in overtime.

Yeah. Hi, good afternoon. In terms of pricing, all else equal and longer term, do you have a preference for a CPI based price index versus a fixed 3% increase? And I guess, more broadly if inflation does pick up generally, could you just outline what you see as the major pros and cons to your business?

Yeah. I think on the pricing, I think, the first thing we want to do is we want to make sure that we secure a price increase that more than covers our costs increase. And even in a low inflationary environment, we have a strong belief that our people need to raise every year, but their expenses are going up. And so we want something that covers that cost increase and then hopefully increase a little more that allows us to expand margins over time. Our broad view is that we don't want to get too concentrated on any single indices, whether that be fixed or water through trash or anything else. So we like a balanced approach. As long as it's something better than CPI or a fraction of CPI, which historically the industry has accepted, which we're no longer tolerating, right? We're making sure we're getting paid for the work we do over time.

Water, sewer, and trash rates have consistently exceeded the Consumer Price Index. We believe that a 3% to 4% fixed rate is fair, allowing us to negotiate transparently with our customers and making the necessary commitments to modernize our fleet. This includes paying our employees competitive wages, providing good benefits, and ensuring they continue to show up every day, just as they did during the pandemic. Service providers in America have not received the recognition they deserve; they showed resilience and commitment with minimal complaints. We intend to acknowledge their efforts over time, as a fair rate is effective. The market is rational, enabling us to gradually make necessary adjustments, and we have already rectified a significant portion of our pricing strategy.

Okay. Thank you for that. And you noted that you expect to retain efficiencies that you gained in 2020 going forward, and specifically you outlined overtime as one of those areas. What are the other cost items where you see the greatest retention of benefits that you captured during the pandemic?

Certainly, we are not the only company dealing with travel and expenses. Traditionally, most companies, including us, used to have two ways of meeting: conference calls or in-person meetings, which required significant time, hotels, and airfare. With the rise of technologies like Zoom and Teams, people have found new ways to collaborate. While there are certainly advantages to being together, we anticipate that some of those costs will eventually return, but not all of them. We are re-evaluating how we operate. Additionally, certain roles may be more effectively performed remotely in the long term. We successfully transitioned our team from an in-office to a home environment, and we believe some positions are better suited for remote work, which will lead to real estate cost savings.

Things like that will positively impact turnover continuously, right? We've seen good benefits from that. It's a number of factors, but there is a lot of sustainability involved.

And as Jon mentioned earlier, the benefits from routing that impacts more than just labor, that also impacts maintenance and fuel. And if you look at our results, right, you can see the improvements that we're seeing in that cost as a percentage of revenue across all of those P&L line item.

Okay. Thank you.

Hey, guys. Thanks. I appreciate you squeezing me in. And just on the 1.5% to 2% volume and the fact that Q1 is going to be slightly negative. Can you just help us understand how that’s going to play out through the year? I mean, do we need a pickup in some commercial and some business units in the second half to get us to that 1.5% to 2%?

Yeah. So, Mike, let me take this one. So, again, as we mentioned in the first quarter, we're expecting the performance to be better than what we saw in the fourth quarter of this year, but still negative, right? As we look at the kind of the distribution of volume, we would expect our best volume performance to be in the second quarter and that’s just because of the comp, right? So that’s when we saw the biggest decline in 2020. So, you’ve got the easiest prior year comparison. And then it gets a little bit tougher as you move into the second half, but our expectation is that, it still remains positive. So, again, we are projecting that the economy continues to gradually improve and that is baked into our guide on the top line. But as you kind of said meaningful type volume recovery to get there, I'd say, no. Most of that has already occurred based on what we’ve seen in 2020, with some modest improvement going forward in unit recovery.

Thanks. Thanks, Brian. And just, I know this has been asked before, the $600 million spend, which does not include Santek, it’s translating to 150 bps of the top line. I mean, you guys just did over $10 billion of sales. I'm just trying to translate the $600 million, the 150 bps top line. And I know you are not going to give us acquisition multiples, I get that. Maybe I’m just a little slow here just like getting that $600 million spend, the 150 bps, is that like just very conservative? Are they are like on divestitures? I'm just trying to triangulate some of that.

Yeah. Yeah. So, let me clarify. Okay? The 150 basis points is the rollover impact of acquisitions that closed during 2020. That includes acquisitions that closed in February of 2020. And that’s nothing to do with Santek. Santek did not close by December 31. It is not in that 150 basis points. Based on the timing of when it closed in 2020, you get a rollover benefit, just because you didn’t report a full year in 2020, that’s the 150 basis points. If you were to just annualize the revenue of what we acquired in 2020, it’s over $200 million.

Okay. All right. That’s helpful. Yeah. Thank you.

As we look forward, though, into 2021, our $600 million investment that we’re anticipating, that does include Santek as well as other deals. We are not talking about right now about the revenue contribution that we are anticipating from those deals, because some of it’s just based on when it closes in 2021, how much it will contribute in here.

Hey guys.

Hi, Scott.

I have a question about recycling. We've noticed that commodity prices have rebounded significantly. China has reduced its involvement in the market. Although we are seeing lower prices for most recycled commodities compared to 2017, does this new, more stable environment make you more confident in investing in recycling? What are your expectations now that the situation with China's import ban has settled and commodity prices are changing?

Yeah. There are two things. One, is certainly that even strengthens our result to go into City Hall and get a pricing mechanism that we think works for both parties. Historically, the industry is price recycling on the backend, which has caused a lot of volatility in the business, that is otherwise quite stable. And we think the fairest pricing model that we get paid a fair return to pick it up, a fair return to process it. And then we share in the commodity value in the backend. And as commodity prices get higher, it’s easier to talk to customers, particularly in municipalities about getting that model right. And then long-term, we are bullish on recycling. We see a world that has population growth and material scarcity and a big desire from a lot of different aspects around reuse and recycle. And we think we are going to be a big part of that and a big player in that. We just have to make sure that to be environmentally sustainable, it is economically sustainable and we get a fair return for the work that we do.

Fair enough. Thanks. I will leave it there. Nice work guys.

Thank you.

Great. Thank you, operator. When we look back on 2020, it's clear to see just how instrumental the foundation we’ve built over the past decade has been and enabling us to thrive in the midst of so many challenges. The pandemic's impact on Republic was just like that of the rest of the world, disrupting the lives of our customers, our communities and, of course, our people. But we were able to react from a position of strength, taking care of all of our stakeholders. Our strong foundation did more than just set us apart, it actually allowed us to prevail. We believe our 2020 performance clearly demonstrated the resiliency of our business, and position just well to deliver continued growth in 2021. This momentum is bolstered by an improving economy, as we move into an era of recovery and growth. As always, we managed this business to create long-term value for all our stakeholders while providing essential sustainable services for our customers. I thank the team for their tenacity and their enthusiasm, as we head into this New Year. Thanks for joining us. Hope you all have a good evening and stay safe out there.