Republic Services Q2 2022 Earnings Call Transcript

Participants

Corporate Executives

• Aaron Evans, Vice President, Investor Relations
• Jon Vander Ark, President and Chief Executive Officer
• Brian Delghiaccio, Executive Vice President and Chief Financial Officer

Analysts

• Toni Kaplan, Morgan Stanley
• Walter Spracklin, RBC Capital Markets
• Jerry Revich, The Goldman Sachs Group, Inc.
• Hamzah Mazari, Jefferies Financial Group Inc.
• Michael Hoffman, Stifel Nicolaus
• Sean Eastman, KeyBanc Capital Markets
• Michael Feniger, Bank of America Co.
• Tyler Brown, Raymond James
• Stephanie Yee, JPMorgan Chase & Co.
• Noah Kaye, Oppenheimer Holdings Inc.

Presentation

[Operator]

Good afternoon, and welcome to the Republic Services Second Quarter 2022 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. [Operator Instructions] Please note this event is being recorded.

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

[Aaron Evans, Vice President, Investor Relations at Republic Services]

I would like to welcome everyone to Republic Services' second 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 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 a recording of this conference call, you should be sensitive to the date of the original call, which is August 4, 2022.

Please note that this call is property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with a 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.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our second quarter results continue to demonstrate the value created by our differentiated capabilities and ability to harness the positive momentum in our business.

We delivered outsized revenue growth, both organically and through acquisitions, while generating underlying margin expansion. This was achieved by pricing in excess of our internal cost inflation and continued savings from productivity initiatives. The fundamentals in our business remain strong, and we remain well positioned to capitalize on additional growth opportunities in the marketplace.

During the second quarter, we delivered revenue growth of 21%, generated adjusting [Phonetic] earnings per share of $1.32, which is a 21% increase over the prior year, and produced more than $1.1 billion of adjusted free cash flow on a year-to-date basis, which is a 14% increase over the prior year.

We continue to effectively allocate capital by investing in value-creating acquisitions and returning cash to our shareholders. Year-to-date, we invested $2.5 billion in acquisitions, which includes the acquisition of US Ecology. The integration of US Ecology is well underway and progressing as planned. We are encouraged by early cross-selling results and remain confident that we will achieve at least $40 million of cost synergies.

We have one of our most robust acquisition pipelines ever with opportunities to close transactions this year and into 2023. We now expect to invest over $600 million in acquisitions, apart from US Ecology for the year. Substantially all of these deals are in the recycling and solid waste space. Year-to-date, we've returned $495 million to our shareholders through dividends and share repurchases. Additionally, we recently announced an increase to the dividend for the 19th consecutive year.

During the second quarter, we reported organic volume growth of 2.4%, which was broad-based across geographies and market verticals. Simultaneously, we demonstrated our ability to price. Core price reached an all-time high of 6.2% and average yield increased to 5%. This is the highest level of pricing in company history. At the same time, we are experiencing higher-than-expected inflationary pressures that continue to persist.

That said, we expect to continue to price more than our internal cost inflation, ultimately leading to full year results that are projected to exceed original expectations. We now expect adjusted EPS in a range of $4.77 to $4.80 and adjusted free cash flow in a range of $1.7 billion to $1.725 billion. This represents an increase of approximately 4% from the midpoint of the prior guidance.

Finally, we believe creating a more sustainable world is both our responsibility and a platform for growth. We recently published our latest Sustainability Report, highlighting the progress we are making toward our most significant opportunities to positively impact key stakeholders and the environment. We reported a 9% decrease in greenhouse gas emissions from our 2017 baseline, which keeps us well positioned to achieve our interim target of a 10% reduction by 2025.

We also highlight progress made on climate leadership goals, including circular economy and renewable energy. These goals are supported by investments we are making in polymer centers and landfill gas projects, which are progressing as planned. In addition to having a positive impact on the environment, these innovative solutions are a platform for growth.

Our efforts continue to be recognized externally as Republic was recently named to 3BL Media's 100 Best Corporate Citizens list for the third consecutive year.

I'll now turn the call over to Brian, who'll provide details on the quarter.

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Thanks, Jon. Core price during the second quarter was 6.2%, which included open market pricing of 7.8% and restricted pricing of 3.5%. The components of core price included: small container of 9.7%, large container of 6.9%, and residential of 5.6%. Average yield on total revenue was 5%, which represents an increase of 80 basis points when compared to our first quarter performance. Average yield on related revenue was 5.4%.

As Jon mentioned, we continue to dynamically adjust price on new and existing business to offset higher levels of cost inflation we see in our operating costs and capital expenditures. Second quarter volume increased 2.4%. The components of volume included: an increase in small container of 2.8%, an increase in large container of 2%, and an increase in landfill of 5.7%. Our customer retention rate remained stable at 95%.

Moving on to recycling. Commodity prices were $218 per ton in the second quarter. This compares to $170 per ton in the prior year. Recycling processing and commodity sales contributed 20 basis points to internal growth during the second quarter.

Next, turning to our environmental solutions business. Second quarter environmental solutions revenue increased $260 million from the prior year, which primarily relates to the acquisition of US Ecology. On a same-store basis, environmental solutions contributed 50 basis points to internal growth during the second quarter. Adjusted EBITDA margin for the environmental solutions portion of our business was 17.1% during the quarter. This includes our existing operations in the Gulf and Northeast, together with the addition of US Ecology.

Total company adjusted EBITDA margin for the second quarter was 29.6%. This compared to 30.6% in the prior year. Margin performance during the quarter included a 140-basis-point decrease from acquisitions, of which 60 basis points relates to US Ecology and a 110-basis-point headwind from net fuel. It's important to note that even though net fuel was dilutive to margin, we've recovered over 95% of the dollar exchange in fuel expense through fuel recovery fees.

These margin headwinds were partially offset by a 30-basis-point increase from recycled commodity prices, a 60-basis-point contribution from relatively higher incentive compensation expense in the prior year and, more importantly, underlying margin expansion of 60 basis points. Adjusted EBITDA margin in the solid waste and recycling business was 30.8%. SG&A expenses, excluding transaction costs from US Ecology, were 10% of revenue. The 70-basis-point improvement demonstrates our ability to effectively manage costs and gain leverage while growing the business.

With respect to our outlook, our guidance implies sequential growth in adjusted EBITDA dollars of 5% to 5.5% in the second half of the year compared to our first half performance. This would continue to drive double-digit EBITDA growth on a year-over-year basis. As a result, we now expect full year 2022 adjusted EBITDA margin to be approximately 29.3%. The change in margin from our initial expectations relates to the impact of US Ecology and fuel.

Year-to-date, adjusted free cash flow was $1.15 billion and increased $143 million or 14% compared to the prior year. This was driven exclusively by EBITDA growth in the business. Year-to-date capital expenditures of $505 million represents 35% of our projected full year spend and year-to-date cash taxes of $79 million represents approximately 25% of our projected full year spend.

We now expect full year capital expenditures in a range of $1.45 billion to $1.47 billion. This represents an increase of $130 million from the midpoint of our prior expectations. The increase includes $75 million related to US Ecology. The remainder of the increase relates to investments to support growth and higher-than-anticipated costs for trucks, equipment and landfill cell development. Total debt was $12 billion and total liquidity was $1.6 billion. Our leverage ratio at the end of the quarter was approximately 3.3 times. We expect to revert to 3 times leverage within the next 12 months.

With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 23.9% during the second quarter and 24.6% on a year-to-date basis. The lower-than-anticipated tax rate was mostly timing related and provided a $0.05 EPS benefit during the first half of the year. We expect this timing benefit will flip in the second half, resulting in an equivalent tax impact of 29% in the third quarter and 26% in the fourth quarter. We still expect a full year equivalent tax impact of approximately 26%.

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

Questions and Answers

[Operator]

[Operator Instructions] The first question today comes from Toni Kaplan with Morgan Stanley. Please go ahead.

[Toni Kaplan, Analyst at Morgan Stanley]

Thanks so much. I was hoping if you could give a little bit of extra color on the expectation for how pricing plays out. I know you gave some great detail in terms of where the open market versus restricted was in the quarter. But just how do you think that plays out during the rest of the year?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah, strong. We clearly have momentum on the pricing side. Obviously we're putting out more price than we ever have on the open market side and retaining at a higher percentage than we ever have, which I think is a function of both the macro economy and inflation, and all costs going up for customers as well as the fact that we continue to differentiate our service offering and provide something unique in the marketplace. I don't see that changing for the remainder of the year, and then we'll get a nice pickup in the second half of the year on the restricted side of the business as those contracts kick in with underlying estimators, something tied to CPI or CPI derivatives like average trash and water sewer trash, that will provide momentum there as well.

[Toni Kaplan, Analyst at Morgan Stanley]

Terrific. And then, in terms of US Ecology, just any additional color on surprises versus now that you've started the integration versus what your expectations were before?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Generally, I'm planned -- very excited about the people. I think maybe one surprise is, we've been able to retain even a higher percentage of people than we expected. Again, there's good natural synergies in the deal and we've talked about that. But the reason we bought this is the platform for growth, and we really respect their compliance culture, their expertise and obviously a very unrivaled set of assets. And their team has been absolutely energized to get connected with us, very strong cultural alignment. And we did a lot of work pre-merger in terms of organization structure and model and design, and have got those teams staffed up and ready to go, and we're out moving in the marketplace. So, I'd say, on balance has got a little more momentum than I expected at this point.

[Toni Kaplan, Analyst at Morgan Stanley]

Terrific. Thank you so much.

[Operator]

Your next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

[Walter Spracklin, Analyst at RBC Capital Markets]

Yeah, thanks very much. Good afternoon, everybody. And just on the pricing question, I guess, a lot of your contracts and just as you alluded, are coming in the back half pretty strong. I guess, that sets you up very nicely for 2023 in terms of carryover of those price -- any pricing you're doing through the year and in the back half of the year. So when we look out to 2023, is there any reason why we shouldn't kind of see a continued elevated pricing rate for 2023, obviously lapping some tougher compares as we get through the back half of 2023. But tell me if I'm wrong, but shouldn't it remain elevated given that the late in-year pricing this year remain elevated through the first half of next year?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. I guess, the one cost sharing note obviously is we're living in very unique and uncertain times. And I think in the last 36 months have to all of us some dose of humility. All that being said, the outlook from what we see right now is very, very positive. And so, you're right. The restricted portion of that book will continue to flow through. We're not going to change our stripes on the open market side of this business. We start and we lead with price.

Our people deserve a fair wage increase and that profit allows us to reinvest in the business and drive sustainability and all the things that we care about. So that won't change. And listen, I think we've got momentum on all three fronts. We've got momentum on the pricing side of the business. We've got momentum on the volume side of this business, and obviously the acquisition activity has also been very strong, and the rollover effect in the next year sets us up for what we think will end up being probably a double-digit revenue year in 2023.

[Walter Spracklin, Analyst at RBC Capital Markets]

Okay. That's great color. On acquisitions, that dovetails into my next question actually is, just how you're looking at acquisitions now in two ways. First of all, taking a fairly large one here with the US Ecology, does that in any way kind of delay you from the cadence of acquisition or the pace and cadence of acquisitions at all? And secondly, related to that, does US Ecology now shift your attention a little bit to perhaps examining different types of acquisitions, some in hazardous, some in solid waste, or do you kind of re-focus, re-center on solid waste for opportunities going forward?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. I think we talked about when we did the deal, this wasn't either or it was both hand. And the timing of the deal was predicated on all the momentum we had in the traditional recycling and solid waste side of the business. And our outlook has never been stronger and more positive there for deals. And I talked about what we're going to close this year and a strong pipeline into next year. And that's where certainly the bulk of our acquisition spend will certainly come in that space.

Now, the benefit is, we've got a second platform with which we can pursue further follow-on and tuck-in acquisitions. And certainly we have a pipeline there. I think it's the only thing I think is very unlikely in the near-term as we do another deal of scale in the environmental solutions side of the business because we think we've got a great platform with US Ecology. We're building that out. Again, we'll be able to tuck in pieces along the way and in a very analogous way to the solid waste and recycling space is getting great post-closure synergies on those deals as we pull those right in.

[Walter Spracklin, Analyst at RBC Capital Markets]

Makes a lot of sense. Thanks for the time as always.

[Operator]

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

[Jerry Revich, Analyst at The Goldman Sachs Group]

Hi. Good afternoon, and congratulations on the strong quarter. I'm wondering if you could just talk about as we think about the pieces for '23, you alluded to top line. Can you just talk about the tailwinds that you folks are going to have from your investments in landfill gas and in our facilities? How many facilities do we have coming online over the next 12 months as we just layer on additional tailwinds to the business as we think about what '23 might look like at this point?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. Jerry, when you -- specifically around some of the landfill gas projects and polymer centers and things of that nature, anything that's going to come online is really going to be in the latter part of '23. So the contribution to '23 is pretty limited with respect to those projects. Now, obviously setting up '24 and beyond, right, that's where it starts to get more exciting with respect to those investments, really next year is more about pricing in excess of cost inflation and the realization of the synergies with the US Ecology deal.

[Jerry Revich, Analyst at The Goldman Sachs Group]

And on that note, obviously really strong margin performance this year, but given the high inflationary environment overall, it certainly limits how aggressive we can get on pricing ahead of cost. So, what's the opportunity to make up for that next year as hopefully inflation slows from high singles to mid-singles? Could we see a 60, 70, 80 basis point margin expansion versus half that, that you would typically target?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

I think the thing you have to remember, Jerry, is that on that restricted portion of our business and those indices that those contracts are tied to, they tend to lag. So, again, when you take a look at what we're doing with the inflationary environment that we're experiencing today and we're seeing that across our book, and we're able to drive underlying margin expansion this year as we start to get those relatively higher price increases next year, we think that actually sets us up very well for continued margin expansion into '23.

[Jerry Revich, Analyst at The Goldman Sachs Group]

So just to be clear, it doesn't sound like we should be thinking about commercial and industrial lines of business pricing slowing significantly. So we were just going to get additional kicker from the restricted business kicking in and continued level of pricing that we've seen in C&I this year. Is that right?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

The only caveat I'd say is, I mean, the labor market remains constrained. We do see some signs of that easing, right? And I would hope that, that would continue to ease throughout the year and create the opportunity in the next year. But we will do whatever -- we run this business forever. So we'll do whatever we need to do to retain our people. So, the level of margin expansion that we have in 2023 will be predicated on exactly how tight a labor market is and what we need to do with wages.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Super. Appreciate the discussion. Thanks.

[Operator]

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

[Hamzah Mazari, Analyst at Jefferies Financial Group]

Hey. Good afternoon. My first question is just around the restricted book and then also, as part of that, just cost inflation. So when you look at your cost buckets, do you sort of believe most of those buckets have peaked, labor included? And then as part of that, when you look at your restricted book, how much of that book is on indices that are not CPI? And when they reset, do they kind of cover cost inflation that you're seeing? I know they lagged -- or does it not even matter because the open market is so strong that it will help you recover whatever you're not currently?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. Let me start on the wage piece, listen, we're seeing inflation right in the high-4s. And we feel good about that number in part because going into this high inflationary period, we thought we had a very healthy cost structure. Healthy meaning not too high, but also not too low, right? Our team does a really good job of understanding local market dynamics. And we want to be the employer of choice in those markets.

Now obviously, we've had to take up -- put wages into the market this year beyond our initial plan, just given the dynamic environment. And I would say, listen, we see that certainly flattening, right, and kind of ending the year right into the high-4s on that front. Assuming that inflation comes down, if that will start to modulate as we go forward. So I think we are past the peak of this thing, again with the caveat of we're living in an uncertain environment.

So, Hamzah, within that 50% book that has a contractual pricing restriction, 34% of those are directly linked to CPI, 18% are some form of alternative index. So I think just over 50% has some inflationary component baked into it. And then, the other 48% is some of the pricing mechanism. So it could be a fixed rate, it could be a rate review of cost plus contract, but that's basically the composition of that 50% of our book.

[Hamzah Mazari, Analyst at Jefferies Financial Group]

Got it. And just my follow-up question. On US Ecology, you mentioned early signs of cross-selling. Could you just remind us what you sized up revenue synergies at? And at the same time, is the sales cycle different than solid waste, or just -- maybe just give us some examples of the early success of cross-selling? Thank you.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Sure. Yeah. Keep in mind, we valued the deal obviously based on the stand-alone intrinsic value plus $40 million of cost synergies. That being said, we think they are the revenue synergies over time will outpace that. Part of that is on the revenue synergies. So we've said $75 million to $100 million of cross-sell realized over three years. We've already gotten $15 million of that, So very good early momentum on that front. And it's cutting both ways, customers that US Ecology have that we're bringing in our services, but even more so customers that we have, we're now selling a broader set of services, too. So we're -- again, early days on that. We haven't really done a full rollout across all of our sales teams. So very excited about the momentum to hit that number.

And then, on pricing, right, we believe these are scarce assets. And again, you need to price to be able to reinvest in these assets over time and grow. And so, we put out a double-digit price increase earlier this week that will go into effect in early September into the marketplace because it's imperative that we do that. It's inflationary environment, right? We're going to reinvest in the business and we're going to expand these margins over time.

[Hamzah Mazari, Analyst at Jefferies Financial Group]

Got it. Thank you.

[Operator]

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

[Michael Hoffman, Analyst at Stifel Nicolaus]

Thank you, all. So many things to think about and choose from. So I'm going to pick free cash flow. If the old midpoint is $1.5 billion, you subtract $130 million for more capex, that means there's about $193 million of upside from performance between solid waste and environmental services. Can you split between them where that came from?

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yeah. That's all solid waste, Michael.

[Michael Hoffman, Analyst at Stifel Nicolaus]

It's all solid waste, okay. So that just shows just how dramatic the leverage of this price has been to convert that into cash. So that's the other observation.

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Agree.

[Michael Hoffman, Analyst at Stifel Nicolaus]

Okay. Margins? So the US Ecology margins or the ES margins, which is basically mostly US Ecology, we came out better than if you were looking at old models for that business coming into 2Q. How much of that is -- it was a really good market for those kind of services, and everybody had a really good quarter, all the peers, versus anything that you all did to affect change? And then, how do I look at your combined margin of 29.3% and convert that into what's the dollars of EBITDA?

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Well, yeah, let me start with the latter part first when you want to talk about the dollars of EBITDA. So we talked for the full year, or I'm sorry, in the second half, of increasing EBITDA 5% to 5.5% over our first half performance. So I think first half was $1.913 billion, second half that would imply $2 billion to $2.020 billion for a full year of $3.91 billion to $3.93 billion. So, when you take a look at that 5% to 5.5% sequential growth, about 3.5% of that is just the additional amount from US Ecology just for having that for longer in that period of time. And then the rest of the business, 1.5% to 2%. And when you think about that 1.5% to 2% on a like-for-like basis, that's relatively consistent with what we would see in a normal year.

And then, on your margin question, so when you take a look at the 17.1% for the environmental Solutions business, that's -- again, I would say, there wasn't much that we were able to affect in that period of time. It was only two months. So most of the synergy capture that we expect, the cross-selling opportunities that Jon mentioned, and then again, the pricing opportunities, that's more on the come. So again, I would say that was more of just the strength in the business from US Ecology, which could also be just reflective of strength in the industrial market.

[Michael Hoffman, Analyst at Stifel Nicolaus]

Yeah, it was very good. We crossed their peer group. So it doesn't surprise me, it was good. I just was wondering how much you were able to influence already. Okay, thanks.

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Thanks, Michael.

[Operator]

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

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Hi, guys. Thanks for taking my questions. I might have missed it, but just the updated yield and volume guidance for 2022 seems like both are going up here.

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yeah. So, we expect with the 5% that we just reported here in the second quarter, we would expect, as we talked about that, to accelerate in the second half of the year for the reasons we discussed. So we expect to stay over 5% for the balance of the year. So, full year, that would average to right around 5% on a full year basis for average yield. And right now, when we take a look at volume, we're expecting that to be at the high end of our original guidance range, so right around 2%.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Okay. Got it. Very helpful. And updated margin guidance, 29.3%, I believe it was 30.3% to 30.4% before. I think ECOL was supposed to be 70 basis points of that gap. Is that what it ended up being in there? And that leaves maybe 35 basis points of fuel, but I assume fuel was actually more than that and you're actually covering a lot of what the incremental fuel drag was with price. So if we could just flesh that out, that would be helpful.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. You actually had a couple of those numbers there. So, US Ecology is 70 basis points, 70 basis point drag from our original expectations. Net fuel is actually 50 basis points worse than we originally thought. We actually have a 120 basis point drag between the two, and we're making that up with the rest of the business. Get to that $29.3 million for the year.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Got it. Nice work. Thanks for the help.

[Operator]

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

[Michael Feniger, Analyst at Bank of America]

Yeah. Thanks, guys. Just when we think about the acceleration that you mentioned in the back half with the yield, obviously you call -- can you help us bind us like the rollover of what that would look like for 2023, just based on really where we're exiting the year at and what we see with USD call after two months?

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Were you talking about just overall revenue or are you just talking about specifically around yield?

[Michael Feniger, Analyst at Bank of America]

Both if you could, just because of the core price as you accelerate. I mean, you're putting these price increases through this year. So there must just be some rollover benefit just by even not even increasing next year, just by run rating from the end of this year. And also, for USD call, I'm curious if there's any change in terms of the 12-month impact that we were thinking of when you originally guided?

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Just a couple of things I want to clarify. So when we're talking about core price and yield, that is on the solid waste business. That's what's included in those numbers. I want to point that out because any change in environmental solutions revenue, whether it be price or volume is on a single line item when we sit there and reconcile the change in revenue. So, as we're talking about 5% yield, as you think about the sequential improvement from the CPI-linked contracts, we think to the second half of the year, that's probably about a 20 basis point increase or so in yield second half versus our second quarter performance within a further step-up, probably somewhere in that kind of mid-5s as we sit there and look at '23 today.

[Michael Feniger, Analyst at Bank of America]

Got it. And Brian and Jon, I'm curious, if we look back at your historical peak margin, 31% EBITDA range in 2010-'11, I know one of the main factors is why margins were below that over the last decade was the low CPI. So if we move into a CPI range of 3%, let's say, on a multiyear basis, which was consistent with prior cycles, how different is the business set up today in terms of streamlined operations, routing cost, like how different is this business today with -- for a CPI 3%, 3.5% to just long-term compared to where we were in prior cycles? Thank you.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yes, strong levels for us. We're certainly stronger on the customer side, which leads to revenue on all fronts, it's a healthier customer mix. Again, I don't think that we talk enough about the economics of loyalty in this business, not every revenue dollar is equal. Some customers are willing to stay with you longer. That's why core price is interesting, but yield becomes the ultimate pricing metric. And that's the one that really connects to the P&L because it factors in the customer that you gain and lose. And you gain and lose those customers at very different rates with the same cost structure. So, yield becomes very important. So we've got the healthier customer base. We've got better tools and better technology to help us work with our local teams and price very dynamically across all of our 300-plus markets. So we feel better about that.

And then, we're more efficient. The RISE digital platform has been a big game changer for us. We've taken out cost. And we think over the next 18 to 24 months, we got another $16 million to take out just in terms of driving efficiency and getting the same amount of work done in a shorter period of time. And so, where CPI goes, listen, we've lived in all kinds of different environments here. I can tell you, it being really low, right, it doesn't work very well for the industry, and we've seen that period.

The current number obviously isn't great either. Even though our results are good, we're out of balance as an economy, right, with labor constraints and in an unsustainable way, where it's impacting consumer spend and everything else. So, modulating something into a 2%, 3%, 4%, I think you're going to find very healthy dynamics for our business and really good performance.

[Michael Feniger, Analyst at Bank of America]

Thank you.

[Operator]

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

[Tyler Brown, Analyst at Raymond James]

Hey. Good afternoon, guys. Hey, Brian, so I just want to clarify and be clear modeling question here. But what is the expected revenue contribution in '22 from M&A based on the guide?

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

Yeah. So, if you take a look at the total contribution from acquisitions, it's about 9.3% or that which is -- has closed and that includes US Ecology. If you were to exclude US Ecology, that would be about 300 basis points.

[Tyler Brown, Analyst at Raymond James]

Okay. And then, is there -- you mentioned a benefit and a rollover in '23. Can you just size based on what's closed, what rolls over?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. So, including US Ecology, that would also be about 300 basis points or, again, US Ecology plus deals close to-date.

[Tyler Brown, Analyst at Raymond James]

Yeah, perfect. Okay. And then, going back to the prior question, did you say that you think your restricted book will be up circa mid-5% next year?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

So, overall, when we kind of talk about the cadence of average yield. And so again, with a 5% average yield in the second quarter, we see second half improving 15 to 20 basis points compared to our second quarter performance. And then, as we look forward into '23, again, assuming that things stay relatively stable on the open market portion of our business, that's where we think of average yield right now in kind of that mid-5% overall yield.

[Tyler Brown, Analyst at Raymond James]

Okay. That helps. You talked about just over $3.9 billion in EBITDA for this year. If I do that calculation, it kind of implies, call it, a 43% to 44% free cash conversion. I think last quarter you re-endorsed that 47% for '24. So, can you kind of build that bridge, that 300 to 400 basis point uplift in conversion? I mean, is that lower leverage, is it better closure post closure, cash taxes, capex, just how do we get there?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. A majority of that would be as we revert to that 3 times leverage, right, so we're going to reduce the interest expense. At the same time, though, capturing the synergies, that's all going to be accretive to both EBITDA margin as well as the free cash flow conversion. So, the combination really of the US Ecology integration, the reduction in interest expense over time is that line of sight to that 47% free cash flow conversion.

[Tyler Brown, Analyst at Raymond James]

Okay. Okay. That's helpful. And then, I think we're 100 days in on US Ecology. Any high-level thoughts about portfolio rationalization do all the lines make sense?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. Listen, there's a couple of things that are strategic review, right, and we'll announce those when we've taken a decision on those items. The vast majority of what we bought we like, and we're going to keep and operate and there's a couple of things that we're taking a look at that might not be the best fit, somebody else might be the natural owner.

[Tyler Brown, Analyst at Raymond James]

Okay. Last one, I promise, and this is a bit of a strange question, but is there an extra workday in Q3 because of how the 4th of July fell?

[Brian Delghiaccio, Executive Vice President and Chief Financial Officer at Republic Services]

I think Q3 is relatively flat year-over-year. Q4, there might be a quarter [Phonetic] of a difference.

[Tyler Brown, Analyst at Raymond James]

Okay. Thank you. That's helpful.

[Operator]

The next question comes from Stephanie Yee with JPMorgan. Please go ahead.

[Stephanie Yee, Analyst at JPMorgan Chase & Co.]

Hi, good afternoon. I want to ask about how you're thinking about capital allocation in terms of debt repayment versus acquisitions? Is the leverage ratio coming down really just coming from EBITDA going up or are you planning to repay debt? And also, how are you thinking about share repurchases?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. I would say that, on the -- reverting the 3 times leverage is most likely a combination of both. So, again, the debt that we assumed as a result of the US Ecology acquisition, paying down, probably not all of it, but a portion of that, as well as just the growth in the underlying EBITDA dollars is certainly going to help the leverage calculations, but think of it as a combo of both.

[Stephanie Yee, Analyst at JPMorgan Chase & Co.]

Okay.

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Great. You had a follow-up question?

[Stephanie Yee, Analyst at JPMorgan Chase & Co.]

Sorry, I just going to -- I think you're going to comment on the share repurchases..

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. As far as share repurchases, so again, we were a buyer in the first quarter. We said that we are going to prioritize at this point the debt repayment, relatively short-term outlook on that as far as 12 months or less. But we always remain opportunistic on repurchasing shares and we will continue to do so.

[Stephanie Yee, Analyst at JPMorgan Chase & Co.]

Okay. And if I can just ask one more question. I know you provided that free cash flow conversion target in 2024. You didn't really outright state an adjusted EBITDA margin target. But if we add in kind of the $40 million of cost synergies, are we looking at total company EBITDA margins getting close to above 30% over that same time frame?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. I think that that's a realistic goal for us as we think about just through the cycle, being able to expand EBITDA margin 30 to 50 basis points per year. So over that two-year period, you could see that, that 30% is a realistic target.

[Stephanie Yee, Analyst at JPMorgan Chase & Co.]

Okay. Perfect. Thank you.

[Operator]

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

[Noah Kaye, Analyst at Oppenheimer]

Thanks for taking the questions. First one is sort of a guidance housekeeping item. Does guidance contemplate the reinstatement of the CNG tax credit? And if you're not including it, if that were to be renewed, would the contribution be incremental in terms of EBITDA?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

No, we did not include that in the guide. We're going to wait until that's actually law at this point. For us, that's about a $15 million annual impact, if it were to be fully reinstated.

[Noah Kaye, Analyst at Oppenheimer]

Okay, great. And then, you mentioned pricing is exceeding internal cost inflation. Just looking at some of these cost line items, I mean, you're getting leverage on labor and maintenance and repairs. I wonder if you could give us some color on how you're seeing the rate of internal cost inflation from 1Q to now to 2Q and where you think it goes in the back half of the year?

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Yeah. We certainly -- we come out with an annual wage increase in the first part of the year obviously for our people. And as the market inflation has persisted and these markets have remained challenged, we've been going into select markets and putting in additional wages, where we need to. And again, we'll do whatever we need to do to retain our people were run the business forever, not for the quarter, not for the year on that front. So, that's certainly gone up from the first quarter to the second quarter. We now see kind of what we're doing, that flatlining throughout the rest of the year, kind of ending the end of the year with wage inflation in the high-4s.

[Noah Kaye, Analyst at Oppenheimer]

Okay. Perfect. Thank you.

[Operator]

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

[Jon Vander Ark, President and Chief Executive Officer at Republic Services]

Thank you, Betsy. We are proud of our second quarter performance. We continue to manage the business to create long-term value for all stakeholders. I would like to thank our 39,000 employees for their continued hard work and commitment to providing our customers with first class service to create a more sustainable world. Have a good evening and be safe.

[Operator]

[Operator Closing Remarks]