Republic Services, Inc. (NYSE:RSG) Q2 2022 Earnings Conference Call August 4, 2022 5:00 PM ET
Company Participants
Aaron Evans – Vice President of Investor Relations
Jon Vander Ark – President and CEO
Brian DelGhiaccio – EVP and CFO
Conference Call Participants
Toni Kaplan – Morgan Stanley
Walter Spracklin – RBC Capital Markets
Jerry Revich – Goldman Sachs
Hamzah Mazari – Jefferies
Michael Hoffman – Stifel
Sean Eastman – KeyBanc Capital Markets
Michael Calleja – Bank of America
Tyler Brown – Raymond James
Stephanie Yee – JPMorgan
Noah Kaye – Oppenheimer
Operator
Good afternoon, and welcome to the Republic Services’ Second Quarter 2022 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today’s call will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [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.
Aaron Evans
I would like to welcome everyone to Republic Services’ second quarter 2022 conference call. Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are joining me as we discuss our performance.
I would like to take a moment to remind everyone that some of the information we discuss on today’s call contains forward-looking statements, which involve risks and uncertainties and may be materially different from 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 August 4th, 2022.
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 the 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 dates and times. 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
Thanks, Aaron. Good afternoon everyone, and thank you for joining us. Our second quarter results continue to demonstrate the value created by our differentiated capabilities and ability to harness the positive momentum in our business.
We delivered outsize revenue growth both organically and through acquisitions, while generating underlying margin expansion. This was achieved by pricing in excess of our internal costs inflation and continued savings from productivity initiatives. The fundamentals in our business remain strong, and we remain well-positioned to capitalize on additional growth opportunities in the marketplace.
During the second quarter, we delivered revenue growth of 21%, generated adjusted earnings per share of $1.32, which is a 21% increase over the prior year and produce more than $1.1 billion of adjusted free cash flow on a year to date basis, which is a 14% increase over the prior year.
We continue to effectively allocate capital by investing in value creating acquisitions, and returning cash to our shareholders. Year to-date, we invested $2.5 billion in acquisitions, which includes the acquisition of US Ecology. The integration of US Ecology is well underway and progressing as planned.
We’re encouraged by early cross selling results, and remain confident that we will achieve at least $40 million of cost synergies. We have one of our most robust acquisition pipelines ever with opportunities to close transactions this year and into 2023.
We now expect to invest over $600 million in acquisitions apart from US Ecology for the year. Substantially all of these deals are in the recycling and solid waste space. Year to date, we returned $495 million to our shareholders through dividends and share repurchases.
Additionally, we recently announced an increase of the dividend for the 19th consecutive year. During the second quarter, we reported organic volume growth of 2.4%, which was broad based across geographies and market verticals.
Simultaneously, we demonstrated our ability to price. Core price reached an all time high of 6.2%, an average yield increased to 5%. This is the highest level of pricing and company history.
At the same time, we’re experiencing higher than expected inflationary pressures that continue to persist. That said, we expect to continue to price more than our internal cost inflation, ultimately leading to full year results that are projected to exceed original expectations.
We now expect adjusted EPS in the range of $4.77 to $4.80, and adjusted free cash flow in a range of $1.7 billion to $1.725 billion. This represents an increase of approximately 4% from the midpoint of the prior guidance.
Finally, we believe creating a more sustainable world is both our responsibility and a platform for growth. We’ve recently published our latest sustainability report, highlighting the progress we’re making toward our most significant opportunities to positively impact key stakeholders and the environment.
We reported a 9% decrease in greenhouse gas emissions from our 2017 baseline, which keeps us well-positioned to achieve our interim target of a 10% reduction by 2025. We also highlight progress made on climate leadership goals, including circular economy, and renewable energy.
These goals are supported by investments were making in Polymer centres and landfill gas projects, which are progressing as planned. In addition to having a positive impact on the environment, the innovative solutions are a platform for growth. Our efforts continue to be recognized externally, as Republic was recently named to 3BL Media’s 100 Best Corporate Citizens list for the third consecutive year.
I will now turn the call over to Brian who will provide details on the quarter.
Brian DelGhiaccio
Thanks Jon. Core price during the second quarter was 6.2%, which included open market pricing of 7.8% and restricted pricing of 3.5%. The components of core price included small container of 9.7%, large container of 6.9% and residential of 5.6%.
Average yield on total revenue was 5%, which represents an increase of 80 basis points when compared to our first quarter performance. Average yield unrelated revenue was 5.4%.
As Jon mentioned, we continue to dynamically adjust price on new and existing business to offset higher levels of cost inflation, we’ve seen our operating costs and capital expenditures.
Second quarter volume increased 2.4%. The components of volume included an increase in small container of 2.8%, an increase in large container of 2% and an increase in landfill of 5.7%. Our customer retention rate remained stable at 95%.
Moving on to recycling. Commodity prices were $218 per ton in the second quarter. This compares to $170 per ton in the prior year. Recycling processing and commodity sales contributed 20 basis points to internal growth during the second quarter.
Next, turning to our environmental solutions business. Second quarter environmental solutions revenue increased $260 million from the prior year, which primarily relates to the acquisition of US Ecology.
On the same-store basis, environmental solutions contributed 50 basis points to internal growth during the second quarter. Adjusted EBITDA margin for the environmental solutions portion of our business was 17.1% during the quarter. This includes our existing operations in the Gulf and northeast together with the addition of US Ecology.
Total company adjusted EBITDA margin for the second quarter was 29.6%. This compared to 30.6% in the prior year. Margin performance during the quarter included a 140 basis point decrease from acquisitions of which 60 basis points relates to US Ecology, and a 110. basis point headwind from net fuel.
It’s important to note, that even though net fuel was diluted to margin, we recovered over 95% of the dollar change fuel expense through fuel recovery fees. These margin headwinds were partially offset by a 30 basis point increase from recycled commodity prices, a 60 basis point contribution from relatively higher incentive compensation expense in the prior year, and most importantly, underlying margin expansion of 60 basis points.
Adjusted EBITDA margin in the solid waste and recycling business was 30.8%. SG&A expenses excluding transactions costs from US Ecology were 10% of revenue. The 70 basis point improvement demonstrates our ability to effectively manage costs and gain leverage while growing the business.
With respect to our outlook, our guidance implies sequential growth and adjusted EBITDA dollars of 5% to 5.5% in the second half of the year compared to our first half performance. This would continue to drive double digit EBITDA growth on a year-over-year basis.
As a result, we now expect full year 2022 adjusted EBITDA margin to be approximately 29.3%. The change in margin from our initial expectations relates to the impact of US Ecology and fuel.
Year to-date adjusted free cash flow was $1.15 billion and increased $143 million or 14% compared to the prior year. This was driven exclusively by EBITDA growth in the business.
Year to date capital expenditures of $505 million represents 35% of our projected full year spend, and year to-date cash taxes of $79 million represents approximately 25% of our projected full year spend.
We now expect full year capital expenditures in a range of $1.45 billion to $1.47 billion. This represents an increase of $130 million from the midpoint of our prior expectations. The increase includes $75 million related to US Ecology. The remainder of the increase relates to investments to support growth, and higher than anticipated costs for trucks, equipment and landfill cell development.
Total debt was $12 billion and total liquidity was $1.6 billion. Our leverage ratio at the end of the quarter was approximately 3.3 times. We expect to revert to three times leverage within the next 12 months.
With respect to taxes, our combined tax rate and non cash charges from solar investments resulted in an equivalent tax impact of 23.9% during the second quarter, and 24.6% on a year to-day basis. A lower than anticipated tax rate was mostly timing related, and provided a $0.05 EPS benefit during the first half of the year.
We expect this timing benefit will flip in the second half, resulting in an equivalent tax impact of 29% in the third quarter, and 26% in the fourth quarter. We still expect a full year equivalent tax impact of approximately 26%.
With that operator, I would like to open the call for questions.
Question-and-Answer Session
Operator
We will now begin the question and answer session. [Operator Instructions] The first question today comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Toni Kaplan
Thanks so much. I was hoping you could give a little bit of extra color on the expectation for how pricing plays out. I know you gave some great detail in terms of where the open market versus restricted was in the quarter. But just how you think that plays out during the rest of the year?
Brian DelGhiaccio
Yes, strong. Because of that momentum on the pricing side, obviously, we’re putting out more price than we ever have on the open market side and retaining at a higher percentage than we ever have. Which I think is a function of both the macro economy and inflation, and all costs going up for customers, as well as the fact that we continue to differentiate our service offering and provide something unique in the marketplace. And I don’t see that changing for the remainder of the year. And then we’ll get a nice pickup the second half of the year on the restricted side of the business. As those contracts kick in with underlying escalator something tied to CPI or CPI derivatives like average trash or water sewer trash, that will provide some momentum there as well.
Toni Kaplan
Terrific. And then in terms of US Ecology, just any additional color on surprises versus now that you’ve started the integration, versus what your expectations were before?
Jon Vander Ark
Generally, unplanned. Let’s see — very excited about the people. I think maybe one surprises we’ve been able to retain even a higher percentage of people than we expected. Again, there’s good natural synergies in the deal we’ve talked about that. But the reason we bought this as a platform for growth, and we really respect their compliance culture, their expertise, and obviously a very unrivalled set of assets. And their team has been absolutely energized to get connected with us very strong cultural alignment. And we did a lot of work pre-merger in terms of organization structure and model and design. And we’ve got those teams staffed up and ready to go, and we’re out moving in the marketplace. So, I’d say on balance. Its got a little more momentum than I expected at this point.
Toni Kaplan
Terrific. Thank you so much.
Operator
The next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.
Walter Spracklin
Thanks very much. Good afternoon, everybody. And just on the pricing question, I guess a lot of your contracts and just as you alluded are coming in the back half pretty strong. I guess that sets you up very nicely for 2023, in terms of carryover of those price — any pricing you’re doing through the year and in the back half the year. So when we look at the 2023, is there any reason why we shouldn’t kind of see a continued elevated pricing rate for 2023? Obviously lapping some tougher compares as we get through the back half of 2023. But tell me if I’m wrong, but should shouldn’t it remain elevated, given the late in the year pricing this year remain elevated through the first half of next year?
Jon Vander Ark
Yes. I guess the one cautionary note, obviously, that we’re living in very unique and uncertain times. And I think in the last 36 months have taught all of us some dose of humility. All that being said, the outlook from what we see right now is very, very positive. And so, you’re right, the restricted portion of that book will continue to flow through. We’re not going to change our stripes on the open market side of this business, right. We started, we lead with price. Our people deserve a fair wage increase. And that profit allows us to reinvest in the business and drive sustainability and all the things that we care about. So that won’t change. And listen, I think we’ve got momentum on all three fronts. we’ve got momentum on the pricing side of the business. We’ve got momentum on the volume side of this business. And obviously, the acquisition activity, has also been very strong. And the rollover effect in the next year sets us up for what we think will end up being probably a double digit revenue year in 2023.
Walter Spracklin
That’s great color. On acquisitions, dovetails into my next question actually, is just how you’re looking at acquisitions now in two ways. First of all, taking a fairly large one here with US Ecology, does that in any way kind of delay you from the cadence of acquisition or the pace and cadence of acquisitions at all? And secondly, related to that, does it — does US Ecology now shift your attention a little bit to perhaps examining different types of acquisitions, some in hazardous, some in solid waste? Or do you kind of refocus re-center on solid waste for opportunities going forward?
Brian DelGhiaccio
Yes. I think we talked about when we did the deal. This wasn’t either or it was both end. And the timing of the deal was predicated on all the momentum we had in the traditional recycling and solid waste side of the business. And our outlook has never been stronger and more positive there for deals. I thought about what we’re going to close this year and a strong pipeline in the next year. And that’s where we certainly, the bulk of our acquisition spend will certainly come in that space. Now, the benefit is we’ve got a second platform with which we can pursue further follow-on and tuck-in acquisitions.
And certainly we have a pipeline there. I think it’s the only, I think it’s very unlikely in the near term is we do another deal of scale in the environmental solution side of the business. Because we think we’ve got a great platform with US Ecology. We’re building that out. Again, we’ll be able to tuck in pieces along the way and in a very analogous way to the solid waste and recycling space of getting great post closure synergies on those deals as we pulled those right in.
Walter Spracklin
Makes a lot of sense. Thanks for the time as always.
Jon Vander Ark
Thank you.
Operator
The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Jerry Revich
Hi. Good afternoon, and congratulations on the strong quarter. I’m wondering if you just talk about, as we think about the pieces for 2023, you alluded the top line. Can you just talk about the tailwinds that you folks are going to have from your investments in landfill gas and in the — more facilities. How many facilities do we have coming online over the next 12 months as we just layer on additional tailwinds to the business as we think about what 2023 might look like at this point?
Brian DelGhiaccio
Yes, Jerry, specifically around some of the landfill gas projects and Polymer centres and things of that nature. Anything that’s going to come online is really going to be in the latter part of 2023. So the contribution to 2023 is pretty limited with respect to those projects. Now, obviously, setting up 2024 and beyond, right, that’s where it starts to get more exciting with respect to those investments. Really next year is more about pricing in excess of cost inflation, the realization of the synergies with US Ecology deal.
Jerry Revich
And on that note, obviously, really strong margin performance this year, but given the high inflationary environment overall, it certainly limits. How aggressive we can get on pricing ahead of cost? What’s the opportunity to make up for that next year, as hopefully, inflation slows from high singles to mid singles? Could we see a 60, 70, 80 basis point margin expansion versus half that you would typically target?
Brian DelGhiaccio
I think the thing you have to remember, Jerry, is that on that restricted portion of our business and those indices that those contracts are tied to, they tend to lag. So again, when you take a look at what we’re doing with the inflationary environment that we’re experiencing today, and we’re seeing that across our book, and we’re able to drive underlying margin expansion this year, as we start to get those relatively higher price increases next year, we think that actually sets us up very well for continued margin expansion into 2023.
Jerry Revich
So just to be clear, it doesn’t sound like we should be thinking about commercial and industrial lines of business, pricing slowing significantly. So, we’re just going to get the additional kicker from the restricted business kicking in and continued level of pricing that we’ve seen in C&I this year. Is that right?
Brian DelGhiaccio
Yes. The only the only caveat, I’d say is, I mean, the labor market remains constrained. And we do see some signs of that easing, right? And I would hope that that would continue to ease throughout the year, and create the opportunity in the next year, but we will do whatever. We want to run this business forever. So we’ll do whatever we need to do to retain our people. So the level of margin expansion that we have in 2023 will be predicated on exactly how tight the labor market is and what we need to do with wages.
Jerry Revich
Super. Appreciate the discussion. Thanks.
Operator
The next question comes from Hamzah Mazari with Jefferies. Please go ahead.
Hamzah Mazari
Hey, good afternoon. My first question is just around the restricted book. And then also as part of that just cost inflation. So, when you look at your cost buckets, do you sort of believe its — most of those buckets have peaked, labor included? And then as part of that, when you look at your restricted book, how much of that book is on indices that are not CPI? And when they reset, do they kind of cover cost inflation that you’re seeing? I know they lag. Or does it not even matter, because the open market is so strong that it will help you recover whatever you’re not currently?
Brian DelGhiaccio
Yes. Let me start on the wage piece. So we’re — listen, we’re seeing inflation right in the high fours. And we feel good about that number in part, because going into this high inflationary period, we thought we had a very healthy cost structure. Healthy meaning not too high, but also not too low, right. Our team does a really good job of understanding local market dynamics. And we want to be the employer of choice in those markets. Now, obviously, we’ve had to take up, put wages into the market this year beyond our initial plan, just given the dynamic environment.
And I would say, listen, we see that certainly flattening, and kind of ending the year into the high fours on that front. Assuming that inflation comes down, if that will start to modulate as we go forward. So I think we are past the peak of this thing with the caveat of we’re living in uncertain environment. So Hamzah, within that 50% book that has a contractual pricing restriction, 34% of those are directly linked to CPI, 18% are some form of alternative index. So I think just over 50% has some inflationary component baked into it. And then the other 48% is some other pricing mechanism. So it could be a fixed rate. It could be a rate review or cost plus contract, but that’s basically the composition of that 50% of our book.
Hamzah Mazari
Got it. And just my follow-up question. On US Ecology, you mentioned early signs of cross selling. Could you just remind us what you sized up revenue synergies at? And at the same time, is the sales cycle different than solid waste? Or just maybe — maybe just give us some examples of the early success of cross selling? Thank you.
Brian DelGhiaccio
Sure. We value the deal, obviously, based on the standalone intrinsic value, plus $40 million of cost synergies. That being said, we think they’re the revenue synergies over time will outpace that. Part of that is on the revenue synergies. So we’ve said, $75 million to $100 million of cross sell realized over three years. We’ve already gotten 15 of that. So very good early momentum on that front. And it’s cutting both ways. Customers that US Ecology have that we’re bringing in our services. But even more so customers that we have, we’re now selling a broader set of services too. So we’re in early days on that. We haven’t really done a full rollout across all on our sales teams.
So very excited about the momentum to hit that number. And then on pricing, we believe these are scarce assets. And again, you need to price to be able to reinvest in these assets over time and grow. And so, we put out a double digit price increase earlier this week that will go into effect in early September into the marketplace, because it’s imperative that we do that. It’s inflationary environment, right? We’re going to reinvest in the business, and we’re going to expand these margins over time.
Hamzah Mazari
Got it. Thank you.
Operator
The next question comes from Michael Hoffman with Stifel. Please go ahead.
Michael Hoffman
Thank you all. So many things to think about and choose from. So, I’m going to pick free cash flow. If the old midpoint $2.65 billion, you subtract $130 million for more CapEx. That means there’s about $193 million of upside from performance between solid waste and environmental services. Can you split between them where that came from?
Brian DelGhiaccio
Yes. That’s all solid waste, Michael.
Michael Hoffman
All solid waste. Okay. So that’s just shows just how dramatic the leverage of this price has been to convert that into cash. That’s the other observation.
Brian DelGhiaccio
Agree.
Michael Hoffman
Okay. Margins. So the US Ecology margins or the ES margins, which is basically mostly US Ecology, were came out better than if you were looking at old models for that business coming into 2Q. How much of that is — it was a really good market for those kinds of services, and everybody had a really good quarter, all the peers versus anything that you all did do affect change? And then how do I look at your combined margin of 29.3% [ph], and convert that into what’s the dollars of EBITDA?
Brian DelGhiaccio
Well, let me start with the latter part first, when you want to talk about the dollars of EBITDA. So we talked for the full year, or I’m sorry, in the second half of increasing EBITDA 5% to 5.5% over our first half performance. So, I think first half was a $1.913 billion. Second half, that would imply $2 billion to $2.20 billion for a full year 3.91 to 3.93. So, when you take a look at that 5% to 5.5% sequential growth, of 3.5% of that is just the additional amount from US Ecology just for having that for longer in that period of time. And then the rest of the business 1.5% to 2%. When you think about that 1.5% to 2% on a like-for-like basis, that’s relatively consistent what would we see in a normal year.
And then, on your margin questions. So when you take a look at the 17.1% for the environmental solutions business, that’s — again, I would say there wasn’t much that that we were able to affect in that period of time, it’s only two months. So most of the synergy capture that we expect, the cross selling opportunities that Jon mentioned, and then again, the pricing opportunities, that’s more on the come. So again, I would say that was more just the strength in the business from US Ecology, which could also be just reflective of strength in the industrial market.
Michael Hoffman
It was very good. We crossed their peer group. So it doesn’t surprise me. It was good. I just was wondering how much you were able to influence already. Okay, thanks.
Brian DelGhiaccio
Thanks, Michael.
Operator
The next question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.
Sean Eastman
Hi, guys, thanks for taking my questions. I might have missed it. But just the updated yield and volume guidance for 2022, seems like both are going up here?
Brian DelGhiaccio
Yes. So, we expect that with the — the 5%, that we just reported here in the second quarter, we would expect, as we talked about that to accelerate in the second half of the year for the reasons we discussed, so we expect to stay over 5% for the balance of the year. So, full year that would average to right around 5% on a full year basis for average yield. And right now, when we take a look at volume, we’re expecting that to be at the high end of our original guidance range. So right around 2%.
Sean Eastman
Okay. Got it. Very helpful. And updated margin guidance, 29.3%. I believe it was 30.3% to 30.4% before. I think Ecol was supposed to be 70 basis points of that gap. Is that what it ended up being in there? And that leaves maybe 35 basis points of fuel. But I assume fuel was actually more than that. And you’re actually covering a lot of what the incremental fuel drag was with price. So if we could just flush that out, that’d be helpful?
Brian DelGhiaccio
Sure. Yes. You actually had a couple of those numbers there. So US Ecology is 70 basis points, 70 basis point drag from our original expectations. Net fuel is actually 50 basis points worse than we originally thought. We actually have 120 basis point drag between the two. And we’re making that up with the rest of the business to get to that 29.3 for the year.
Sean Eastman
Got it. Nice work. Thanks for the help.
Operator
The next question comes from Michael Calleja with Bank of America. Please go ahead.
Michael Calleja
Yes, thanks, guys. Just when we think about the acceleration that you mentioned, the back half with the yield, obviously, you call — can you help us find just like the rollover of what that would look like for 2023 just based on really where we’re exiting the year at and what we see with US Ecol after two months?
Brian DelGhiaccio
Are you talking about just overall revenue? Or are you just talking about specifically around yield?
Michael Calleja
Both, if you could, just because of the core price as you accelerate, I mean, you putting these price increases through this year. So there must be some rollover benefit just by even not even increasing next year, just by run rating on the end of this year. And also for U.S. Ecol, I’m curious if there’s any change in terms of the 12-month impact that we were thinking of when you originally guided?
Brian DelGhiaccio
Yes. Just a couple of things I want to clarify. So, when we’re talking about core price and yield, that is on the solid waste business. That’s what’s included in those numbers. I want to point that out, because any change in environmental solutions revenue, whether it be price or volume is on a single line item when we sit there and reconcile the change in revenue. So, as we’re talking about 5% yield, as you think about the sequential improvement from the CPI-linked contracts, we think to the second half of the year, that’s probably about a 20 basis point increase or so in yield second half versus our second quarter performance, within a further step up, probably somewhere in that kind of mid fives as we sit there and look at 2023 [ph] today.
Michael Calleja
Got it. And Brian and Jon, I’m curious, if we look back at your historical peak margin of 31% EBITDA range in 2010, 2011. I know one main factors, why margins were below that over the last decade was the low CPI. So, as we move into a CPI range of 3%, let’s say, in a multi year basis, which was consistent with prior cycles, how different is the business setup today in terms of streamline operations, routing, costs, like how different is this business today with for a CPI 3%, 3.5%, long term compared to where we were in prior cycles? Thank you.
Jon Vander Ark
Yes. Stronger on both fronts. We’re certainly stronger on the customer side, which leads to revenue on all fronts. It’s a healthier customer mix. Again, I don’t think that we talk enough about the economics of loyalty in this business. Every revenue dollars equals. Some customers are willing to stay with you longer. That’s why core price is interesting, but yield becomes the ultimate pricing metric. And that’s the one that really connects to the P&L, because it factors in the customer that you gain and lose. And you gain and lose those customers at very different rates with the same cost structure. So, yield becomes very important.
So we’ve got the healthier customer base. We’ve got better tools, right and better technology that help us work with our local teams and price vary dynamically across all of our 300 plus market, so we feel better about that. And then we’re more efficient. The rise of digital platform has been a big game changer for us. We’ve taken out $40 million of cost. And we think over the next 18 to 24 months, we got another $60 million to take out just in terms of driving efficiency and getting the same amount of work done in a shorter period of time. And so, where CPI goes? Listen, we’ve lived in all kinds of different environments here. I can tell you, it’d be really low, right. Doesn’t work very well for the industry. And we’ve seen that period.
The current number obviously isn’t great either. Even though the results are good, we’re out of balance as an economy, right with labor constraints and an unsustainable way where it’s impacting consumer spending everything else. So modulating something into a 2%, 3%, 4%, I think you’re going to find very healthy dynamics for our business, and really good performance.
Michael Calleja
Thank you.
Operator
The next question comes from Tyler Brown with Raymond James. Please go ahead.
Tyler Brown
Hey, good afternoon, guys.
Jon Vander Ark
Hi, Tyler.
Tyler Brown
Hey, Brian. So I just want to clarify and be clear on modeling question here. But what is the expected revenue contribution in 2022 from M&A based on the guide?
Brian DelGhiaccio
Yes. So if you take a look at the total contribution from acquisitions, it’s a 9.3%. Or that which is close, has close and that includes US Ecology. If you were to exclude US Ecology, that would be about 300 basis points.
Tyler Brown
Okay. And then is there — you mentioned a benefit in a rollover in 2023. Can you decide based on what’s closed, what rolls over?
Brian DelGhiaccio
Yes. So including US Ecology that would also be about 300 basis points. Or, again, US Ecology plus deals close today.
Tyler Brown
Yes. Okay. And then going back to the prior question, did you say that you think your restricted book will be up circa mid 5% next year?
Brian DelGhiaccio
So overall, and we kind of talked about the cadence of average yield. And so, again, with a with a 5%, average yield than the second quarter, we see second half improving 15 to 20 basis points compared to our second quarter performance. And then as we look forward to 2023, again, assuming that things stay relatively stable on the open market portion of our business, that’s where we think of average yield right now in kind of that mid 5%. overall
Tyler Brown
Yield. Okay, that helps. You talked about just over $3.9 billion in EBITDA for this year. If I do that calculation, it kind of implies, call it a 43% to 44% free cash conversion. I think last quarter, you reendorsed that 47% for 2024. So, can you kind of build that bridge that three to 400 basis point uplift and conversion. I mean, is that lower leverage? Is that a better closure, post closure, cash taxes, CapEx. Just how do we get there?
Brian DelGhiaccio
Yes. A majority of that would be as we revert to that three times leverage, right, so we’re going to reduce the interest expense. At the same time though capturing the synergies, that’s all going to be a creative to both EBITDA margin as well as to free cash flow conversion. So, the combination really of the US Ecology integration, the reduction in interest expense over time, is that line of sight to that 47% free cash flow conversion.
Tyler Brown
Okay. That’s helpful. And then, I think we’re 100 days in on US Ecology. Any high level thoughts about portfolio rationalization. Do all the lines make sense?
Jon Vander Ark
Yes. So there’s a couple of things that are a strategic review, right. And we’ll announce those when we’ve taken a decision on those items. The vast majority of what we bought, we like, and we’re going to keep and operate. And there’s a couple of things that we’re taking a look at that might not be the best fit, somebody else might be the natural owner.
Tyler Brown
Okay. Last one, I promise. And it’s a bit of a strange question. But is there an extra workday in Q3, because of how 4th of July fell?
Brian DelGhiaccio
I think Q3 is relatively flat year-over-year. Q4, there might be a quarter of a difference.
Tyler Brown
Okay. Thank you. That’s helpful.
Operator
The next question comes from Stephanie Yee with JPMorgan. Please go ahead.
Stephanie Yee
Hi, good afternoon. I want to ask about how you’re thinking about capital allocation in terms of debt repayment versus acquisitions. Is the leverage ratio coming down really just coming from EBITDA going up? Or are you planning to repay debt? And also how are you thinking about share repurchases?
Brian DelGhiaccio
I would say that on the reverting the three times leverage is most likely a combination of both. So again, the debt that we assumed as a result of the US Ecology acquisition, paying down probably not all of it, but a portion of that, as well as just the growth in the underlying EBITDA dollars is certainly going to help the leverage calculation, but think of it as a combo of both.
Stephanie Yee
Okay.
Brian DelGhiaccio
Go ahead, if you just have a follow up question.
Stephanie Yee
Oh, sorry. I just going to — I think you’re going to comment on the share repurchases.
Brian DelGhiaccio
Yes. As far as share repurchases. So, we were a buyer in the first quarter. We said that we are going to prioritize at this point the debt repayment, relatively short term outlook on that as far as 12 months or less. But we always remain opportunistic on repurchasing shares, and we will continue to do so.
Stephanie Yee
Okay. And if I can just ask one more question. I know you provided that free cash flow conversion target in 2024. You did really outright state and adjusted EBITDA margin target. But if we add in kind of the $40 million of cost synergies, are we looking at total company EBITDA margin kind of getting close to or above 30% over that same timeframe?
Brian DelGhiaccio
Yes. And I think that that’s a realistic goal for us as we think about just through the cycle, being able to expand the EBITDA margin 30 to 50 basis points per year. So over that two-year periods you can see that that 30% is a realistic target.
Stephanie Yee
Okay, perfect. Thank you.
Operator
The next question comes from Noah Kaye with Oppenheimer. Please go ahead.
Noah Kaye
Thanks for taking the questions. First one is sort of guidance, housekeeping item. Does guidance contemplate the reinstatement of the CNG tax credit? And if you’re not including it, what if that were to be renewed with the contribution be incremental in terms of EBITDA?
Brian DelGhiaccio
Yes. No, we did not include that in the guide. We’re going to wait until that’s actually law at this point. For us, that’s about a $15 million annual impact if it were to be fully reinstated.
Noah Kaye
Okay, great. And then, you mentioned pricings exceeding internal cost inflation. Just looking at some of these cost line items. I mean, you’re getting leverage in labor, in maintenance and repairs. I wonder if you could give us some color on how you’re seeing the rate of internal cost inflation from 1Q to now 2Q and where do you think it goes in the back half of the year?
Jon Vander Ark
Yes. We certainly, we come out with a annual wage increase in the first part of the year, obviously, for people. And as the market — inflation has persisted and these markets have remained challenge, we’ve been going into select markets and putting in additional wages where we need to. And, again, we’ll do whatever we need to do to retain our people who run the business forever, not for the quarter, not for the year on that front. So, that’s certainly gone up from the first quarter, the second quarter. We now see kind of what we’re doing with that flat lining throughout the rest of the year, kind of ending the — end of the year with wage inflation in the high fours.
Noah Kaye
Good. Perfect. 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
Thank you, Betsy. We are proud of our second quarter performance. We continue to manage the business to create long term value for all stakeholders. I would like to thank our 39,000 employees for their continued hard work and commitment to provide our customers with first-class service to create a more sustainable world. Have a good evening and be safe.
Operator
Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.
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