Republic Services Q3 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, Chief Financial Officer

Analysts

• Tyler Brown, Raymond James Financial
• Toni Kaplan, Morgan Stanley
• Noah Kaye, Oppenheimer & Co. Inc.
• Kevin Chiang, Canadian Imperial Bank of Commerce
• Michael E. Hoffman, Stifel Financial
• Walter Spracklin, RBC Capital Markets
• Jerry Revich, The Goldman Sachs Group, Inc.
• Sean Eastman, KeyBanc Capital Markets
• Kyle White, Deutsche Bank Aktiengesellschaft
• David J. Manthey, Robert W. Baird & Co.
• Stephanie Moore, Jefferies Group
• Michael Stringer, Bank of America Merrill Lynch

Presentation

[Operator]

Good afternoon, and welcome to the Republic Services Third Quarter 2022 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. [Operator Instructions].

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

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

I would like to welcome everyone to Republic Services' third 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 cause actual results --- that could cause actual results to differ materially from expectations. The material that we discuss today is times-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 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, 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 strong results in the third quarter demonstrate our ability to profitably grow the business and effectively manage our cost structure, even with increased volatility in the broader marketplace. Cost pressures remain elevated and more persistent than we originally anticipated. In the face of those cost headwind, we are leveraging our tools and technology to price ahead of cost inflation and drive margin expansion in the underlying business. From our perspective, customer demand remains strong and supportive of continued volume growth. The sound fundamentals in our business, together with a laser-focus on the customer position us well to capitalize on growth opportunities in the market.

During the third quarter, we delivered revenue growth of 23%, including over 12% from acquisitions. Generated adjusted earnings per share of $1.34, which is a 20% increase over the prior year, and produced more than $1.6 billion of adjusted free cash flow on a year-to-date basis, a 23% increase over the prior year. We remain confident that investing in value-creating acquisitions is the highest and best use of our cash flow. Year-to-date, we invested $2.6 billion of acquisitions, which includes the acquisition of US Ecology. The integration of US Ecology is progressing as planned, and we remain confident that we will achieve at least $40 million of cost synergies. Our initial pricing actions have been successful. We will continue to increase prices to ensure that all stages of the value chain earn an appropriate return. We are also gaining traction cross-selling our products and services, achieving our $25 million in new sales to-date. Apart from US Ecology, we've invested over $400 million of acquisitions this year. Substantially, all of these deals are in the recycling and solid waste space. Our robust acquisition pipeline continues to support outsized levels of activity over the coming years.

Year-to-date, we returned $640 million to our shareholders through dividends and share repurchases. We continue to invest for the future and advance our strategic initiatives to build distinctive capabilities in customer zeal, digital and sustainability. With respect to customer zeal, we delivered organic volume growth of 2.2% during the third quarter. Volume growth was broad based across our market verticals and geographies. We also demonstrated our ongoing ability to price in excess of underlying cost inflation. Core price increase to 6.9% and average yield increased to 5.6%. This is the highest-level of pricing in company history.

Moving onto our digital capability. The team continues to advance the implementation of digital tools that improve the experience for both customers and employees. Our proprietary RISE tablets have been fully deployed across our large and small container route, and deployment to residential route is 26% complete. The remaining residential routes are on-track for completion by mid-2023. We have also launched TrackMyTruck. This technology connects per customer to their large and small container truck utilizing a GPS enabled RISE tablets. This is a major milestone and serves as a foundation for further digital offerings to our customers.

As it relates to sustainability, development of our renewable gas projects remains on track. We expect the first tranche of these projects related to our joint-venture to come online beginning in late 2023. We are pleased to work with BP and these RNG projects, who recently-announced its intent to acquire Archaea. This provides additional opportunities to work together on decarbonization and environmental services initiatives. Regarding polymer centers, we are accelerating the development of these projects and now expect to invest an additional $40 million of capital this year to start working on future locations.

Finally, our company values guide everything we do. I am proud of our recent certification as a Great Place to work for the sixth consecutive year. This is a significant achievement as employee retention and recruiting remains a top priority in today's market.

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

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

Thanks, Jon.

Core price during the third quarter was 6.9%, which included open-market pricing of 8.7% and restricted pricing of 4%. The components of core price included small container of 10.7%, large container of 7.6% and residential of 6.7%. Average yield on total revenue was 5.6%, an increase of 60 basis points when compared to our second-quarter performance. Average yield unrelated revenue was 6.3%. The team continues to dynamically adjust price on new and existing business to offset higher levels of inflation in our operating costs and capital expenditures. Third quarter volume increased 2.2%. The components of volume included an increase in small container of 2.3%, an increase in large container of 1.7% and an increase in landfill up 6.8%. Our customer retention rate remained strong, at over 94%.

Moving on to Recycling. Commodity prices were $162 per ton in the quarter. This compares to $230 per ton in the prior year. Recycling, processing and commodity sales were at 130 basis point headwind to internal growth during the quarter. We are now forecasting fourth quarter commodity prices to be approximately $90 per ton. This would result in a full-year average commodity price of $165 per ton.

Next, turning to our Environmental Solutions business. Third quarter Environmental Solutions' revenue increased $343 million over the prior year, which primarily relates to the acquisition of US Ecology. On a same-store basis, Environmental Solutions contributed 60 basis points to internal growth during the quarter. Adjusted EBITDA margin for the Environmental Solutions business was 18.7%, a sequential increase of 160 basis points. This includes our existing operations in the Gulf and Northeast, together with the addition of US Ecology.

Total company adjusted EBITDA margin for the third-quarter was 29.2%. This compares to 30.5% in the prior year. Margin performance during the quarter included a 150 basis points decrease from acquisitions, including 90 basis points related to US Ecology, and, a 40 basis points headwind from lower commodity prices. These margin headwinds were partially offset by a 10 basis point increase from net fuel and underlying margin expansion of 50 basis points.

Adjusted EBITDA margin in the Recycling and Solid Waste business was 30.5%. SG&A expenses, excluding transaction costs from US Ecology were 9.8% of revenue. This is a 30 basis point improvement over the prior year and reflects continued cost management as we grow the business. Year-to-date adjusted free cash flow was $1.67 billion, an increase of $309 million or 23%, compared to the prior year. This was driven almost exclusively by EBITDA growth in the business.

Similar to prior years, we expect to spend a disproportionate amount of our full-year capex and cash taxes during the fourth quarter. Year-to-date net capital expenditures of $808 million represents a little more than half of our projected full-year spend. And year-to-date adjusted cash taxes of $115 million represents 50% of our projected full-year spend. Total debt was $11.8 billion and total liquidity was $1.9 billion. Variable interest rates on our debt increased 1% during the third quarter and an additional 50 basis points in October. As a reminder, a 1% increase in interest rates resulted in $36 million of additional annual interest expense. Our leverage ratio at the end of the quarter was approximately 3.2 times. We expect to revert to three times leverage by mid-2023.

With respect to taxes, our combined tax-rate and non-cash charges from solar investments resulted in an equivalent tax impact of 25.1% during the third quarter and 24.8% on a year-to-date basis. We expect a similar tax impact in a range of 28% to 29% in the fourth quarter and an equivalent tax impact of just under 26% for the year.

I will now turn the call-back over to Jon.

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

We are proud of the results we delivered during the third quarter, which exceeded our expectations. Stronger contribution from price more than offset persistent cost inflation which we have seen stabilize, but not retreat from elevated levels. That said, we remain comfortable with our full-year financial guidance we provided in July even with the recent drop-in recycled commodity prices and increase in interest rate.

Looking-forward to 2023, the fundamentals of our business remain strong. Recent decreases in recycled commodity prices, increased interest rates and rising fuel costs will have a direct impact on our business. While these headwinds may modulate our performance expectations, we remain confident in our ability to price ahead of cost inflation. We still expect to deliver above average levels of growth in revenue, EBITDA and free cash flow. We plan to provide detailed 2023 guidance on our fourth quarter earnings call in February.

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

Questions and Answers

[Operator]

[Operator Instructions]

And our first question will come from Tyler Brown of Raymond James. Please go-ahead.

[Tyler Brown, Analyst at Raymond James Financial]

Hey. Good afternoon, guys.

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

Hi.

[Tyler Brown, Analyst at Raymond James Financial]

Hey, Jon, I just wanted to start on US Ecology. Curious how things are progressing there. It sounds like your September price hike, but can you just talk about how that actually was received in the market and did that cover both disposal and field services.

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

Yeah. Integration broadly is going well. Really happy with what we purchased in terms of certainly the asset quality and also the people and culture and capabilities and get ahead, we're able to do a lot of the integration planning work ahead of the close, so that, we've got a team that has hit the ground running and I think the results are certainly showing that. Yes, we did put it in the pricing action, that was on the disposal side of the business where we start there. We've certainly taken some more tactical pricing actions on the field services side and we've seen no degradation in volume from that. So, the market has been very receptive to that. I think it propels our thesis that these assets and services have a lot of value to customers and if you provide great work, they're willing to certainly pay a fair price and we will be continuing with pricing actions into 2023 and beyond t

O make sure that we're getting positive returns in every stage of that process.

[Tyler Brown, Analyst at Raymond James Financial]

Okay. Good deal. That's helpful. And then on the pricing side, obviously, another good print, but I'm curious about a couple of things. Number-one, do you think that the 69 that you posted this quarter could be the high watermark as we look to '23. What do you think that 50% of the book that restricted? What do you think that you'll see on pricing in that piece as we look to '23?

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

Yeah. I think the --- we'll get a little momentum here in the second-half in restricted side, in the first-half of next year. That'll be 4.5% or north of 4.5%. It is based on the roll-through we're the all the different indices that we have at this point start to hit.

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

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

[Tyler Brown, Analyst at Raymond James Financial]

Yeah. Perfect. Okay and then last one just on the acquisition drive. I think, Brian, did you say 150 basis points. Why was that so big?

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

We have the combination of, US Ecology was 90 basis points out of 150 basis points. We also have some of the Environmental Solutions' transactions that we did late Q3 of last year. So, most of that, the other 60 basis points starts anniversarying in the fourth quarter.

[Tyler Brown, Analyst at Raymond James Financial]

Okay. Perfect. Thank you guys.

[Operator]

The next question comes from Toni Kaplan of Morgan Stanley. Please go ahead.

[Toni Kaplan, Analyst at Morgan Stanley]

Thanks so much. First I wanted to ask about the strong volume that we've been seeing this year. Wanted to ask about your view on the sustainability of that. I think it's been progressively, maybe coming down, but I think overall, fairly good. So, trying to ask about that.

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

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

[Toni Kaplan, Analyst at Morgan Stanley]

Terrific. And on the OTC, I know you mentioned the expectation for I should say commodity basket. You mentioned the $90 a ton for 4Q. Is the sensitivity that you gave in the filings, that $10 million impact to revenue and profitability for a $10 a ton, is that a fair, like is that going to still hold for this or is there a sensitivity on certain levels of where it is? And also if you could help us think about the main components within the basket. Thanks.

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

Yeah. I know that, that sensitivity will hold. So, right now, if we were to sit there and look at $90 a ton. if that held true for all of '23 compared to the on $165 average that we're projecting for '22, that would be a decrease of about $75 million to both revenue and EBITDA on the commodity line item.

[Toni Kaplan, Analyst at Morgan Stanley]

Terrific. Thank you.

[Operator]

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

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

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

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

Yeah. Noah, that's a net number. So, if you remember, if you go back and look at our filings a couple of years ago, the sensitivity to a $10 change was $20 million. So we've cut that in half. And that's by being able to go in and actually share right in that volatility with the customer. So, that's where you really see that change. When we talk about that $10 equaling about $10 million worth of EBITDA, that is a net number.

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

$10 million of EBITDA, but not $10 million of revenue? Just to clarify.

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

It's both. It is $10 million of revenue and EBITDA.

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

Yeah.

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

Again, if you think about what we did is that when we actually went in and changed the structure of the recycling contracts, we basically just put that into the base rate.

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

All right.

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

So, that's how we actually wound up offsetting some of that volatility. So that's why when, you look at the sensitivity now, it is the $10 change is $10 million, both revenue and EBITDA. That is just isolating the commodity impact. The service fee that we're charging to actually to be in the process, the material or to collect that material is going to stay unchanged, regardless of what the commodity prices.

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

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

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

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

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

Yeah. I mean, again reiterating. I just want to make this point right and please nuance that as it makes sense but in saying you're comfortable with this year's guidance and point to above average growth for next year, I mean it's really pricing and operating leverage in solid waste. That's making up some of these headwinds do well. And, I just wanted to get your view on whether or not there is incremental pricing that you can put through looking at '23 to shore up some of those gaps?

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

So, I'd also say it's also growth and margin expansion of Environmental Solutions. There is nothing outside it that we've got. Plans there to continue to cross-sell, continue to price, right and drive our cost synergy numbers there. So, you'll see nice margin expansion in that part of the business well. We're committed to price ahead of cost inflation. Under almost any scenario, obviously, we are right in a black spot where we get into crazy levels of interest rates. Brian will come back and talk then but we've been in a pretty high-interest rate environment and lower interest-rate environment and we've done a pretty good job of, in both scenarios or both cases, pricing ahead of cost inflation and we're doing that playing a long game, right. We have customers. This is a loyalty business. So we're always going to do things that maximize the lifetime value of the business and therefore drive intrinsic value versus doing anything unnatural in a quarter that might drive short-term results, but aren't really good for the shareholder longer-term.

[Noah Kaye, Analyst at Oppenheimer & Co. Inc.]

I appreciate all the color. Thank you.

[Operator]

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

[Kevin Chiang, Analyst at Canadian Imperial Bank of Commerce]

Hi. Good evening. Thanks much for taking my question. Maybe just on just on the comments you made on the small container yield improvement. It continues to be outsized well, you're going to get the pricing everywhere, but especially, seems to be outside. Just -- you can just explain to me why that is? Why you are seeing stronger pricing in small container relative to your other segments?

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

I think it's --- Yeah. I think it's a combination of things, Kevin. I think it's certainly customer mix. We want to be with customers who are willing to pay more. We've got pretty sophisticated tools in our sales and marketing teams to identify those customers and present them with an offering where they're willing to pay more. More transactional parts of the business, for example, brokers, we have just push that out of our portfolio because they are renters. So, renting those customers, they're not going to be with us for a long, long-time and so the mix certainly helps us and then the offering we put in front of customers in terms of digital tools, sophistication of our pricing, that allows us to give very targeted pricing to a customer and understanding those who are to stay. All of those things drive yield, which is the ultimate pricing metric. Core price as a means to an end. Ultimate metric which ties for the P&L and larger expansion is yield.

[Kevin Chiang, Analyst at Canadian Imperial Bank of Commerce]

Okay. No, that's very helpful. And then just my second one, the 160 basis points sequential improvement in EBITDA margin in Environmental Solutions, you talked about some of the early wins in terms of pricing and cross-selling and cost. I think just as you think about that 160 basis points, is there a bucket that primarily drove, that what would be primarily the cost-cutting and then can be build-off on this business some of the other synergies work through or was that kind of a mix of things that drove that 160 basis points?

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

No, it's a mix of things. All contributed and that really that balanced approach is what we look for going-forward. As we look to take a business again that was in mid to-high teens and over a longer period of time, we think there's no reason that business can't be in the mid-to-high 20s, right. That's where over a period of years we think we can take that business. Yeah, remember too, there's obviously seasonality in that business just like there is in the Recycling and Solid Waste business and so, Q3 seasonally tends to be at highest quarter. So, I think as we get more quarters, as well you'll start to see the growth year-over-year, but, I think, you'll definitely see as Jon mentioned, you're going to see a combination of pricing actions, you're going to, see some of the cost takeout that we've done is we realized some of the synergies and benefit from some of the cross-sell.

[Kevin Chiang, Analyst at Canadian Imperial Bank of Commerce]

Thank you for taking my questions, and congrats results.

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

Thanks.

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

Thank you.

[Operator]

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

[Michael E. Hoffman, Analyst at Stifel Financial]

So, I went back here as fast as I could do this, so I was on the call. I think for 10 years you all have given some kind of indication of what the next year is going to be in the third quarter. So, it looks like the first time you're not in 10 years. And yet then you say sales EBITDA and free cash flow will be up. So, can you help us a little bit of how to understand with the messaging? What's up mean? Up a little? Up a lot? Up like --- How do we make sure we get the right place to land on '23?

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

Yeah. We had talked about last quarter. We thought we potentially have line-of-sight to double-digit revenue growth. Right. We're probably off that a little bit in terms of what our expectations are, for a couple of reasons. One is commodity price. Those coming down. They obviously have a revenue impact and a margin impact. The second is, some of the acquisitions that we had hope to close in the fourth quarter or get pushed out. We feel very confident that those are going to be deals that close, but they're going to roll into the first-quarter, in one case, the second-quarter which just pushes the rollover effect of that revenue benefit. And then the market, I think is getting a little more uncertain as you see from a broader macro standpoint. All that being said, Michael, we feel really good about high-single-digit revenue growth, right kind of in-line with that EBITDA growth and free cash flow growth. So --- and those if you think about getting back to a 10 year period, right, those are certainly above-average numbers for the performance in a very challenging environment. So we're very optimistic about it.

And I think the reason why we're not giving some more formal steps of indication, if you go back five years, the pretty predictable recurring revenue business, you got a lot of visibility. We're living in very dynamic and different times in terms of what's happening with interest rates and labor tightness and inflation and all those things. So, I think that just comes out in commodity price. Given all those uncertainties, we're going to be in a better position three months from now to provide more clarity.

[Michael E. Hoffman, Analyst at Stifel Financial]

Fair enough. But at least we've got some guardrails we can live in based on what you just shared. So, thank you for that. And then, you didn't give us a sense of restricted price first-half, 4.5% but the rate of inflation kept accelerating in the second-half. So, the assumption with the restricted pricing in the second-half would be greater than the 4.5% if the current trend holds. That's the right observation?

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

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

[Michael E. Hoffman, Analyst at Stifel Financial]

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

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

Yeah for the most part. I mean look if you look at where we're seeing right now with 5.6% average yield on total revenue, core around 6% and unrelated revenue in total, if you, think about the open-market portion of that, we would see that participating next year contributing relatively in-line with what we got this year.

[Michael E. Hoffman, Analyst at Stifel Financial]

Okay. That's really helpful. And then one just tweak of the, you're getting better volume. I mean, you're getting, you're still seeing your good correlation, household formation, new business formation, you alluded to positive service interval changes, new business are exceeding loss business. But the rate of change will start to narrow because we were off of a pretty healthy recovery in second-half of '21 and in the first-half of '22. So, we're going to start normalizing into a more narrow rate of change but the trend underlying is still hard.

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

Absolutely, Michael. That's our expectation when we think about '23, that starts to modulate.

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

We think you'll start seeing that in the fourth quarter, Michael, and then again getting to a more normalized level of growth.

[Michael E. Hoffman, Analyst at Stifel Financial]

Right. Okay. That's great. Thank you.

[Operator]

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

[Walter Spracklin, Analyst at RBC Capital Markets]

Yeah. Thanks very much. Thank you for taking my question here. Let me start on the cross-selling opportunities. I think, Jon you mentioned earlier, $75 million to $100 million eventually. You're at the $25 million mark now. Are you still on-track from a timing perspective and achieving that full run-rate of cross-selling or if it's changed, can you comment on that? Has it been pulled forward or pushed back at all and why?

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

Yeah we said we'd achieve that by 2024. That's the timeframe and you said, we are at $25 million already given that we're still working through some integration, rolling this thing out. We have touched many of our customers yet. We're really, really pleased about our progress, and I would say quite optimistic about hitting both the level and the timing of that.

[Walter Spracklin, Analyst at RBC Capital Markets]

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

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

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

[Walter Spracklin, Analyst at RBC Capital Markets]

Okay. And last question here is on, you mentioned BP's purchase of Archaea there, that you're optimistic working with them and all that. Anything that you can add, have you spoken to the folks at BP at all? What kind of new ways would you would you look at partnering with them? Or is it just what you had before is pretty much what you have now and expect to have going-forward or is there something additional now that, now that you have a new owner or they have a new owner?

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

Yeah. We spoke. Yes. We are talking with about many levels including talking about our CEO, their [Indecipherable], make bold ambitious plan around sustainability and decarbonization, and we think there's a number of ways we can work together. Certainly, in the core JV itself, and they are fully committed to that. We're getting the best of both worlds because the colleagues at Archaea, that they are going to acquire, are going to stay. So we feel really excited about that team, but bringing more resources to bear, that will certainly help us hit our marks and maybe move a little faster on that front. And then they have a a big business. So, they've got a big Environmental Services business. So there are ways to partner together there. There they have a major network of gas station. Gas station is actually a major place that are fast to leak out-of-the value chain and don't get recycled. So there's ways to pilot, innovate there and we've done nothing formal together and those fronts are there obviously, but, like-minded ambitions in terms of making the world more environmentally sustainable and doing that in a way that drives growth for our shareholders as well.

[Walter Spracklin, Analyst at RBC Capital Markets]

Yeah. So, the opportunity to get creative and advance that initiative. That's great. Okay. Appreciate the time. Thank you very much.

[Operator]

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

[Jerry Revich, Analyst at The Goldman Sachs Group]

Hi. Good afternoon, and good evening everyone. I'm wondering if you can talk about for the recycling line-of-business if the commodity price that you mentioned for the fourth quarter, do you anticipate the business being in a profit position? Can you just comment on that and then nice to hear about the reiteration of guidance despite that headwind only $30 million from recycling? Can you just talk about what part of the guidance has evolved? Ahead of expectations, it sounds like it might be yield but would love it if you could flesh that out. Thanks.

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

Yeah. So just your first question there at $90 commodity price. Yes, that portion of the business would remain profitable at that level. And then, the second part, when you talk about the evolving guide, you're talking about with respect to '22.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Correct.

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

Yeah. So you are talking about just the puts and takes?

[Jerry Revich, Analyst at The Goldman Sachs Group]

That's right. Yes. So, it sounds like you're able to overcome the recycling headwinds.

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

Yes.

[Jerry Revich, Analyst at The Goldman Sachs Group]

It feels like yield has accelerated ahead of expectations but, I'm wondering if. I could just get you to expand on that? What is your mantra?

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

Yeah. Yeah. Better overall yield, better volume performance was we were able to overcome the commodity headwind, as well as the higher interest rates in the third quarter. As we now look in the fourth quarter, there was a big drop really happened recently. So, September into October. So again, that's why we have maintained the guide because the outperformance from Q3 is basically funding what we expect now for Q4 and we feel pretty good about the full-year guide.

[Jerry Revich, Analyst at The Goldman Sachs Group]

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

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

Yeah. We think we're always going to try to price ahead of our cost inflation, Jerry, and obviously, commodities are headwind on that front but how we don't think about it is, because now there is a short-term headwind that we're going to go out and put a bunch of price in the market that we could deal destructive from a long-term value-creation with our customers on that front. So we feel-good, like I said in the '23 and even with these headwinds that we're going to have high-single-digit growth on revenue EBITDA and free cash flow, given that we're overcoming that commodity headwind, I think speaks to the strength of the business.

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

Yes. I mean we talked about the fact that we've seen elevated cost inflation in the business. We see that rolling into '23 and right now, we are making our plan if that cost inflation stays in the business for the full-year. So, that's where the pricing ahead of cost inflation, that's where that comment is.

Now look, if inflation is lower than we think or starts to abate then that could be some upside to our current plan. But that's not how we're going into it. So, we do versus our original expectations, we do expect the impact of both lower recycled commodity prices and higher interest rates to have an impact on where we thought we were headed as of 90 days time. But as we just kind of talked about with Michael, we still think the outcome is going to be very strong, especially, in the context when you look at an average growth rate. And revenue, EBITDA, free-cash flow, free-cash flow conversion, we think they are all very strong metrics, all growing.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Sure. And lastly, I'm wondering can you, just talk about the evolution for offtake agreements in landfill gas, in addition to capital deployed by BP. Morgan has, obviously, bought some assets as well. Can you just provide an update on offtake agreement visibility. It sounded like the market was moving into the 20s per MMBPU on a multiyear basis. Not sure if you feel comfortable commenting on that and how the shape of the market has evolved since the last public update a quarter ago? Thanks.

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

So, we're still on-track and still the same view that we're going to fix a portion of this and play spot-on the market with the rest of it but what we think has been a we think the best balance between maximizing returns, as well as predictability of the cycle and managing risk-on that. Certainly have alignment with BP on that same philosophy on the back-end of the facility.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Okay. Thanks.

[Operator]

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

[Sean Eastman, Analyst at KeyBanc Capital Markets]

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

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

Yeah. From a rollover perspective right now that's what we're planning is the 300 basis points of rollover. As Jon mentioned, there were a couple of deals that were in the hopper They still are. They were we thought they might close in Q4, they're now looking like they could be early-to-mid '23. So, we'll keep you updated on that progress but right now, we're building a plan with 300 basis points of acquisition rollover.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Okay. Got it. So you don't want to give any hence on the magnitude of those acquisitions that are in the hopper?

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

No, we will tell you when they close.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Got it. Okay. Fair enough. Fair enough. And then, I just wanted to make sure I understand the Eco contribution within that bridge to 2023. Obviously, we get a full-year of revenue, but, I'm just curious, how you guys are thinking roughly about the growth rate and Eco's topline and I think we've got a lot of different pieces to work with here but just in terms of where we're going to end up on Eco margins this year? What do you guys think that will be for the full-year next year?

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

Yeah. So, of that 300 basis points of rollover, call it 250 basis points of it is related to US Ecology. If you just think about in the context of a consolidated company margin, we look at that additional four months of rollover. I think about a 30 basis point headwind on total company margin in '23.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Okay. Got it. Does that assumes status quo margins for Eco year-on year?

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

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

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Okay. Very helpful. Thanks guys.

[Operator]

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

[Kyle White, Analyst at Deutsche Bank Aktiengesellschaft]

Hey. Thanks for taking my question. I wanted to go back to pricing. Just curious, are you starting to see any kind of push-back from customers. It seems like everyone six months ago is willing to pay higher prices, and now the environment has changed somewhat. I'm curious how those dialogs have gone? If you've seen any kind of pushback that you've mentioned?

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

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

[Kyle White, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. That's helpful. You've talked about this a little bit. As we think about 2023 in kind of underlying solid waste expansion margin, I think this year, you're probably running about 60 basis points, 50 to 60 basis-points and so if you're pricing at these elevated levels of inflation that you're seeing today and that carries into 2023, would that equate to again 50 basis points to 60 basis points with the potential to go even higher if we're in a more moderate inflationary environment next year?

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

Yeah, we said across the cycle 30 to 50 basis-points, is what we think about doing in recycling and solid waste and we'll do that over time right at the elevated level in Environmental Solutions. Could that creep higher next year? if pricing sticks and inflation comes down the back-half, it certainly could. We're not expecting that in terms of building a plan around it, but that would cause that gap to widen a lot for a little more margin expansion in the second-half and certainly then going into 2024.

[Kyle White, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. Thank you. I'll turn it over.

[Operator]

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

[David J. Manthey, Analyst at Robert W. Baird & Co.]

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

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

Eyeing as far as, because again, look, that's been a historical correlation, but again I think that's been in a call it a relatively stable macro-environment. And where we've been in anything but we are going to have these puts and takes with inflation. So again, at this point, as Jon mentioned, we're going to continue to price in excess of cost inflation. From an overall demand perspective, again, we've actually seen the demand very strong throughout '22. We're not really seeing any signs of that abate. So again, that's how we're building our plans. Growth levels probably won't be as strong as they were. Certainly won't be as strong as they were in '22, just because we were still recovering units from the pandemic, but we still expect underlying unit growth in '23 year-over-year.

[David J. Manthey, Analyst at Robert W. Baird & Co.]

Got it. So, maybe directionally you still think there are some correlation there, but not necessarily of the magnitude depending on the starts is what I'm hearing. Could we talk about the interest-rate? You said 1% change in rate is $36 million in interest expense. What was the reference rate in the third quarter from which to build for the fourth quarter and 2023 then?

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

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

[David J. Manthey, Analyst at Robert W. Baird & Co.]

Okay. Thank you.

[Operator]

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

[Stephanie Moore, Analyst at Jefferies Group]

Hi. Good afternoon.

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

Good afternoon.

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

Hi, Stephanie.

[Stephanie Moore, Analyst at Jefferies Group]

I wanted to touch on your tech investments in digital tools. I appreciate the update on the RISE platform. It would be helpful if you could share, I don't know, any KPIs or benefits that you're seeing from the early rollout of those tools on the efficiency side and as we think to 2023, kind of what's in the pipeline from the the digital tools and some investments that might be in the work?

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

Yeah. We've certainly seen over the last 18 months productivity benefit, which allows us to get more work done in the same amount of time, with great customer service and doing it safely. That is the primary value for our drivers. So, probably from a cost standpoint, we think we've taken out almost $50 million at this point and we think over the next 18 months we've got another $50 million, that we can take-out of the business as we get all deployment and fully utilization of this, and then when you connect it back to the customer, all that information allows us to communicate with the customer. This TrackMyTruck that we talked about, that allows the customer to see where we are and when the pickups are going to occur. And it not only allows, in some cases, then to look for themselves, right where the vehicle is and when the pickup is coming, but even if they decide to use a different channel and call our customer service center and then we're able to have our agent look up there and give the customer, not, it will be there tomorrow or range but give them a far more precise time, that the trunk is on the way. It gets the customer assured.

So there's a lot of what we get is that, that we run so precise that we are there within a half-hour, 45-minute window every week or multiple times a week for customers. So, when we miss that window, even if we are going to be there that day, the customers call as they are concerned. So, this allows us to provide better information. They call us assuming, I'm not going to talk about those today but you're going to see more innovation come off that that meet the customer offering differentiated. That will then directly hit the P&L in terms of customers there.

[Stephanie Moore, Analyst at Jefferies Group]

Great. Thank you. And then just touching on the M&A side, maybe on the traditional way. Are you seeing any changes in demand or interest levels there in this environment?

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

No. I think the pipeline is certainly strong and there is significant willingness to sell. We're obviously maintaining a lot of discretion, right. Some companies don't fit us from a profile standpoint, from a value standpoint. They might not be a good fit for us. So, we remain very discriminating in terms of what we buy, but the pipeline is very, very strong. It's getting harder to do business. Think about the digital investments we just talked about. But that's becoming a second moment, not just the full-fledged infrastructure.

All of those investments we make are very expensive. They take a lot of time. They take a lot of expertise. So, that makes it tough. But the current labor environment makes it more challenging. The current supply-chain being constrained. We're only slightly delayed in deliveries of equipment because we're a great customer for our suppliers, where we buy trucks year in, year out. Where some of the smaller players will go years without buying and trying to buy now, they're locked out. Those factories are full and at the end-of-the line. So, it is difficult to get labor and those people you hire have to drive all the equipment that's in need of repair and-or replacement that's a big advantage for us to take-over those business.

[Stephanie Moore, Analyst at Jefferies Group]

Understood. Well, thank you so much.

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

Thank you.

[Operator]

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

[Michael Stringer, Analyst at Bank of America Merrill Lynch]

Hey, guys. Thanks for squeezing me in. Brian, you guys just did on a yearly basis adjusted free cash of 1.67. Really strong. I think your guide is 1.7 or so. You might touch on it earlier. Is there anything I'm missing on the fourth quarter that we should be aware of why you're not raising the free cash flow outlook?

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

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

[Michael Stringer, Analyst at Bank of America Merrill Lynch]

Got it.

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

Some of that as Jon mentioned, accelerating some of the investments in polymer center, throughout the year some of the things we've done in order to fund this outsized growth. But you can reasonably expect a little bit more capex than we originally anticipated, partially being offset by a little bit less cash taxes than we originally anticipated.

[Michael Stringer, Analyst at Bank of America Merrill Lynch]

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

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

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

[Michael Stringer, Analyst at Bank of America Merrill Lynch]

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

[Operator]

[Operator Closing Remarks]