Republic Services Inc (RSG) — Q4 2021 Earnings Call Transcript

Hello. I would like to welcome everyone to Republic Services' Fourth Quarter 2021 Conference Call. Jon Vander Ark, our Chief Executive Officer; and Brian DelGhiaccio, our Chief Financial Officer, 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 10, 2022. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of 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 Republic's website at republicservices.com. I want to remind you that Republic management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website. With that, I'd like to turn the call over to Jon.

Thanks Stacey. Good afternoon, everyone. And thank you for joining us. Our fourth quarter performance capped off a very strong year of financial results and operational execution. We outperformed expectations throughout the year and exceeded the high end of our upwardly revised guidance. During 2021, we generated adjusted earnings per share of $4.17, which increased 17% over the prior year, produced $1.52 billion of adjusted free cash flow, which increased 23% over the prior year. Expanded EBITDA margin by 60 basis points to 30%, improved free cash flow conversion by 350 basis points to 44.8% and increased customer retention rates to an all-time high of 95%. Profitable growth remains our strategic priority. And we continue to believe that investing in acquisitions is the best use of free cash flow to create long-term value. In 2021, we invested over $1 billion in acquisitions to further enhance our market position and increased free cash flow. This is the highest level of acquisition investment in over a decade. Our acquisition pipeline remains robust with opportunities in recycling, solid waste, and environmental solutions. Yesterday we announced our agreement to acquire US Ecology. This acquisition propels Republic into a leading position in the environmental solutions space, and provides a platform of high-quality assets and difficult-to-replicate infrastructure. I will discuss this strategic acquisition in more detail before we open up the call for Q&A. In addition to investing in acquisitions, we returned $800 million to our shareholders through dividends and share repurchases. We delivered outsized growth and profitability by executing our strategy. Our strategy is supported by three differentiating capabilities: customer zeal, digital, and sustainability. With respect to customer zeal, our customer retention rate remained at a record-setting level of 95% and NPS remains well above pre-pandemic scores. During the fourth quarter, we delivered outsized revenue growth throughout the business. Core price reached an all-time high of 5.4% and average yield increased to 3.4%. Volumes increased 3.6% compared to the prior year, and acquisitions contributed an incremental 490 basis points to total revenue growth. Full-year combined yield and volume of 6.7% was the highest level in company history, and over 200 basis points above the next highest year of performance. Turning to digital, we continue to make meaningful progress on the rollout of the next phase of the RISE platform. We've now implemented tablets in approximately 90% of our large and small container fleet. With these new capabilities, we generated operational efficiencies, and delivered over 1 million automated proactive notifications to customers last year. We will begin to point tablets to the residential fleet early this year, and expect to be complete by mid-2023. Next, turning to sustainability. We continue to partner with developers to capitalize on landfill gas-to-energy opportunities. We expect four of these projects to be completed this year, with another 14 in our pipeline expected to be completed over the next couple of years. We see an opportunity for another 40 projects beyond the current pipeline. We're also making recycling investments beginning in 2022 to further integrate into the plastics value chain. These investments will provide a platform for future revenue growth with attractive returns and drive a more sustainable role for future generations. We will absorb these investments within our normal level of capital spending. Our sustainability performance continues to be well regarded, as Republic Services was named to the Dow Jones Sustainability Index for the sixth consecutive year. Additionally, our MSCI ESG rating was upgraded to an A, which is the highest rating in our industry. One of the primary factors leading to the upgrade was an increase in our human capital management score. This reflects our strong culture that embraces inclusion and diversity. These strong financial and operational results would not have been possible without our dedicated employees. In appreciation of their hard work throughout the pandemic, we paid each frontline employee a $500 Committed to Serve Award in the fourth quarter. Combined with the award paid in January of 2021, our frontline employees received an additional $1,000 during the year. This brings our total support provided through our Committed to Serve initiative to $50 million since the beginning of the pandemic. The strength of our 2021 results clearly demonstrates our ability to create sustainable value and provides the foundation from which we will continue to grow. That said, we expect another strong year of performance in 2022. Specifically, we expect to deliver adjusted earnings per share in the range of $4.58 to $4.65 and generate adjusted free cash flow in the range of $1.625 billion to $1.675 billion. This represents high single-digit to low double-digit growth over our 2021 performance. It's important to note that this guidance, as well as any assumptions we discussed in today's call, do not contemplate the impact from the pending acquisition of US Ecology. We will provide updates to our guidance if needed once the transaction closes.

Thanks, Jon. Core price during the fourth quarter was 5.4%, which included open market pricing of 7% and restricted pricing of 2.9%. The components of core price included small container of 8.6%, large container of 5.6%, and residential of 4.8%. Average yield was 3.4%, which represents a 20 basis point increase from our third quarter performance. In 2022, we expect average yield of approximately 3.4%. This is an increase of 50 basis points over our full-year 2021 results. Fourth quarter volume increased 3.6%. The components of volume included an increase in small container of 4.6%, large container of 3.7%, and an increase in landfill of 6.7%. We expect organic volume growth in a range of 1.5% to 2% in 2022, which remains well above our long-term average. Moving on to recycling. Commodity prices were $218 per ton in the fourth quarter. This compares to $110 per ton in the prior year. Recycling processing and commodity sales contributed 110 basis points to internal growth during the fourth quarter. We are assuming $187 per ton for recycled commodities in 2022, which is consistent with the full year 2021 average. Next, turning to our Environmental Solutions business. Fourth quarter Environmental Solutions revenue increased $65 million from the prior year. This was driven by organic growth from increased activity and the contribution from acquisitions. On a same-store basis, Environmental Solutions contributed 20 basis points to internal growth during the fourth quarter. Adjusted EBITDA margin for the fourth quarter was 28.1%. This compared to 29.9% in the prior year. Margin performance during the quarter was impacted by a 70 basis point headwind from higher incentive compensation expense, and we expect incentive compensation expense will return to target levels. Margin performance also included a 50 basis point dilutive impact from recent acquisitions, which included deal and transition costs. It should be noted that we pulled forward certain integration costs originally planned for 2022. The remaining impact on margin was primarily driven by a 50 basis point increase in risk management costs. The current period includes a one-time true-up for an insurance captive that increased expense by 20 basis points, while the prior year included a 30 basis point favorable reduction in reserves that did not repeat. We expect risk management expense in 2022 to be relatively flat with our full year 2021 performance. For reference purposes, fourth quarter margin performance at target levels of incentive compensation and excluding the one-time Committed to Serve payment would have been 29.4%. The remaining difference to prior year margin performance relates to the impact of recent acquisitions. SG&A during the fourth quarter was 10.6% of revenue. This represents an increase of 60 basis points over the prior year, which was driven by higher incentive compensation approvals previously discussed. Full-year 2021 EBITDA margin of 30% expanded by 60 basis points compared to the prior year. This resulted from pricing levels in excess of cost inflation and effective cost management, which demonstrates our ability to gain operating leverage in the business. To put our operating leverage in context, we estimate wage inflation net of productivity was approximately 3%. Our average yield of 3.4% covers this level of cost inflation, which is why labor and maintenance were both down as a percentage of revenue for the fourth quarter and for the year. In 2022, we expect EBITDA margin will continue to improve and we are targeting margin expansion of 30 to 40 basis points over our full year 2021 performance. The components of expected margin expansion include pricing in excess of cost inflation, adding 60 to 70 basis points, and incentive compensation expense returning to target levels, adding 50 basis points, partially offset by acquisitions decreasing margin by 40 basis points and net fuel decreasing margin by 40 basis points. DD&A as a percentage of revenue was 11.2% for the year. We expect DD&A as a percentage of revenue of approximately 11.5% in 2022. Year-to-date adjusted free cash flow was $1.52 billion, an increase of $279 million or 23% compared to the prior year. This was driven by EBITDA growth in the business and a reduction in interest expense resulting from refinancing debt. Full year 2021 free cash flow conversion increased by 350 basis points to 44.8%. We are targeting a high 40% conversion level within the next couple of years. Total debt was $9.6 billion and total liquidity was $2.8 billion. Our leverage ratio was 2.9x. With respect to taxes, our combined tax rate and noncash charges from solar investments resulted in an equivalent tax impact of 24% during the fourth quarter. This was in line with our expectations and resulted in a 26% equivalent tax impact for the year. We expect an equivalent tax impact of 26% in 2022, made up of an effective tax rate of 21% and approximately $120 million of noncash charges from solar investments. Let me now turn it back over to Jon.

Thanks, Brian. Before we open up a call, let me provide a little more color on our recent announcement. With the addition of US Ecology’s national footprint of vertically integrated assets, leading disposal infrastructure, and comprehensive capabilities, we are better positioned to serve our customers with one of the most complete sets of products and services. This strategic acquisition provides a platform for additional organic and acquisitive growth, with cross-selling opportunities for existing customers who want a single partner to manage their environmental service needs. We expect this acquisition to be immediately accretive to adjusted earnings and free cash flow, and to create significant value with double-digit returns for our shareholders. We are excited to welcome US Ecology’s talented employees to the Republic team and expect the deal to close by the end of the second quarter of this year. Expanding our environmental solutions business is a strategic priority. And this acquisition is a key addition. That said, the investments we are making are not limiting growth or reducing focus in the traditional recycling and solid waste businesses. This is not an either/or but both/and approach. We plan to make outsized investments in both businesses to accelerate growth and create lasting value. We remain disciplined allocators of capital and will only make investments in organic growth opportunities and M&A that increases intrinsic value and improves returns. With that operator, I would like to open the call to questions.

Thanks so much. I'm sure there'll be a bunch of questions about US Ecology. But I'd like to focus on the core business for now. And starting with pricing. Notice the yield was really strong, especially on a full-year basis. But that core price you called out at an all-time high with noting, the yield was very strong in collection. Just what's your view on post-collection pricing and yield going into 2022? Do we start to see that nudge up as well? Because certainly there's rising operating expenses there just like there is everywhere else.

Yes, certainly, you'll see some momentum in the first couple of quarters. And I think you'll see that momentum accelerate in the second half of the year; a lot of those customers are attached to CPI or some derivative of CPI. And like our collections business, there's a 12 to 18-month lag, so that elevated print from last year will then start to flow through, and you'll see really nice economics on the yield side, especially in Q3 and Q4.

That's super helpful. And that leads into the next question, which was really how to think about the readability or the cadence of yield trends over the course of the year. I know you're not like some peers, you tend to do your pricing increases rapidly through the year. So is that 3.4% full-year number, since you're doing 3.4% here in the fourth quarter? Is that fairly smooth and stable over the balance of the year? Anything that you would call out?

Yes, the same thing, which is the portion of our book that's attached to CPI or something related to that, you will get more momentum in the second half. So I think you'll see really good pricing numbers here in Q1 and Q2. And then you'll see that start to accelerate in Q3 and Q4. The open market side will end up being more ratable, with the caveat that we're living in a very dynamic world, right, and we see inflationary cost pressure. The core thesis of this business is that we are going to price ahead of our costs, right? We did a great job of that last year as costs start to accelerate. And we'll do the same thing this year. Nothing broad-based, right? We look at every market uniquely and dynamically and make sure that our people are getting paid. And then again, we're pricing ahead of our costs.

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

Yes.

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

Yes, let me kind of talk about the incentive compensation piece first, and then we can talk about the Committed to Serve award. So clearly, from an incentive compensation perspective, we put a plan together that assumes target, right? And as you've seen all year long, we've outperformed. And with that came additional incentive compensation accruals which will be expensed in '21, the cash for that will be paid in '22, which is one of the reasons when you take a look at our free cash flow, the growth on a more normalized basis is actually even in excess of what we're presenting, because we've got to absorb that extra cash payment in the first quarter. On the Committed to Serve again, that was a discretionary item, right, that we decided to do, certainly in recognition for the hard work that our frontline employees did during the pandemic. But we are not planning on making any of those additional or incremental awards going forward.

Largely because that's baked into the plan, right? We've got elevated increases for all of our frontline people given it’s an inflationary environment. And again, we're pricing ahead of that. And even with that plan, we're planning to expand margins. So that's why we assume that, again, as the situation moves and becomes dynamic, we'll adjust accordingly.

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

Yes. Hi, good afternoon. Can you talk about the cadence of the margin expansion that you folks are looking for over the course of the year? Obviously, the fourth quarter will have the easy comp that you just mentioned. But what about as we head into the first quarter? If we apply normal seasonality, it looks like your margins might be starting to year down 50 to 100 basis points year-over-year in the first quarter unless we get outsized pricing contribution, is that right? Can you just talk about the cadence of the year-over-year margin performance that you're looking for?

Yes, Jerry, you're on the right path there. I would say in 2022, we're expecting normal seasonality with respect to both the revenue as well as the EBITDA margin. I think when you look at the last two years, right, in '20 and '21, you had anything but normal, right? So you really have to go back and look at that seasonal cadence prior to that, which again, when you think about it seasonally we tend to see our highest revenue margin performance in the third and second quarters, Q4 thereafter. And then usually Q4 is a little bit the lightest for the year, really for two reasons; you've got the winter months. So you're not seeing that uptick in particular landfill volumes, as well as you've got the highest percentage of taxes in the first quarter. Payroll taxes, right?

Yes, appreciate it. And then separately on the acquisition announcement, can you talk about the path to get to double-digit returns? What amount of bolt-on activity do we need? Or how much more do we have to go from a synergy standpoint to earn that double-digit return? That typically for transactions that size takes most companies at least three to five years to get to.

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

Hey, good afternoon. Just real quick, Brian, but to be clear, the margins in '22 are assuming a normal like 100% incentive comp accrual?

That's correct.

Okay.

Hold the fire. Yes, we'll take, Tyler, but we're planning on 100% that is correct.

Right. Okay. That's helpful. And then I know while we're on the talk of margins here, I know in the US Ecology release, you laid out that 47% free cash flow conversion by '24. But you didn't really make any mention of the margin targets. Now I get that US Ecology is probably, I'm going to say 70-80 basis points dilutive to margins, but does anything preclude you from achieving those call it 32% margins longer term? And is that something that investors should still think could be a reasonable expectation like mid-decade?

Yes, Tyler, absolutely in the solid waste and recycling side, right? We're on our marks, right? And we're going to get there. And you're right, this acquisition right in this space in general has a slightly different value creation formula, a little bit lower margins, but less capital intensity, right. And so that starts to converge more into free cash flow conversion. You'll see us move later in the year to segment reporting, right, that calls those things out and really makes it clear to the investment community what kind of progress we're making on each front. And so just arithmetically right, we'll get there just slightly slower than we would have otherwise. But our sights are still set toward that target over time.

Okay, yes, segment detail would be helpful. And then Jon, I think it was only 90 days ago, though, you mentioned that you wanted to get environmental services up to a $1 billion franchise, over I think the next like three years. Clearly pro forma, this is going to get you there. You mentioned a platform for deals in the release, you mentioned it again, on this call, but like, where do you envision the business longer term? Are you targeting a certain percentage of sales that you maybe don't want to exceed or just big picture there?

This deal represents a very unique set of assets that puts us in a highly advantageous position. We don't anticipate finding another deal of this size or scale in the future, and we are committed to pursuing it. Once we close and integrate it, we will connect our team to the systems and ensure we are performing above expectations. Additionally, we see opportunities for other deals to complement this as we aggressively expand our solid waste and recycling business. While we don't have a specific target for what percentage of the business this will comprise, the majority will still come from our traditional recycling and solid waste operations, and we plan to continue growing both aspects as we move forward.

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

No, it's two broad fronts. Think about half of it as duplicative corporate costs, right? This is costs of being a public company, IR treasury and all the normal things that you would think to take out. And then the other $20 million would come more at the field level because you see, we have a Gulf Coast region, right? We have a Northeast Region and the environmental solutions business, right? They have a national footprint. And we'll obviously think about harmonizing and integrating those. Right, that's a relatively small number, right? When you think about it in terms of cost takeout because we think this is a huge platform for growth for us, right? We're not going in to cut and flip or buying to keep and build. Now, as we go and we learn more, if there's more opportunities to do things a bit more efficiently, we'll certainly take advantage of that.

Okay, all right. Appreciate the time.

Yes, and I think Tyler the other thing we do just the $40 million is exclusively cost synergies; there are no revenue synergies baked into the plan.

Thank you very much. How to ask two questions and get 10 of a minute. You ended the year at 44% free cash flow conversion; your guidance is up almost nine. But cash flow from ops are only up about 5.5, capital spending is almost flat. So I'm trying to understand what's happening in capital spending. What do you think the cash conversion ratio does in '22? And is the cash flow from ops as a percentage of revenues kind of the same in '22 as it was in '21? How was that to combine on question?

Yes, so Mike, let me kind of put it to you this way here. And I mentioned that we've got the additional cash incentive compensation that we're paying in '22. That's related to '21 performance. It's about $40 million of extra cash, which impacts free cash flow conversion by 100 basis points. So we think we're going to be able to from an overall perspective get to that 45% plus even absorbing that $40 million extra that extra 100 basis points of free cash flow conversion.

Okay. And that'll show up in the cash flow from ops number.

That’s cash for ops, right and working capital where you see it.

Got it. So why is capital expenditure relatively flat compared to last year?

Well, remember we talked about in the current year, right? So again, if you take a look at our original guide, and then what we ultimately spent at the midpoint of that, we were kind of $90 million more of CapEx. So we had the ability to fund additional growth. So again, let's take a look at our volume performance. So from an organic perspective, we had additional growth opportunities, as well as pulled forward some capital that was originally going to be spent in '22. So that's why it's relatively flat in '22, is because some of that spending actually happened in '21.

Got it. That's what I thought it was. Just wanted to make sure that was clear. And then, Jon, I think it is important for everybody to understand that don't focus on margins focus on the discipline of Republic's cash on cash returns. And just to put it in perspective, I mean, you now have about $1.3 billion in ES revenues. And what do you got maybe, two, if you get US Ecology close, two and a $2.5 billion invested. And all like-to-like basis, the same investment is probably 2x on a per revenue basis in garbage. So that's the way people want to put it in perspective, am I thinking about that correctly?

Well, I probably have to do a little math offline, Michael to confirm or deny your thesis. But I think broadly speaking, you're in the right zone, which is people get very caught up in the margin. And listen, we understand the margin as a way to measure the business. And we don't run away from that, we own that. And we've done a great job of expanding margins the last couple of years, right, kind of creeping up on 300 basis points as we get into next year, right? But we don't run the business for the core; we don't run it for any single metric, we run it for the long term and intrinsic value. So that's where cash on cash returns. And that's where value creation comes in. And so a business that might have a slightly different optics, which is structurally a little lower margin, but less capital intensity, that free cash flow conversion is a better metric that serves to harmonize those two things, and get much closer to returns or a view toward returns. And, look, we think there's margin opportunity in this business, right? We think that we're going to continue to look for efficiencies, and we're going to think about make sure that we take our mindset around revenue management and our skills and capabilities and our belief that we have to price out of our cost, right? and be expanding margins that allows us to reinvest in the business, right, and take care of our customers over time.

Yes. Thanks very much. Good afternoon, everyone. So just touching on that. I know, you just kind of said it. The answer to my question being how do you grow margin? And how do you take advantage of that margin opportunity in the environmental services business? You said, both synergy and pricing, but if you were to kind of frame it, is it 50:50? Or is it really a business that needs to be repriced and properly priced to get those margins up? And/or is it more on the cost synergy side that you're looking to get those margins higher?

Yes, I talked about the $40 million that we have right in front of us. And then, of course, as we go, and we'll look for opportunities. Now, we're acquiring not just assets we are acquiring deep expertise, right, in the hazardous waste value chain, and around compliance and operations and commercial capabilities. And so we're very, very mindful of that. And the last thing I want to do is step over a $20 bill to grab a nickel. So we're not going to be very short-term focused, we're going to think about long-term. And as we find more and learn more, right, we'll certainly report out on that. On the revenue side, but we haven't put anything into the pro forma, right, we see opportunities across multiple fronts. And strategically, the reason that we're into this business is because of the connectivity of solid waste, and recycling customers that have asked us to go here, they want a one-stop shop, they want somebody who we now think we will have the leading set of products and services in the environmental services space to serve our customers. So the cross-sell opportunities become immediate, and we've seen that with ACV and any other previous acquisition that we've done in this space. We talked about the following acquisitions and that being a real opportunity. We think there are really interesting capital investment opportunities on the post-collection side of that business that allow us to compete more broadly right across incineration and some other parts of the value chain we're excited about. And then plus we will bring our skill and capability of revenue management to the table understanding that there is no work for free. So we'll look at every individual job that we do and make sure there's sufficient returns on that over time again, that becomes important to allow us to pay our people and to reinvest in the business. And we haven't quantified any of those yet, right, because we're thinking concentrate, and hopefully closing this transaction and integrating our colleagues. But we think there's a lot of upside over time.

That's great color. And then my second question here is on the scalability of future acquisitions, what solid waste versus the environmental services side? Is environmental services, is that a much more scalable? Where integration of acquisitions, future acquisitions is better, it’s easier to integrate, it's much more upside, is that rather that way on solid waste more. So I'm looking to gauge where your opportunity set and incremental dollar will be spent now, if there's a lot bigger opportunity in one of the buckets through acquisitions than the other one?

Well, I think the great news is that we're not capital constrained, right? So that we don't to have $1 and choose where to put it. We look strategically, where's the fit? And does it meet our discipline returns criteria? And then if it's both, we invest in both over time. I think this space looks very similar to what's always in recycling looked like a decade or more ago where there's a lot of fragmentation. And we've already seen this rolling in smaller players, right providing a ton of synergy. And we've got a pipeline that we see sometimes building on a regional footprint, sometimes it's adding further to our product and service offering that will be great fits. And our pipeline and acquisitions is robust on both fronts.

Hi team, thanks for taking my questions. I just wanted to make sure I understand the price compared to underlying inflation expectations for the year. If we're expecting 60 to 70 basis points of margin expansion from pricing ahead of cost inflation, and the average yield guidance is 3.4%, does that imply we have an assumed inflation rate of around 2.75%? Can you help clarify those assumptions?

Yes, so Sean, remember one of the things you have to keep in mind when we disclose average yield, we're using total revenue as the denominator. When you take a look at where we price and you look in that solid waste business, if you did an unrelated business, it would actually be 70 basis points higher than our 2021 performance and about 20 to 30 basis points higher on total revenues. So that's the way you have to put it into context. So the 3.4%, you got to make 3.6% or 3.7%, call it, based on related revenues. And you look at that pricing in excess of cost inflation that would imply closer to a 3% inflation, cost inflation. The wage and benefit number, there's probably slightly higher, but keep in mind, we're not talking a lot about it, but we're still getting a lot of productivity benefits from RISE. And that's one of the great stories through the pandemic; it's allowed us to keep paying our people as their bills go up while managing the cost structure because we're just getting more efficient at the work.

Hey, thank you very much. I just had a question around as you think about synergies on revenue from hazardous waste and solid waste. Do you have a sense of how many customers can subscribe to sort of both services? And then also in the past, there have been people that have looked at medical waste and solid waste together. And that hasn't worked quite out. What's different about this space? Do you have a lot of manufacturing customers that sort of are asking you to do both? Just give us a sense of revenue synergies? You don't have to quantify it just help us understand that?

Yes. So I think versus your previous thesis, I think, when you start with this sounds like an interesting bundle, let me try to go sell it right, that may or may not work, right, we start with asking the customer, what they want, what they need, and how they want to buy, and have worked our way back into this. So it's true, certainly for our broad set of industrial customers, right, who produce an ongoing recurring set of waste streams. And this really has accelerated over the last decade; they want fewer people in their plants. And second, they're taking a very hard look at the sustainability footprint of their supply base, right? that's a big part of their sustainability story. And so people who have the ratings we have, who have the record we have become really meaningful for them. And keep in mind, we're still a very, very small percentage of their overall cost structure. So the idea that they'd be willing to pay a little bit more for somebody who can handle their needs compliantly and provide the speed they need, right? that's the value proposition. And that's what we've seen proven out with the ACB transaction immediately, right? And we think we'll get that to just at a much bigger scale with a US Ecology transaction. It also applies to some event-type work. I think about the infrastructure bill and brownfield sites remediation, the same thing, you have a contractor there, but who's really unwatched to understand speed, and a single provider that can handle all the different waste streams becomes a really big strategic advantage.

Can you provide insight on the situation following the acquisition of US Ecology? What is your market share in the hazardous waste sector and what potential do you see for growth? I'm aware that US Ecology has a strong focus on landfills and event work, and that they have taken on significant debt for the NRG business. How are you evaluating this portfolio? Does incineration hold significance? Is there more emphasis on hazardous waste landfills? Is NRG considered a valuable business? Please explain your approach to the portfolio, noting that they operate several businesses. Hazardous waste represents a large market with numerous competitors and includes captive incinerators, which differs greatly from solid waste, as you surely understand.

Certainly. It begins with their historical bid related to a hazardous landfill site post-collection, which includes TFTs and other components. These five sites provide them with approximately a 36% share in the hazardous post-collection market, highlighting the strength of their business, which we find very promising. They acquired a company named NRC, primarily focused on field services and reinforcing the idea of proximity to the customer, which we support and have confirmed works effectively. We experienced this with the ACB deal and observe similar results in our Gulf Coast region over time. The NRC acquisition also introduced additional business types, including some operations in Europe and a marine standby service for oil spill recovery. We will assess these new aspects to determine how they align with our existing business, whether through customer connections or asset sharing. We approach this with an open mind, considering what can be developed for growth while also evaluating if certain components might be better suited as standalone operations for others.

Good evening. Thanks for taking my question here. You called out, you talked about some of these revenue synergies and as you build up your environmental solutions capabilities, the vertical integration, and I guess you spoke a little bit about this. What does the customer get out of it? It sounds like you might give them better service under one umbrella? And maybe it's just not clear to me why that would be. But do they also have like a cost savings? Like does a bundle program offer a level of pricing discount that they wouldn't get it? These are two different vendors, just what does the customer get out of this having this all come out of Republic versus maybe dealing with Us Ecology and Republic separately, let's say?

Yes, I know the thesis and it's true in some industries, where hey, the more you put together, the more you bundle, the more price pressure you could be under. And we see this in our business today, actually, that the more products a customer and services a customer buy, the average price per product or service goes up, not down, right? And keep in mind waste and recycling broadly, are a very, very, very small portion of a customer's cost structure. If you run a manufacturing facility, you think first about all of your direct costs could be steel, or copper, anything else, and then you think about your labor, and then you think about your SGA costs of IT and everything else. Waste and recycling, right, we're talking about basis points, right on someone's overall cost structure. So a small price premium on a very small number is still a very, very small number. So for them, it's around compliance, right? Think about producer liability, right? When they produce a waste stream, especially more complex and complicated ones, they have the liability of that forever. So having somebody who's going to handle that in a sustainable and appropriate manner is of enormous value to them, the speed right of being able to get things out of their facility, and keep the container empty, because a full container can sometimes shut down the manufacturing process. So there's enormous value created by speed, ease of service, right, digital interface, and billing. And those are all pieces that we start to put together for people. So that's the value proposition for customers.

No, that's a great clarification answer. And as you know, the compliance has got to be a big part of the value proposition. My second question, maybe it's more of a philosophical question. But the industry and you're seeing it yourself, you're getting strong pricing, the covering inflation, the churn is at record lows as well, so you kind of get the best of both worlds. But I guess what trend level would force you to reevaluate your pricing strategies? You said 95%, I think it’s a Q4 number like, at what point or what level of churn would you readjust the pricing you're putting out into the market in order to maintain a certain level of market share or volume?

Well, we look at that all the time, right; we understand and we're very sophisticated with pricing, both pricing new customers as well as pricing existing customers. And the latter becomes more important for us, obviously, because we have such a long customer tenure, right? That's what that high customer retention drives are underneath that long customer tenure. And so we have all kinds of experiences with customers around test and learn, right, we take A and B sampling, in terms of understanding a price that customers are willing to pay, and then at what price does that start to drive churn, right? and start to drive defection. And there's an incredible amount of science underneath that process that's been developed over the last two decades. So it's really not the top-down number we look at. And if we go to 92, we change pricing across the board or the opposite direction, right? It's much more surgical almost at a customer by customer level, right? And that's what produces the pricing number while driving great volume growth.

Yes, thank you very much. Two quick ones here. Jon, you mentioned at the beginning something about forward integrating into the plastics supply chain; could you tell me what that means? I'm completely clueless about that. And second, on the US Ecology deal. It looks like margins, free cash flow and returns are lower than core Republic out of the box here, organic growth may be a little bit more attractive and the platform for bolt-on acquisitions seems to be one of the best attributes of it. Could you just compare and contrast sort of the pipeline at US Ecology, you've gone through your due diligence, talk to them about deals versus what you know about the average MSW deal.

Yes, sure. So on plastics, listen, the world has a single-use plastics problem, right? And you don't have to read too many websites or magazines or watching television shows to figure that out. Now, it's a very different nature of those firms across geography. But in the US, the problem is right circularity right, we produce single-use water bottles or anything else. And we don't capture enough of those. And that plastic ultimately gets lost or gets downgraded, right? And there's huge pressure on the CPG companies to drive more reusable products. And rather than just using virgin plastic, and the constraint, and all this is aggregation, and supply. And so we are uniquely positioned in the value chain, because we have that material. Today, that value chain isn't very well constructed. So you have products that moves very inefficiently, we sell that product for a relatively low value for what it's ultimately worth when it returns into the hands of the CPG companies. So a lot of dialogue, a lot of discussion going on across every stage of the value chain, right? But we think where we've got an opportunity to take a next step, and move forward with some pretty simple processing that is going to allow us to capture a higher selling price, and take more volatility right out of those sales through longer-term contracting. I'm not going to get any more detail right now than that. But stay tuned here, because I think in the next few months, you're going to hear far more color on that topic. And then on US Ecology, listen, we have a really robust and capable business development team, both out and geographically dispersed, as well as here in Phoenix that maintains a perspective on every company big and small and builds a pipeline. So we've been working on this for years on the environmental solution side of the business. And have we're very disciplined buyers, very patient, but we've had discussions right with dozens of companies. So this isn't talking to US Ecology and saying what's in your pipeline, of course, we'll do that. But we have our own robust pipeline, right that we know will fit in well, right to the US Ecology platform, right post-closing.

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