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] Please note this event is being recorded. I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations. Please go ahead.

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 maybe 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 time-sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 27, 2022. Please note that this call is property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and the discussion of business activities, along with the recording of this call, are available on Republic’s website at republicservices.com. I want to remind you that Republic’s management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website. With that, I would like to turn the call over to Jon.

Thanks, Aaron. Good afternoon, everyone and thank you for joining us. 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 headwinds, 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 over $25 million in new sales to-date. Apart from US Ecology, we have invested over $400 million of acquisitions this year. Substantially, all of these deals are in the recycling and solid waste space. Our robust acquisition…

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 on related 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 of 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 a 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…

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 stabilized, 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.

[Operator Instructions] And our first question will come from Tyler Brown of Raymond James. Please go ahead.

Hey, good afternoon guys. Hey, Jon, I just wanted to start on US Ecology, curious how things are progressing there. It sounds like your September price type stuff. But can you just talk about how that action was received in the market and did that cover both disposal and field services?

Yes. Integration broadly is going well. I am really happy with what we purchased in terms of certainly the asset quality and also the people and culture and capabilities. And we are able to do a lot of the integration planning work ahead of the close so that we have got a team that’s hit the ground running and I think the results are certainly showing that. Yes, we did put in the pricing action that was on the disposal side of the business, where we start there. We have certainly taken some more tactical pricing actions on the field services side and we have seen no degradation in volume from that. So, the market has been very receptive to that. I think it fulfills our thesis that these assets and services have a lot of value to customers. And if you provide great work, they are willing to certainly pay a fair price and we will be continuing with pricing actions into 2023 and beyond to make sure that we are getting positive returns in every stage of the value chain.

Okay, good deal. Yes, that’s helpful. And then on the pricing side, obviously, another good print, but I am curious about a couple of things. Number one, do you think that the 6.9% 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’s restricted? What do you think that you will see on pricing in that piece as we look to ‘23?

Yes. I think the – we will get a little momentum here in the second half – on our ship side in the first half of next year, that will be 4.5% or north of 4.5%, we think, just based on the roll through of where the all the different indices that we have at this point start to hit.

Yes. And Tyler, just to put that into context, in the third quarter, the restricted pricing was 4% and in Q2, that number was 35%. So, you can see the nice acceleration as we move forward.

Yes, perfect. Okay. And then last one, just on the acquisition drag, I think, Brian, did you say 150 basis points, why was that so big?

Well, you have the combination of US Ecology was $90 million of the $150 million. We also have some of the environmental solutions transactions that we did late Q3 of last year. So, most of that, the other $60 million, starts anniversarying in the fourth quarter.

Okay. Alright, perfect. Thank you, guys.

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

Thanks so much. First, I wanted to ask about the strong volume that we have been seeing this year. I 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 I just wanted to ask about that?

Yes. Volume remains strong certainly in our recurring side of the business, but also in the places that are more transactional like special waste and temporary large container. We are still supply-constrained there and that’s still broad-based. Now as we think into next year, right, we are planning on those growth rates modulating a bit just because we are reading the same things you all are around some 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 and the small container business continues to exceed lost business and service increases are exceeding service decreases. So the demand is definitely there.

Terrific. And on the OCC, 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 give in the filings, the $10 million impact to revenue and profitability for $10 a ton, is that 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.

Yes. No, that sensitivity will hold, right? 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 $165 average that we’re projecting for ‘22, that would be a decrease of about $75 million of both revenue and EBITDA on the commodity line item.

Terrific. Thank you.

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

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 delink the commodity exposure. So any clarification you can provide there would be helpful.

Yes. No, 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.

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

It’s both. It’s $10 million of revenue and EBITDA. Because again, if you think about what we did is that when we actually went in and changed the structure of the recycling contract, we basically just put that into the base rate. 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’s the $10 change is $10 million to both revenue and EBITDA because just isolating the commodity impact, the service fee that we’re charging to either actually the process the material or to collect that material is going to stay unchanged regardless of what the commodity price is.

Yes. Very helpful. There is been some discussion of – you mentioned interest expense looking at next year, but also 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?

Yes. 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 a $70 million increase to interest expense year-over-year, which, in isolation, it’s about a 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.

Yes. I mean in reiterating, I just want to make this point right and please nuance 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, if you will. And I just want 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.

Well, I’d also say it’s also growth and margin expansion in Environmental Solutions. Nothing offset it, right? 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 as well. We’re committed to price ahead of cost inflation under almost any steady scenario, obviously, right, in a black sponsor area, where we get into crazy levels of interest rates, right? We 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 shareholders longer-term.

Appreciate all the color. Thank you.

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

Hi, good evening. Thanks for taking my question. Maybe just on the comments you made on the small container yield improvement, continues to be outsized well – I, mean, you’re going to get good pricing everywhere, but especially seems continue to be outsized. Just can you just explain to me why that is – why are you seeing even stronger pricing of small container relative to your other...

Yes, 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 are willing to pay more. More transactional parts of the business, for example, brokers, we just pushed that out of our portfolio because they are renters. For renting, those customers, they are not going to be with us for a long time. And so the mix certainly helps us. And then the offering we put in front of customers in terms of digital tools, the sophistication of our pricing that allows us to give very targeted pricing to a customer and understanding billings to pay. All of those things drive yield, which is the ultimate pricing metric. Core price is a means to an end. The ultimate metric which ties to the P&L and margin expansion is yield.

Okay. No, no, that’s very helpful. And then just my second one, the 160-basis-point 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-cutting. Just as you think about that 160, like is there a bucket that primarily drove that? Would it be primarily the cost-cutting and then build off of business, some of the other synergies roll through or was it kind of a mix of things that drove that 160?

No, it’s a mix of things. All have 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 the mid- to high teens. And over a longer period of time, we think there is 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 the business.

Yes, remember, too, there is obviously seasonality in that business, just like there is in the recycling and solid waste business, and so Q3 seasonally tends to be that 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’re definitely going to 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 as we realize some of the and benefit from some of the cross-selling.

Thank you for taking my question and congrats with the good results here.

Thank you.

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

So I went back here as fast as I could do this while we’re 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 this is 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 on how to understand what’s the messaging? What’s that mean, up a little, up a lot, up like – how do we make sure we get the right place to land on ‘23?

Yes. We had talked about last quarter, we thought we’d potentially a 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 hoped to close in the fourth quarter get pushed out. So we feel very confident that those are going to be deals that close, but they are 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 kind of in line with that EBITDA growth and free cash flow growth. So – and those, if you think about, to get 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 the rate. It’s the reason why we’re not giving some more formal type of indication, if you go back 5 years, it’s a pretty predictable recurring revenue business. So you got a lot of visibility we’re living in very dynamic in different times in terms of what’s happening with interest rates and labor tightness and inflation and all those things. So I think that’s just – commodity prices. Given all those uncertainties, we thought we’re going to be in a better position 3 months from now to provide more clarity.

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 did give us a sense of restricted price first half, 4.5%, but the rate of inflation can be accelerating in the second half. So the assumption would be that restricted price in the second half would be greater than the 4.5% at the current trend hold. Is that the right observation?

Yes. 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’ll see some acceleration, but I think it will be moderate acceleration throughout the year.

And one last thing on price. Is your starting open market price, your exit rate from 4Q?

Yes. For the most part. I mean, look, if you look at where we’re saying right now with a 5.6% average yield on total revenue, call it around 6% on related revenue in total. If you think about the open market portion of that, we would see that participating next year or contributing relatively in line with what we got this year.

Okay. That’s very helpful. And then one just tweak as you getting asked about volume. I mean you’re getting – you’re still seeing your good correlation in household formation, new business formation. You alluded to positive enteric interval changes, new business exceeding loss business, but the rate of change will start to narrow because we were off of a pretty healthy recovery in the second half of ‘21 into 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 positive.

Absolutely, Michael. That’s our expectation when we think about ‘23%, that’s sort of a modular. And we think you start seeing that in the fourth quarter, Michael, and then again, getting to a more normalized level of growth.

Great. Okay, that’s great. Thank you.

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

Yes. 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 push back at all and why?

Yes. We said we’d achieve that by 2024. That’s the time frame that we said, could be at ‘25 already given that we’re still working through some integration, rolling this thing out. We have not 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.

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

Yes. And that’s what – 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 or that sort of thing, those sort of things can be different company to company, but that’s our sensitivity.

Okay. And last question here is 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 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 you have a new owner?

Yes. yes, we’re talking at many levels, including talking to their CEO. They have to probably tick up big, bold, ambitious plans around sustainability and decarbonization, and we think there is a number of ways that can work together. Certainly, in the core JV itself, and they are fully committed to that, and we’re getting the best of both worlds because the colleagues from 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 big business. So they have got a big Environmental Services business. So there is ways to partner together there. They have a major network of gas stations, and gas station is actually a major plays that plastic leak out of the value chain and don’t get recycled. So there is ways to pilot and innovate there. And we’ve done nothing formal together on those fronts yet, obviously, but have 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.

Yes. So it’s an opportunity to get creative and advance that initiative. That’s great. Okay. I appreciate the time. Thank you very much.

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

Hi, good afternoon and good evening, everyone. I’m wondering if you can talk about, for the recycling line of business at the commodity price that you mentioned for the fourth quarter, do you anticipate the business being in a net profit position? Can you just comment on that? And then nice to hear about the reiteration of guidance despite that headwind of $20 million, $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 I would love it if you could flesh that out. Thanks.

Yes. So just your first question there at the $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?

Correct.

Yes. So you’re talking about just the puts and takes?

That’s right. Yes. So it sounds like you’re able to overcome the recycling headwinds. It feels like yield has accelerated at our expectations, but I’m wondering if I could just get you to expand on that.

Yes, better overall yield, better volume performance as 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 though the big drop really happened recently, so September into October. So again, that’s why we’ve 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.

And then conceptually, as 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 are going to think about pushing pricing in municipal solid waste to essentially fund the recycling headwind, is what I think I am hearing from you. But can I trouble you to put a finer point on that, please?

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

Yes. I mean we talked about the fact that we have seen elevated cost inflation in the business. We see that rolling into ‘23. And right now, we are making our plan is 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 it starts to abate, then that could be some upside to our current plan, but that’s not how we are 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 have an impact on where we thought we were headed as of nine days ago. 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.

Super. And lastly, I am wondering, can you just talk about the evolution for off-take agreements in landfill gas in addition to capital deployed by BP. Kinder Morgan has obviously bought some assets as well. Can you just provide an update on off-take agreement visibility? It sounded like the market was moving into the 20s per MMBtu on a multiyear basis. I am 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.

No, we are still on track and still the same view that we are going to fix a portion of this and play spot on the market with the rest of it, which has been probably we think that, that balance between maximizing returns as well as predictability over the cycle and managing risk on that. Certainly have alignment with BP on that same philosophy on the back end of these facilities.

Okay. Thanks.

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

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

Yes. From a rollover perspective right now, that’s what we are planning is that the 300 basis points of rollover, as Jon mentioned, there were a couple of deals that were in the offer and they still are where we thought they might close in Q4. They are now looking like they could be early to mid ‘23. So, we will keep you updated on that progress. But right now, we are building the plan with 300 basis points of acquisition rollover.

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

Well, we will tell you when they are closed.

Got it. Okay. Fair enough. And then I just wanted to make sure I understand the ECOL contribution within that bridge to 2023. Obviously, we get a full year of revenue. But I am just curious how you guys are thinking roughly about the growth rate in ECOL’s top line and I think we have got a lot of different pieces to work with here. But just in terms of where we are going to end up on ECOL margins this year, what you guys think that will be for the full year next year?

Yes. So, of that 300 basis points of rollover, call it, $250 million of it is related to U.S. psychology. If you just think about in the context of consolidated company margin, we look at that additional four months of rollover, having about a 30 basis point headwind on total company margin in ‘23.

Okay. Got it. And does that assume status quo margins for ECOL year-on-year?

Slight step-up as we realized a portion of the synergies again. But for the most part, that’s going to be in the ZIP code.

Okay. Very helpful. Thanks guys.

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

Great. Thanks for taking the question. I wanted to go back to pricing. Just curious, are you starting to see any kind of pushback from customers? It seems like everyone six months ago is willing to pay higher prices? And now the environment has changed. Is it somewhat – so curious how those dialogues have gone? And if you have seen any kind of pushback that you would mention?

No, we are still – like we 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 realization rate as the 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 have got challenges in small micro markets where we have had some challenges with turnover, given labor constraints. Obviously, when you are not providing the service that you want in a given market, right, you are going to cause the customers to reconsider and go elsewhere. And so that’s why we are into, 2023, still planning on relatively elevated inflation levels because we run the business forever. And we want to make sure that we provide customers world-class service, and that will keep them staying and stay longer.

Got it. That’s helpful. And then on the – you talked about this a little bit. So, as you think about 2023 in kind of underlying solid waste expansion margins, I think this year, you are probably running about 60 basis points – 50 basis points to 60 basis points. And so if you are pricing at these elevated levels of inflation that you are 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 are in a more moderate inflationary environment next year?

Yes. We sat across the cycle, 30 basis points to 50 basis points is what we think about doing in recycling solid waste. And we will do that over time, right, at an elevated level in environmental solutions. Could that creep higher next year if pricing stick and inflation comes down in the back half, it certainly could. We are not expecting that in terms of building a plan around it, but that would cause that gap to widen and allow for a little more margin expansion in the second half and certainly then going into 2024.

Got it. Thank you.

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

Yes. Thank you. You previously outlined that your revenues have about a 90% correlation with housing starts on a 1-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 are eyeing relative to the back half of next year?

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 we are – we have been in anything, but kind of have these puts and takes with inflation. So, again, at this point, as Jon mentioned, we are going to continue to price in excess of cost inflation. From an overall demand perspective, again, we have actually seen the demand very strong throughout ‘22. We are not really seeing any signs of that abating. So, again, that’s how we are building our plan. Growth levels probably won’t be as strong as they were – or 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.

Got it. So, maybe directionally, you still think there is some correlation there, but not necessarily of the magnitude depending on starts, is what I am 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 to the fourth quarter in 2023 then?

Yes. So, again, right now, what we are expecting is another 125 basis point increase, right, 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.

Okay. Thank you.

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

Hi. Good afternoon.

Go ahead Stephanie.

I wanted to touch on your tech investments and 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 are 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 digital tools and some investments that might be in the works?

Yes. We have 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, primary value for our drivers. So, we – from a cost standpoint, we think we have taken out almost $50 million at this point. And we think over the next 18 months, we have got another $50 million that we can take out of the business as we get full deployment and full utilization of this. And then when you connect it back to the customer, all that information allows us to communicate with a customer, right, with this Track My Truck we talked about. That allows the customer to see where we are and when the pickup is going to occur. And it not only allows in some cases, them to look for themselves, right, where their vehicle is and when the pickup is coming, but even if they decide to use a different channel and call our customer service center, then we are able to have our agent look up there and give the customer it will be there tomorrow or range, but give them a far more precise time that the truck is on the way and get the customer assured. So, a lot of what we get is that, right. We really run so precise that we are there within a 5-hour, 45-minute window every week or multiple times a week for a customer. And so when we miss that window, even if we are going to be there that day, the customers call and they are concerned. So, this allows us to provide better information take cost out of the system and – we are not going to talk about those today, but you are going to see more innovation come off that, that make the customer offering differentiated that we think can directly hit the P&L in terms of customers staying longer.

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

No, I think the pipeline is certainly strong, and there is significant willingness to sell. We are 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. If you think about the digital investments, we just talked about. That’s becoming a second moat. It’s not just the post-collection 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, or the current labor environment makes it more challenging. The current supply chain being constrained, right, we are only slightly delayed in deliveries of equipment because we are a great customer for our suppliers, right. We buy trucks year-in and year-out, where some of the smaller players will go years about buying and try to buy in the spot market. Well, now they are locked out. Those factories are full, and they are at the end of the line, and so you suffer to get labor. And those people you hire have to drive old equipment that’s in need of repair and/or replacement, right. That’s a big advantage for us to take over those businesses.

Understood. Well, thank you so much.

Thank you.

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

Hey guys. Thanks for squeezing me in. Brian, you guys just did, on a year-to-date basis, adjusted free cash flow of $1.67 billion, really strong. I think your guide is $1.7 billion or so. You might have touched on it earlier. Is there anything I am missing on the fourth quarter that we should be aware of, of why you are not releasing the free cash flow outlook?

Yes. So, Mike, I had actually mentioned it 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 have seen. So, that’s why you see a relatively modest Q4 contribution and why we have maintained the guide as it is on free cash flow. Some of that, as Jon mentioned, accelerating some of the investments in Polymer Center throughout the year, some of the things we have done in order to fund this outsized growth. But so 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.

And I guess, Brian, just to follow-up with that and to 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.

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 it a little bit more. Obviously, the impact of interest expense and recycled commodity prices impacts that, but we are fully expecting to grow.

Thank you.

At this time, there appear to be no further questions. Mr. Vander Ark, I will turn the call back over to you for closing remarks. End of Q&A:

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.

Ladies and gentlemen, this concludes the conference call. Thank you for attending and you may now disconnect.