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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
And welcome to the Republic Services Fourth Quarter 2019 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 questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Nicole Giandinoto, Senior Vice President of Finance and Treasurer. Please go ahead.
Thank you. I would like to welcome everyone to Republic Services fourth quarter 2018 conference call. Don Slager, our CEO; Jon Vander Ark, our President; and Chuck Serianni, 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 involves risk and uncertainties and maybe materially differ 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 13, 2020.
Please note that this call is the property of Republic Service, 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 table 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 date, time and presentations are posted on our website.
With that, I would like to turn the call over to Don.
Thank you, Nicole. Good afternoon, everyone and thanks for joining us. We are very pleased with our strong finish to 2019. The hard work, passion and commitment from our 36,000 employees enabled us to outperform our upwardly revised EPS and free cash flow guidance despite continued headwinds from lowered recycled commodity prices.
By successfully pricing in excess of cost inflation in 2019, we expanded underlying EBITDA margin by 70 basis points and generated over $1.2 billion of adjusted free cash flow. For the full year, we invested over $0.5 billion in acquisitions and returned the remaining cash flow to our shareholders through dividends and opportunistic share repurchases.
We continue to believe that disciplined investment in acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value. Our strong finish to 2019 sets us up for continued success in 2020. Given the underlying momentum in our business, we are well-positioned to deliver approximately 5% top-line revenue growth and nearly 6% EBITDA growth. On top of that we are entering 2020 with one of the strongest acquisition pipelines we've seen in years.
We will achieve our 2020 guidance by continuing to prioritize the safety of our people and communities above all else; attracting value-oriented customers to drive profitable volume growth; leveraging technology to empower our employees; increase connectivity with our customers; and drive operational excellence; and finally, continue to make disciplined acquisition investments to grow free cash flow and drive sustainable long-term value.
These priorities represent the continued execution of our profitable growth through differentiation strategy. We believe our 2019 results clearly demonstrate the effectiveness of our strategy and our team's ability to consistently execute against it. For example, the most critical component to successfully executing our strategy is our people.
We believe that engaged and diverse workforce is the greatest indicator of our success. We know that our business units with higher employee engagement have fewer safety incidents, better customer service and better financial performance. In 2019, we improved our overall employee engagement score by over 100 basis points to 86%, which is well above national norms and is high performing for the industry. We also reduced driver turnover by 130 basis points versus the prior year.
Moreover, the team continued to receive notable national awards and recognition of the inclusive culture we are building here at Republic. These results reflect the cumulative benefit of the investments we've made in our people over the last decade. We will continue to invest in our people and culture which will further enhance our reputation as an employer of choice. Our strategy also includes investments to improve the customer experience, drive operational excellence and enhance our leading market position.
I'll turn the call over to Jon to walk you through our 2019 results in each of those strategic areas. Jon?
As Don mentioned, we've been investing in the customer experience for several years now. Having a passion for our customers is core to our strategy. We know by offering differentiated products, services and experiences designed to meet our customers wants and needs, we drive customer loyalty and increased willingness to pay.
In 2019, we continued to invest in and enhance our customer-facing technology including our website and mobile app. We also attained our highest level of pricing in the last 10 years, while maintaining our industry-leading customer churn of 7%. Another key component of our strategy is delivering durable operational excellence. This enables us to deliver consistent high-quality service to our customers while lowering our operating costs.
In 2019, we successfully managed our cost inflation and drove solid operating leverage in the business. We also began to roll out our new RISE platform to our dispatch operations. This new technology equips our dispatchers with more real-time routing information and enhanced data visualization tools. It also supports additional mobile and in-cab technology, which we will begin rolling out in our large container business later this year.
Over time, this platform will further empower our employees, transform our operations improve productivity and increased connectivity with our customers. Additionally in 2019 we raised the bar with our latest long-term sustainability goals. These goals address our most critical sustainability risks and opportunities and are aligned with the United Nations Sustainable Development Goals.
We believe each new goal has the potential to significantly benefit the environment and society while enhancing the foundation and profitability of our business over the long term.
Finally in 2019, we further strengthened our leading market position by strategically investing over $525 million in value-enhancing acquisitions. Through these investments we increased our operating density in existing markets, entered new geographical markets and increased the scale of our downstream environmental services offerings. As you can see the investments we've made over the years in our people, the customer experience, operational excellence and our market position are delivering tangible results. They also provide a solid platform for continued growth in the business.
Next, I'd like to discuss our fourth quarter operating performance. During the quarter our pricing environment remained favorable and we continued to price in excess of our cost inflation. Core price which represents price increases to our same-store customers net of rollbacks was 4.8%. This included open market core price of 5.8% and restricted core price of 3.2%.
Our restricted core price reflects the significant progress we've made in repricing and restructuring our municipal recycling collection contracts. Restricted core price also reflects the continued benefits of moving away from CPI-based pricing to an alternative pricing mechanism. To date, including both collection and disposal-related contracts, we've converted $780 million or 31% of our CPI-based book of business. This represents a $120 million increase over the prior year.
Next, average yield for the quarter was 2.6%. Average yield measures the change in average price per unit and contemplates the impact of customer churn. Average yield was strongest in our small container collection and landfill MSW businesses. Small container average yield was 4.1% and landfill MSW average yield was 3.4%. This is the fourth straight quarter landfill MSW pricing has been greater than 3%.
Looking forward in 2020, we expect average yield of approximately 3%. We will achieve this by continuing to focus on enhancing the customer experience and delivering superior service; partnering with our municipal recycling customers to build more durable economically sustainable recycling programs; and pricing our products and services to ensure we earn an appropriate return on our capital investment.
Turning to volume. Total volume in the quarter decreased 20 basis points versus the prior year. We continue to intentionally shed certain volumes, which we view as non-regrettable losses. These included residential collection contracts that did not meet our return criteria and work performed on behalf of brokers in our small container business. Normalizing for these non-regrettable losses, underlying volumes increased 30 basis points.
On the collection side of the business, large container volumes increased 80 basis points versus the prior year and underlying small container volumes increased approximately 60 basis points after normalizing for broker-related losses. As expected, residential collection volumes decreased 2.2% due to non-regrettable contract losses.
On the disposal side of the business in the fourth quarter, MSW volumes increased 40 basis points and C&D volumes increased 16% versus the prior year. As anticipated, special waste volumes were relatively flat versus the prior year. Looking forward, overall in 2020 we expect total volume growth of approximately 75 basis points to 100 basis points.
Turning to recycling. In the fourth quarter, our average commodity price per ton was $66. This represented a $6 sequential decrease from the third quarter and a $40 per ton decrease versus the prior year. Importantly, we continue to make progress transforming recycling into a more durable economically sustainable business model.
As a result of the team's efforts, our expected earnings sensitivity to changes in commodity prices has decreased by over 25%. Every $10 change in our average price per ton is now equal to approximately $0.03 of annual EPS or $13 million of EBITDA.
For purposes of our 2020 guidance, we're assuming commodity prices remain at Q4 levels of approximately $65 per ton. This represents a decrease of $12 per ton versus 2019 and will result in an EBITDA headwind of approximately $15 million. Any recovery in recycling commodity prices would be upside to our 2020 guidance.
Next turning to our environmental services business. In the fourth quarter, U.S. rig count and associated drilling activity continued to decline. As expected, revenues in the upstream portion of our environmental services business decreased versus the prior year. In the fourth quarter, this resulted in a 50 basis point headwind to total revenue growth. Relative to our preliminary outlook, we're now taking a more conservative view regarding drilling activity and are assuming it will remain lower for longer.
Finally turning to margins. Our adjusted EBITDA margin in the fourth quarter was 28.8% and increased 140 basis points versus the prior year. This included a net benefit from CNG tax credits of 60 basis points and a headwind from lower commodity prices of 50 basis points. After normalizing for these two items underlying EBITDA margin expanded 130 basis points. By effectively executing our operating plan, we successfully managed our cost inflation and drove operating leverage across nearly all cost categories.
With that, I will now turn the call over to Chuck to discuss our 2019 financial results and 2020 guidance in greater detail.
Thanks Jon. Adjusted EPS for the full year was $3.34 and included a $0.06 net benefit associated with CNG tax credits. In December, CNG tax credits were enacted retroactively to 2018 and will be available through 2020.
Our adjusted EBITDA margin for the full year was 28.3% and increased 30 basis points versus the prior year. This included underlying margin expansion of 70 basis points. This is partially offset by a 40 basis point headwind from lower recycled commodity prices.
The CNG tax credit did not impact the year-over-year change in margin. Adjusted free cash flow for the full year was $1.2 billion. Adjusted free cash flow was favorable relative to our expectations, primarily due to lower cash taxes. Cash taxes were favorably impacted in the fourth quarter by acquisition-related bonus depreciation. At year-end leverage was 3 times and within our optimal range of 2.5 to 3 times.
Next turning to our 2020 guidance. The current economic backdrop remains supportive of continued growth. Consumer sentiment is strong, unemployment is low and housing starts are up year-over-year. Given this favorable backdrop for the year we expect total revenue growth of approximately 4.25% to 5% and adjusted EBITDA margin expansion of 20 to 40 basis points.
We expect this level of margin expansion, despite approximately 30 basis points of headwind going into 2020. These headwinds include lower recycled commodity prices, a decrease in upstream environmental services revenues and an additional workday.
Relative to our preliminary outlook, we increased our adjusted EPS guidance range by $0.02 to $3.48 to $3.53. The increase is due to a $0.04 benefit from CNG tax credits which is partially offset by an additional $0.02 headwind from our upstream environmental services business.
We also increased our adjusted free cash flow guidance by $25 million to $1.175 billion to $1.225 billion. The increase is due to a $30 million benefit from CNG tax credits partially offset by an additional $5 million headwind from our upstream environmental services business.
Keep in mind our adjusted free cash flow guidance for 2020 includes $100 million of CapEx associated with the reinvestment of tax reform savings. These funds represent continued investments in updated locker rooms, break rooms, training facilities and equipment for the benefit of our front-line employees. This $100 million capital investment will not reoccur in 2021. Normalizing for this capital investment, our free cash flow baseline exiting 2020 will be approximately $1.3 billion.
With that operator I'd like to open the call to questions.
[Operator Instructions] Our first question comes from Hamzah Mazari with Jefferies. Please go ahead.
Hey good afternoon. Thank you. The first question is just around the volume on commercial small container. Do you see that sort of turning positive at some point? I guess, we've been pruning low-margin business for three years. And so just any thoughts as -- any thoughts as when that inflects positive?
Yes absolutely Hamzah you're right. We've been shedding some of that work. And while there'll always be a little bit of that work to shed because as we acquire companies, right we find that the book of business, we don't value that when we pay for those companies. But we're certainly kind of at the bottom of that trend and you're going to see positive growth in that line of business.
And then just on the M&A sort of pipeline how are you guys thinking about deal flow this year? Where the balance sheet leverage is at? I guess, there's a lot of private company revenue up for sale ahead of the election plus the ADSW divestitures. Any thoughts on how aggressive you want to be there?
Sure. This is Don. We – as I said in my remarks, we've got the most robust pipeline, we've seen in years going into the year. And we spent over $0.5 billion in 2019. While our guide only has $200 million spend in it, I personally wouldn't be surprised, if we matched or exceeded this – last year's performance. There's a good pipeline of really good companies, and we've got a really good team that is across the nation looking at deals. And as I always say, we look at everything, and we sort out what we're most attracted to. And we're out there talking to a lot of people. We've got a lot of interest right now.
So we feel pretty confident. And as far as the leverage, when we talk about leverage being sort of sweet spot two and half to three we have at times gone over three times leverage to buy really good cash flow. And as I said in my remarks, the very best use of our cash flow is to buy more good cash flow at the right multiple. So we could lever up a little bit and then we'll pay that debt down over time. As long as, we're buying good cash flow that's a good recipe for success.
Got you. And just last question and I'll turn it over. Just on SG&A, I realized there was sort of corporate function build-out at the company. And in your SG&A's run rate is higher than your largest competitor by a bit at least this quarter. Do you see that coming down? Is SG&A at peak levels today? Or does it go further up from here? Thank you.
Yeah. Hamzah, this is Chuck. And yeah, we do see SG&A trending down from here. I would say into 2020 we're projecting that it will be flat to slightly down.
Okay. Great. Thank you so much.
And Hamzah, I'll add to that. We have done a great job of building really strong foundational capability within the business over the last several years. And we are at a good inflection point to leverage that scale. And believe me, we're having a lot of conversations about that. We've got a really good talented group of people here that frankly can run a bigger company without having to add – constantly add people and resources. So you're exactly, right.
Great. Thank you very much. Have a good evening.
The next question is from Brian Maguire with Goldman Sachs. Please go ahead.
Hey, good afternoon. Just a follow-on question on the volume outlook, the volumes were down a little bit in 4Q but the guidance for 2020 implies about 100 basis point pickup from where we were in kind of 4Q. So just wondering, where or what quarter we might expect to see that inflection to positive growth comps? And what kind of visibility do you have into that volume turning after a couple of years of it being down a little bit or kind of flattish?
Yeah. I think you'll see that in Q1. And please keep in mind volume and price are related. And we've had really, really strong pricing over the last couple of years in part, because we think about returns at every level. When we acquire a company every customer we sell to, we want to have the appropriate return on the investment we make. And so that's caused us to shed some of that work as we've taken price up. We feel like we're off a really good base to price. And I think you're going to see that volume growth we're forecasting you're going to see that consistent across the four quarters in 2020.
Yeah. Let me add to that. And we have a very consistent approach for price-volume. There's no zigging and zagging, with our thinking on that. And so there's a lot of moving parts to this story. But as Jon said, everything has to contribute. And we feel like we're getting our fair share of organic growth, but we are doing some intentional things right to make sure that we're not doing this for practice.
Got it. And the 3% yield guidance for 2020 that would be I think the highest in over a decade for you guys. Is that – do you think that's a sustainable level going forward? Or should we just view this as sort of a one-year level given what's going on in recycling and the need to just kind of recoup that in other parts of the business?
Yeah – no. I think I'll see that as sustainable. And the reason is, it's years in the making. It's not an event. We've always gotten that or above that in the open market part of the business and the bag – the drag excuse me has been the CPI related part of the business. And we've worked very, very hard on alternative index and getting everybody to pay their fair share. And as you're seeing us continually push that the market is changing on that front. Those RFPs change and that is becoming the norm of the pricing index and a lot of those municipal contracts and when everybody contributes to pricing that allows us to sustain that 3% over time.
Yes. And let me add to that. We posted landfill pricing, really strong landfill pricing 3.4% MSW pricing as a backdrop. If you look at just the open market landfill and transfer pricing, pricing is actually 4.5% to 5.5%, right? So, in open market post-collection pricing is moving in the right direction as it should. That also provides sort of underlying economics that make the market more rational.
Okay, great. I'll turn it over. Thanks.
The next question is from Noah Kaye with Oppenheimer. Please go ahead.
Thanks. Just a follow-up on the pricing theme thinking about the drivers for 2020. You mentioned tailwinds from reworking the muni contracts both with CPI migration to alternative index and then also recycling landfill just driving higher collection willingness to pay. That kind of covers most of your business lines. So, should we expect fairly broad-based improvement in yield across business lines? Any lines you would expect to be leaders on the yield front?
Yes, I mean small container is usually our flagship along with large container perm historically and I expect them to continue to lead the way. But I think the broader theme you're hearing is every part of the business needs to contribute, right? We don't just accept some people are not willing to pay their fair share, right?
And to Don's point, it's got to start from the landfill right and that emanates into the collection side of the business. And when those two things work in the right direction, we get it across the Board.
Sure. Look also I mean housing starts if housing starts remain up that's a supply and demand environment that contributes to higher pricing, right? So, we've got open-top -- our open-top business should improve as well.
Makes sense. Perhaps a question on 2020 margins guidance for 20 to 40 bps expansion. It seems like recycling if I got your guide right is maybe 15 bps or so impact to margin. What are some of the other offsets that might offset solid waste margin expansion, dilutive acquisitions, the E&P softness CNG? I guess, just are there any other considerations we should keep in mind or is there some deceleration of margin expansion in solid waste?
No. So, the headwinds that we faced in 2020 one is commodity prices about 10 basis points. I talked about the upstream environmental services that's about another 10 basis points of margin headwind that we face.
And then I mentioned the extra workday that we have in 2020 that's another 10 basis points. Net all that out and what you end up with is about 50 to 70 basis points in underlying margin expansion just due to the base business.
Yes. Now remember commodity prices were still high in the first half of 2019. That's really what we're talking about. We think they've stabilized and they'll remain stable through the year. But we still have to sort of overcome that first half of 2019 where they were stronger.
And while we have that commodity price headwind we're taking pricing actions overall in recycling that more than offset that commodity price headwind.
And so the acquisitions you've done there you did a lot this last year. They're margin-neutral or margin-accretive?
That's right.
Okay. Okay. And if I could sneak one more in. You mentioned in the prepared remarks some of the technology levers you're deploying over the course of this year in the large container cabs. I guess without kind of giving the game away on what you're doing just how to think about some of the areas of focus there and what you see as the key benefits.
Yes. Broad-based we start with the customer right? The first thing is to deliver an even better customer experience. We're 99.9% reliable in our delivery. We want to think about a zero defect environment. So, how do we improve the customer experience. How do we make the fully experienced better? And they want to be dealing with a digital environment making it easier for them to do their job.
And then we think we take some costs out of the business. We make it more productive or more efficient right and we can get more pulls in this case into the large container system because we've got the tools available to do that.
And so think about the size of our business 5 million transactions a day 5 million pickup points a day. And you can get a little -- just incrementally better across five pickup points right from all the points Jon said, there's leverage there.
Great. Thanks very much.
The next question is from Kyle White with Deutsche Bank. Please go ahead.
Hey good afternoon. Thanks for taking my question. Congrats on the CDP Climate A List recognition. And obviously we're seeing a lot more interest in ESG investing here. Curious how you think Republic should be viewed from this lens. And maybe, what are some specific initiatives you're doing on this front? Further, just curious, are you seeing pressure from shareholders? And what particular metrics do you think they're focused on this?
Well, I'll let Jon give you some detail. But we've seen a lot more I wouldn't say pressure, but interest from shareholders, right. ESG is on tip of the tongue and top of mind of our investors today. Certainly, we spend a lot more time on these issues in the boardroom. We have a Corporate Responsibility and Sustainability Committee on our Board that spends significant time working with management on all of the goals we set, initiatives we have in place. And so, ESG isn't going anywhere and we'll see more and more interest in it as time goes by. And of course, you can see just by the rating system, by the grades we get and then by the goals we've set how competitive we are? Jon?
Yes. And I think the more important thing is these aren't disconnected or these aren't just aspirations. These are deeply connected in our business. And we believe to be environmentally sustainable. You have to be economically sustainable. So, these are things that are great for the broader community as a whole, the smaller community and municipalities and they're going to be good for our business. So safety for example is one of our goals, right?
Our number one priority right, we want all of our colleagues to go home after work every night, so a huge priority for us. By doing that, we also lower our risk expense and improve the profitability of the business. Our employee engagement by getting them more engaged we lower our turnover and lower the cost of operating the business, right? By adding to our recycling capacity, we meet our customers' need doing it in a sustainable business model where they're going to be willing to pay their fair share for those investments, right? Engaging our community and our national neighborhood promise right is a way that we give back to the community, but it entrenches us with our most important customers and allows us to maintain and extend those contracts over time.
Got you. And then just a quick one, I think you mentioned your average recycled commodity basket was $66 per ton here in Q4. Just kind of curious, what you're seeing in 1Q on the average basket there?
Yes. So, 1Q is -- it's a little bit higher right now, a few dollars higher right now, but not significantly different than our guidance level which is at $65.
And I think the long-term outlook is that, it's pretty flat all year.
All right. Thank you. Good luck to you.
Thank you.
The next question is from Tyler Brown with Raymond James. Please go ahead.
Hey good afternoon. Chuck, congrats on the margin momentum here in 2019 which looks like it's expected to continue into 2020. But I was hoping if you could give us some help on the cadence of margin improvement as the year progresses? I mean I'm assuming you still have some dilutive impacts from recycling and the workday specifically in Q1. So, would Q1 margins maybe be down year-over-year or maybe more flatty? And then they kind of build steam as the year progresses and then maybe a little bit of a tougher comp in Q4 given the CNG, is that the right way to think about it?
Yes. You're right about that Tyler. So, a little bit more of a headwind in Q1. Keep in mind that that's where we have the additional workday, right? So you've got that phenomenon in there. And Don already mentioned the fact that you've got the commodity price headwind that hits us in Q1. And then we accelerate there from there right to a good Q2 good Q3. And then Q4 right now we're thinking is going to be kind of flattish.
Okay.
We start to get the rollover benefit of pricing and all the great work the team is doing on converting contracts to the right index to the fair share arrangement. All those things are building speed sort of compound through time. The full pipeline when we first integrate these businesses, we don't see a lot of extra cash flow because of the integration cost. But as they get fully tucked in everything gets converted it bills right? So you'll see all that bills return.
Okay. That's helpful. And then Don, so obviously you guys have done a really good job on the yield front. But if I look at the spread between core price and average yield, it actually continues to widen out. I think it's actually as wide as it's been in say five years. But I'm just curious if you could speak to why that is. It would indicate that either churn is picking up or the spread between new and lost business is widening. But I really don't get the sense that that's the case. So, I'm having a hard time squaring that.
Well, there's a lot of mix, right? And then again when we intentionally shed business we're shedding business that is a lower price per unit right? And we're attentional and unregrettable then that's just a change. So I'll tell you this, we have a pricing plan, of course. There's no doubt that we have a pricing group here that works very closely with all our field leaders. And we know what kind of pricing actions we're going to be taking throughout the year. And we have a pretty good feeling for what willingness to pay is in the markets.
And then, it's just the power of the portfolio. We're number one or number two across these markets. We've got good penetration. The field team is doing a better job every month on customer experience and service. And that all drives willingness to pay.
The team is doing a great job in educating customers on the way to recycle correctly and people are starting to buy in more, really willing to pay their fair share. I mean, all those things create pricing opportunity for us. So we're pretty confident in the direction we're headed and in the stability and the traction in pricing group.
Okay. Okay. And then, maybe my last one. So I love maybe asking you guys a strange question after a long day of earnings. But -- and I'm going to go ahead and throw this out to any of you. But if I was to set aside your property insurance, say related to the landfills and I just looked at your vehicular insurance, are you guys seeing any unusual inflation in your premiums particularly in the upper layers of your insurance tower?
Yes. What we're seeing Tyler and it's not just us, it's all of Corporate America right now. The insurance markets are really, really hard. They're really tight right now. And it has to do with a lot of the natural disasters that the insurance companies are – have been dealing with. Having said that, considering the fact that we are a Fortune 300 company, given our size and all that, we're able to mitigate those cost increases through other cost initiatives that we have within our system.
Okay. All right. That is very helpful actually. Thank you.
And, of course, right, we're self-insured, right? So we're really just talking about insurance for sure.
Yes. It was probably --
Yes. Looking at the upper layers of the tower?
Right. You bet. Yes.
The next question is from Sean Eastman with KeyBanc Capital Markets. Please go ahead.
Hi, team. Compliments on closing out a strong year.
Thank you.
Thanks.
So just a quick housekeeping one from me first. Just on the CNG, you guys gave a pretty clear contribution number on EPS. But just curious on EBITDA for 4Q and for 2020, what's reflected on the CNG piece?
Yes. So EBITDA in 2019 in Q4 was $17 million of a benefit. And then we're expecting it to be similar to that in 2020.
Okay. Got it. That's helpful. And the flat to down 25 bps in environmental services,0 could you just help me frame kind of the upper and lower end there? I mean, in the prepared remarks you guys point to the upstream piece being the swing factor. But I'm just curious, is that just kind of drilling activity? Or is there something else that could frame the upper end or lower end?
Yes. It really is just drilling activity. That's what's driving that variance right now. So that's -- that could be anywhere like we said from 0 to 25 basis points of the negative.
Okay. And then on the five $25 million of acquisitions completed in 2019, how much of that was environmental services versus traditional solid waste?
Yes. The majority was solid waste. And frankly, the majority will continue to be solid waste, right? I mean, there -- as I said in my remarks earlier, there's a great pipeline of really good quality companies. There's still plenty of good business for us to look at and consolidate tuck-in and bolt-on and even maybe in a few new markets that we can look at geographically. That's where the focus will continue to be. But there'll be some great opportunities as our core capability expands with key customers who want us to do a few more things for.
Got it. And last quick one from me. Can you just talk about the runway on the solar investment opportunity? Is the vision here longer term to start utilizing the cap to landfills with these solar build outs?
Well, I'll start and Chuck can add in. We have, as you know, quite a few closed landfills. So we've got a big real estate portfolio. And, yes, I mean ultimately, depending on the economics depending on the tax incentives, depending on the advancement of solar technology, of course, and the ability to connect to the grid, all those things are in flux.
But just like you've seen advancements in EV, there'll probably be more advancements in solar that we can't even imagine today. But we're well positioned with a great deal of real estate.
We've got good partners in the solar space. The investments we made have been great investments with good returns. And as the opportunity exists, we'll continue to do it. And we'd like to certainly see asset utilization in this new way from our landfills if that's possible. That's why we started down this road in the first place.
Yeah. And according to the statute right now, solar credits actually start to phase out. I believe it's this year. And I think that they phase out over a five-year period. Now there's debate right now whether or not they'll be extended similar to what happened with CNG. So -- but to Don's point that remains a great investment alternative for us and something that we would like to do on our fully depreciated closed landfills.
Helpful. Appreciate the time. Thank you.
The next question is from Jeff Silber with BMO Capital Markets. Please go ahead.
Thank you so much. In your prepared remarks, you talked about the percentage of your contracts that you've shifted to alternative -- alternate inflation targets. I'm just wondering if we can get the same kind of color on how much of your contracts have been shifted on the recycled side to fee-for-service? And where do you think that goes over time? Thanks.
Yeah. So, on the processing side, a little further ahead on that front. So, we're over 50% on that side of the business. On the recycling collection side, we've got about 36% converted. And that's across a portfolio of 1,300 contracts, and we're not stopping. We continue to walk through City Hall and tell the message around a model that needs to be economically sustainable, to be environmentally sustainable over time. And I can tell you we're seeing momentum shift.
First, it was trying to convince staff and now staff is saying to us, hey, listen we've got to work together to convince the electeds because they understand the issue and they have a strong desire to keep their recycling programs: one because it's the right thing to do; and second because the residents deeply want them to keep it. And we've got to work together to make it economically sustainable.
And besides the cost impact, what other pushback if any do you get?
Some of the cost -- some of the volatility impact, right. There's the volatility aspect to recycling is the commodity prices. And historically, we've borne most of that and some cities say, well, I don't want to bear that either because I don't like the idea of moving residential recycling pricing month to month to month. And we've innovated together with them thinking about hey, let's get a price that's sustainable for residents over the cycle and do things like when commodities are up you can put that in an enterprise fund, right? And so you could take the volatility there. And when the buy prices are high that creates some upside to get the new fire truck, put in the new playground and do things to enhance the community.
Yeah. The other thing that gets uncomfortable is just the discussion around contamination, right? So, we focus greatly now on contamination levels. And that could include just glass, which is highly recyclable but of course has low value. And in some geographies the trucking cost to get glass to an end user just takes the whole thing upside down. So, we've got to have those honest discussions with generators about whether the material really does have real sustainable environmental value at the end of the day or are we just basically burning more rubber and more fuel to make ourselves feel good.
And then, I just -- the contamination level of educating the end users the consumers on how to do it, right. So again, we've done a great deal of work in creating tools and training to point people to the right place to learn how to do it right. But frankly municipalities, consumers, customers have to take responsibility for this contamination, because when they deliver a stuff that's 80% contaminated we call that garbage, right? So we're working through that. But -- so, we're having a great honest discussions about how do we make recycling sustainable and profitable and good for everybody and we think we can do it. So we're well...
Okay. Thanks so much. If I could just sneak in some quick modeling questions. What should we be expecting for depreciation and amortization, interest expense and taxes for 2020? Thanks.
Yeah. We'll follow-up with you some time after the call.
Okay. We’ll do. Thank you.
The next question is from Michael Hoffman with Stifel. Please go ahead.
Hey, guys. Thanks for taking the questions. Chuck, on the free cash flow, can we bridge to the exit run rate given there's some one-timers off the midpoint? So I think the midpoint is $1.17 billion, ex the CNG credit? What's the ratio exiting?
Yeah, Michael. So think about $1.2 billion kind of as the midpoint on the exit. We've got $100 million of tax reform capital included in that number as we had talked about, which doesn't rollover into 2021. So that's really how you get to that exit of $1.3 billion.
And what about...
In 2021 you have -- you'd have the growth on top of that.
And isn't there some working capital timing? There's like $40 million of working capital timing that…
Yeah, there is Michael that we had talked about. $40 million of working capital timing but that is offset now by the $30 million of a benefit that we get associated with CNG.
Got it, okay. All right. So the exit rate is $1.3 billion and then you've got underlying growth greater than whatever your EBITDA growth is going to be?
Yeah, that's exactly right.
Yeah. And again this is based on the $200 million target for M&A.
Right. Your -- could you share what your year-end for all of 2019 the open market price was versus restricted to get to your 2.8% for yield in 2019? And then I'd be curious what you think those look like to get to the 3% in 2020?
So you want the -- I'm sorry, Michael you want the restricted…
Open -- so your open market yield and your restricted yield for 2019 for the full year, you gave us for the fourth quarter or maybe gave it for the year I thought it was the fourth quarter. And then what you think those pieces are to get to the 3% in guidance?
Michael, we don't have that detail in front of us. That's the quarterly amount and not the full year. But as you think about it, we should do somewhat the same of what we did this year. You're going to have -- CPI is going to be a benefit in the first half of 2020, but it will flip to a slight headwind. So for the year it kind of -- it'll wash its way out. So again think of core price and restricted price to look it a lot like it does today.
Well, one of them has got to get better to get to 3% or churn is coming down?
Yeah, yeah. And it's probably -- it's going to be the open market piece of it Michael. We think that that's going to get a little bit better.
Okay. And then housekeeping question. The $15 million of modeled headwind from recycling doesn't give you any benefit for your continuing to work through the 55% that's MRF processing in the 36% on contracts right? You could in fact offset some of that if you make some progress on...
Yeah. Just to clarify Michael, $15 million is just the pure commodity impact. The actions that we already have baked into the plan more than offset that. To the extent, we make additional progress that's just icing on top of that cake.
Perfect.
And we will make additional progress.
Yeah. And remember Michael as we increase recycling collection pricing that flows through the yield.
Got it. And then one just subtly because there's a slightly different messaging around this from another player. And I think you have the same answer. 100% of your open market customer at your MRF has been repriced but you have some contracted work and that's why the aggregate MRF is 55%?
Correct. Yeah. Any open market customer has long since had re-priced more than a year ago.
And that's open market. The facilities that's open market collection, all the open market recycling has been repriced.
Great. And then if I could, how is the progress in Plano in the context of lessons learned? And is it going to be transferable into other operations. And as you think of, recapitalization through the MRF fleet have you been happy with what you're seeing that this is -- this -- you've hit on something and this is something worth pushing in other places?
Yeah. We've been very happy. Obviously, it's a CapEx-OpEx trade-off which is -- we've got state-of-the-art equipment in there and it allows us to cut the labor about in half, right? In the overall process and produce a cleaner product, on the back-end.
So we think that's really attractive. And then, as you know, we always think about an anchor tenant. And a community that's willing to partner with us, in order to do that. And over time, I think you'll see continued investment as we go forward. And build out that product line.
Terrific, thanks a lot. And one -- I'll just make one comment. This press release is really useful, the way it's been laid out. Thanks for doing that.
Yeah. You're welcome, Michael. Have a good day. I think you had six questions in there.
Yeah. I know. Well, if everybody else gets four, five, I had to jump in, yeah.
Okay.
The next question is from Michael Feniger with Bank of America. Please go ahead.
Hey guys. Just on the 3% yield number is that -- Chuck is that like even through the year. Does it -- do we accelerate off this Q4 number? Or do we just build through the year to end up averaging 3% for the full year?
Yeah. It's relatively evenly distributed throughout the year.
Okay. And then, Chuck, I think you made a comment about like SG&A flat to down. I -- that's on a percent of sales basis or is that on an absolute basis?
That's 100% of sales. That's as a percent of revenue.
All right, all right. Perfect. Yeah. I just wanted to clarify that. And then, just on the acquisitions, you guys have completed already, like if we just take that number, what's the revenue lift on that? Is -- if you just -- with everything that's been completed by year-end so far for 2020?
Yeah, the rollover revenue benefit of $68 million.
Okay. And then just on the acquisitions, you guys completed in 2019, is there any -- obviously the overall effect that we've seen, multiples expand. I'm just curious, if you could kind of touch on -- you mentioned -- Don mentioned, you're leveraging up to buy good cash flow.
I'm just curious, if you could kind of help us on, what you've seen in the private market with multiples for some of these businesses?
Yeah. Multiples are still very good. We will of course and have and we will continue to we pay more for businesses that have infrastructure, that's critical permits, that are impossible to replicate those types of things.
We discount purchase prices, when there's a little bit too much temporary work or too much broker work. We don't pay for that. So, each deal is different. But on a blended basis, when you look at the whole portfolio of M&A that we're doing, we would tell you that multiples are still pretty stable.
Thank you. The next question is a follow-up from Brian Maguire with Goldman Sachs. Please go ahead.
Hi. Thanks for taking my follow-up. Did I hear you say that, -- so of the 1% contribution to sales growth in 2020 from acquisitions, which I guess would be $103 million. You've already got kind of $68 million of it completed from last year?
Or are there some offsets from divestments in there? And I guess, like is there anything you've closed so far in 1Q that would kind of already get to that $103 million number?
Yeah. We said the $68 million is the right number. That's already included in our 1% growth guidance for 2020.
Yeah. Some of those deals were deals we thought, we'd close at year-end. And they just didn't get done. They rolled into the New Year.
Okay. But you're effectively kind of at almost two-thirds of the way through hitting that 1% number already?
Yes. Yes, that's right.
That's correct.
Okay. And then last one for me. Just I think some of the cost breakout you give, which are very helpful, looks like on the landfill side those costs were actually down for the first time in a while. I know it maybe was unusually high number a year ago. But I just wondered if you're finally seeing maybe a little bit of a light at the end of the tunnel or some leveling off of the inflationary pressure you've been seeing on the landfill side?
Yes. So -- no listen landfills are important assets to Don's point very, very tough to permit. And we -- environmental compliance is something we take very, very seriously. So -- and we price accordingly to more than cover our cost of inflation. That being said, we work on both sides of the equation, not just pricing, but also on the cost. And we work very, very diligently and have an incredible team here that looks at all our landfills from a centralized basis. And every month we're monitoring every element of the landfill is it producing the right level of leachate right any elevated heat sources. And we're getting in quickly and we're mitigating small problems, so that those small problems won't become big ones. And that's really helped us mitigate our cost over time.
Maintenance too is a good story.
And I think across the category, you're seeing that in labor. You're seeing that in maintenance. If you take out the commodity impact on the revenue right really, really good leverage on business on the cost side. And we feel that's a great foundation that takes us into 2020 which is helping drive that margin expansion.
Great. Thanks so much.
At this time, there appear to be no further questions. Mr. Slager, I'll turn the call back over to you for closing remarks.
Thank you, Gary. You've done a great job for us today. In 2019 through the relentless efforts of our people working together at all levels of the company, we outperformed the financial goals we set at the beginning of the year. We achieved strong pricing and we expanded EBITDA margins, generated $1.2 billion of free cash flow and invested over $500 billion in acquisitions.
Our strong finish to 2019 sets us up for continued success in 2020. Given the underlying momentum in our business, we're well positioned to deliver approximately 5% top line revenue growth and nearly 6% EBITDA growth. On top of that, we are entering 2020 with one of the strongest acquisition pipelines we've seen in years. We will achieve our 2020 guidance by pricing our products and services to ensure we earn an appropriate return.
Partnering with our municipal recycling customers to build more durable economically sustainable recycling programs. Tightly managing our costs and increasing productivity through the rollout of our RISE platform as Jon described and leveraging the current momentum in our business from the investments we've made in our people, the customer experience, operational excellence and our strong market position.
As always, we will continue to manage the business to create long-term value for our -- all of our stakeholders. I would like to thank everyone on the Republic team for their hard work commitment and dedication to operational excellence and of course creating the Republic way. Thank you for spending time with us today. Have a good evening and please be safe out there.
Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.