Republic Services Inc (RSG) — Q4 2022 Earnings Call Transcript

I would like to welcome everyone to Republic Services fourth quarter 2022 conference call. Jon Vander Ark, our CEO; 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 our actual results. Our SEC filings discuss factors that may cause actual results to differ materially from expectations. The material 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 October 27, 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 the discussion of business activities, along with the recording of this call, are available on Republic’s website at republicservices.com. I want to remind you that Republic’s management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website. With that, I would like to turn the call over to Jon.

Thanks Aaron. Good afternoon, everyone, and thank you for joining us. The Republic team finished the year strong by executing our strategy designed to profitably grow the business. We outpaced expectations throughout the year, delivering results that exceeded our full year guidance, even in the face of increased volatility in the broader marketplace. During 2022, we achieved revenue growth of 20%, including 10% from acquisitions; delivered adjusted EBITDA growth of 16%; generated adjusted earnings per share of $4.93, an 18% increase over the prior year; and produced $1.74 billion of adjusted free cash flow, a 15% increase over the prior year. We continue to believe that investing in value-creating acquisitions is the best use of our free cash flow. We invested $2.7 billion in acquisitions in 2022, including the acquisition of US Ecology. The integration of US Ecology is going well, with cost synergies tracking ahead of plan. Revenue contribution from US Ecology outperformed our expectations by nearly $50 million for the year, with almost all of the overperformance occurring in the fourth quarter. We continue to adjust prices related to US Ecology and our broader Environmental Solutions business to better align with the capital invested and resources deployed. Pricing actions taken to date have been successful as our customers recognize the high value of service we provide. Additionally, we are building momentum cross-selling our complete set of products and services, with approximately $40 million in new sales to date. Aside from US Ecology, we invested $500 million in value-creating acquisitions during the year. All of these deals were in the recycling and solid waste space. As part of our balanced approach to capital allocation, we returned nearly $800 million to shareholders through dividends and share repurchases. Regarding Customer Zeal, we continue to enhance our culture of delivering a world-class customer experience to win new business and drive customer loyalty. Our customer retention rate remained strong at 94%, and we exited 2022 with our highest NPS scores of the year. We delivered outsized organic revenue growth during the fourth quarter, with simultaneous growth in both price and volume. Core price on related revenue increased to 8.4% and average yield on related revenue increased to 6.7%. This is the highest level of pricing in company history. Organic volume growth was 1.5%. Volume growth was broad-based across our market verticals and geographies. Moving to digital. In early 2022, we implemented the finance and procurement modules of our new ERP system, which streamline back-office activities and provide our local leaders with enhanced data. Currently, we are building our new asset management system, which is expected to increase maintenance technician productivity and drive better warranty recovery. We expect to implement the new asset management system beginning in 2024. We continue to make progress on deploying RISE tablets in our collection business. We finished the implementation for all large container and small container routes during 2022 and completed 37% of residential routes by the end of the year. The remaining residential routes are scheduled to be complete by mid-2023. This is a key component enabling further connectivity with our customers, including real-time service notifications. The adoption of RISE has helped drive operational efficiencies and cost savings worth approximately $50 million annually. Sustainability is core to our strategy and one of our differentiating capabilities. We believe Republic Services is in a unique position to leverage sustainability as a platform for profitable growth, while making a positive impact on the environment. For example, our polymer centers are advancing the circularity of plastics. This is the first time a single U.S. company will manage the plastic stream from current site collection to delivery of high-quality recycled content for consumer packaging. Development of the first center in Las Vegas is on track and is slated to come online in late 2023. Development of our second polymer center is already underway. This facility will be located in the Midwest and will serve as a hub for aggregating and processing recovered plastics in the region. This center should come online in late 2024. The investments we are making to develop these polymer centers are being absorbed through our normal capital expenditure process. Additionally, the development of our renewable natural gas projects is progressing well. All 57 of these projects are being co-developed with partners, with the majority structured as a joint venture. We expect four of these projects to come online by mid-2023. As part of our approach to sustainability, we continually strive to be a workplace where the best people from all backgrounds come to work. Employee engagement improved to a score of 85, with 97% participation. Turnover rates in the fourth quarter improved to the lowest level we've experienced in nearly two years. As a result, we are better staffed to capitalize on growth opportunities in the market. Our comprehensive sustainability performance continues to be widely recognized as Republic Services was named to the Dow Jones Sustainability Index for the seventh consecutive year. Our 2022 results clearly demonstrate our ability to create sustainable value and strengthen the foundation from which we will continue to grow our business. Looking forward, we expect to deliver high single-digit growth in revenue, EBITDA, and free cash flow in 2023, even with the headwinds from lower recycled commodity prices and higher interest rates. More specifically, we expect 2022 revenues in a range of $14.65 billion to $14.8 billion. This represents high single-digit growth compared to the prior year. Adjusted EBITDA is expected to be in the range of $4.275 billion to $4.325 billion. This represents high single-digit to low double-digit growth compared to the prior year. We expect to deliver adjusted earnings per share in a range of $5.15 to $5.23 and generate adjusted free cash flow in the range of $1.86 billion to $1.9 billion. Our acquisition pipeline continues to support outsized levels of activity in both Recycling and Solid Waste and Environmental Solutions. We are targeting at least $500 million of investment in value-creating acquisitions in 2023. Our 2023 financial guidance includes a rollover contribution from acquisitions that closed in 2022. I will now turn the call over to Brian, who will provide details on the quarter and year.

Thanks Jon. Core price on total revenue was 7.4% for the fourth quarter. Core price on related revenue was 8.4%, which included open market pricing of 10.4% and restricted pricing of 5.1%. The components of core price on related revenue included small container of 11.8%, large container of 8.6%, and residential of 7.8%. Average yield on total revenue was 5.9%. Average yield on related revenue was 6.7%, an increase of 40 basis points when compared to our third quarter performance. In 2023, we expect average yield on total revenue of approximately 5.5%. We expect average yield on related revenue of approximately 6.5%. This is an increase of 80 basis points over our full year 2022 results. Fourth quarter volume increased 1.5%. The components of volume included an increase in small container of 1.6%, an increase in large container of 60 basis points, an increase in residential of 1.2% and an increase in landfill of 3.9%. For 2023, we expect organic volume growth in a range of 50 basis points to 1%. Moving on to recycling. Commodity prices were $88 per ton in the quarter. This compared to $218 per ton in the prior year. Recycling processing and commodity sales decreased revenue by 180 basis points during the quarter. 2022 full-year commodity prices were $170 per ton. This compared to $187 per ton in the prior year. Current commodity prices are approximately $95 per ton. We believe that current commodity prices are temporarily depressed due to a global supply/demand imbalance and that prices will recover in the second half of the year. Accordingly, we are assuming average recycled commodity prices of $125 per ton in 2023, with prices starting at $95 per ton in the first quarter and steadily increasing throughout the year. At $125 per ton, this would result in a decrease in full year 2023 revenue and EBITDA of $45 million when compared to the prior year and a 30 basis point headwind to EBITDA margin. In the first quarter of 2023, this would result in a year-on-year decrease of nearly $30 million in revenue and EBITDA and a 70 basis point headwind to EBITDA margin. Next, turning to our Environmental Solutions business. Fourth quarter Environmental Solutions revenue increased approximately $320 million over the prior year, which primarily related to the acquisition of US Ecology. On a same-store basis, environmental solutions contributed 60 basis points to internal growth during the quarter. Fourth quarter adjusted EBITDA margin was 27.3%. This compares to 28.1% in the prior year. Margin performance during the quarter included a 130 basis point decrease from acquisitions, which included 100 basis points related to US Ecology, and an 80 basis point headwind from lower recycled commodity prices. These margin headwinds were partially offset by a 20 basis point increase from net fuel and margin expansion in the underlying business of 110 basis points. Fourth quarter adjusted EBITDA margin in the Recycling and Solid Waste business was 28.7%. This compares to 28.6% margin in the prior year or 10 basis points of margin expansion. Margins improved in the Recycling and Solid Waste business even with an 80 basis point headwind from lower recycled commodity prices. Fourth quarter SG&A expenses, excluding transaction costs from US Ecology, were 10.9% of revenue. This included 40 basis points from additional incentive compensation expense due to full year financial outperformance. Full year SG&A expenses were 10.2% of revenue. This was favorable 20 basis points compared to the prior year and reflects continued cost management as we grow the business. In 2023, we expect EBITDA margin to be approximately 29.2%. The 10 basis points of expected margin expansion include a 40 basis point decline related to acquisitions, primarily related to US Ecology, and a 30 basis point headwind from lower recycled commodity prices. These headwinds are more than offset by margin expansion in the underlying business of 80 basis points.

Hey, guys.

Hey, Tyler.

Brian, so obviously, pricing really strong here. I think full year pricing in the open market would stay just over 9% in the restricted piece, call it, 4.5%. But I am curious if we were to kind of decompose that next year, how those numbers would look? Will we kind of see a convergence in those two? Or could we actually see the restricted pricing lead with all the CPI lookbacks?

No, we would actually expect the restricted pricing to increase from the levels of where it is in the fourth quarter. So, again, on related revenue, it was 5.1% restricted in the fourth quarter. And we would expect that to improve 50 to 100 basis points in 2023. But we do expect the level of pricing to be driven by the open market, similar to what you've seen in 2022 and, for that matter, the prior years as well.

Yes, that's helpful. Regarding how the yields will develop, will we see a more historically normal pattern where pricing is above 5.5% initially and then decreases below 5.5% as the year progresses?

Yes. I understand you're asking about total revenue. Our highest point is expected in the first quarter, and then it will gradually decrease from there. However, we anticipate that pricing will stay above 5% in all quarters.

Yes. Okay. All right. That's helpful. And just real quick, how much M&A rollover is in the guide? And just to be crystal clear, the $0.5 billion that you expect to spend, none of that is included in guidance. Is that right?

Yes. So, I'll answer your second question first. That is correct. We have not included that. So, what is included are deals that closed by the end of the year. It's $440 million worth of revenue or 300 basis points of growth, that's the rollover, and most of that being US Ecology.

Right, okay. Thank you very much.

Thanks for taking the questions. So, with the US Ecology outperformance of $50 million, can you give us a breakdown of how much of that outperformance was price versus volume? And then maybe you can tell us what you're expecting in terms of ES segment growth specifically for 2023.

Yes, it was a mix of both price and volume, but more pricing to come, right? We've taken a lot of pricing action, but we still have some contracted portion of that business and fully seen that. So, you're seeing both the cross-sell that we talked about, and you're seeing the pricing hit with really strong performance. And the plans for 2023, that business is performing ahead of our plan, more broadly both the US Ecology acquisition and the broader ES space, I think, is going to be a very positive contributor.

Yes. A significant part of the year-over-year growth will come from the acquisition rollover. However, when considering the total contribution from an organic standpoint, we anticipate a 50 basis points increase in total revenue, which is approximately $70 million. This projection aligns with the anniversary of the US Ecology acquisition, indicating a high single-digit rate of organic growth.

That's very helpful. Thanks. And then since you mentioned the synergies were tracking ahead of plan, can you quantify that for us? And I guess, any chance you could give us an updated cost synergies number as to where you think this will get to within the timeframe?

Yes. So, just to give you an idea, when we actually provided the guidance when we closed the deal, we said we thought we'd get about $5 million worth of synergies in 2022. We actually got closer to $13 million, $14 million. So, you can see nice outperformance there. And a lot of that was just actually getting the integration activities done quicker than we originally anticipated.

And we said total synergies would be $40 million, cost synergy would be $40 million. I think that number wound up closer to $50 million.

Yes, thank you very much. Good afternoon everyone. I want to focus on the M&A guidance of $500 million. What factors contribute to your target of $500 million? Are you aiming to maintain a certain leverage ratio, or is it more of an estimate based on the types of deals available in your target areas for 2023?

I'd say it is based on a passionate view about intrinsic value, right, and driving intrinsic value over time and conservatism, right? So, we never want to put out a number that people go and they have to hit, and therefore, we start chasing deals. So, I want the team to feel comfortable at any point in time passing on a given deal because it doesn't meet a return criteria or there's a set of terms or business conditions or practices that we're not going to want to be owners of over time. And so I think we've always put out a number over the last three or four years, I think you've seen a pretty steady beat against that number. My expectations for the team, I think, are slightly higher than that. But we always want, again, to put out a conservative number that the team feels no pressure to reach.

And has there been any shift in valuations, be it with higher interest rates, be it with more deals having been done? Is there more difficulty? Have valuations come off? Has availability changed? In other words, the pipeline that you look at going into 2023, is it very much different than what you saw in 2022, excluding obviously US Ecology?

No, pipeline is very strong. We've got a mix of small- and medium-sized deals across Recycling and Solid Waste and ES, right, and that's kind of at different stages in the process and feel good about that. The premiums or the multiples are still kind of hanging in the same ZIP Code because we're looking at premium assets. We're not just buying revenue. We're very particular buyers, and we want to get something that's quality. And one of the first questions one has asked is why would we do this ourselves? And if it's something like a residential subscription business or a temporary roll-off business, we should go get that with our sales team, not pay a premium for that. So, we're looking for infrastructure. We're looking for route-based businesses with customer contracts that we know that we will integrate into the business and drive value over time.

Okay. And just the last one here. Just on your guidance, I know you had had a double-digit in there. You kind of walked it back last quarter. You've kind of brought it back again confidently here this quarter. Just what's changed your view here that gives you the confidence behind this guide, that you perhaps kind of didn't have when you had the third quarter report?

Well, maybe a slightly different view of the history, right? We never gave an official guidance. We said we had line of sight at one point to double-digit growth, right? That was in a different commodity price environment. And so given the commodity market being depressed for six to nine months, that certainly gave us a different outlook, right, just based on the math of the commodity prices. I think we've talked about a high single-digit number going forward. Now, if we end up doing more M&A early in the year and that has the year impact and we get to double-digits, we certainly could, but I think we've been pretty consistent with how we've approached it.

And the other thing I would just add to that as well is that on the October call, we said that we've got a perspective that we're going to achieve high single-digit growth. And if you look at the midpoint of everything we put out there, it's high single-digit growth. So, to Jon's point, I would sit there and say it is exactly in line with where we thought we would be in October.

Perfect. I wanted to ask first on capital expenditures. I know 4Q is usually sometimes seasonally high, and this quarter seemed maybe particularly high. I was wondering if that was related to the asset management system in the polymer centers, or if there was something else in there. And how we should be thinking about CapEx for 2023?

Yes, we are definitely investing to grow the business. We maintain a disciplined approach but are not hesitant to allocate funds. A significant factor driving this is the second polymer center we are establishing in the Midwest. The demand from our first center has been so strong that it gives us great confidence in the market's value for that product. We believe the returns on our business case will exceed our initial projections. This confidence has motivated us to expedite our investment plans going forward.

Yes, and the other thing is, we talked that there were some supply chain disruptions throughout the year, impacted things like trucks and some of the heavy equipment. And we actually were able to take or seed, take title of those assets in the fourth quarter. So, as you think about building the 2023 plan, most likely, we'll be more back-end loaded like you've seen in the last couple of years, but maybe not to the extent that you saw in 2022.

Super helpful. And I wanted to ask on volumes. I know you gave the 50 to 100 basis points for 2023 of volume. I wanted to just ask sort of what you're seeing with regard to commercial and industrial. I know some of your competitors talked about like a little bit of a softness in 4Q, but maybe a little bit better in January. I wanted to hear your experience on that.

Yes, there's different moving pieces for sure. Obviously, there's been a little bit of a slowdown in the construction market as you've seen housing starts kind of pull back in the second half of last year, and we've certainly baked in some softening of that into the 2023 environment. But listen, the industrial market is very, very strong right now, right? You saw the consumer number this morning. I mean the consumer is engaged. So, we still see lots of economic activity. Travel and leisure, right, is kind of bursting at the seams. So, we remain mindful, right, that there's certainly recession talks on the environment, but we're a pretty broad-based barometer of the economy, and we're seeing a lot of strength right now.

Yes. And even though we're seeing a little bit of softness on some of the construction activity, we're still seeing above-average price. If you take a look in the temporary large container business, we're nearly 9% priced during the fourth quarter.

Thank you operator and good afternoon everybody. I was just wondering, when you talk about the pricing initiatives within ES, just wondering what percentage of your revenue do you think you need to reprice to get to the levels you wanted? And how long do you think it takes to kind of get through all of that?

We will thoroughly analyze every dollar of revenue from each customer to gain a comprehensive understanding. Our approach to pricing involves two perspectives. First, we assess it from the customer’s viewpoint, considering what the market can support and how our value compares to competitors. Secondly, we evaluate our internal costs, including capital charges, to ensure we achieve a fair return. We will systematically review each customer and every revenue dollar. The positive news is that we have implemented some double-digit price increases, which are being accepted by our customers. They truly appreciate our integrated offering, and it’s important to remember that their spending with us represents a minimal part of their overall cost structure. Therefore, our investments in safety, speed, sustainability, and digital tools serve as significant differentiators that help maintain those prices.

That makes a lot of sense. I apologize if you've shared this number previously, but when you consider the long-term outlook and the cost synergies along with potential revenue growth, do you have a target for the adjusted EBITDA margin that you’re considering? You achieved about 17.5% in 2022. Will this reach the mid-20s once you have implemented many of these initiatives?

Yes, I believe that over time, these businesses will yield similar returns. Initially, we will see free cash flow conversion due to a different operational and capital expense trade-off in this segment. Longer term, achieving margin convergence seems feasible as well. However, this won't happen immediately; we will gradually work towards this goal. I believe that reaching a margin in the mid-20s over the next four or five years is very achievable.

Hi, thank you very much Jon and Brian, Aaron for taking the questions. Brian are we at about a $1.6 billion run rate in ES revenues when I roll in the M&A? And then what does that $1.6 billion grow organically? I just trying to put all the pieces together from your transcript, and I think I have myself a little confused.

We're probably closer to just over $1.5 billion. But organically, as I mentioned earlier, we're anticipating a 7% to 8% growth rate in the near term, with opportunities for additional cross-selling to contribute to that.

So, in your margin for the whole year, which is 29.2%, how do you perceive the Solid Waste business and the Environmental Services business contributing individually to the overall merger?

So, in the Recycling and Solid Waste business, we're expecting overall about 30 basis points of margin expansion, right? And in that business, we have to overcome the 30 basis points headwind from commodity prices. So, the underlying business is growing kind of 60 to 70 basis points. Now, in the Environmental Solutions business, we're expecting 100 basis points of margin improvement, and there is the acquisition roll over of US Ecology, which is kind of a negative 70 on that portion when you compare it to what we had in the Gulf. So, we're expecting margin expansion in the underlying business thereof of 170 basis points. The reason why that only comes to 10 basis points overall is we just have a greater mix or a greater percentage of ES business in 2023 than we did in 2022.

Yes. Yes, I get that. And then can you bridge for us the $1.724 billion of free cash in 2022 to get to the midpoint of your guide? What is the cash interest, the cash tax, the incentive comp above plan? And then I'm assuming everything else is made up by organic growth productivity.

Sure. Let me provide you with some figures. For reference, you can consider roughly 70% of the total after-tax. Interest has increased by $90 million, leading to a higher outflow. The incentive compensation is about a $35 million outflow compared to target levels. Regarding bonus depreciation, you wouldn't make any tax adjustments for this, but it results in a $35 million rise in cash taxes.

Okay. And then

When you combine all those factors, it results in about a 300 basis point headwind to conversion, which is counterbalanced by the EBITDA growth in the business and some benefits in working capital that are just beginning to materialize. We discussed completing the finance and procurement modules in 2022, and we see particular opportunities to enhance working capital, especially on the DPO side.

Okay. And then just squeezing one in, sorry. The $125 per ton, how much of that has to rely on OCC moving? And what would your target be for OCC to make the $125 in your guide?

To provide some perspective, OCC fiber accounts for about 70% of our goods basket. Therefore, we anticipate most of our expectations will come from the OCC side. Additionally, if we compare our guidance to current prices, we see a relatively modest recovery, which translates to $30 million in EBITDA and an increase of about 20 basis points to margin, along with $20 million in free cash flow, assuming prices remain at current levels.

Good afternoon and good evening everyone. Brian, if we just go back to your margin cadence discussion, the headwinds in the first quarter, really, the first half, that implies we're going to be exiting the fourth quarter of 2023 with margins up something like 150 basis points year-over-year heading into 2024. So, I'm wondering, are we setting up for 2024 to be an outsized margin expansion year because we're essentially making up for a lost year from a commodity price impact in 2023? Anything that you'd add to that bridge as we think about what the margin progression might look like.

Sure, Jerry. You have two factors to consider here. One is our expectations for 2023 and the other is what occurred in 2022. We anticipate commodity prices in 2023 will be at their highest for the year, while they were at their lowest in 2022. So, we shouldn't focus solely on margin expansion. However, we believe that as we exit 2024, it will serve as a strong starting point for the following year. Keep in mind that the margin expansion is influenced by two years of data you need to factor into your calculations.

Sure. But you're going to have the same comp benefit in the first half of 2024, hopefully. And if we think about the profitability of the recycling business in the fourth quarter with this ultra-low recycled cardboard prices. Can you just update us on what was the margin profile of the business, roughly, just so we can get a feel for where it's troughing in the cycle, given all the work you've done there?

You're referring to the recycling aspect of the business? It remains profitable at current levels and provides an appealing return. We anticipate that these low prices will be temporary and will return closer to a 10-year average, but not necessarily to the over $200 per ton levels that we saw previously for our basket of goods.

Super. And can I ask around the gas part of the business? Nice little bonus we got from the EPA in terms of eRINs. How much gas to electric power do you folks generate in terms of your share of the power that you generate? And what's your take on what's a reasonable value capture opportunity for you and your peers?

Yes. Most of our current projects involve gas electricity. With the recent changes in RINs, all new projects in the pipeline were intended to be gas powered or utilize methane RNG. The positive aspect of our partnership with BP is that we have options available, particularly with eRINs becoming available. We are both open to exploring how these markets evolve and examining local conditions, as well as considering our power generation capabilities to determine if we would prefer to convert some of those opportunities from RNG to electricity. We believe this could ultimately benefit us, as it will provide us with two pathways.

Thank you very much. My question is regarding residential volumes that have inched up here in the last couple of quarters. Is that a trend you expect to continue this year? And when you look at that 1% overall midpoint volume outlook, does that contemplate commercial container volumes being flat or negative at any point in 2023?

No, I mean what you're seeing mostly on the residential is some relatively larger contracts. You're seeing that in the numbers. So that's expected to anniversary in 2023. So, we don't expect that to continue throughout the year. And yes, when you take a look at our volume cadence, we expect that small container will remain positive, right, throughout 2023. When you take a look at overall volumes, we think to have our highest volume performance early in the year. And again, that's a step down throughout but remaining positive in all four quarters.

I'd say residential, that's been, I'd say, over the last decade, the most disappointing part of the business in terms of where margin and return has gone and that hasn't expanded at the same rate as the other businesses. There's a lot of reasons for that, with commodity prices and inflation and everything else. But listen, we don't do work for free, right? We put upward pressure, right, on all those contracts and look at those contracts just like we were an acquisition, right? We're going to put capital into it and what type of return do we get against that. And if we can't meet our return thresholds on that, we won't do the work.

Hey good afternoon. Thanks for taking the questions. Just curious what you're seeing on open market pricing heading into 2023 as inflation starts to come down and maybe there's a bit more uncertainty regarding economy and volumes going forward. Are you seeing any change in behavior from maybe some of the smaller competitors in this environment relative to last year?

No, last year, we put out the highest level of pricing we ever have in small container in the open market, and we had the highest percentage of retention of that price that we've ever had in our history, which is really a staggering number. I think it speaks to, right, the value of our service that we're providing. It also speaks to the broader context with everything else in plating. Those numbers were quite consistent across the quarters, right, in terms of our ability to retain price, right? And we're seeing strength here in the early part of the year on that. So, we're mindful of the environment. But look, at all of these smaller competitors, right, they have truck costs that are going up. They need to buy new equipment after some supply chain challenges, right? They have labor costs that are going up. So, they need the price to cover their costs, which I think is support of a broader pricing environment.

Yes, we've talked about kind of that sweet spot for us being right around three times. We're a little bit over that right now, but we expect to be there in the next, call it, six months, at which point then we would look to kind of return to that normal level of looking at the repurchases and so on and so forth.

Hi, good afternoon. Thank you. I certainly appreciate the level of details of your 2023 expectations. I think a lot of puts and takes in this environment. So it might be helpful if you could just outline the areas where you kind of see the greatest source of upside, inflation moderating, some tech investments. And then on the flip side, where you see the greatest risk to maybe hitting these targets as well? Thanks.

Yes, from an upside perspective, we expect inflation to remain persistent throughout 2023. As Jon mentioned, we are pricing at higher levels early in 2023 than we did in 2022 because we anticipate inflation to remain sticky. If inflation does decrease, it presents an opportunity to achieve better performance than we had expected. However, it's important to note that some inflation related to wages tends to be sticky since wage increases are typically annual. Once those wage rates are set in the marketplace, they cannot be retracted. Therefore, while there is some stickiness to inflation, reductions in third-party costs, maintenance-related expenses, and transportation expenses could provide a source of upside.

Great. And then on the downside?

Sorry. We just talked a little bit about recycled commodity prices. Again, we've expected a recovery, but we've also dimensionalized it for you so you realize it's a relatively modest recovery that we're expecting. But if they stay at current levels, that would be a little bit of some downside relative to our expectations.

And I just said the broader macro environment, obviously, we've been through a pandemic and war at the doorstep of Europe and China virtually shutting down and supply chain challenges and inflation. So, I think we're prepared for uncertainty in a dynamic environment. Again, we're running the business, not just for the quarter or the year, we're running it through the cycle and making decisions accordingly. But we're mindful that we may have to adjust or adapt the business if new things emerge.

Of course. Regarding the second polymer center that is beginning to ramp up this year, could you share some insights on the initial key performance indicators or returns that you are witnessing or anticipate, considering the demand from your first center and the factors that led to the decision to establish the second center?

Yes, across, we think we're going to have at least four centers across the U.S. We think when they all get up and running at scale, it's kind of a $250 million incremental revenue business for us. We think the EBITDA margins are going to be certainly north of 30%, right? Very attractive IRRs on those investments, and I think we're going to beat that pro forma, right? And we know from the conversations we've had and the pricing that we're getting right now, we're starting to take orders, obviously, for the center in Las Vegas. I'm very confident we're going to beat those numbers in the pro forma.

Yes, thanks for taking my question. I understand that you guys have been pricing ahead of cost, and there's been a lot more discipline in the industry. But is there like a step function change in terms of how Republic is pricing from a few years ago? I mean, you guys went through some years of intentional shedding some business. I'm just wondering if the quality of the business now, you feel that you can have a wider price versus cost spread than maybe the Republic Services a few years ago?

Yes, I think it's a good question, Michael. Certainly, and you highlighted it. Certainly, customer mix is a hidden element or hidden factor in being able to get price. And we went through some intentional shedding, right, which has negative drag on our volume for a few quarters when you look a few years back. The quality of our revenue is much higher than it was historically, and we feel good about that. And that's all the way across from national accounts to small container to getting out the last remain broker work out of the system to municipal and getting a fair escalator into those contracts. So, I think the overall health of our pricing across the portfolio, well, not perfect, of course, but it's much, much better than it was a few years ago. And then you combine that with the capture and the tools that we have to really start to grind out a few extra bps here and there across our 13 million customers, who have understanding and willingness to pay. And then on the other side of that, with the RISE platform, driving productivity and changing our cost position in the business. So, when you've got a healthier customer mix, right, and better ability to price with a cost structure that I think is healthy and getting healthier. I think that does create the context for continued margin expansion over time.

Yes, if you think about for the full year for 2023, we're in that, call it, 5% to 5.5% inflation-type range. And again, when you take a look at the 6.5% expected yield on related revenue, that's how we're driving that 80 basis points or so of expansion in the underlying business. That's about the level we saw exiting the fourth quarter, and we expect it to remain relatively consistent throughout 2023.

Thank you, Andrea. I would like to thank our 40,000 employees for their efforts that enabled our strong 2022 results. The success of our strategic investments is made possible due to their hard work and commitment to serving our customers. Have a good evening and be safe.