Jon Vander Ark: Yes, I think what we’re — listen, over time, long-term, I think these businesses converge in terms of returns. I think you’ll get free cash flow conversion to get there first because this is a slightly different OpEx-CapEx trade-off in this part of the business. And then over time, I think — for a longer period of time, I think getting the margin to converge, I don’t think is out of sight or out of reach as well. Now, that’s not going to happen overnight, right? We are going to kind of ratably, right, systematically take this up. So, I think the goal in the next four or five years to get that in the mid-20s is very reachable.
Kevin Chiang: Excellent. I’ll leave it there. Thank you very much.
Operator: The next question comes from Michael Hoffman of Stifel. Please go ahead.
Michael Hoffman: Hi, thank you very much Jon and Brian, Aaron for taking the questions. Brian are we at about a $1.6 billion run rate in ES revenues when I roll in the M&A? And then what does that$1.6 billion grow organically? I just trying to put all the pieces together from your transcript, and I think I have myself a little confused.
Brian DelGhiaccio: We’re probably closer, Michael, to — in the $1.5 billion range, a little over $1.5 billion. But organically, like I said earlier, we’re thinking that’s a 7% to 8% organic type grower here in the near term, and with opportunities for even some of the additional cross-sell opportunities to be additive to that.
Michael Hoffman: So — okay. So, the following that then, in your margin for the whole year, 29.2%, what do you think the Solid Waste business and the Environmental Services business do individually to merge together?
Brian DelGhiaccio: So, in the Recycling and Solid Waste business, we’re expecting overall about 30 basis points of margin expansion, right? And in that business, we have to overcome the 30 basis point headwind from commodity prices. So, the underlying business is growing kind of 60 to 70 basis points. Now, in the Environmental Solutions business, we’re expecting 100 basis points of margin improvement, and there is the acquisition roll over of US Ecology, which is kind of a negative 70 on that portion when you compare it to what we had in the Gulf. So, we’re expecting margin expansion in the underlying business thereof 170 basis points. The reason why that only comes to 10 basis points overall is we just have a greater mix or a greater percentage of ES business in 2023 than we did in 2022.
Michael Hoffman: Yes. Yes, I get that. And then can you bridge for us the $1.724 billion of free cash in 2022 to get to the midpoint of your guide? What is the cash interest, the cash tax, the incentive comp above plan? And then I’m assuming everything else is made up by organic growth productivity.
Brian DelGhiaccio: Yes. Yes, let me give you a couple of pieces of that, certainly. So, interest — and I’m going to give you some pre-tax numbers. And for argument’s sake, you can just sit there and take, call it, 70% of it. You do the after-tax. But interest up $90 million, right? So, that’s an increased outflow there. Incentive comp is about a $35 million outflow compared to target levels. And then bonus depreciation, you wouldn’t tax effect the impact of bonus depreciation, but that’s about a $35 million increase in cash taxes.
Michael Hoffman: Okay. And then–
Brian DelGhiaccio: So, when you take all those pieces, that creates — now I’m going to kind of flip a little bit to conversion, and that creates, call it, about a 300 basis point headwind to conversion, all of which being offset by just the EBITDA growth in the business as well as some benefits in working capital, some of those benefits being unlocked. We talked about finishing the finance and procurement modules during 2022, and we think that there’s an opportunity, in particular, on the DPO side to drive improvements in working capital.
Michael Hoffman: Okay. And then just squeezing one in, sorry. The $125 per ton, how much of that has to rely on OCC moving? And what would your target be for OCC to make the $125 in your guide?
Brian DelGhiaccio: Well, I mean, just to put it in perspective, right, OCC, fiber, right, represents about 70% of our basket of goods, right? So, most of this, we are expecting to come more on the OCC side. But even just to put it into –all of it into perspective, if you take a look at what we’re expecting from a guide perspective compared to current prices, it’s a relatively modest recovery, right? That’s $30 million worth of EBITDA and about 20 basis points to margin, $20 million of free cash flow, if things were to stay at current levels.
Michael Hoffman: Okay. Thank you very much.
Operator: The next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Jerry Revich: Good afternoon and good evening everyone. Brian, if we just go back to your margin cadence discussion, the headwinds in the first quarter, really, the first half, that implies we’re going to be exiting the fourth quarter of 2023 with margins up something like 150 basis points year-over-year heading into 2024. So, I’m wondering, are we setting up for 2024 to be an outsized margin expansion year because we’re essentially making up for a lost year from a commodity price impact in 2023? Anything that you’d add to that bridge as we think about what the margin progression might look like.
Brian DelGhiaccio: Sure. And a couple of things, Jerry. I mean, you’ve got two variables, right, when you take a look at that. You have the — what we’re expecting in 2023, but also what happened in 2022, right? So, we’re expecting commodity prices in 2023 to be at the highest point of the year. They were at the lowest point in 2022, so you can’t just go to the margin expansion. But yes, exiting the year in 2024, we think it’s going to be kind of a nice jump-off point heading into 2024. But I wouldn’t just look at the overall margin expansion because you’ve got two years in your math there that you got to take into consideration.
Jerry Revich: Sure. But you’re going to have the same comp benefit in the first half of 2024, hopefully. And if we think about the profitability of the recycling business in the fourth quarter with this ultra-low recycled cardboard prices. Can you just update us on what was the margin profile of the business, roughly, just so we can get a feel for where it’s troughing in the cycle, given all the work you’ve done there?
Brian DelGhiaccio: You’re talking about on the recycling side of the business?
Jerry Revich: Yes.
Brian DelGhiaccio: It’s still a profitable business at these levels and still an attractive return. So, again, we would expect — through the cycle, we talked about we expect these depressed prices to be somewhat transitory and, again, return closer in line to a 10-year average. Not even back to the levels it was when it was over $200 a ton on our basket of goods.
Jerry Revich: Super. And can I ask around the gas part of the business? Nice little bonus we got from the EPA in terms of eRINs. How much gas to electric power do you folks generate in terms of your share of the power that you generate? And what’s your take on what’s a reasonable value capture opportunity for you and your peers?
Brian DelGhiaccio: Yes. Of our existing projects, the vast majority are gas electricity. Now the — where RINs have gone, all of the new projects in the pipeline were contemplated to be gas powered and/or methane RNG. The great news with our partnership with BP, we’ve got option value, right? eRINs coming online. And we’re both very open-minded to understanding where those markets move and the local geography and even places where we make power on fleet to figure out whether we want to convert some of those opportunities rather than RNG to go to electricity as well. But we see it as, over time, a benefit for us because it will have two pathways.
Jerry Revich: I’ll leave it there. Thank you.
Operator: The next question comes from David Manthey of Baird. Please go ahead.
