Good afternoon, and welcome to the Republic Services Second Quarter 2023 Investor Conference Call. All participants in today's call will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 second quarter 2023 conference call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If, in the future, you listen to a rebroadcast or rerecording of this conference call, you should be sensitive to the date of the original call, which is July 31, 2023. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with the recording of this call, are 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 second quarter results demonstrate the value created by our differentiated capabilities and the execution of our strategic priorities. We continue to successfully grow our business both organically and through acquisitions while enhancing profitability. During the quarter, we delivered revenue growth of 9%, including more than 4% from acquisitions; generated adjusted EBITDA growth of 10.5%; expanded EBITDA margin by 40 basis points; reported adjusted earnings per share of $1.41; and produced $1.26 billion of adjusted free cash flow on a year-to-date basis, a 10% increase over the prior year. We continue to effectively allocate capital by investing in acquisitions to create long-term value. Year-to-date, we invested $927 million of acquisitions, all transactions were in the recycling and solid waste space, including the acquisition of assets in Colorado and New Mexico from GFL. The M&A environment remains active with opportunities in both the recycling and Solid Waste and Environmental Solutions businesses. We now expect investment in value creating acquisitions to exceed $1 billion for the year. We are making great progress on the integration of U.S. Ecology and increasing the profitability of our Environmental Solutions business. Pricing realization in this business remains strong. Customers value our complete set of products and services. We have achieved over $110 million in new sales to date as a result of cross-selling our products and services. The sales pipeline is robust with opportunities for organic growth and expansion of services within our existing customer base. We achieved more than $40 million of annualized cost synergies and EBITDA margin in the Environmental Solutions business improved to more than 22% in the quarter. The strong results we achieved in the first half of the year, along with the positive momentum in our business, supports a…

Thanks, Jon. Core price on total revenue was 7.3%. Core price on related revenue was 8.8%, which included open market pricing of 11% and restricted pricing of 5.3%. The components of core price on related revenue included small container of 12.3%, large container of 8.8% and residential of 8.3%. Average yield on total revenue was 5.9% and average yield on related revenue was 7.1%. We continue to price new and existing business ahead of cost inflation to drive margin expansion in the underlying business. Volume on total revenue increased 40 basis points, while volume on related revenue increased 50 basis points. The components of volume on related revenue included an increase in small container of 1.4%, an increase in residential of 80 basis points, and an increase in landfill of 3.7%. Landfill was primarily driven by an 8.3% increase in special waste revenue. Volume growth was partially offset by a decrease in large container of 1.3%, primarily due to a slowdown in construction-related activity. Moving on to Recycling. Commodity prices were $119 per ton during the quarter. This compared to $218 per ton in the prior year. Recycling processing and commodity sales decreased revenue by 1.1% during the quarter. Current commodity prices are approximately $115 per ton. We believe commodity prices will remain relatively flat with current levels in the second half of the year and we now expect average recycled commodity prices in a range of $110 to $115 per ton for the full-year. Next, turning to our Environmental Solutions business. Second quarter environmental solutions revenue increased $104 million over the prior year, which primarily relates to the acquisition of U.S. Ecology. On a same-store basis, environmental solutions contributed 20 basis points to internal growth during the quarter. Adjusted EBITDA margin for the Environmental Solutions business was 22.5%, a…

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Bryan Burgmeier of Citi. Please go ahead.

Good afternoon. Thanks for taking the question. On the Blue Polymer announcement this morning, is that something that's already captured in the pro forma earnings from Polymer Centers that you've spoken about previously? Or is this going to be incremental? And if it is incremental, could you give the full sense of the potential impact?

No, it's incremental. So think about that Polymer Center producing two things, PET on one side and olefins on the other side. At the PET, we take into a flake, basically, a hot wash clean flake that's food grade that can go right back into water bottle manufacturing or other types of PET applications. On the olefins, it takes a slightly different path. So we sort, get full collection of that olefins and then we feed the Polymer Center. So this basically guarantees the demand on the back end of our Polymer Center for the olefin side of it. And then Ravago was world-class at compounding and blending olefins to create unique products. And so that's why we partnered with them. We think we can provide the right applications to the market. We get to participate – not only do we get the supply, so it affects the supply agreement on one side, we get to participate in the benefit and the upside as a 45% minority JV partner.

Yes. From an economics perspective, we look at our equity pickup, that one line pickup, beginning in 2026 two centers somewhat contributing in that year with about $15 million. So you can think $7 million to $8 million per center. And then getting $7 million to $8 million incremental in both 2027 and 2028. Ultimately, we see $30 million to $32 million worth of EBITDA for all four at run rate in 2029.

Understood. Thanks for that detail. And if I can just maybe follow-up on the recycling business. I think your filings say your volume is about 80% fiber. Once the Polymer Centers are online, do you think that 80% fiber exposure drops a bit? Or is there maybe a different way we should start to think about value versus volume? Thanks, and I will turn it over.

Yes. Look, initially, it won't drop much, at least from a volume standpoint, because what we're really doing with Polymer Center is taking things that are down cycle today and some material along the way in that down cycling is lost and landfilled to get full volume recovery out of that plastic and get much higher yield because they're driving true circularity. Now these Polymer Centers are built actually to take third-party product over time. So over time, we'll flow third-party product in there. That will put more plastic into the system and then dilute the fiber percentage right at a certain level, but you're probably talking more like going from 80 to 75 versus a major change in the mix.

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

Thanks so much. You mentioned a couple of comments on volume, and I was just wondering if volume was sort of in line with what you were expecting or if it was a little bit lighter. And I know you mentioned the construction activity and the special waste was something mentioned by one of your competitors is slowing. I know here, you got the 8.3% increase in special waste revenue. But just anything on volume trends and where things are above or below what you were expecting and how you think for the rest of the year?

Yes. I'd say broadly kind of in line with expectation, probably slightly ahead in certain areas. So construction, we anticipated that being down. We saw residential and commercial starts obviously start to soften the second half of last year. And there's a lag effect as we have jobs that are getting completed. And so we're down 3.8%, but we have really strong pricing there. So we've taken the opportunity there to be disciplined on price and making sure that we're getting a positive mix even in that environment. And then other special waste, right, is attractive. Part of that special waste clearly is our cross-sell initiatives. With the U.S. Ecology acquisition, we have now a unique offering in the marketplace, and we're seeing customers demand to that unique offering. So that's certainly helping us. Small container was a bright spot, right, in terms of volume growth for the quarter. So I feel really good about that as well. And again, I'd say broadly in line with what we expected.

Yes. And Toni, if you remember, in our original guidance, the range on volume was 50 basis points to 1% positive. And now we're thinking it's at that – still within the range, but at the lower end. But at the same time, we increased our guidance on average yields, right? So the flow-through and the contribution of a 50 basis point increase on yield is much more significant to the enterprise in our results than the 50 basis point decrease on the volume side.

Yes, understood. And then you mentioned the partnership with Coca-Cola. Can you talk about potential impacts from that? It might be a little bit longer term, but just any thoughts on how to quantify how you're thinking about that partnership and the benefits to you? Thank you.

Yes, Coca-Cola has been a great partner. I would say this, demand for our product out of the Polymer Center outstrip supply by a lot, right? So we were able to talk to a number of parties. We could have sold the Las Vegas center out three or four times over without challenges because the market is so short supplied for this type of ARPA that's food grade. And we're taking it right now, the single site over time, we'll take the Midwest side. And then these partnerships will evolve, and I'm certain they'll grow, right, as we expand the network, but that's all we're disclosing at this point.

Perfect. Thank you.

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

Hey, good afternoon, guys.

Hey, Tyler.

Hey, Brian, just real quick from a modeling perspective, what is the expected contribution from M&A in the new revenue guidance? I think it was supposed to be maybe a 3% contributor coming into the year. Is it maybe closer to 3.5% to 4%? And then how much rolls into 2024 based on what we know today?

Yes. So the in-year contribution rollover from 2022 transactions as well as the in-year impact from 2023 transactions, we're thinking 4.25%, right? And the rollover impact into 2024, right, from the deals that were completed in 2023, we think adds 50 basis points to our 2024 revenue growth.

Okay, perfect. That's helpful. And then – so I just kind of want to think about the EBITDA a little bit. So it looks like you raised EBITDA by, call it, $50 million. But if I'm not mistaken, you actually lowered your commodity assumption, but then you added in some M&A. So basically, I'm trying to bridge that change. How much of the EBITDA change was basically core versus some other moving pieces, if that makes sense at all.

Yes. Let me answer the question. The short story is that the entire increase is essentially the underlying business. So let me go through some of the puts and takes. So to your point, right, we've added EBITDA associated with acquisitions, but most of those acquisitions were completed mid-year. So you're going to have half the contribution. We've also got deal and integration costs. Two of these deals require regulatory filings, so we had heavy legal costs. We also have a fairly significant integration costs just because one of those deals requires that we rebrand the trucks within the first six months. So the contributions from acquisitions in here is still positive, but it's somewhat muted. To your point, that's been further offset by the reduction in recycled commodity prices. So if you think about taking all those things I just mentioned relative to our original guide, it's a relative push. The $50 million increase in EBITDA at the midpoint is essentially the increase in price flowing through to the bottom line.

Okay, perfect. Yes, okay, that's what I thought. Okay, just real quick on the last one here. So if we just exclude Blue Polymer and we just look at the Vegas facility, what is the expected EBITDA impact of that facility in 2024? And then how dependent will it be on recycled plastic prices because we have seen some weakness there recently. And basically, sorry, does this Blue Polymer JV, does it kind of inoculate that offtake risk longer term? Am I thinking about all that right?

Yes. Let me go ahead and start. You had a couple of questions there, so we'll kind of unpack some of those. So the expected contribution from just the Polymer Center, right, so this is the one in Vegas in 2024 is $15 million, right, of EBITDA contribution in 2024. You can then think of about an incremental $20 million per year thereafter, right, as we bring other centers online, ultimately getting to about $80 million worth of EBITDA at run rate in 2028. To your other point, right, on the Blue Polymers, yes, we are going to be selling all of the olefins coming out of the Polymer Center 2, the Blue Polymers JV, right? And when you start thinking about the offtake agreement there that guarantees, right, a contractual rate for all of those units leaving Blue Polymers on the olefin side – or I'm sorry, Polymer Center on the olefin side.

Okay, perfect. Yes, so it kind of helps inoculate the offtake longer-term.

Yes.

If I read it right.

Correct.

Okay. All right. Thank you guys so much. Thank you.

Sure.

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

Good afternoon and good evening, everyone. Jon, I'm wondering if you could just expand on comments you recently made to the Wall Street Journal. You spoke about having visibility on double-digit topline growth here in the medium term. I'm wondering if you could just unpack what gives visibility on that between Polymer, M&A yield, other moving pieces? And in that type of topline environment, do you think you can still deliver the 2x leverage between revenue and earnings that Republic has done over the past decade? Thanks.

Yes. We're certainly starting with price, right? That's always the first component, right? We have to price ahead of our costs. You've seen the organic growth picture. And the underlying solid waste and recycling business is a slow growth business, right? And we expect to grow slightly faster than the market, only slightly because it's a highly contracted market and shares don't move easily. And again, we're always going to stay disciplined on price first. As we've expanded into Environmental Solutions, the underlying growth from an organic standpoint is certainly a little stronger. So that's a tailwind. On the growth side, we're doing more M&A than we ever had. It was six or seven years ago, we talked about spending $100 million a year in M&A. And then that's been ramped up to $500 million to $700 million, and obviously, we had announced last year the U.S. Ecology acquisition and got to $3 billion. But even outside of U.S. Ecology, it's $800 million of deals outside of U.S. Ecology. And this year, we've said more than $1 billion, and we're already sniffing up against that number. So M&A is certainly contributing. And then our other sustainability investments, right, are nice contributors and probably a little less on the topline in terms of really moving the needle given the scale of the business. But on the bottom line, right, these are kind of high EBITDA margin investment opportunity, very high return. So we feel great about that over time.

Super. And Brian, can I ask separately? In the quarter, really strong margin performance. Your COGS per unit were up just 3%. In terms of lumpy items that contributed to the results in the quarter? Or were the results pretty clean? It sounds like attrition was pretty low, but I'm wondering, were there any other moving pieces that helped margins or costs in the quarter that we should keep in mind before run rating the really strong results?

Look, I would say there's always some puts and takes. But I would say if you aggregate those from a net number perspective, it was a fairly clean quarter.

Well done. Thank you.

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

Hi, good afternoon. Thank you. Brian, could we walk through a dollar reconciliation of last year's EBITDA to this year's EBITDA on a dollar basis, so not just that aggregate change, the 50, but what are all the puts and takes? Because I think have the sense that we're understating the power of solid waste by just saying 50. This is on the guide. Sorry, I meant the guide.

Yes, the guide. So, Michael, as I mentioned, I mean, we're not going to get into the individual components of the EBITDA contribution of our acquisitions and other things. But what I can tell you is, as I just said with Tyler on the phone, if you take a look at the in-year acquisition contribution net of those deal and integration costs, right, that is a positive number, which is almost entirely offset by the reduction in recycled commodities. That reduction in recycled commodities is about $15 million to $20 million negative compared to our original expectations. So if you look at guide to guide right at the midpoint, our EBITDA is up $50 million, which is the underlying business made up primarily of relatively higher price. We took our yield from 5.5% on total revenue to 6%. We took it from 6.5% on related to 7%. So that's that 50 basis points as well as just outperformance within the Environmental Solutions business. That's what's contributing, right, to the overall increase in EBITDA.

Okay. Could we then talk about Environmental Solutions, and would you talk about the price volume mix there because I think it's important for everybody to see that there's a combination of both in the pricing of a scarce asset continues.

Yes, let me start there, Michael. We're working through that. Obviously, it's a little bit like special waste in terms of there's a mix issue that there's a lot of unique products and services. So we haven't nailed yet what we might report externally in terms of price or yield metric there, certainly our aspiration over time, whether that's large parts of the business, like yield per drum or things like that, work through it. But a huge portion of the outperformance there is price. We've taken multiple double-digit price increases, and we will lead from a pricing standpoint. And that's caused a few units to be shed in certain places. So we found the ceiling, but we're unafraid. These are valuable assets, impossible to replicate and customers are valuing what we're offering. So we're going to continue to push on that front. And that, also combined with the cross-sell, which is where we're driving a lot of the volume, has been a really good story and picture for that business.

Yes. I mean just to put some numbers on that, Michael. If you take a look at the Environmental Solutions business, this time last year, was 17.1% EBITDA margin. This quarter, 22.5%. So that 540 basis points of margin improvement is essentially most of that being price-driven, but also just better overall utilization as well. We're becoming more efficient, and we're optimizing from a labor perspective. So when we do get those units, not just because of the price alone, but as far as the overall profitability of each one of those jobs, we're just becoming overall more efficient as we have better utilization of the assets and the resources that are providing those services.

Okay. If I could just tease out one thing. We've had negative trends in ISM PMI were below 50 on the index. It looks like it's floor bottoming. But is there a positive volume even if I don't get the split, there's positive volume plus a lot of price?

Yes. I think, yes. And so we look at all those indices, too, Michael. And I think what we're not fully accounting for is a lot of the infrastructure spend and the government spending is flowing through. And we're certainly getting a lot of opportunity there.

Okay.

And I think the other thing, too, Michael, that we're also seeing right now as well is the benefit of the cross-sell. As we said, we've now increased – or reported more than $110 million in new sales, which is positively impacting both the Environmental Solutions business as well as the Recycling and Solid Waste business. But more of that positively impacting the Environmental Solutions business just because when you take a look at the revenue per customer tends to just be higher than we see in recycling and solid waste.

All right. Let me squeeze one more, if I can. You raised price in 4Q, you raised it in 1Q. Did you raise it in 2Q as well?

We are actually in the process of raising prices here early in 3Q.

Perfect. Thank you so much.

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

Yes. Thanks very much. Good afternoon, everyone. Just on the volume, good job on growing that volume amid some of your peers seeing it contract a little bit. But I'm just curious as to whether we're hearing a little bit on the price competition from smaller players that are somewhat less disciplined in that regard and some of your peers walk away from that is. Are you seeing any evidence that smaller players are acting a little bit more aggressive here? And do you suspect that this will ultimately translate in either pressure on pricing or on volumes for your business going forward?

No, we haven't seen it. Now again, there's always an ankle biter and a market here or there who's going to take advantage of try to grow volume and figure out pretty quickly, right? That's a tough way to make a business and earn your cost of capital. With a small container, right, 9.5% yield, 1.4% volume. Really, really strong numbers for us this quarter. And that's a place we often see the price competition come in. That's where they try to attack because that's a profitable part of the business and people try to build their business there. They might start out on resi script or start out and temporal off and then they quickly get into that because that's the higher margin stuff. And so we've not seen the market broadly turn into a negative direction at all.

And the other thing, too, you have to remember is that there are still supply chain constraints on getting new trucks. So in order to sit there into, again, have that type of behavior, you'd have to have capacity in your system or be able to secure a new truck in order to service those new accounts. And we are not seeing those supply chain constraints easing anytime soon.

Right. Being a little bit of a natural limiter there. On the CapEx spend, we saw a few of your competitors, again, increase CapEx a little bit unexpectedly in certain cases. And just curious how you review your CapEx spend is – and new projects as they develop? Are you – have you looked at your budget for this year? Is that something you do on an ongoing basis? Is it upcoming? Are you seeing evidence of projects that perhaps weren't on the horizon or perhaps not in your purview that are starting to pop up? Just curious as to, on a time frame, when you might update your CapEx budget based on what projects may or may not have come into the fold.

Yes. No, we're doing that on an ongoing basis, right? We're looking at opportunities and Polymer Centers and Blue Polymer are good examples of things that we think. If they're value-creating, sustainable investments over time, we're going to make those investments. But we think also about, hey, normal course of business, what is the budget and not having any big CapEx bubble. So in this year, for example, the supply chain is challenged on the truck side. And so we're able to pull forward a little bit of spend on heavy equipment this year and some of that truck spend then will flow into next year. So across the two years, it will be relatively balanced. So there's always a little bit of push, pull on the margin, but we're looking at it all the time. And then thinking about into next year, if there's things that are really value creating, we'll put those into the budget next year. But we're kind of giving you what we see in terms of Blue Polymer and Polymer Centers in terms of investments outside of that, including the landfill gas energy projects we've already talked about.

And if you look in the details of the guidance, when we do the reconciliation of adjusted free cash flow, included in that is a guide for the capital expenditures. And the number that's in there in the revised guide is exactly the same as what we guided back in February.

Got it. And last question here is on acquisitions. You had a couple of lumpy – chunky ones in the quarter. Is it your intention now to digest a little bit as you go into 2024? Or is this something that you think you could keep up a fairly solid clip that even ex those chunkier acquisitions you would have done otherwise?

No, pipeline remains strong, both on the Recycling and Solid Waste and the Environmental Solutions side of the business. We're mindful of not loading up a specific geography, right, if they've done a big deal. We want to make sure that they can digest that and get that operational. But we've got a good pipeline of deals of all sizes, and we look forward to a strong second half and then into 2024 as well.

That's fantastic. Appreciate the time. Thank you.

Thank you.

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

Hi, team. Thanks for taking my questions. So particularly in light of the way the EBITDA guidance raise was framed in terms of that pricing falling through to the bottom line and relative to the comments in response to Michael's question about raising prices successively each quarter. Just in light of those – with those as context, could you just talk about what you're seeing in the underlying inflation in the business, how those trended through the quarter, how you're responding, how these pricing programs are responding to those trends?

Sure. Yes. Different picture obviously. Labor has been a really good story for us in terms of we brought the turnover down, starting to see that inflation certainly modulate. Maintenance has been a little more of a challenge and it's twofold. Some of it's just the underlying tires or things and true inflation. The other is the challenge of the supply chain, right, while we're growing the business, right, and we're not getting the replacement trucks or the growth trucks we need at the exact clip, that's causing us to drive older trucks, and we're going to do that to service our customer and capture the opportunity. So it's still value creating, but it is going to show up in that maintenance line in terms of older trucks at higher maintenance cost on that front. But we expect broadly all the cost categories, we're starting to see that inflation modulate in the second half of the year. And so we should see pretty good price cost spread at the remainder of the year.

Okay. And then maybe taking that a little bit further. Just trying to think about the jumping off point for margins into next year, just assuming kind of status quo on some of the commodity-related inputs. I'm trying to think about the typical 30 to 50 basis points. Should we be building that number off of the second half outlook? As much information or thoughts as you can provide on that bridge would be really appreciated.

Yes. Look, we're not providing guidance right now for 2024.

Totally understand.

But again, if you – when we talk about that kind of 30 to 40 basis points per year, we're doing off of a full-year comp. So again, if you take a look at the midpoint of the EBITDA and the midpoint of the revenue, you can get a baseline adjusted EBITDA margin and think of it off of that because we're saying this year is a relative – we're expecting a relatively normal level of seasonality. We always expected it to follow the normal seasonal pattern from a margin profile perspective by quarter. So I think if you look at the full-year number, that's a good baseline.

Okay. Thanks a lot, gentlemen, and nice update here.

Thank you.

The next question comes from [Lydia Yang] of Oppenheimer. Please go ahead.

Hi, sorry. This is Noah Kaye on Lydia.

Hey, Noah.

Hey, thanks for taking the questions. Maybe we – can just to make sure we understand, to put a finer point on the last question, how you think about kind of the yield and margin cadence for the back half. There's some odd comps, obviously, last year to consider versus what feels this year. As you said, more like normal seasonality. So can you maybe help us put a little bit of a finer point on it for modeling purposes?

And again, I would say it had more to do with the prior year than the current year. We always said this year, we expect more of a normal seasonality sequentially. And so again, when you take a look at – in a normal year, your two best quarters tend to be Q2 and Q3 because you're capturing those summer months, right? And then again, you start pulling in some of the – in the colder climates where some of the units start to step down, and that's why you see comparably lower margin performance, lower revenue, lower EBITDA in Qs four and one. But as you kind of see this year and you kind of do the math, it looks like second half will be slightly more contribution than the first half, kind of a 49.5%, 50.5% type contribution. And again, we would say that that's relatively in line with our original expectations.

Okay, great. And I think – by the way, I take your point around higher flow-through on price versus volume and agree with it all day. And so part of just trying to better understand because I think there's been a theme to this earnings around what the volume environment actually looks like. So I just want to make sure I can reconcile something. I think that the guide basically implies flat volumes, right, for the back half. And as you said in your commentary, you're not really looking at a flat volume environment, you're still looking at growth. So just how do I reconcile those? Are you maybe just being a little bit conservative given some of the indicators? Just help us to make sense.

Yes. It's just caution and conservatism, given the construction market, given obviously the manufacturing industry we talk about and just there's some general uncertainty out there have we really stuck the soft landing or not. So we want to be cognizant of that. Listen, we're still raising, right? We've got a great story to tell and very, very positive. But on the volume standpoint, we're just being conservative.

Okay, great. That's helpful. Thank you.

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

Thanks. Good afternoon, everyone. Question on Environmental Solutions. In broad strokes, can you outline what that segment might look like in five years based on your strategy today?

Yes, we expect to keep growing. And this question comes up often, what percentage of the mix is going to be, right? We don't have a target percentage mix. I can tell you that we also plan on growing the recycling and solid waste side of the business. And so whether that is 12%, 14%, 15%, 16%, one year might be outsized one or the other, but we expect it to contribute. And the most important thing for us is it's related, right? It's the thing that's helping us drive cross-sell and stickiness with our customers, not just on the ES side of the business, but in the recycling and solid waste side of the business. So same formula there. We're going to start with price, right? We're going to look to gain organic growth, right, and grow some basis points ahead of the market, but not wildly ahead of the market. And then have a strong M&A pipeline, but stay very disciplined in terms of double-digit returns and make sure that any deal we do there fits our strategy.

Okay. Thank you. And second, I guess someone has to ask about PFAS. So with your current environmental solutions capabilities, is PFAS remediation a net positive opportunity today for Republic? Or do you need other pieces to make it that way?

So we see it as a positive. And again, this is not – there's – laws are still evolving here and the regulations are. And so we're actively having discussions at a federal, state and local level, right, to make sure that we're not – and the industry broadly, right, isn't the one holding the bag or they should want us to take care of PFAS because we're the one collecting it. We didn't generate it or create it. So we're going to be mindful that we're not penalized because we're doing the right thing from the environment. And then you flip that on the ES side of the business, lots of opportunities already emerging and lots of customer discussions for how we remediate. We have some solutions today, that portfolio is going to grow. So we think this is a net positive for us.

Great. Thank you.

The next question comes from Tobey Sommer of Truist Securities. Please go ahead.

Thanks. Can you keep this pace of margin expansion in ES into 2024? And where is the ultimate end goal? Maybe speak to the drivers from this low 20% range.

Yes. The ultimate end goal is to harmonize the financial profile of this business with the recycling solid waste side of the business. We think we first will get their free cash flow conversion because over the cycle, this side of the business has a little less capital intensity and then ultimately margin. We're going to get there in a very disciplined way, right? You won't see the pace of the margin expansion, right, 540 basis points, that's leaps and bounds. We're not going to keep this pace. But I think you're going to see steady progress on that front. And listen, there will be some movement in this business like there is as the economy ebbs and flows, but we're going to take a through-cycle mindset, continue to serve customers, stay disciplined, focus on people who are generating recurring revenue over time. And I think you'll see the financial profile harmonize over time in the two sides of the business.

How much higher can you drive retention above the 94% level and still have it sort of be economically advantageous? And what's driving service delivery improvement now?

I'll start with the end of your question. Certainly, technology is helping us on that front. As we put in the RISE platform is just allowing – positioning our frontline people to succeed every day. All the information with the customer is in front of them. When things come up like a block stop, they can immediately communicate digitally to our logistics department through our customer service. So we've got a full visibility and can communicate with the customer quickly. Turnover coming down is certainly helping that, and we feel good about that on the front line of the business. And I don't think we can drive loyalty to 100 because at some point, that's unattractive for certain customers who aren't willing to go or want to go from a price increase. And there is some natural movement of movement of homes, closures of business, et cetera. But we don't think we're done yet. We aspire to take that 94 up higher.

Thanks. Last one for me. What are the puts and takes of multiple price hikes per annum as opposed to larger, less frequent price hikes?

Well, one would be test and learn, right? So when you put out the price increase, right, you can understand exactly how customers react and are we able to retain that work? And so that's the flexibility we have. Over time, you're not going to see us do that. Our normal case in recycling and solid waste business is typically annual increases when extraordinary things happen like the commodity issue four, five years ago, multiple price increases in a year, but that's not normal course. So over time, the ES business will matriculate to that model as well.

Thank you very much.

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

Hi, good afternoon. Thank you.

Good afternoon.

Sticking on the move to the ES side and particularly the U.S. Ecology deal. I mean, I think kind of everything that was laid out tonight kind of speaks to the strength you've seen, whether it's pricing or the cross-selling. So suffice it to say, is that $75 million to $100 million revenue synergy target, presumably, we've blown past that at this point? Do you have a new target? Or how would you think about kind of ultimately the opportunity you can continue to garner from a cross-selling and pricing standpoint and what that means for that original target?

Yes. Listen, the pipeline is strong. Ultimately, this will manifest itself in our guidance for 2024, which we're not talking about today, but that will roll right. And again, U.S. Ecology, which was a great company. We were lucky to acquire, most importantly, the people, but also those assets. They're now part of the Republic Services in the Environmental Solutions business, so we've anniversaried that going forward. And so you'll see that roll through our volume numbers as we forecast 2024.

Okay, got it. And then maybe switching gears. Can you provide us an update on the joint venture with the BP and on the RNG front, maybe any updates or how it's progressing thus far?

Yes. It's progressing about 57 projects and partnership. The largest chunk of that is with BP. It's 40-plus projects of those are with BP. And listen, we're hitting our marks broadly. Now there's certainly been some push-pull across individual locations where we've had some capital delays in being able to get facilities built. But then we've had other places where we've been able to redirect and pull forward faster and get that permitting in place. So ultimately, we're meeting our expectations for what's going to come online by the end of this year. And I think that's a helpful part of our portfolio, given the number of sites where you have one or two sites that might run into a little bit of delays. You've got the opportunity to look to accelerate other places.

Okay. Got it. So maybe any volatility we've seen with RINs this year and nothing – that really doesn't have any significant impact with kind of your expectations for this year and next just given the structure of the JV? Is that kind of a fair assessment? Or how would you talk about company volatility?

From a long-term planning, and we talked about how we were valuing these investments, we assume $2 RIN prices through cycle. So the more recent uptick in RINs prices will actually be upside to our original expectations.

All right. 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. Just, Brian, the M&A rollover you said next year is 50 basis points. I think typically, M&A ends up being margin dilutive, but some of the acquisitions look like nice assets like Colorado. Just on that 50 bps next year, is there any chance that M&A isn't margin diluted that it could be neutral or even accretive based on some of the assets you guys were able to purchase?

Yes. On a majority of that 50 basis point rollover, we would expect that to be at the margin plus.

Great. And I guess just for my second question, free cash flow is tracking well. I think the conversion is going to be that 44% range in line with last year. I guess with all the conversations about sustainability investments and these projects, just do you think that free cash flow conversion is going to plateau? Or is there an opportunity for next year, for 2024, to see that break out a little bit and step up? What are some things that we should consider that might maybe hold that back or potential upside for that into next year?

Yes. Well, a couple of things. So I mean your observation of relatively flat with 2022. Be mindful though that we're overcoming over 300 basis points worth of headwinds between higher cash interest rates, commodity prices and the impact of bonus depreciation. So the underlying business is actually offsetting all of that to drive a result that looks relatively flat. That said, the contribution as we start thinking about the RNG plants and we think about Polymer Centers, Blue Polymers, all of which would be accretive to current company performance, that should all be additive. And as long as we don't continue to experience these year-over-year headwinds like we did this year in those three areas I just mentioned, you should start to see that flow through.

Great. And Brian, just maybe just the last one. Just when I look at the open versus restricted pricing, obviously very healthy. How do we kind of think of those moving parts as we go into second half? And any visibility we kind of have in the first half next year just based on how we do the look backs? Thank you.

Yes. So again, when we think about open market pricing, and we've said this all along that we expected relatively higher pricing in the first half as compared to the second half, not really a function of what we're doing in the current year, it just we'd start getting into tougher comps. And again, it's a year-over-year comparison, so expressed as a percentage. You start to see that modulate a little bit. But again, all staying within, call it, 50 basis points of the full-year guide. So it steps down a little bit. Within the restricted, as we look forward, depends really on the pricing mechanism. So while we see potentially some of the CPI escalators, right, sequentially start to step down, water sewer trash and garbage trash are doing the exact opposite. Each month, they tend to improve. So again, we see it being relatively consistent in the restricted portion of the book just because what we see in step downs in CPI being offset again by those alternative indices.

Thank you.

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

Yes. Thanks for squeezing. Maybe just one for me. I'm just wondering when you think of ES margins from the low 20s to eventually 30%, it sounds like pricing is tracking well. You've got the cross-selling opportunities. Just you had good success rolling on technology, automation, a bunch of things that have helped improve your solid waste margins. Just wondering how many of those initiatives you've rolled into ES. Or maybe how many of those initiatives would be applicable in the ES segment that could help bridge that gap? And is there a way to maybe quantify how much that could be to margins if you roll out some of that technology to the Environmental Solutions business?

Yes. No, it's a great question. Right now, that's all costs, no benefit. So we're investing a lot in IT and doing a lot of hard integration work. U.S. Ecology, but also ACV and a lot of the other legacy assets we have all in the common platform, starting with a customer, how do we make that service offering even more compelling by getting digitally integrated with them. And then there's certainly some things on the operating side of the business, which will also help us drive labor utilization, more efficiency in terms of material flow, et cetera. We haven't quantified exactly what that's worth yet, but that will be part of the path to get to the 30. And when we get a little further down the road, we'll talk about those initiatives in more detail.

Okay. That's helpful. I'll leave it there. It's been a long call. Thank you very much.

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

Hi, good afternoon. I want to ask about the Polymer Centers. So the Las Vegas, Midwest and the two others that you're planning to build, is four kind of the gating factor because of how much plastics you're actually collecting in your recycling routes? Or if there is a lot of demand, would you consider investing in more than four facilities?

Yes. Four was – the business case we based it off of was all the material we collect today. So we don't have supply risk, which is great. Now we built those centers with a capacity to take third-party volume, and we're already getting some of that. So we've created a brokered asset that's already starting to capture some third-party volume, and it's a great value proposition. For example, if you have a municipally owned recycling center, we can take labor out of your facility, right, give you a few more penny for that load, and it's part of your sustainability story as well. So you share in the environmental benefits of that. Over time, right, as that demand for third party continues to grow, we could imagine five or six centers. It's regionally based, all hub-and-spoke model. So we've got the flexibility in the network over time that if the demand outstrips the capacity of the four, that we'll continue to invest.

Okay. That's very helpful. And just on the Blue Polymers JV, can you give us an idea of the CapEx spend that would be coming from Republic? Or is it too early at this point?

Remember, it's more – we're a minority owner, so it's more an investment then it will come through CapEx. But we're thinking that our allocable share would be about $40 million per facility or $160 million in total over the next five to six years.

Okay. That's helpful. Thank you.

At this time, there are no further questions. I'd like to turn the conference back over to Mr. Jon Vander Ark for any closing remarks.

Thank you, Andrea. This month marks the 25th anniversary of Republic Services' stock trading on the New York Stock Exchange. I would like to thank all of our stakeholders, including customers, employees, communities and shareholders for their commitment and support in building this great organization. Have a good evening and be safe.

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