Republic Services Inc (RSG) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to Republic Services Fourth Quarter 2020 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 Stacey Mathews, Vice President of Investor Relations.

Hello. I would like to welcome everyone to Republic Services Fourth Quarter and Full Year 2020 Conference Call. Don Slager, our CEO; Jon Vander Ark, our President; 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 22, 2021. 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 expressed written consent of Republic Services is strictly prohibited.

I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with a recording of this call, are all 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 date, time and presentations are posted on our website.

With that, I would like to turn the call over to Don.

Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. We are extremely proud of our strong finish to 2020. We further proved our ability to overcome adversity and execute in a challenging environment. 2020 tested the company's foundation, and the team repeatedly stepped up to the task at hand and demonstrated the strength and resiliency of our business. Through their hard work, dedication and commitment, we delivered record-setting operational and financial results. We outperformed expectations for the year and even exceeded the high end of the original guidance we provided last February.

During 2020, we delivered adjusted earnings per share of $3.56, which represents an 8% increase over the prior year; generated $1.24 billion of adjusted free cash flow even after repaying all deferred payroll taxes; expanded EBITDA margin 130 basis points to 29.4%; improved free cash flow conversion to over 41%; increased customer retention rates to an all-time high at just above 93%; and achieved record-setting safety performance. Profitable growth remains our #1 strategic imperative, and we continue to believe that investing in acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value.

We prioritize acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles. In 2020, we invested more than $600 million in acquisitions. Our acquisition pipeline remains full, and we expect 2021 will be an equally robust year of activity. We anticipate the year will start strong with Santek expected to close by the end of the first quarter.

As part of our balanced approach to capital allocation, we returned $620 million to our shareholders through dividends and share repurchases.

Turning to 2021. We expect another year of record setting performance. Specifically, we expect to deliver adjusted earnings per share in a range of $3.65 to $3.73 and generate adjusted free cash flow in a range of $1.3 billion to $1.375 billion. We believe our strong results exiting the year provide the momentum to further grow in 2021 and clearly demonstrate our ability to create lasting shareholder value. Jon and Brian will provide additional insights later in this call.

Before turning the call over, I want to thank each and every one of our 35,000 team members for their hard work and extra efforts during these unprecedented times. I also want to recognize our frontline employees for their continued heroic service as essential workers throughout the pandemic. Early in 2020, we launched our Committed to Serve program to recognize the contributions of our frontline team while also supporting our small business customers and the communities we serve. Toward the end of the year, as the vaccine roll off began to signal hope, company leadership decided to again thank frontline team members with a $500 award, which they each received last month. This brings our direct financial support provided to our frontline employees to $45 million since the start of pandemic. Nothing is more vital to the success of this company than our people, and that has never been proved more true than during this past year.

With that, let me turn the call over to Jon.

Thanks, Don. Throughout the fourth quarter, we continue to see improvement in the business and reported positive combined growth from average yield and volume for the first time since the beginning of the pandemic. During the quarter, total core price was 4.6%. This includes open market pricing of 5.4% and restricted pricing of 3.3%. For the full year, core price was 4.8%, which represents the highest level of pricing in the last 10 years.

Average yield for the fourth quarter was 2.5%. Average yield measures the change in average price per unit, which considers the impact of customer churn. Looking forward, we expect average yields to remain strong at approximately 2.5% in 2021.

During the fourth quarter, volume decreased 1.8%. This compares favorably to the 3.4% volume decrease we experienced in the third quarter with all lines of business showing an improvement from Q3 levels.

Fourth quarter small-container volume decreased by 3.5%, which is a 130 basis point improvement from the third quarter. Fourth quarter large-container volume decreased 3.4%. Volume performance was relatively consistent between the permanent and temporary portions of this business.

Total landfill volume decreased 2.4% versus the prior year. This included an increase of 1.7% in MSW and a 1% increase in C&D, which is offset by 9.8% decrease in special waste. Our pipeline for special waste volume remains strong. Looking forward, we expect the gradual improvement in the economy that we saw during the second half of last year to continue, leading to volume growth of 1.5% to 2% in 2021.

Next, turning to our environmental solutions business. Fourth quarter environmental solutions revenue decreased $22 million from the prior year. This resulted in a 90 basis point headwind to total revenue growth. This was primarily due to a decrease in drilling activity and delays in in-plant project work. Looking ahead, we believe our environmental solutions business can experience above-average growth rates. We are particularly focused on the downstream business where customers are looking for integrated solutions, and we can leverage our broad capabilities and sustainability platform.

Turning to recycling. Recycled commodity prices increased 67% to $110 per ton in the fourth quarter. This compared to $66 per ton in the prior year. The benefit from higher recycled commodity prices was partially offset by a 3% decrease in inbound recycling volume.

Next, turning to margin. Our adjusted EBITDA margin in the fourth quarter was 29.9% and increased 150 basis points versus the prior year. We successfully managed our costs for changes in underlying demand and more than offset the decline in revenue due to the pandemic. This was enabled in part by the implementation of our RISE dispatch platform, which was a critical tool to adjust our costs for rapid changes in volume. We are accelerating the use of technology to drive productivity improvements and efficiencies as well as improve the customer and employee experience.

I'm especially proud of our safety results. During the quarter, we achieved record-setting safety performance by reducing safety incidents 21% versus the prior year. This drove a 14% decrease in risk management costs. For the year, EBITDA margin expanded 130 basis points to 29.4%. We believe we have found a new level of performance and plan to further expand our margin from here. We expect EBITDA margin of approximately 29.5% in 2021.

Finally, in 2020, we published our first year of progress to our latest long-term sustainability goals. These goals address our most critical sustainability risks and opportunities and are aligned with the UN sustainable development goals. We believe these goals have the potential to significantly benefit the environment and society while enhancing the foundation and profitability of our business over the long term.

As part of our commitment to reduce carbon emissions, we have taken a leadership position in the industry to embrace electrification. We believe this emerging technology will be the preferred choice to power recycling and solid waste trucks and equipment in the future.

In addition to our ongoing electric vehicle pilots, we recently made a minority investment and entered into a strategic alliance with Romeo Power to further explore electric solutions for our fleet. We remain committed to make further progress against all our sustainability goals in 2021 and beyond.

Our sustainability performance continues to be well regarded as Republic Services was named to the Dow Jones Sustainability World and North America Indices for the fifth consecutive year. Additionally, we were named the Barron's 100 most sustainable companies list for the third time.

I will now turn the call over to Brian.

Thanks, Jon. Adjusted EPS for the fourth quarter was $1. This represents an increase of $0.12 or 14% from the prior year. Adjusted EPS for the year was $3.56. This performance was $0.16 above the high end of our guidance range. Approximately $0.07 of the beat resulted from operational outperformance and $0.09 was due to favorable tax items. Our adjusted EBITDA margin for the fourth quarter was 29.9% and increased 150 basis points versus the prior year. This included underlying margin expansion of 130 basis points and a 20 basis point benefit from net fuel and recycled commodity prices. SG&A expense for the fourth quarter was 10% of revenue, an improvement of 110 basis points from the prior year. This level of spending reflects our effective management of discretionary costs while continuing to make investments to drive growth and generate efficiencies in future periods.

Adjusted EBITDA for the year was 29.4%, an increase of 130 basis points versus the prior year. The outsized margin expansion is a direct result of pricing in excess of our cost inflation and dynamically flexing costs to optimize our cost structure. We are leveraging new ways of working and utilizing new tools and technology to be more efficient and agile.

We also continue to make progress on converting our municipal contract structures to drive increased profitability and ensure an appropriate return on the assets we deploy. Adjusted free cash flow for the year was $1.24 billion and increased $62 million or 5.3% compared to the prior year. Adjusted free cash flow exceeded our expectations due to better-than-expected EBITDA growth and favorable contribution from working capital.

Working capital included a 1.5-day improvement in DSO and a 2.5-day improvement in DPO. The benefit we realized from positive working capital added approximately $100 million compared to our expectations, which enabled us to repay all previously deferred payroll taxes.

Full year 2020 free cash flow conversion was 41.3%, a 70 basis point improvement compared to the prior year. We expect free cash flow conversion to further improve in 2021 and are planning to achieve mid-40% level performance within the next couple of years. As Jon mentioned, we expect combined average yield and volume growth of 4% to 4.5% in 2021. We expect average yield to remain relatively consistent with our 2020 results even with lower CPI-based pricing. From a timing perspective, we expect average yield to be relatively lower than the full year average in the first quarter. We also expect volumes to improve sequentially but remain negative during the first quarter. Both expected outcomes are due to the tough prior year comparison.

During the quarter, total debt was $8.9 billion, and total liquidity was $2.8 billion. In 2020, we refinanced debt to capitalize on the low interest rate environment and extend maturities. These activities reduced annual interest by approximately $60 million. About half of this benefit was realized during 2020. Our leverage ratio was 3.1x. We have plenty of capacity to fund outsized acquisition growth while maintaining leverage within an optimal range.

With respect to taxes, our adjusted effective tax rate was slightly negative during the fourth quarter and approximately 16% for the year. When you further consider noncash charges from solar investments, we had an equivalent tax impact of 20% during the fourth quarter and 23% for the year. We expect an equivalent tax impact of 26% in 2021 made up of an effective tax rate of approximately 22% and approximately $90 million of noncash charges from solar investments. If you normalize for the expected increase in taxes, our 2021 EPS guidance represents high single-digit to low double-digit growth.

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

(Operator Instructions) Our first question comes from Hamzah Mazari with Jefferies.

I guess the first question, and you touched on it at various points in the prepared remarks, but maybe if you could just go a little deeper into sort of underlying trends that you're seeing, service increases, how much of sort of COVID impacted revenue has yet to come back, any way you want to frame that? And maybe how does that position you for 2021 and beyond? One of your competitors said that waste is a reopening play. The market obviously isn't given credit for that, but just sort of just give us a flavor of underlying trends and how you're positioned long term.

Sure, Hamzah. Thanks for the question. Yes, we're feeling really good about the trends we're seeing. You mentioned service decreases -- increases. We continue to see more increases than decreases. We're seeing the business come back. We're seeing people get back to work. We continue to find, as we have throughout the last year, new ways to work more efficiently. We're going to continue to employ that into 2021, but we're planning for continued steady growth through the year. That's what we're seeing.

I mentioned the pipeline being strong, so we're feeling really good about the business. And as we've talked, as we exited last year, some of the efficiency gains that we've seen in '20 we expect to hold on to.

But look at pricing. Pricing has held up. The market is still very rational. The underlying fundamentals are solid. Our market position is better than ever. Our foundation is strong. Our team is more capable than it's ever been. And the market's coming back, and we're going to be right there to get our fair share of it as we go through time. But that service increase number is steadily rising, and pricing is holding up as -- alongside of it.

And then I think there's a little bit talk of inflation out there on the horizon. Inflation, as you know, is actually good for our business. A little inflation will help CPI tick up. So we've got a lot of year-on-year improvements that we're seeing in the business.

Jon mentioned RISE in his commentary. We are still seeing the benefits of that unfold here in '21 and beyond. So -- but I think on the revenue front, on the customer front, I think all things are green for us right now, and it's the matter of the pace, right? And we'll just be reporting on that pace of recovery through the year.

But if you look at the guide, right, we're looking at double-digit EPS and cash flow growth. We've got a pretty strong year in front of us, we think.

Our next question will come from Tyler Brown with Raymond James.

Brian, so in the implied guidance, how much of a rollover benefit from M&A do you have baked in there?

Yes. From a top line perspective, Tyler, we've got about 150 basis points of top line rollover in the guide.

Okay. And to be clear, that incorporates what you spent late in 2020 and what you expect to spend in early '21, just to be clear.

No. That's just what's actually closed through the end of 2020.

Okay. Okay. Perfect. That's helpful. And then, Brian, I know you guys did such a good job on managing margins in '20. I think you're maybe only guiding to, say, a 10 basis point improvement. My hunch is there's quite a bit moving in there. So can you kind of talk about some of the puts and takes there, maybe recycling to the benefit, core expansion? And then maybe what are some of the takes, like, maybe health care or M&A dilution? Just any help there?

Yes, yes. Look, I'll give you the puts and takes here in a second, but just kind of to further Don's comment, one of the things, I think, you have to appreciate is when you take a look at our 2020 performance, we're coming off of triple-digit margin expansion, which I think really differentiates us from our peers. And we're talking about further margin expansion from here, and we don't think we're done after we get through '21.

But if you take a look at the puts and takes, what's underlying that 29.5%, we're looking at underlying expansion of, call it, somewhere in the 50 basis point range. The things that are offsetting that, we kind of aggregated net fuel and commodity prices together. To your point, commodity is a slight tailwind. Actually, the headwind is more on fuel, and that's just really more of a timing thing than anything else. The combination of those 2 is about a 20 basis point headwind to margin.

And then on the acquisition front, we've got about 20 basis points of dilution in year 1. That's predominantly just from the integration, the transaction and the deal costs that we experienced in the first year. So while it's dilutive in year 1, we expect those acquisitions to actually be accretive to our average margin performance year 2 and beyond.

Yes. No. Core expansion, that's kind of the message though.

Yes. Core expansion of 50 basis points, and again, that's the -- really, the important story here is that's on the heels of really strong margin expansion in 2020.

And then the underlying -- or the headline story is 30% is right there in our sights, Tyler.

Yes.

Yes. Yes, I'm aware of that. Jon, really quick. Do you have any specific thoughts about '21 MSW landfill yield trends? Do you expect that to maybe step up? And I am curious, how much of that line is indexed to CPI? Is it quite a bit?

Yes. Listen, we have around probably 6 or 7 quarters into a substantial step-up in landfill average yield, right, over 3.2% for the quarter, and we expect it to be strong again in 2021. To your point, a chunk of that volume is certainly tied to contracted business and tied to some inflation-based index. So as CPI goes up, we get inflation. That should put upward pressure on it.

And I also just think people have realized landfills are expensive to operate. And so we need to price for the investments we make into those assets, and that's put upward pressure on MSW price or landfill pricing more broadly, again, across the last couple of years. And I don't see that trend abating at all.

Our next question will come from Kyle White with Deutsche Bank.

Just wanted to talk about -- on contracts. Now that we're basically a year from when this pandemic started, has any of the terms or contract structures changed as a result as you kind of approach new renewals maybe particularly on the resi side?

Yes. We've gotten over 100 customers to amend the terms primarily on municipal residential contracts because weights have increased. Now in April in the immediacy of the shock when everyone was sheltering in place, weights were up about 10%. That's modulated to be down to 5%. But again, that's still -- and those contracts, those are time and weight-based contracts. And so as we get heavy, we need to price for that.

As that number dissipates and sort of some modulated people get back to work, most -- more of those pricing renewals will come in the normal cycle of price -- contract changes versus out-of-cycle contract changes. But that is not a high-margin part of the business for us on all the players in the industry, so we absolutely have to get paid for the work we do there.

Kyle, I think if you actually take a look at the overall average yield performance, you've seen in that residential business 3% plus pricing the last 2 quarters. And that's what you're going to see as we renegotiate and change the structure of those contracts, that's where you're going to see it.

Got it. That makes sense. And then on electrification of vehicles, you touched on it a bit in your prepared remarks. Maybe you can just talk a little bit more about your strategy and how it's different from some of your competitors. And then also, I know you had the partnership in the quarter that ended, and I'm curious if there's any kind of ramifications from that and then just maybe the rationale of the partnership with Romeo.

Sure. Yes. No, listen, we think electrification is exciting technology for a couple of reasons. One, it's truly the only 0-based emission technology out there. CNG is incrementally better than diesel but only incrementally better than that, so it's the right technology long term. And our application tends to be a perfect one for electrification because range anxiety is a big issue in trucking for electrification, and we don't have that as our trucks come home to the same location every night, and you can get into overnight charging. So we're really excited about the technology.

And we're going to get there. We've always said there's going to be multiple paths to get there, and there's going to be some uncertainty. The destination is clear. The path to get there has some uncertainty.

So we've got a number of different relationships going on, pilots with multiple manufacturers. We talked about the Romeo investment. And in terms of the specific partnership that we exited, right, disappointing for us, but that didn't cost us anything. That contract was very intentionally designed. It was performance-based. And the extent they couldn't execute against the performance, it cost us nothing on that front. So disappointing again because we're cheering for everybody to get there because we think it's good for the planet, but we are confident that we've got the right set of partners, and we're going to be excited to update you on our progress as we move forward.

Our next question will come from Walter Spracklin with RBC Capital Markets.

So on the M&A guide, $600 million, you mentioned that it could be tuck-in. It could be new growth areas. First, can you give us a sense of what the rollover is there? I don't know if you touched on that, if you could repeat it. And really, are you finding that the pipeline is -- as we come and exit through, is it getting -- is it changing day to day in terms of the availability of sellers? Or are you going after any particular targeted areas or marketplaces that are starting to open up a little bit more? Just curious how things are changing kind of day to day with regards to the availability of sellers.

Yes. So let me just start with some of the numbers that you asked on the rollover. So the rollover, right, by definition is that which is closed in 2020. Again, that's about 150 basis points, okay? So again, the actual revenue contribution from the $600 million will be -- which are the deals that we intend to close in '21, that'll be based on the timing of when they close. So again, we're guiding on the top line to organic growth, which is that combination of yield and volume. How much revenue we get in '21 again on the $600 million will be more timing-based than anything else.

Yes. The pipeline remained strong, and it remained balanced, balanced across kind of core markets we're in, in the recycling and solid waste space. And obviously, that's the bread and butter of our acquisition strategy, and those tuck-ins are highly accretive. We're also looking at new geographies and have gotten into different extended geographies in the last 2 to 3 years, which, again, provides new growth opportunities and then also into new parts of the business.

So we mentioned environmental solutions, and those are actually core customers of ours. We've done work for them for a long period of time. It's really expanding our product line into those customers because they've asked us to do it. They want a provider who can provide digital solutions, who's got a great track record on safety and sustainability, and we're finding it attractive to expand our product set through acquisitions there as well.

Okay. And then my follow-up just on capital allocation. Obviously, again, very resilient business. That came through clear. You're mentioning 3x leverage, and that looks good. I mean there's been a whole range of kind of a little bit more aggressive to a little bit -- a little less aggressive. What's your thought on how you weather this pandemic and what you can do to perhaps press the accelerate a little bit, especially with your pipeline that you just mentioned is full and balanced? Could we see a little bit of higher leverage now that it seems that you can tolerate a little bit higher leverage to take advantage of that M&A opportunity?

Well, I would say, one, we are weathering the pandemic and feel hopeful that we'll be on the other side of this thing before too long. So as it relates to leverage, we've always stated the way that our optimal leverage is, and we've been, for the last couple of years now, kind of keeping right in that 3x. The good news is when you're buying good cash flow, good EBITDA, good reoccurring revenue, you can continue to grow and even increase the overall debt level but keep your leverage pretty stable. That's how we built this business, frankly, right?

So we are -- we have, in the past, for the right deal, increased leverage a little bit with the commitment to get it right back in line over a short period of time, call it, 12 or 24 months. We've shown we can do that. If the right deal came along, we certainly would look at that. We're not going to over lever the company by any means. But we've got a lot of dry powder. We've got a lot of capability. We're proven as it relates to getting deals done, getting deals through DOJ accordingly, getting assets sold if necessary and getting things integrated. We've got a proven model for that improving capability within our team.

So yes, I think as the world continues to change, as maybe some competitors get fatigued with what's ahead of them or change the regulation, sometimes drives smaller competitors to selling, a lot of it still is people coming to a point in life where they -- pardon the term, but they kind of age out, right? They've been in business for a long time, and they start to think about selling their business as their retirement. So we are right there to pick them up.

Again, first or second position in a market is what we're looking to achieve. As Jon mentioned, we've gone into some new markets where we've taken a lesser position but with the appetite to move into that #1 or #2 spot before too long, and that's still our approach. So the pipeline is strong. The ability to get deals done and integrate deals is strong, and the balance sheet is strong. So we can't be in a better place.

Our next question will come from Kevin Chiang with CIBC.

Maybe if I could just follow up on the electric vehicle strategy question, maybe just on the Romeo investment, can you remind me if any of the technology that you developed there -- would that be proprietary to them? Or is that something you can share with other OEMs as you look to eventually convert your fleet there over time? And then secondly, you made a comment in your prepared remarks about electric being kind of the only -- maybe the only 0 carbon propulsion system. Just wondering how you think about hydrogen fuel cells. It seems like that's making a little bit of a push in Europe in terms of waste vehicle. Just are you testing anything from that perspective? Or is electric kind of the horse you're riding on now?

Yes. Let me start with the second part, and I'll work back to the first part. The -- so yes, lots of work in Europe and everywhere else. And listen, innovation is going to have lots of people looking at lots of different things over time. If you look at where the balance of the global OEMs are, the investment in electrification in our space is dwarfing the investment on hydrogen. Most of the hydrogen investment has really been in the long haul space.

And look, we remain open minded, right, as the technologies emerge and evolve, but I think it's -- we're pretty confident electrification is going to be the right technology for our application. And then we're working through the alliance with Romeo. They're not going to become an exclusive supplier to us by any means. That wasn't the nature of the relationship and deal. However, we are working on proprietary things together, including a pilot where we retrofit one of our vehicles because that's what's electrification. To get it to scale, it's going to take commitment and willingness to innovate, right? Trial and error, learning, testing, right, we'll adjust. And over time, right, we'll kind of overcome those hurdles, and we will get to scale with the technology.

That sounds like a sound strategy, makes a ton of sense. And maybe just a housekeeping question. You had commented that environmental should see -- I know it's a small part of your revenue stream but would see above average growth. Is there a way to think about maybe what that kind of looks like, I don't know, on a quarterly revenue basis? I think it's been around kind of mid-20s a quarter the last couple of quarters here. Should we think of something like mid-30s? Or any goalpost might be helpful.

Yes. No. I -- the comment was a little bit more, I would say, on the top line as it relates. And that's, again, back to the commentary was really that focus on the downstream portion of that business. So again, as Jon mentioned, that's an area where we really feel like we can leverage our core capabilities. It's what we do already. So it's really just expanding that addressable market to those customers that are really looking for an integrated solution and really from a provider of someone like us. So that's where we just feel like a combination of both organic growth opportunities as well as through acquisition that we can see above-average growth rates relative to what we may see on the solid waste side expressed as a percentage.

Our next question will come from Jeff Silber with BMO Capital Markets.

In your prepared remarks, you talked about the accelerated use of technology. I'm assuming that goes beyond what you talked about on the EV side. I know you talked about the digital platform before. Can you talk a little bit about how you think technology might be changing your business over the next few years?

Yes. Sure. So we started with our dispatch function. And so -- from the operations side, and that's where -- that's the team that really builds routes and directs the trucks out every morning and adjusts those trucks sometimes in the middle of the day so that we can service our customers. And we got them into a very visual-based mapping structure that allows us to build routes more efficiently and, frankly, more effectively for customers to improve our delivery time and speed.

We're now in the process of rolling that technology into all of our vehicles, and so now we'll have 2-way communication between dispatch and the vehicle. And we think that has a number of benefits. One, it allows us to provide a better employee experience. It certainly allows us to take more costs out of the system because we're more efficient. And then it'll also allow us to connect to all of the customer-facing investments we've made over time that allow us to provide service notification, verification and reporting and a number of the benefits that customers want, which we think will help further differentiate our offering in the marketplace.

Okay. Great. That's helpful. And my follow-up -- I'm sorry to go back to the M&A contribution. I know you said it's 150 basis points for the deals that have closed, but I'm assuming that excludes Santek. One, can you confirm that? Two, can you just remind us how large Santek is and what you paid for the business or will be paying?

Yes. So you're correct, right, the 150 basis points, that only includes acquisitions, which have closed. So that specifically excludes Santek. And we're not giving any sort of details on what we pay for Santek or, for that matter, any other deals.

Our next question will come from Jeff Goldstein with Morgan Stanley.

Looking at your average yield guidance next year of 2.5%, how should we think about potential upside to that figure? Does it mostly revolve around increasing inflation? Is it around more success in your resi and renegotiations? Is it more commercial coming back online? Just what would be the most likely source of upside in looking at that estimate?

Well, it's all of the above, right? There's a lot of mix issues that go into yield. Certainly, it is. CPI has an impact on our business as CPI moves up. And we have all sort of the automatic escalator working through our resi space. That will happen. We've talked about now for a couple of years as we've been changing the indices for the escalators in our resi-based business to something that's more representative of the solid waste space. We've had a lot of success there. Jon has been talking about that quarter after quarter, and we continue to have success there. Even though CPI continued to get better, we still moved continually toward an escalator that made more sense.

Recycling, we've got work to do still in recycling, right? It's all those things -- I don't think it's any one thing that you can point to, although CPI by itself, if it gets north of 2, 2.5 will be a nice pickup for us.

Yes. Two things I'd point to are construction, right, which certainly looks strong, and it's probably gaining strength. So that could provide some upside in our large-container side of the business, and we feel really optimistic about our special waste pipeline. We've always talked about in election year, some of those jobs tend to stall out just given the uncertainty, and our pipeline remains strong through 2020. But we did see some of those jobs push out, and those jobs are now hitting. So as special waste gets more busy, that should put some upward pressure on pricing on the landfill side.

Look, on top of that, you think about kind of best ever service levels, right, that speaks well for extending customer loyalty, and that means better pricing and all the rest of it. So there's just a lot of factors. Go ahead, Brian.

Yes. I was going to say there's -- the one thing to remind you of, of how CPI works through our business is it lags, right? So the CPI print from 2020 is impacting our pricing in '21. And even with that lower CPI-based pricing, we're talking about margin expansion, strong EPS, strong cash flow growth as well as improvements in free cash flow conversion. As we start to see inflation, right, that's only going to benefit '22 and beyond. So as you start to see those inflation prints and if you see anything kind of north of 2, right, because this year was only 120 basis points, anything north of 2 is only going to be a solid tailwind going forward.

That was all super helpful color. Then just you said last quarter that overtime was down 10% year-over-year. And maybe I missed it, but where does that stand right now? And do you think moving into 2021 overtime can still tick -- is it going to tick up again given that comp? Or do you think you've learned how to be more efficient there?

Yes. We're still at about the 10% range. I'd expect over time that we'd settle into the 5% to 10% kind of pre-pandemic, post-pandemic change or a reduction in overtime. And we'll capture some of that benefit because we just learned how to be more efficient, right? We've taken some routes off of Saturdays and Sundays, right, and put them into our kind of daily routine Monday through Friday, and that's certainly a more efficient way to service the customer. But also keep in mind, we're always looking at the income statement and the balance sheet. We're going to make the optimal trade-off on the asset. And so you could have 0 time -- or 0 overtime by running a truck 40 hours a week, but that wouldn't be a very good capital trade-off, right?

So we think in the low 50s is really the optimal spot from hours per week where that truck should be running, and that balances out customer service and safety and employee experience and all those things. So again, we'll sustain some of those savings and -- overtime savings, and I think that'll settle out between a 5% to 10% reduction over time.

Our next question will come from David Manthey with Baird.

In terms of pricing, all else equal and longer term, do you have a preference for a CPI-based price index versus a fixed 3% increase? And I guess more broadly, if inflation does pick up generally, could you just outline what you see as the major pros and cons to your business?

Yes. I think on the pricing, I think the first thing we want to do is we want to make sure that we secure a price increase that more than covers our cost increase. And even in a low inflationary environment, we have a strong belief that our people need to raise every year, right? Their expenses are going up. And so we want something that covers that cost increase and then hopefully increase a little more that allows us to expand margins over time.

Our broad view is that we don't want to get too concentrated on any single indice, whether that be fixed or water, sewer, trash or anything else. So we like a balanced approach. As long as it's something better than CPI or a fraction of CPI, which historically the industry has accepted, which we are no longer tolerating, right, we're making sure we're getting paid for the work we do over time.

And then in terms of inflation, why Don mentioned that's good for us is because, again, we've always given our people a fair wage increase, right? And so our cost increases with inflation don't really change a whole lot where we get more on the top line of the business, right, puts upward pressure on our fixed -- our CPI or CPI or water, sewer, trash-related indices. And I think even in the open market, just puts more upward pressure on pricing and what customers are willing to pay.

Yes. Look -- and water, sewer, trash has consistently outpaced CPI. And again, we talk about a waste-related indice. It's fair. That's really the point, right, is 3% to 4% fixed is fair. We can negotiate with customers in fairness, and we can make the commitment we need to continue to update our fleet, global modernization that Jon talked about, pay our people market rates, provide good benefits and do all the great things we do to keep our people showing up every day just like they did throughout this pandemic, right?

The waste service providers in America didn't get near-enough respect or appreciation from people at large. They showed up every day with very little complaining and were true heroes. And to Jon's point, we're going to continue to reward that over time. And a fair rate works. And the underlying issue is really the market is rational, and it's allowing us to continue to move that needle little by little by little, and we've got a big portion of our book now corrected.

Okay. And you noted that you expect to retain the efficiencies that you gained in 2020 going forward. And specifically, you outlined overtime as one of those areas. What are the other cost items where you see the greatest retention of benefits that you captured during the pandemic?

Yes. Certainly on T&E. I would say we're not the only company on that front, but there's -- historically, most companies, and we were in this bucket, they had 2 modes of meeting. Either it was a conference call or it was in person, which involved a lot of time and hotel costs and airfare costs and everything else. And the emergence of Zoom and Teams and the other technologies have allowed people to work in new ways. And there's certainly benefits from being together. And so we expect over time that some of those costs will come back from the business but certainly not all those costs. So we're challenging the way we work.

And the other thing over time will be real estate. There are some roles that we think will be better permanently done from home. We did an unbelievable job of transitioning our team from an in-office environment primarily to an at-home environment. And some of those roles, we think, long term are best suited to be at home, and we'll have some real estate savings associated with that.

Things like that'll affect turnover continually positively, right? So we've seen good benefits from that. So it's a number -- again, a number of things but a lot of sustainability there.

And as Jon mentioned earlier, the benefits from routing, that impacts more than just labor. That also impacts maintenance and fuel. And if you look at our results, right, you can see the improvements that we're seeing in that cost as a percentage of revenue across all of those P&L line items.

Our next question will come from Michael Hoffman with Stifel.

If I'm playing cleanup, Brian, can I ask a couple of housekeeping so we all hear the same message, like what's the share count in the earnings guidance? What's your run rate interest expense per quarter so we get those right in our model?

Yes. Michael, we're -- like I said, we're not going into that level of detail on the guide. Again, I think just keeping it to the EPS and the free cash flow and some of the organic growth is where we're keeping that as compared to going through some of the individual components. That said, I mentioned on the -- I mentioned in my prepared remarks that we are assuming that, that 26% equivalent tax rate, that's that combination of both the effective tax rate as well as the noncash charges from solar investments. But again, we're kind of keeping it a little bit more to a higher level guide.

Okay. But are you assuming share buybacks in the -- in that number? Or should we -- I mean it does matter because it could be a 2% or 3% movement.

Yes. No. We've got a modest amount of share repurchases. Again, as we've talked about previously, again, the first use of that free cash flow is going to be for acquisitions. We talked about that robust pipeline of acquisition activity. So again, that's going to be the first use, is going to be to fund that. So it's not going to be necessarily, I would say, as significant as what you've seen in years prior to 2020 but still a modest amount of share repurchases assumed in '21.

Okay. On the margin, just for clarity, your original guidance was -- midpoint was 28.5. You beat that by 90 basis points, which I presume what's happened is there's nothing like a crisis to get you all focused on a cost structure that was coming out of the model regardless but has now come all out in 2020. You're going to carry and hold it, keep it and build from it. Is that the right way to read all this?

Yes. I would say the one exception, Michael, is there is a little bit of tailwind benefit here on the safety side and on the productivity side with lower traffic patterns. And as people return to the office, right, to what pace that happens, we'll see, right? There may be some headwind, but I think that's a minor part of the story, right? I think the majority of those safety productivity benefits that we plan on capturing because success begets success, right? We figured out a new way of working, and those -- our teams are committed to capturing those benefits.

When you think about -- to your point, Michael, we were -- when we moved originally from answering the phone at 300 locations to 3, we said, hey, someday, we're going to think about work-from-home solution. But that wasn't in our mind to do in 2020 until it had to be, right? We were -- that was, sort of in our mind, a couple of years out, right? There'll be other things we're working on. And then all of a sudden, it had to happen. And as we reported, we moved to working from home in those 3 locations within like 72 hours. That was a great learning. It was a great find. It was a great pickup. Now we'll benefit from that going forward, right? We'll figure out what that all means.

As Jon said, as things sort of modulate and we find this new -- this next new plateau, if you will, and then we'll grow from there and from there, right? But yes, we did better than we originally thought, and the story continues to improve from here. As we mentioned, there's still a lot of upside in this business. Jon talked about RISE, talked about all these other things that we're doing that are still in early innings that are going to continue to pay benefits into the future.

Yes. And Mike, I mentioned it earlier, I think it was Tyler's question, right? So back on the heels, and I think you were just asking this question, on the heels of that triple-digit margin expansion in '20, right, we expect further margin expansion. Within the guide there, there's 50 basis points of margin expansion with -- from the underlying business in '21. And then there's a couple of pieces that are somewhat offsetting that but very strong performance, especially given what we did this year.

Yes. Think about RISE, I mean, we started to roll that out and then COVID hit, and then we pump the brakes. And then we kind of went full on, right? And we continue to implement that. I mean the team that did that did an outstanding job. We thought sort of spring last year that we'd have to, let's say, pull the plug on it but just really put it aside while we were dealing with the uncertainty of COVID. Instead, we moved forward. We actually increased the speed and actually got that phase of it all implemented. It's pretty impressive.

Got it. Last one from me. You did $128 million in 2020 in the environmental solutions business. Is that -- you've confused me with your answer. Is that number going to be up or down in 2021?

It's going to be somewhat flattish is what we're expecting on the environmental solutions, yes.

All right. Which is pretty significant since you're running at $25 million a quarter for 3 quarters. So you've got to overcome a really tough 1Q to be flat. So that's the importance of that statement.

Yes.

Our next question will come from Noah Kaye with Oppenheimer.

And first of all, congratulations to your entire team from the frontline focus on up for the performance and a really tough year, outstanding. I guess I have a little bit of a long-term or even the medium-term growth strategy question here, which is I think we understand that there's always a component of churn that is structural and driven by bankruptcies. I think if you had tested back in April that you'd be exiting the year at a 93% retention rate, we would have been surprised. It's interesting to note, commercial bankruptcies are actually down year-over-year in the U.S.

And still just listening to what you said about your own cost structure. I mean if more companies act like Republic and continue to not spend on hospitality, travel and some of the other expense in the past, where business formation and where growth happens in the economy is still going to change from what we might have expected previously. So how do you calibrate for that? How do you position the business to capture where the growth is going to be?

Well, overall, think about where we are, right? And think about the balance we have. We always talk about the power of the portfolio, right? And that is #1 or #2 across the markets we're in. We have a good concentration in what I would call Sunbelt markets but markets that people move to, whether it's the Northwest, down the West Coast, across the South and up into the Carolinas. We're well positioned in places like Texas and Florida, right? A lot of people move in there these days. So we've still got strong positions in metro markets, right?

This thing is going to settle down. People are going to become more rational in their behavior again, and we are well positioned to pick up all the growth in the markets we're in. So the way that growth comes will change. Downturns and these kind of shocks to the economy that we've lived through for our entire lives here and there are different. This one's different than the last one. So there's still strong demand for housing, right? And we've always talked about how single-family home housing starts and household formation clearly tracks with our growth. So that paints a pretty strong picture.

Household formation lends to business formation. There's a lot, I think, pent-up demand in the consumer. The consumer's in pretty good shape, right? When you think about wage growth, you think about what's happened in savings accounts across the nation, I think there's a lot of people just chomping at the bit to get out. And so while we may have pulled in a little bit on T&E, it doesn't mean the average consumer is going to -- I think they're going to get out there and rush to some new opportunity, right? And so we're not too concerned and -- about that. The free market always finds a way, and we're right smack down in the middle of the free market, right?

Right. Household balance sheets are in great shape as you're doing now relative to past crises, and you mentioned the housing sector activity plus potential for rising CPI plus a full year of reopening, and that all points to kind of a multiyear growth acceleration for the waste industry. So I think your comments around the portfolio and how you can leverage off of that are well taken. Lastly...

The other thing, too, is when we went through the Great Recession, right, that thing was, pardon the term, but death by 1,000 cuts. I mean it just kept going and getting deeper and longer and sustained and is this thing ever to get over. There's probably some people that have some of that feeling about COVID, but we went from, hey, surprise, COVID here to the bottom falling out across the market, defining that bottom in a pretty short order and then battling back. It wasn't this ongoing 3-, 4-year slump of this abyss. We're coming out of it, right?

And there are still people who are dealing with tragedy. There are people dealing with hardship, and we're not minimizing any of that. But all in all, over the top of it, the economy is coming out of it, and we're coming out of it with it. And we're seeing those things reflect in our business. And so that's our viewpoint for 2021 and beyond.

Our next question will come from Sean Eastman with KeyBanc Capital Markets.

It's getting long, so I'll just ask one. I'm just curious, if you look at your private competitors or maybe if you looked at your acquisition pipeline, the companies in your acquisition pipeline, I mean, it sounds like the pricing discipline goes all the way down to the small independents, which is great. I'm just curious, if you look at this ability RSG has had to dynamically flex costs and really having gone on offense on some of these technology initiatives in 2020, has it been similar with those private companies? I mean have you observed a similar approach from them through this last year or not? I'd be curious to get your sense on that.

I think it's a mix, to be honest. I think some people panic, frankly, and did mass layoffs really quickly. Other people kind of plowed their way through. I think the broader theme is they're not making some of the investments we're making into sustainability, for example, or into the digital platform that we're making. These are multiyear investments, and these are 8-figure investments over time that become really, really expensive that we need broad scale to get value out of investments over time.

So -- and we see them -- I think pricing has held up well. I think, in general, people have tried to do the right thing in terms of taking care of their people on balance, but we've been able to kind of do both, where they've -- we've seen them more just focus on getting the garbage or the recycling off the ground rather than thinking longer term about where to take their business.

And look at our CapEx, right? I mean we didn't take a CapEx holiday in '20, right? We didn't hit that free cash flow number by not spending on the company. We continued our investments in fleet, in systems and some of the innovation stuff that Jon talked about. Of course, we invested heavily in our frontline, in our people. We've committed to serve, and we saw some of that from some of our smaller providers. As Jon said, it's a mixed bag. I mean, overall, I think it depends how healthy and strong you are going into it. And as I said in my prepared remarks, I mean, we were coming into this from a position of strength and stability and alignment across our team and a really strong culture going in, and that led the way for us.

And again, back to the power of the portfolio, we're well positioned, good balance sheet, all those things in our favor. So position of strength matters. And from there, now we'll get back to '21, and we'll do it again.

Our next question will come from Stephanie Yee with JPMorgan.

I'll just ask one question. Do you envision Republic getting to 30% EBITDA margins? And can you talk about what drivers will get you there as you have to offset some of the headwinds when business activity picks up? Is there a time frame that you have in mind for reaching that target?

Well, we're right on the cusp of 30% EBITDA margins. And 29.5% is our guide. We think, yes, we will certainly be at 30%. What are some of the drivers? As we continue to improve our recycling business, we're well into that. We can give you more detail, but we're running out of time on the call today. But we've made good progress there, good progress on -- Jon mentioned the approach we're taking on the alternative indices in the resi space, good progress there. The RISE platform, while we've got it rolled out, it's only in sort of the early phases of that. That is going to be something that we'll build on. Once we get connected digitally to customers and all different parts of our business, we'll just continue to add enhancements that drive margin, that drive quality customer experience that drive customer loyalty, will drive price, right?

The safety story is a good story. Fleet is a good story. And then M&A, right? As we build, we're going to do a nice balance of new platform acquisitions, new markets, but also our bread and butter is still tuck-ins in markets we're already in. It's come at a higher margin. They're quicker to integrate. So there's just a handful of things that are in our favor, and we'll continue to invest properly in the business.

We told you we had 30% in our sights. We're right there. And a 30% margin will be here before you know it. How's that?

Our next question will come from Mike Feniger with Bank of America.

Just on the 1.5% to 2% volume and the fact that Q1 is going to be slightly negative, can you just help us understand how that's going to play out through the year? I mean do we need a pickup in some -- in commercial and some business units in the second half to get us to that 1.5% to 2%?

Yes. So Mike, let me take this one. So again, as we mentioned, the first quarter, we're expecting the performance to be better than what we saw in the fourth quarter of this year but still negative, right? As we look at the kind of the distribution of volume, we would expect our best volume performance to be in the second quarter, and that's just because of the comp, right? So that's when we saw the biggest decline in 2020. So you've got the easiest prior year comparison. And then it gets a little bit tougher as you move into the second half, but our expectation is that it still remains positive.

So again, we are projecting that the economy continues to gradually improve, and that is baked into our guide on the top line. But as you kind of said, meaningful type volume recovery to get there, I would say, no. Most of that has already occurred based on what we've seen in '20 with some modest improvement going forward in unit recovery.

Just -- I know this has been asked before. The $600 million spend, which does not include Santek, it's translating to 150 bps of the top line. I mean I -- you guys just did over $10 billion of sales. I'm just trying to translate the $600 million to 150 bps top line, and I know you're not going to give us acquisition multiples. I get that. Maybe I'm just a little slow here just like getting that $600 million spend to 150 bps. Is that like just very conservative? Are there like a lot of divestitures? I'm just trying to triangulate some of that.

Yes, yes. So let me clarify, okay? The 150 basis points is the rollover impact of acquisitions that closed during 2020. That includes acquisitions that closed in February of 2020 and has nothing to do with Santek. Santek did not close by December 31. It is not in that 150 basis points. So based on the timing of when it closed in 2020, you get a rollover benefit just because you didn't report a full year in 2020. That's the 150 basis points. If you were to just annualize the revenue of what we acquired in 2020, it's over $200 million.

Okay, okay.

Okay?

All right. That's helpful. Yes.

I think -- so as we look forward, though, into '21, our $600 million investment that we're anticipating, that does include Santek as well as other deals. We are not talking about -- right now about the revenue contribution that we're anticipating from those deals because some of it's just based on when it closes in '21, how much it'll contribute in year.

Next question comes from Scott Levine with Bloomberg.

I'll have one question for you actually on recycling. So we've seen commodity prices come back very nicely. China has essentially pulled back from the market. Even though we're at a lower price point on most recycled commodities than we were in, say, 2017, does the new environment give you -- being more stable give you more confidence in investing in recycling? Or what are your expectations now that kind of the whole China import ban scenario has kind of played itself out and commodity prices are on the mend there?

Yes. There are 2 things. One, it certainly even strengthens our resolve to go into city hall and get a pricing mechanism that we think works for both parties. Historically, the industry is price recycling on the back end, which has caused a lot of volatility in a business that is otherwise quite stable and we think the fairest pricing model that we get paid a fair return to pick it up, a fair return to process it, and then we share in the commodity value on the back end. And as commodity prices get higher, it's easier to talk to customers, particularly in municipalities, about getting that model right.

And then, listen, long term, we're bullish on recycling, right? We see a world that has population growth and material scarcity and a big desire from a lot of different aspects around reuse and recycle. And we think we're going to be a big part of that and a big player in that. We just have to make sure that to be environmentally sustainable and economically sustainable and we get a fair return for the work that we do.

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

Great. Thank you, operator. When we look back on 2020, it's clear to see just how instrumental the foundation we've built over the past decade has been in enabling us to thrive in the midst of so many challenges. The pandemic's impact on Republic was just like that of the rest of the world, disrupting the lives of our customers, our communities and, of course, our people. But we were able to react from a position of strength, taking care of all of our stakeholders. Our strong foundation did more than just set us apart. It actually allowed us to prevail.

We believe our 2020 performance clearly demonstrated the resiliency of our business and positions us well to deliver continued growth in 2021. This momentum is bolstered by an improving economy as we move into an era of recovery and growth.

As always, we manage this business to create long-term value for all our stakeholders while providing essential sustainable services for our customers. I thank the team for their tenacity and their enthusiasm as we head into this new year. Thanks for joining us. I hope you all have a good evening, and stay safe out there.

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