Republic Services Inc (RSG) Q4 2022 Earnings Call Transcript

Republic Services Inc (NYSE: RSG) Q4 2022 earnings call dated Feb. 15, 2023

Corporate Participants:

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 — Analyst

Noah Kaye — Oppenheimer & Co. Inc. — Analyst

Walter Spracklin — RBC Capital Markets — Analyst

Toni Kaplan — Morgan Stanley — Analyst

Kevin Chiang — Canadian Imperial Bank of Commerce — Analyst

Michael Hoffman — Stifel Financial Corp. — Analyst

Jerry Revich — Goldman Sachs — Analyst

David Manthey — Baird — Analyst

Kyle White — Deutsche Bank — Analyst

Stephanie Moore — Jefferies Group LLC — Analyst

Michael Feniger — Bank of America Corporation — Analyst

Presentation:

Operator

Good afternoon, and welcome to the Republic Services Fourth Quarter and Full-Year 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.

Aaron Evans — Vice President, Investor Relations

I would like to welcome everyone to Republic Services fourth quarter and full-year 2022 conference call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are joining me as we discuss our performance.

I would like to take a moment to remind everyone that some of the information we discuss on today’s call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

The material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 15th, 2023. Please note that this call is property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call, in any form without the expressed written consent of Republic Services is strictly prohibited.

I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with 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.

Jon Vander Ark — President and Chief Executive Officer

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. The Republic team finished the year strong by executing our strategy designed to profitably grow the business. We outpaced expectations throughout the year, delivering results that exceeded our full-year guidance even in the face of increased volatility in the broader marketplace.

During 2022, we achieved revenue growth of 20% including a 10% from acquisition, delivered adjusted EBITDA growth of 16%, generated adjusted earnings per share of $4.93, which is an 18% increase over the prior year, and produced $1.74 billion of adjusted free-cash flow, a 15% increase over the prior year. We continue to believe that investing in value-creating acquisitions is the best use of our free-cash flow. We invested $2.7 billion in acquisitions in 2022, which includes the acquisition of US Ecology.

The integration of US Ecology is going well with cost synergies tracking ahead of plan. Revenue contribution from US Ecology outperformed our expectations by nearly $50 million for the year with almost all of the over-performance occurring in the fourth quarter. We continue to adjust prices related to US Ecology and our broader Environmental Solutions business to better align with the capital invested and resources deployed. Pricing actions taken to date have been successful as our customers recognize the high value of service we provide. Additionally, we are building momentum cross-selling our complete set of products and services with approximately $40 million in new sales to date.

Aside from US Ecology, we invested $500 million in value-creating acquisitions during the year. All of these deals were in the Recycling & Solid Waste space. As part of our balanced approach to capital allocation, we returned nearly $800 million to shareholders through dividends and share repurchases.

Regarding customer zeal, we continue to enhance our culture of delivering a world-class customer experience to win new business and drive customer loyalty. Our customer retention rate remained strong at 94%, and we exited 2022 with our highest NPS scores of the year. We delivered outsized organic revenue growth during the fourth quarter with simultaneous growth in both price and volume.

Core price and related revenue increased to 8.4%, and average yield and related revenue increased to 6.7%. This is the highest level of pricing in company history. Organic volume growth was 1.5%. Volume growth was broad-based across our market verticals and geographies.

Moving to digital. In early 2022, we implemented the finance and procurement modules of our new ERP system, which streamlined back-office activities and provided our local leaders with enhanced data. Currently, we are building our new asset management system, which is expected to increase maintenance technician productivity and drive better warranty recovery. We expect to implement the new asset management system beginning in 2024.

We continue to make progress on deploying RISE tablets in our collection business. We finished the implementation for all large container and small container routes during 2022 and completed 37% of residential routes by the end of the year. The remaining residential routes are scheduled to be complete by mid-2023. This is a key component enabling further connectivity with our customers, including real-time service notification. The adoption of RISE has helped drive operational efficiencies and cost savings worth approximately $50 million annually.

Sustainability is core to our strategy and one of our differentiating capabilities. We believe Republic Services is in a unique position to leverage sustainability as a platform for profitable growth while making a positive impact on the environment. For example, our polymer centers are advancing circularity of plastics. This is the first time a single U.S. company will manage the plastic stream from current side collection to delivery of high-quality recycled content for consumer packaging. Development of the first center in Las Vegas is on track and is slated to come online in late-2023. Development of our second polymer center is already underway. This facility will be located in the Midwest and will serve as a hub for aggregating and processing recovered plastics in the region. This center should come online in late-2024.

Investments we are making to develop these polymer centers are being absorbed through our normal capital expenditure process. Additionally, the development of our renewable natural gas projects is progressing well. All 57 of these projects are being co-developed with partners with the majority structured as a joint venture. We expect four of these projects to come online by mid-2023. As part of our approach to sustainability, we continually strive to be a workplace where the best people from all backgrounds come to work. Employee engagement improved to a score of 85 with 97% of participation.

Turnover rates in the fourth quarter improved to the lowest level we’ve experienced in nearly two years. As a result, we are better staffed to capitalize on growth opportunities in the market. Our comprehensive sustainability performance continues to be widely recognized as Republic Services was named to the Dow Jones Sustainability Index for the seventh consecutive year. Our 2022 results clearly demonstrate our ability to create sustainable value and strengthening the foundation from which we will continue to grow our business.

Looking forward, we expect to deliver high-single-digit growth in revenue, EBITDA, and free cash flow in 2023 even with the headwinds from lower recycled commodity prices and higher interest rates. More specifically, we expect 2022 revenues in a range of $14.65 billion to $14.8 billion. This represents high-single-digit growth compared to the prior year. Adjusted EBITDA is expected to be in the range of $4.275 billion to $4.325 billion. This represents high-single-digit to low-double-digit growth compared to the prior year. We expect to deliver adjusted earnings per share in a range of $5.15 to $5.23, and generate adjusted free cash flow in a range of $1.86 billion to $1.9 billion.

Our acquisition pipeline continues to support outsized levels of activity in both Recycling & Solid Waste and Environmental Solutions. We are targeting at least $500 million of investment in value-creating acquisitions in 2023. Our 2023 financial guidance includes the rollover contribution from acquisitions that closed in 2022.

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Thanks, Jon. Core price on total revenue was 7.4% for the fourth quarter. Core price on related revenue was 8.4%, which included open-market pricing of 10.4% and restricted pricing of 5.1%. The components of core price on elated revenue included small container of 11.8%, large container of 8.6%, and residential of 7.8%.

Average yield on total revenue was 5.9%. Average yield on related revenue was 6.7%, an increase of 40 basis points when compared to our third quarter performance. In 2023, we expect average yield on total revenue of approximately 5.5%. We expect average yield on related revenue of approximately 6.5%. This is an increase of 80 basis points over our full year 2022 results.

Fourth quarter volume increased 1.5%. The components of volume included an increase in small container of 1.6%, an increase in large container of 60 basis points, an increase in residential of 1.2%, and an increase in landfill of 3.9%. For 2023, we expect organic volume growth in a range of 50 basis points to 1%.

Moving on to recycling. Commodity prices were $88 per ton in the quarter. This compared to $218 per ton in the prior year. Recycling processing and commodity sales decreased revenue by 180 basis points during the quarter. 2022 full year commodity prices were $170 per ton. This compared to $187 per ton in the prior year. Current commodity prices are approximately $95 per ton. We believe that current commodity prices are temporarily depressed due to a global supply-demand imbalance and that prices will recover in the second half of the year.

Accordingly, we are assuming average recycled commodity prices of $125 per ton in 2023 with prices starting at $95 per ton in the first quarter and steadily increasing throughout the year. At $125 per ton, this would result in a decrease in full-year 2023 revenue and EBITDA of $45 million when compared to the prior year and a 30 basis point headwind to EBITDA margin. In the first quarter of 2023, this would result in a year-on-year decrease of nearly $30 million in revenue and EBITDA and a 70 basis point headwind to EBITDA margin.

Next, turning to our Environmental Solutions business. Fourth quarter Environmental Solutions revenue increased approximately $320 million over the prior year, which primarily related to the acquisition of US Ecology. On a same-store basis, Environmental Solutions contributed 60 basis points to internal growth during the quarter.

Fourth quarter adjusted EBITDA margin was 27.3%. This compares to 28.1% in the prior year. Margin performance during the quarter included a 130 basis point decrease from acquisitions, which included 100 basis points related to US Ecology and an 80 basis point headwind from lower recycled commodity prices. These margin headwinds were partially offset by a 20 basis point increase from net fuel and margin expansion in the underlying business of 110 basis points.

Fourth quarter adjusted EBITDA margin in the Recycling & Solid Waste business was 28.7%. This compares to 28.6% margin in the prior year or 10 basis points of margin expansion. Margins improved in the Recycling & Solid Waste business, even with an 80 basis point headwind from lower recycled commodity prices.

Fourth quarter SG&A expenses excluding transaction costs from US Ecology were 10.9% of revenue. This included 40 basis points from additional incentive compensation expense due to full-year financial outperformance. Full-year SG&A expenses were 10.2% of revenue. This was favorable 20 basis points compared to the prior year and reflects continued cost management as we grow the business.

In 2023, we expect EBITDA margin to be approximately 29.2%. The 10 basis points of expected margin expansion include a 40 basis point decline related to acquisitions, primarily related to US Ecology and a 30 basis point headwind from lower recycled commodity prices. These headwinds are more than offset by margin expansion in the underlying business of 80 basis points.

While we expect full-year expansion compared to the prior year, margins are expected to be down in the first half due to the impact of acquisition rollover and recycled commodity prices. This is most notable in the first quarter, where these headwinds impact margin by a combined 210 basis points.

Depreciation and amortization and accretion was 10.7% of revenue in 2022 and is expected to be relatively consistent at 10.8% of revenue in 2023. Full-year 2022 adjusted free cash flow was $1.74 billion, an increase of 15% compared to the prior year. This was driven by EBITDA growth in the business.

For ’23, we are projecting adjusted free cash flow in a range of $1.86 billion to $1.9 billion or approximately 8% growth at the midpoint. We believe this level of performance is very strong, given the expected impact from lower recycled commodity prices, higher interest rates, and higher cash taxes as bonus depreciation begins to unwind.

Total debt at the end of the year was $11.9 billion and total liquidity was $1.7 billion. Floating debt interest rates consistently increased throughout 2022 and we now expect net interest expense of approximately $480 million in 2023. This is an increase of approximately $90 million compared to the prior year. As a reminder, a 1% increase in interest rates resulted in approximately $33 million of additional interest expense.

Our leverage ratio at the end of the year was approximately 3.1 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 26.1% during the fourth quarter and 25.1% for the full-year. This lower than anticipated tax rate resulted in a $0.06 benefit to our full-year 2022 EPS. We expect an equivalent tax impact of approximately 26% in 2023, made up of an adjusted effective tax rate of 20% and approximately $170 million of non-cash charges from solar investments.

Finally, we expect a majority of the EPS growth in 2023 to be back-end loaded. This results from having the toughest prior year comparisons on recycled commodity prices, interest rates, and taxes during the first half of the year.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]

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

Tyler Brown — Raymond James — Analyst

Hey. Hey, guys.

Jon Vander Ark — President and Chief Executive Officer

Hey, Tyler.

Tyler Brown — Raymond James — Analyst

Brian, so obviously, pricing’s really strong here. I think full-year pricing in the open market was, say, just over 9% and the restricted piece, call it 4.5%. But I am curious if we were to kind of decompose that next year, how those numbers would look? Would we kind of see a convergence in those two or could we actually see the restricted pricing we’d — with all the CPI look backs?

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

So, we would actually expect the restricted pricing to increase from the levels of where it is in the fourth quarter. So, again, on related revenue, it was 5.1% restricted in the fourth quarter. And we would expect that to improve 50 basis points to 200 basis points in ’23, but we do expect the level of pricing to be driven by the open market, similar to what you’ve seen in ’22 and for that matter, the prior years as well.

Tyler Brown — Raymond James — Analyst

Yeah, okay. Okay, that’s helpful. And then on the shape of kind of how the yields will progress. We have a more, I’m going to call it, historically normal cadence, where pricing, and I’m talking total pricing, say, above 5.5% and then it tapers off below 5.5% as the year finishes up.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah, let me — so, I guess you’re talking about them on total revenues, I’ll give you that piece.

Tyler Brown — Raymond James — Analyst

Yeah.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

So, yeah. It started highest. Actually, our high watermark is in the first quarter based on our expectations and then it sequentially declines from there, but we’re expecting that pricing remains above 5% in all quarters.

Tyler Brown — Raymond James — Analyst

Okay, that’s helpful. Just real quick, how much M&A rollover is in the guide? And just to be crystal clear, the $1.5 billion that you expect to spend, none of that is included in guidance. Is that right?

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah, so I’ll answer your second question first, that is correct. We have not included that. So, what is included are deals that close by the end of the year. It’s $440 million for the revenue, 300 basis points of growth. That’s the rollover. Most of that being US Ecology.

Tyler Brown — Raymond James — Analyst

Right, right. Okay, thank you very much.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah.

Operator

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

Noah Kaye — Oppenheimer & Co. Inc. — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah, so if you think about — no, I was just going to add. A good portion of the growth rate that you’re going to see year-over-year is coming vis-a-vis the acquisition rollover. But if you think about total contribution from an organic perspective, we’re expecting 50 basis points on total revenue. So, that’s about, call it, $70 million and that would be just at the point when US Ecology anniversaries forward. That’s still kind of a high single-digit type organic growth.

Noah Kaye — Oppenheimer & Co. Inc. — Analyst

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

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

Jon Vander Ark — President and Chief Executive Officer

Yeah. We said total synergies would be $40 million cost synergies. $40 million, I think that number will end up closer to $50 million.

Noah Kaye — Oppenheimer & Co. Inc. — Analyst

Perfect. I’ll give it back. Thanks.

Operator

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

Walter Spracklin — RBC Capital Markets — Analyst

Yeah. Thanks very much. Good afternoon, everyone. I want to just focus on the M&A there and the $500 million guide. What drives your target for $500 million? Is that on a leverage basis that you’d like to keep yourselves close to or is it more just your best guess as to what kind of deals in your — in the target areas that you want to do are available in 2023?

Jon Vander Ark — President and Chief Executive Officer

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

Walter Spracklin — RBC Capital Markets — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

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

Walter Spracklin — RBC Capital Markets — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

Well, maybe a slightly different view of the history, right? We never gave an official guidance. We said we have line of sight at one point to double-digit, right? That was in a different commodity price environment. And so given the commodity market being depressed for six to nine months, that certainly gave us a different outlook, all right, just based on the math of the commodity prices. And I think we’ve talked about here a high-single-digit number going forward.

Now if we end up doing more M&A early in the year and that has been your impact when we get double digits, we certainly could, but I think we’ve been pretty consistent with how we’ve approached it.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

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

Walter Spracklin — RBC Capital Markets — Analyst

Fair enough. Okay. That’s all my questions. Thank you very much.

Operator

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

Toni Kaplan — Morgan Stanley — Analyst

Terrific. Wanted to ask first on capital expenditures. I know 4Q is usually sometimes seasonally high and this quarter seemed maybe particularly high. I was wondering if that was related to the asset management system and the polymer centers or if there was something else in there and how we should be thinking about capex for ’23.

Jon Vander Ark — President and Chief Executive Officer

Yeah. Certainly investing to grow the business, right? And we’re always disciplined. We’re never afraid to spend that money. One of the bigger drivers of that was the second polymer center that we’re putting in the Midwest. We just — we’ve seen so much demand for the offtake of our first one that — because we have a lot of confidence that the market is really going to value and need that product and the returns in our business case, we think are going to be north of what we originally performed in. So that gave us the confidence to accelerate that investment move forward.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah. And the other thing is we talked that there were some supply-chain disruptions throughout the year. It impacted things like trucks and some of the heavy equipment. And we actually were able to take receipt, take title of those assets in the fourth quarter. So as you think about building the ’23 plan, most likely will be more back-end loaded, like you’ve seen in the last couple of years, but maybe not to the extent that you saw in ’22.

Toni Kaplan — Morgan Stanley — Analyst

Super helpful. And wanted to ask on volumes. I know you gave the 50 basis points to 100 basis points for ’23 of volume. Wanted to just ask sort of what you’re seeing with regard to commercial and industrial. I know some of your competitors talked about like a little bit of a softness in 4Q but maybe a little bit better in January. Wanted to hear your experience on that.

Jon Vander Ark — President and Chief Executive Officer

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

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

Toni Kaplan — Morgan Stanley — Analyst

Terrific. Thanks for the color.

Operator

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

Kevin Chiang — Canadian Imperial Bank of Commerce — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

Well, we’re looking every dollar of revenue and every customer and really try to understand — Again, we look at pricing two wins, one is from a customer and an insight standpoint, right? What does the market bear, what does our offer have from a value standpoint versus our competitors? And then we also want to look on the internal side, say, what is our cost, including the capital charge and make sure that we’re getting a fair return on that. And so we’re going to go systematically through every customer and every dollar revenue and I think the encouraging thing is we’ve put out some double-digit price increases and we’re seeing it stick, right? Customers are really valuing the integrated offering and keep in mind, whatever they spend with us is a very small percentage of their cost structure, and so safety and speed, sustainability, and our digital tools, and all those things that we’re investing in, those are big differentiators that allow that price to stick.

Kevin Chiang — Canadian Imperial Bank of Commerce — Analyst

Right. That makes a ton of sense. And then I apologize if you’ve given this number before but when you look out longer term and you’re through some of the cost synergies and some of the revenue upside opportunities, do you have a targeted ES adjusted EBITDA margin that you’re thinking about? You did 17.5% in — roughly 17.5% in 2022. Did it get to the mid-20s when you’re kind of through many of these initiatives?

Jon Vander Ark — President and Chief Executive Officer

Yeah. I think what we’re — listen, over time long-term, I think these businesses converge in terms of returns. I think we’ll get free cash flow conversion to get there first because this is a slightly different opex, capex trade-off in this part of the business. And then over time, I think for longer period of time, I think getting the margin to converge I don’t think is out of sight or out of reach as well. Now, that’s not going to happen overnight. We are going to kind of raddedly, right, systematically take this up, so I think a goal in the next four, five years to get that in the mid-20s is very reachable.

Kevin Chiang — Canadian Imperial Bank of Commerce — Analyst

Excellent. I’ll leave it there. Thank you very much.

Operator

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

Michael Hoffman — Stifel Financial Corp. — Analyst

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah, we’re probably closer, Michael, to in the $1.5 billion range, a little over $1.5 billion. But organically, like I said earlier, we’re thinking that’s 7%, 8% organic-type grower here in the near-term. And with opportunities for even some of the additional cross-sell opportunities to be additive to that.

Michael Hoffman — Stifel Financial Corp. — Analyst

So, okay, so the following that then — In your margin for the whole year, 29.2%. What do you think Solid Waste business and the Environmental Services business do individually instead of merged together?

Jon Vander Ark — President and Chief Executive Officer

Yeah. So, in the Recycling & Solid Waste business, we’re expecting overall about 30 basis points of margin expansion. In that business, we have to overcome the 30 basis point headwind from commodity prices. So, the underlying business has grown kind of 60 basis points to 70 basis points. Now, in the Environmental Solutions business, we’re expecting a 100 basis points of margin improvement and there is the acquisition rollover US Ecology, which is a — kind of a negative 70 basis points on that portion when you compare it to what we had in the Gulf. So, we’re expecting margin expansion in the underlying business there of 170 basis points.

The reason why that only comes to 10 basis points overall is we just have a greater mix, a greater percentage of ES business in ’23 than we did in ’22.

Michael Hoffman — Stifel Financial Corp. — Analyst

Yeah, yeah, I get that. And then can you bridge for us the $7 — $1.724 billion [Phonetic] of free cash in ’22 to get to the midpoint of your guide, what is the cash interest, the cash tax, the incentive comp above plan? And then I’m assuming everything else was made up by organic growth productivity.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah, look, let me give you a couple of pieces of that certainly. So, interest, and I’m going to give you some pre-tax numbers and for argument’s sake, you can just sit there and take — call it 70% of it after you do the after tax, but interest, up $90 million. And so, it’s an increased outflow there. Incentive comp is about a $35 million outflow compared to target levels. And then bonus depreciation, you wouldn’t tax effect the impact of bonus depreciation, but that’s about a $35 million increase in cash taxes.

Michael Hoffman — Stifel Financial Corp. — Analyst

Okay.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

When you take the average of those pieces that creates a — now, I’m going to kind of flip a little bit to conversion, and that creates a, call it about a 300 basis point headwind to conversion. All of which being offset, adjust the EBITDA growth in the business, as well as some benefits in working capital. Some of those benefits being unlocked, we talked about finishing the finance and procurement modules during ’22. We think that there is an opportunity in particular on the DPO side to drive improvements in working capital.

Michael Hoffman — Stifel Financial Corp. — Analyst

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Well I mean, just to put it in perspective. OCC, fiber represents about 70% of our basket of goods. So, most of this we are expecting to come more on the OCC side, but even just to put it into — all of it into perspective, if you take a look at what we’re expecting from a guide perspective compared to current prices, it’s a relatively modest recovery. That’s $30 million worth of EBITDA and about 20 basis points to margin, $20 million of free cash flow if things were to stay at current levels.

Michael Hoffman — Stifel Financial Corp. — Analyst

Okay. Thank you very much.

Operator

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

Jerry Revich — Goldman Sachs — Analyst

Good afternoon, and good evening, everyone. Brian, if we just go back to your margin cadence discussion, the headwinds in the first-quarter, really the first half, that implies, we’re going to be exiting the fourth quarter of ’23 with margins up something like 150 basis points year-over-year heading into ’24. So, I’m wondering, are we setting up for ’24 to be an outsized margin expansion year because we’re essentially making up for a lost year from the commodity price impact in ’23? Anything that you would add to that bridge as we think about what the margin progression might look like.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Sure. And a couple of things, Jerry. I mean, you’ve got two variables when you take a look at that. What we’re expecting in ’23, but also what happened in ’22. So, we’re expecting commodity prices in ’23 to be at the highest point of the year, they were at the lowest point in ’22. So, you can’t just go to the margin expansion. But yes, exiting the year in ’24, we think it’s going to be kind of a nice jump-off point heading into ’24. But I wouldn’t just look at the overall margin expansion because you’ve got two years in your math there that you got to take into consideration.

Jerry Revich — Goldman Sachs — Analyst

Sure, but you’re going to have the same comp benefit in the first half of ’24 hopefully. And if we think about the profitability of the Recycling business in the fourth quarter with this ultra-low recycled cardboard prices. Can you just update us on what was the margin profile of the business roughly just so we can get a feel for where its traffic in the cycle, given all the work you’ve done there?

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

You’re talking about the Recycling side of the business?

Jerry Revich — Goldman Sachs — Analyst

Yes.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yes. No, it’s still a profitable business at these levels and still an attractive return. So, again, we would expect — through the cycle, we talked about we expect these depressed prices to be somewhat transitory. And again, return closer in line to a 10 year average. Not even back to the levels it was when it was over $200 a ton on our basket of goods.

Jerry Revich — Goldman Sachs — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

Yeah, of our existing projects, the vast majority are gas, electricity. Now, the — where RINs had gone, all of the new projects in the pipeline were contemplated to be gas are under methane RNG. The great news is, our partnership with BP, we’ve got option value. We’ve been coming online and we’re both very open-minded to understanding where those markets move and the local geography and even places where we made power on fleet to figure out whether we want to convert some of those opportunities rather than RNG to go to electricity as well. But we see it as — over time as benefit for us because it will have two pathways.

Jerry Revich — Goldman Sachs — Analyst

I’ll leave it there. Thank you.

Jon Vander Ark — President and Chief Executive Officer

Welcome.

Operator

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

David Manthey — Baird — Analyst

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

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

No, I mean, what you’re seeing mostly on the residential is some relatively larger contracts, you’re seeing that in the numbers. So, that’s expected to anniversary in ’23, so we don’t expect that to continue throughout the year. And yeah, when you take a look at our volume cadence, we expect that small container will remain positive throughout ’23. When you take a look at overall volumes, we think to have our highest volume performance early in the year. And again, that’s a step-down throughout but remaining positive in all four quarters.

Jon Vander Ark — President and Chief Executive Officer

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

David Manthey — Baird — Analyst

I appreciate it. Thank you.

Operator

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

Kyle White — Deutsche Bank — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

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

Kyle White — Deutsche Bank — Analyst

Yeah. That makes sense. And then on leverage, how are you thinking about leverage in this environment? What’s the right target for you before investors expect meaningful capital return through buybacks?

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah. We’ve talked about kind of that sweet spot for us being right around 3 times or a little bit over that right now, but we expect to be there in the next, call it six months at which point, then we would look to kind of return to that normal level of looking at the repurchases and so on and so forth.

Kyle White — Deutsche Bank — Analyst

Sounds good. I’ll turn it over.

Operator

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

Stephanie Moore — Jefferies Group LLC — Analyst

Hi. Good afternoon. Thank you.

Jon Vander Ark — President and Chief Executive Officer

You bet.

Stephanie Moore — Jefferies Group LLC — Analyst

I certainly appreciate this — the level of detail of 2023 expectations. I think a lot of puts and takes in this environment. So it might be helpful if you could just outline the areas where you kind of see the greatest source of upside, inflation moderating, some tech investments, and then on the flip side, where you see the greatest risks in hitting these targets as well. Thanks.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah, yeah. From an upside perspective and I — we mentioned this earlier is that we are expecting inflation to remain persistent throughout ’23. And so again, Jon just talked about the fact that we’re pricing at higher levels in ’23, and really in ’23 than we did even in ’22 because we expect inflation remain sticky. So if that does come down, that is certainly an opportunity in order to sit there and to drive better performance than we anticipated but you do have to remember, some of that’s inflation of wages and wages typically go in annually. So once you put that wage out in the marketplace, you’re not pulling that back. So there are — there is some stickiness to the inflation but certainly, as it relates just to third-party costs, some of the maintenance-related expenses, transportation expenses, if those come in, that would certainly be a source of upside.

Stephanie Moore — Jefferies Group LLC — Analyst

Great. And then on the downside?

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

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

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

Stephanie Moore — Jefferies Group LLC — Analyst

Absolutely. And then just on the second polymer center going up starting about this year. Maybe you could talk a little bit about some of the initial KPIs or returns you’re seeing or expect to see just given the demand from your first center and kind of what drove you to decide to open up the second here.

Jon Vander Ark — President and Chief Executive Officer

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

Stephanie Moore — Jefferies Group LLC — Analyst

Great. Thank you so much.

Operator

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

Michael Feniger — Bank of America Corporation — Analyst

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

Jon Vander Ark — President and Chief Executive Officer

Yeah. And I think it’s a good question, Michael. Certainly, you highlighted it. Certainly, customer mix is the hidden element or hidden factor in being able to get price and we went through some intentional shedding, right, which has been negative drag on our volume for a few quarters, when you look at futures back but the quality of our revenue was much higher than it was historically and we feel good about that. And that’s all the way across from national accounts, to small container, to getting out the last remaining broker work out of the system, to municipal and getting a fair escalator into those contracts. So I think the overall health of our pricing across the portfolio while not perfect of course is much, much better than it was a few years ago.

And then you combine that with the capture and the tools that we have to really start to grind out a few extra bps here and there across our 13 million customers of understanding, willingness to pay, and then on the other side of that with the RISE platform driving productivity and changing our cost position the business. So when you’ve got a healthier customer mix, right, and better ability to price with a cost structure that I think is healthy and getting healthier, I think that does create the context for continued margin expansion over time.

Michael Feniger — Bank of America Corporation — Analyst

Great. And, Brian, you touched on it with the question earlier, but just to dig a little deeper, can you actually talk about the cost inflation, how that kind of trended through the fourth quarter and what you’re seeing early 2023? What you guys are kind of embedding there because I think you’re saying you’re not really embedding overall over there? Just curious what you actually saw through the quarter and early 2023 and what kind of expect or what you guys are really embedding in the guidance there? Thanks.

Brian DelGhiaccio — Executive Vice President, Chief Financial Officer

Yeah. If you think about for the full year for ’23, we’re in that, call it, 5% to 5.5% inflation-type range. And again, when you take a look at the 6.5% expected yield on related revenue, that’s how we’re driving that 80 basis points or so of expansion in the underlying business. That’s about the level we saw exiting the fourth quarter and we expect it to remain relatively consistent throughout 2023.

Michael Feniger — Bank of America Corporation — Analyst

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

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

Operator

[Operator Closing Remarks]