Q1 2021 Republic Services Inc Earnings Call
Good day and welcome to the Republic services first quarter 2021, Investor Conference call for Republic services is traded on the New York stock exchange under the symbol R. S. G.
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Please note. This event is being recorded I would now like to turn the conference over to Stacy Matthews Vice President of Investor Relations. Please go ahead.
I would like to welcome everyone to the public service, Inc. First quarter, 2020 one.
John.
Later, our CEO, Jon Vander Ark, our president and incoming CEO and Brian <unk> got you. Our CFO are joining me Anthony discussed are performing.
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 myself.
Our SEC filings discuss factors that could cause actual results to differ materially.
Material 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 COVID-19.
The day of the original call, which is may 5th 2021.
Please note that this call is the property of Republic Services, Inc. Any.
Any redistribution retransmission or rebroadcast of this call in any form without the express 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 a recording of this call are all available on Republic's website at Republic services Dotcom.
I want to remind you that Republic management team routinely participates in investor conferences when events are scheduled.
Good day times and presentations are posted on our website with that I would like to turn the call over to Don.
Thanks, Stacy and good afternoon, everyone and thank you for joining US we are very pleased with our strong start to 2021.
The momentum in our business is undeniable.
Strong foundation and consistent execution have allowed us to turn that momentum into meaningful sustainable results and shareholder value.
In the first quarter, we delivered adjusted earnings per share of <unk> 93.
Which represents a 24% increase over the prior year.
Generated $464 million.
Adjusted free cash flow.
And expanded EBITDA margin 270 basis points to 37%.
As you know next month will be my last day as CEO, Ed Republic services. So this will be my final quarterly earnings call with the company.
Having said that I expect the bulk of the questions on today's call to be taken by John and Dell is they tell you about the solid results in Q1, but also they'll share a glimpse of the future and the exciting trajectory of Republic I'm more than proud of what this team has accomplished over the last decade.
And I am extremely confident and how we are positioned to go forward from here.
No I can give you a long list of accomplishments and important milestones that we've achieved and frankly surpassed.
Could go on and on about the foundation, we have built more importantly, let me tell you. This.
The team we have in place is the strongest team in the history of the company.
Not only did they establish a foundation we are standing on but they have the energy and the capability to build it from here.
Republic has been tested many times.
2020 was no different the stability of our business the power of the portfolio the capability and dedication of our people were all once again defined improvement the.
<unk> C and predictability of our operating model and the strength of our culture and the spirit of our people shined brightly.
I have a poster that hangs in my home Jim.
It's been there for 20 years. It is a simple photograph of an old brick wall with a pair of well worn boxing gloves hanging on our book.
It displays one of my all time favorite quotes.
The fight is won or lost far away from the witnesses behind the lives in the Jim and out there on the road long before I dance under those lights.
Those words were attributed to the great and won an Oldie Muhammad Ali.
This team this Republic team also knows how to prepare for and how to win the fight and you are seeing that in these results.
Now the five most enjoyable things for me as a leader are these first.
Casting and collaborating toward a shared vision.
Second assembling a purpose bill team.
Third, creating an effective work environment fourth ushering in the future along with necessary change new energy and next Gen leaders.
Fifth and finally, keeping a promise and <unk>.
So appropriately this is where I leave you.
Republic is on solid ground and operating from a position of strength from.
Public has plenty of traction horsepower and motivation.
Republic leadership has proven aligned and invigorated.
Republic, Workforces professional well equipped and highly engaged.
Republic looks pretty darn good under those lights.
I am so very grateful for the opportunity I've had to serve and to lead here at Republic.
All my teammates and trusted advisors. Thank you for your perseverance passion and your friendship over the years.
And to those of you on the phone with US today, the analysts and our investors.
I appreciate you putting your faith in us and thank you for constructively challenging us along the way it makes us better.
As I've said before that Republic, we all have the same job we may have different roles, but we all have the same job all 35000 of us are United in support of each other every day as we safely and reliably serve our customers and our communities and as we responsibly store.
Third our resources.
I know John feels the same way John has a clear vision for the road ahead. He also has the strong character and relentless focus to do the hard work that ultimately delivers the victory which means.
My role at Republic is concluded and my purpose here is complete John and his team are well on their way to write a wonderful and rewarding new chapter of the Republic story.
With that al.
I'll turn things over to John.
Thanks, John I appreciate the kind words and I'm honored to have this opportunity to be Republic next CEO.
Now turning to the first quarter results, we continue to see improvement in the business and reported positive revenue growth for the first time since the beginning of the pandemic.
The pricing environment remained strong which allowed us to deliver double digit earnings growth and margin expansion.
Total core price was four 3% and average yield was two 3%.
Core price included open market pricing of five 2% and restricted pricing of two 8%.
As discussed on our last earnings call average yield was expected to be relatively lower in the first quarter.
We remain confident in our ability to achieve average yield of at least two 5% for the full year.
During the first quarter volume decreased 80 basis points versus the prior year.
This is a 100 basis point improvement from the fourth quarter with nearly all lines of business showing improvement.
We expect volume to turn positive in the second quarter and remain positive for the remainder of the year.
We continue to drive profitable growth and believe that investing in acquisitions with attractive returns is the best use of free cash flow to increase long term shareholder value.
Earlier today, we closed the acquisition of Santa <unk>. We welcome these new employees to the Republic team and we look forward to integrating these high quality assets into our business or.
Our pipeline of acquisition opportunities is strong and we remain on track to invest at least $600 million in acquisitions for the full year.
Now turning to <unk>, our environmental solutions business.
Quarter Environmental solutions revenue decreased $17 million from the prior year. This resulted in a 70 basis point headwind to total revenue growth.
We continue to focus on the downstream portion of this business where customers are looking for integrated solutions, and we can leverage our broad capabilities and sustainability platform.
Moving on to recycling recycled commodity prices increased 75% to $133 per ton in the first quarter this compared to $76 per ton in the prior year.
Next turning to margin or adjusted EBIT margin in the first quarter was 37% and increased 270 basis points versus the prior year.
We continue to successfully manage our costs per changes in underlying demand and leverage our new more efficient ways of working.
This includes utilizing our <unk> platform and accelerating the use of technology to drive efficiencies and improve the customer and employee experience.
In the first quarter, we continued our high performing safety record, reducing safety incidents, 18% versus the prior year.
We continue to see the positive contribution from our maniacal focus on the customer experience.
In the first quarter, our MTS increased four points over the prior year.
And we achieved a record setting customer retention at 94%.
During the first quarter, we made further progress towards our long term sustainability goals.
As part of our sustainability platform, we recognize the importance of identifying and managing opportunities and risks related to climate change.
We remain committed to transparency and metrics that are important to all our stakeholders.
We are proud to be the first in the industry to disclose our climate related opportunities and risks through a comprehensive Tcf day report.
We were also recently named to Fortune's 2021, most admired companies list.
This is an award recognizing our team focused management innovation and socially responsible business practices.
Looking ahead, we expect to outperform our original guidance due to a strong start and outlook for the remainder of the year.
As a result, we are raising our full year financial guidance as follows.
Adjusted EPS is now expected to be in the range of $3 74 to $3 79.
And adjusted free cash flow is now expected to be in the range of $1 35 to $1 4 billion.
I will now turn the call over to Brian.
Thanks, John first quarter volume decreased 80 basis points. Additionally, there was one less workday, which reduced revenue by 50 basis points compared to the prior year.
<unk> volume included a decrease in small container volume of two 8%.
This represents a 70 basis point improvement from the fourth quarter.
A decrease in large container volume of two 1% this.
This represents a 130 basis point improvement from the fourth quarter.
And an increase in landfill volume of two 5%.
The increase in landfill volume includes a three 5% increase in MSW volume and a one 9% increase in special waste.
Within the quarter volume performance was negative in January and February and turned positive in March.
We expect volume will remain positive for the remainder of the year.
Adjusted EBITDA margin for the first quarter was 37% and increased 270 basis points versus the prior year.
This included underlying margin expansion of 210 basis points.
A 20 basis point benefit from net fuel and recycled commodity prices and.
And a 40 basis point benefit from one less workday.
The outsized margin expansion is a direct result of pricing in excess of our cost inflation and effective cost management.
SG&A expense for the first quarter was 10, 2% of revenue an improvement of 70 basis points over the prior year.
Bill SG&A costs have decreased expressed in both dollars and as a percentage of revenue, we continue to make investments to drive growth and generate efficiencies in future periods.
Adjusted free cash flow for the quarter was $464 million and increased $178 million compared to the prior year.
This increase is the result of EBITDA growth positive contribution from working capital and the timing of capital expenditures.
Working capital included a one day improvement in DSO and a two day improvement in <unk>.
Capital expenditures of approximately $200 million during the first quarter represents 17% of our projected full year spend.
The timing benefit of capital expenditures will flip over the remainder of the year.
During the quarter total debt was $8 9 billion and total liquidity was $3 billion.
Interest expense decreased $18 million as a result of our refinancing activities completed last year and our leverage ratio decreased to two nine times.
With respect to taxes, our first quarter adjusted effective tax rate was 26%.
When you further consider non cash charges from solar investments, we had an equivalent tax impact of 28, 4% I will now turn the call back over to John.
Thanks, Brian I'm excited about the company's future.
However, we can't go forward without looking back.
It is impossible to overstate Don's impact on Republic services.
He is the architect and champion of the Republic way.
Don will always be known as a visionary who successfully integrated the several 100 acquisitions in a form the current day Republic.
He has strengthened Republic foundation, while investing in the capabilities that allow us to drive profitable growth and shareholder value.
During the last 10 years, John has led the company to more than Triple our stock price and market capitalization, which is now approaching $35 billion.
Among everything down is accomplished as big as achievement is the culture he created <unk>.
He made Republic services, the place where the best people come to work.
He professionalized, our company and motivated our talent along the way by modeling a purpose driven approach to the business.
He took care of the team and in turn they are taken care of one another.
We should all be so lucky to have a career like this 35 years of service to a company that has created tremendous value for all.
No one has driven value creation for their employees customers communities and shareholders like dawn.
So on behalf of our 35000 team members across the country as well as our industry. Thank you Don for your leadership your perseverance and your vision.
With that operator, I would like to open the call to questions.
We will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone.
The interest from Todd we ask that you limit yourself to one question and one follow up question today.
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I will now pause momentarily as we assemble our roster.
Our first question today will come from Tyler Brown with Raymond James. Please go ahead.
Hey, good afternoon.
Good afternoon, Joe.
Hey, John Congrats on the new role Don Thanks, So much for everything over the years, but John I figure Republic is a little bit like a cruise ship and this is a complement but it's probably not the fastest moving ship.
So how should we think over time should we or maybe investors think overtime just should we expect any noticeable changes in focus or strategy.
Thanks for the question Tyler.
I like the analogy in terms of the durability and stability I think you will see us pick up speed listen there'll be no right or left turns in part because the business has lots of momentum I've had the privilege of being part of a team. That's driven the current strategy that has led to the set of results at the same time, we are at an inflection point and all of that.
Hard work, we talked about in the prepared remarks in terms of building. The foundation has produced the level of performance that allows us we think to move faster going forward.
Youre going to see us focus a lot on three core capabilities customer zeal and digital and sustainability and we think thats going to allow us to drive growth opportunities certainly in our traditional.
Waste and recycling business, but also more broadly in environmental services over time, and we're going to do that again with a balanced approach on organic and inorganic growth always with an eye toward our returns and putting the shareholder at the top of our priority list in terms of how we think about making investments.
Okay, Great. That's very helpful and then maybe to drill down here.
Brian So I think the Ark in Q1 was $133, but specifically what is in the guide for the full year.
Yes, Tyler, we actually just maintain that recycled commodity price at about that $130 a ton over the remainder of the year.
Okay. So if I look at my notes I think you were around 100 box for 2020 someone do the math on the fly here, but it sounds like it was about $30 Delta and I think it's a three per 10. So it's something like nine since you raised your guidance by <unk> 10.
What's the whole guide raised effectively just commodities and we're not really touching the volume at this point.
Yes.
Couple of questions. There. So let me kind of break it apart first of all in our original guidance, we had it pegged at 110 Bucks a tonne. So it's actually a $20 per ton increase that is included in this new guide.
But to your point, Brian really this guidance the new guidance is a reflection of a strong start in the first quarter relatively.
Relatively higher commodity prices, we want to wait and see that normal seasonal uptick before we address some of those other assumptions like like the price and the volume and the margin.
Right now we feel optimistic about what we see coming out of the first quarter, but we want to see it before we address those.
Those assumptions, which we plan to do in July on our second quarter call and I'll be from kind of we're cognizant of the fact, we're still coming out of a pandemic and theirs.
Certainly some uncertainty that goes with that again, we feel really good about the momentum we have and.
Outlook is positive, but looking around the world. This thing is certainly moving in in certain ways. So we wanted to have the appropriate level of caution and wait until we see.
That volume come back to Brian's point.
Okay, No that's very fair and then my last one so I think you mentioned Santa closed today.
Brian can you give us the expected revenue contribution from all M&A.
Closed last year and so far.
Today. This year here in 2021, I know that was something that you did not give on the last quarter call.
Let me give it to you this way right. So what we talked about was for the deals that closed right.
In 2020, the rollover impact of that was 150 basis points.
Ed.
What we're seeing now when you take sand tech plus some of the other I would say smaller acquisitions that we anticipate on closing over the balance of the year. We would expect total contribution so rollover plus in year impact of 250 to 300 basis points.
Perfect. Okay, that's what I needed. Thank you.
Thanks Todd.
Our next question comes from Missouri with Jefferies. Please go ahead.
Hi, This is Mario quite a lot she filling in for Hamzah.
I also wanted to congratulate John and also Don wanted to wish you the best from from Hamzah and our team it's definitely been a pleasure.
<unk>.
Could you just walk us through how youre thinking about operating leverage in your model on a go forward basis.
Maybe specifically with some of the investment spend coming off that are pricing with higher inflation and an exit of low margin business that you were doing for for a while being behind you.
Sure I'll start and Brian can fill in the pieces listen we feel good about all the hard work. We've achieved this isn't an among our results from the first quarter as a result of just the last three months. The result of the prior three years and all of the heavy lifting we've done too.
Optimize the business. So again, we've always pursued returns and profitable work and that caused us to take a hard look and make sure that.
Customers that weren't willing to pay their fair share we rotated out of the portfolio. So we feel great about that as volume comes back obviously, we've gotten really tight from an operating and a cost standpoint, and we think we have capacity to take on that volume are not limitless of course, but we will make the appropriate investment with the appropriate return into.
Fleet, our fleet and landfill capacity as we see the growth come back.
I would sit there and just to add we think we've found a new gear here right. So the work that Tim Stuart and the entire operating team did throughout the pandemic to find these new levels of profitability, Brian We don't plan on giving that back.
So again, it's throughout the P&L at the operating cost of the SG&A expenses, we found new ways to work.
And we've talked all along that we expect to emerge from this pandemic more profitable than we entered it and we feel more confident than ever in that statement.
Great. Thanks, and then from my follow up I want to touch on recycling.
What percentage of your contracts have been restructured.
Post the recycling downturn, yet a few years ago.
And then maybe I missed it earlier in the call but.
What was the EBITDA for for recycling in Q1, I know, it's small I.
I guess, just just trying to gauge where that can go with the contractor strike I'm, sorry restructuring longer term.
Yes, we've restructured about 60% of our processing contracts and about 50% of our collection contracts on the recycling side.
That just tells US we have more work to do but because we have to move the model to one that becomes economically sustainable where we get paid an appropriate return to collect the recycling we get paid an appropriate return to process. It and then we can share on the commodity value, but frankly, the customer we think as the natural owner of most of that in the volte.
<unk> associated with that so I think we've done a good job of reducing the volatility in that front, but I also think theres more upside as we move forward.
And then EBITDA wise.
Yes, we don't actually disclose the EBITDA by line of business.
What I can tell you is just the contribution to margin.
Higher commodity prices during the quarter was 50 basis points.
Got it appreciate it thank you.
Thank you.
Sure.
Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.
Good afternoon, and John John Congratulations.
Thank you Jeff.
I'm wondering if you could just talk about.
The ESG theme, obviously landfill gas economics look pretty attractive Ed.
Spot RIN prices I'm wondering if you could just talk about.
How many additional plants over the next couple of years are you folks considering.
Transitioning to tie in to pipelines to achieve the.
The full benefit of rent economics.
You're thinking about.
Staying ability of rent.
<unk> prices.
Anywhere close to the current range.
Yeah. Thanks, Joe So we have about 70 projects today, we've got.
A dozen or more in flight of additional projects today those projects as you know are a mix of.
Some pure electricity some are.
More high Btu ones and as we go forward, we're looking at those to capture the Rins opportunity because our primary model historically has been to work with partners on the development. We think that just gets us there faster. It also certainly we don't get all the upside of the RIN pricing.
Also helps us kind of manage the volatility of that that was more of a royalty model going forward and we're always looking at the model and we pursued some of those on our own but I think our predominant model going forward will be working with.
Working with third parties and we don't think we're done at a dozen and those are just the ones. We have right in front of US now we're going through more of a medium sized landfills and we think there's other opportunities to unlock there going forward as well.
Okay. Thank you and then from a cost structure standpoint.
Really impressive continued performance and landfill operating costs.
Maintenance and repairs Im wondering as volumes come back whats the magnitude of wood.
The recovery in these types of costs that we should be looking at with volume you alluded to it earlier in terms of some things are going to be done differently going forward. I'm wondering can we just talk about that within the context of how strong the performance has been within those areas.
To what extent, we might mitigate the impact of a volume recovery on those types of expenses.
Yes, listen I think there are going to be some things that don't look exactly like they are today. So some costs come back obviously, we're still largely in a.
No travel mode, and there is going to be some travel that comes back at the same time, it's not going to come back to pre pandemic levels, we're going to take advantage of the tools that we have are our virtual meetings that certainly save us some cost that shows up in SG&A frankly, much more an opportunity cost what are the reasons that we're driving great performance on the frontline.
The business is our people our focus on day in and day out there.
Theyre not getting tied up are distracted with other things on that going forward on the operating side Bill listen we will have to see what happens with work from home going forward and what traffic patterns do so we may give up a little bit of productivity, but I think that will be more than offset by the further rollout of our EIS platform and digital ops and pushing that through our <unk>.
Operations, where we continue to get an incremental load on a route and just continue to be more and more efficient while maintaining a great customer experience and our safety record that we think again allows us to kind of claim the ground overall, though we've gone from an EBIT margin standpoint, and hopefully look upwards.
Okay I appreciate the discussion thank you.
Thanks, Jeff.
Our next question will come from Sean Eastman with Keybanc capital markets. Please go ahead.
Hi, guys John Dod many congratulations.
Great retirement remarks, there Don great.
I just wanted to.
I just wanted to try and try to figure out.
What the kind of midpoint of the updated earnings guidance reflects from an EBITDA perspective, I think the old guidance, you had 10 basis points of margin expansion 50 basis points underlying offset by <unk>.
<unk> from the acquisition dilution and then a net 20 headwind from fuel and recycled commodities would you be able to help update that for us.
Clearly off to a pretty big head start here.
Yes, it's Sean as I have mentioned before right off to a strong start we're going to wait until we actually see that normal seasonality uptick which tends to happen in that may and June timeframe, and then we're going to come back and in that Q2 call, we'll talk about price volume and margin assumption.
What I can tell you Brian is that we did get off to a stronger start than we originally anticipated.
We are optimistic about what the next few quarters hold but again, we want to actually have that in hand, before we make a full update with respect to those up major assumptions.
Okay fair enough and maybe with Santa Claus.
It'd be great just to hear sort of what's exciting about that from a strategic perspective synergy potential over the next couple of years.
Any color around around the acquisitions since it's a larger one would be would be great.
Yes, we're really excited about the acquisition it's unique in the sense of you rarely find an acquisition that has kind of this level of post collection assets and infrastructure that we're taking on 11 landfills.
Soma and it fits perfectly into our footprint kind of layers into the southeast mid Atlantic.
From a country, where we've got lots of strong assets and again, we think provides the platform when we pick up a few new communities as well to that.
The platform for a follow on M&A and tuck in deals that allows us to grow further on that front. It was a well run company for a long long time.
It was a protracted close to it as we went through the Doj process I think the pandemic did us no favors just in terms of the process on that front, but the great News is we came out exactly where we expected we knew that they were going to be from small divestitures associated with that and we ended up right on our numbers. So we feel really really excited.
But having those team members join our team.
Excellent Thanks, I'll turn it over.
Our next question will come from Walter <unk> with RBC capital markets. Please go ahead.
Thanks, very much and both John and John I Echo the same sentiments congrats and good luck.
Starting with.
Volume, obviously the year over year compare.
Is not is instructive as it is it would be in prior years prior.
In other years I'm wondering if you could talk a little bit therefore about the sequential cadence and.
And how that compares to.
Normal.
Years.
And its cadence in other words.
Are you looking at April.
And to May and how would you judge that that that performance relative to where you'd be in April and may.
In a typical year is are you feeling like things are getting.
Sequentially stronger faster or are we starting to slow with some of the things that you mentioned.
On the.
On the recovery front, but.
Just curious on the cadence side.
Yes, obviously, it's an unprecedented time, so its hard to perfectly compared to history.
There's two things going on obviously, we're coming out of a pandemic and so you can start to see really positive comps as we move forward and then you also had weather and weather Episodically hits us.
In this case right we had a fine start in January kind of unplanned February we were certainly off plan. For example, the state of Texas was largely closed for a week.
Some of the ones I endured and then March was really really strong and we feel very good about the momentum into April as well. So I think from a just a top down look we think the February event and was more weather related than it was pandemic related right and now we're seeing pretty strong momentum in the business, but still waiting to see kind of a normal.
Up seasonal uptick that really starts to take off in demand.
Yes, I would sit there and just to add when you take a look at March and into April right. So again, we're not closed at this point.
But so far that.
The sequential increase looks very similar to what we saw back in 2019.
Perfect. So that's a good sign but again, usually the real acceleration the real seasonality happens April into May and then may into June and that's why again, we're going to come back in July and be able to report what we saw and be able to then talk to the other assumptions and talk to the guide at that point.
Okay, and just on that note understanding you're not giving specifics around any of those inputs.
Joe you are increasing guidance is there something that you wood wood.
Getting into the details you just call out that this one element was.
What's the biggest variance I mean, this one element be it price or <unk>.
Costs or volume.
Was the main driver of the better quarter here in terms of what you were expecting when you laid out your guidance.
Yes, I think listen we had a very very solid start across the board in terms of the underlying performance of the business pick up Brian earlier point on the guide for commodity prices writers $20 above our expectations and I think the outlook is pretty strong on that front. That's what gave us the confidence at this point to raise the guide and it's kind of just do the <unk>.
Flow through math on that Brian kind of took us into that territory.
I would just sit there and say is you pocket as you talk about just Q1, though right.
Our performance relative to our initial expectations I would also just sit there and say the performance on the cost side as well. So again, if you remember when we gave the full year guidance, we talked about those macro benefit modulating as volume returns we're hanging on to some of those benefits more than we originally anticipated so we're going to see it.
That holds which again, we can actually talk to that again, when we get together in July because that would be relative upside to what we originally anticipated.
Alright, I appreciate the time as always.
Thank you Walter.
Our next question will come from Tyler Wood.
Deutsche Bank. Please go ahead.
Hey, good afternoon, thanks for taking the questions John Congrats and hope you enjoy your retirement, John Congrats on the new role.
I wanted to talk about the CPI book of business.
Understanding that you had the 37% tied to CPI waste index or fixed rate increase of 3% or more but are you seeing maybe a slowdown in terms of conversions.
This initiative due to kind of inflationary environment, we're in right now.
Yes, I think there's probably a bit of a slowdown just because as you go through all of these initiatives. Obviously, you go and talk to everybody and there is going to be some first movers and then there is going to be some slow movers and we don't stop we're relentless. So we just keep marching right into city Hall, and eventually we get everybody to turn sometime.
The reality of that is going to turn when the contract is up. So then there is a normal cadence of that.
In reality, the pandemic hurt us in that respect because you couldnt have as many face to face meetings in cities. We're working on other priorities at the time, but now that we see people kind of come out of it the economy opening up we're back at it as a normal part and as part of the performance incentive frankly of our municipal sales team that their work.
On what we could to get what we think is a fair and favorable price index for US, Yes, I would even say, even though right that thats.
The challenges we face we made great progress in the quarter, so that 37% represents $930 million of revenue.
We reported that at the end of 2020 was 875 right. So we actually moved $55 million of revenue during the quarter.
Got it that's helpful and then going back to M&A, just curious about the pipeline and if youre seeing any kind of increased activity just given some of the speculation on tax changes.
And then also regarding the sante well linked it took to close does that make you kind of rethink your M&A strategy at all in terms of maybe what you're targeting from a size of original standpoint.
So we haven't seen I would say a huge increase.
Because of the looming tax law changes only because I think the pipeline has been strong now for a number of months. We stayed really active during the pandemic, obviously meeting with potential sellers in new ways virtually and now our team is getting back out in the road.
Meaning people face to face, but the pipeline continues to be strong on that front. So we feel good about that.
Yes. This is a fantastic in terms of the Doj process and that taking longer.
He said not really right we're still targeting.
Those types of opportunities.
There's not a ton of those opportunities versus the smaller tuck ins obviously, that's just the kind.
Kind of a numbers game, but we're not deterred at all from pursuing those types of opportunities and we will go in eyes wide open in terms of the length of time, but I think the great headline sort of incentive it took us longer than we wanted but we ended up.
We expected and their business performed very very well in the process. So we were buying exactly what we paid for.
Got it thank you I'll turn it over.
Our next question will come from Michael Hoffman with Stifel. Please go ahead.
So very much.
John and John Best to both of you John I have a question for you.
Could you talk about one or two actions that you've taken.
And this tenure that John and Brian are going to be talking about two or three years from now that will make them be part of why the growth rate or the margin or the cash conversion looks the way it does.
Well look I think there's a couple of things first of all my goal was to say very little today.
<unk>.
<unk>.
I think talent is going to be a top of the list here.
Wherever.
We put the talent agenda from center, a decade ago, we focused on composite strength focused on building the best.
Place the best it will come to work.
We're not done yet youre never done because the world turns right and.
It's the people of the company the talent of the company.
His dedication of those people and the fact that they are all growing and developing.
<unk>, there's waves and waves of generations of really top talented people here.
John who has got his eye on to do their next assignment so they're going to talk a lot about that.
That they were going to go way up that is embedded in the Republic way.
There are broader Republic way of really getting the best out of our scale and then getting the best out of our local density. When we first started a decade ago that was we were a collection of various companies with.
The trucks from 40 different colors, and $35 50 different names I don't remember anymore, but we used to argue about silly things that took.
Time and energy, we don't do any of that anymore. So.
The speed that Jon talks about speed.
<unk>, a differentiator speed becomes a strategic strength and speed at which our team now can change.
And rollout new things in rides as an example, a bit speed. So we're gaining speed all the time and so.
John is starting is.
New position from a running start.
<unk>.
That really bodes well for the future of the company many of the things that we've been doing over last several years, John and the spirit involved in the operating structure of the team.
That he's inheriting he has been playing a big part of developing and choosing and directing so.
Back to speed is going to be a big deal, but Republic waves. Michael went away, it's just going to get bigger and brighter it's going to help us know we've talked about.
Things like customer zeal.
We're going to be the best service provider in the space and people are going to compares to world class in the same way they do on safety today and fleet operations and those other things so.
Now I'm going to those are my final words, Michael Okay. Thank you.
And I hung it up in the ring and it scared the Hell out of my young harvest. The first time you saw it.
Thank you Joe.
So Brian and John It's been 10 years. Since this company has produced a 40% or better gross margin in the first quarter.
And the trend in the three years that did that eight 9% or 910 and 11.
You were consistently above 30% EBITDA margins.
So what I'm hearing throughout the call and I'm asking a question that's been asked in different ways.
This is secular and structural year Theres no get back here your whole.
Onto this between the gross margin.
10 to 10, 5% SG&A of 45% to 41% gross margin this is structural.
Absolutely we feel good about the ground that we've gained in getting we're setting our sights on new heights and going well.
There's going to be some.
Headwinds short term that we had talked about earlier, there's still plenty of upside, but we're still working on a lot of our price initiatives on the municipal side, which we talked about earlier, we think that probably gets a little more inflationary here that creates upside in the business, we're still improving the recycling side of the business, we think there's more leverage.
On operating costs through the digital tools, we're putting out we think we can make customers even more loyal even though we achieved a record royalty rate this quarter. So.
Yes, we have we're optimistic about the future and we think the financial results again.
A great sign of our achievement, but certainly not something we're going to go down from we're going to go up from here.
Thank you and good luck to all of you.
Each of you a very new roles.
Thanks, Bill Thanks, Michael.
Our next question will come from Jeff Goldstein with Morgan Stanley. Please go ahead.
Hey, good afternoon, and I'll Echo all the previous comments here and say congrats on a long and successful tenure and congrats John on the neuro Raul.
I know you used to I know you used to give this figure, but any sense of what percent of customers, who reduced service have now resumed and on those customers who haven't reached out what are you really seeing in those business are a subset of those likely to be permanent closures or at least permanent service reductions maybe they realize they can get by at a low.
Our service level here, just how are you thinking about the path back of those remaining customers.
Yes, if you take our small container business, which I think is that.
The best place to look obviously residential.
Change rate that went the other direction right. We've maintained those customers. We just got a little heavier on the small container I think thats the nature of your question.
6% to less than 1% are still pause and if you look at that the mix of that it really falls into three verticals schools, which shouldnt be any surprise, it's entertainment and hospitality is restaurants.
Schools are going to come back.
The pace and timing right, we can debate that offline, but schools are going to come back in person at some point here, our restaurants have been shockingly resilience from our perspective. It doesn't mean, there hasn't been any closures, but there has been some openings to people have expanded their capacity is at restaurants as they started to have outdoor dining combined with our <unk>.
Mining and they're probably going to try to maintain that Brown and then entertainment I think that's going to move that probably going to be most interesting to watch I think youre going to see a boom back in some pent up business travel and personal travel and everyone's got the Disney vacation in the business conference that has gotten pushed out now for 18 months that will come back.
But I also think over time there'll be some modulation in some of these small meetings that people were flying around the country.
Sure that May now just decided to take advantage of the technology. Just like we are going forward, but again, that's going to be relatively de minimis and our overall results in terms of volume.
Okay that was all very helpful. And then how should we think about the $45 million of financial support you were providing to frontline employees last year does that number come down this year and if so to what extent and then and then in the first quarter were any of those costs still.
Baked into your operating expenses, just how should we think about that.
Yes, we still have a little bit of that into the system because thats just the heightened protocol around PPE cleaning facilities et cetera, we are.
Incredibly cautious on that front I think one of the successful things that we did during the pandemic was we took care of our people in all respects.
Certainly they are safety, we put is our number one priority in their health as well.
Well as facility cleaning and <unk>.
Everything Alex and so we still have a bit of that because I think it's about $8 million in the first quarter that will modulate it will have some of that in the second and third quarter. Hopefully we don't have any of it in the fourth quarter, but we will spend it as long as we need it but it is certainly coming down off of that.
5 million from last year.
Okay. Thanks, a lot.
Thank you.
Okay.
Our next question will come from David Manthey with Baird. Please go ahead.
Thank you good afternoon, and congratulations everyone.
My question is also on the.
Indices here. So when you look at CPI in the water sewer trash index, they've kind of converged Butler lately and when you think about the components that make up each of those if we do see generalized inflation in the economy.
Is it your expectation that the water sewer trash index is going to increase at the same magnitude as his regular old CPI.
I don't know that we know that it will be identical to the same magnitude. It will certainly be in the same direction.
So again as there is inflation that will put upward pressure exactly how that moves if you look at the history of this.
Index, which hasn't been around forever, but it hasnt always been perfectly correlated CPI, but it is certainly connected directionally. This EPS.
It's a sub component of headlines David yes, so the water sewer trash is an element its one of the components of the basket that makes up headlines.
I see okay.
I apologize if this is a simple question, but how does the maintenance and repair work at Republic is there.
Maintenance schedule for each period, and then repairs would be sort of the unplanned swing factor and if that's the case, what what percentage of the overall is that sort of unplanned piece. If you could just help me understand the dynamic there.
Yeah. Obviously this is a big part of John's legacy, we were very reactive historically on maintenance and everybody figured out maintenance themselves.
A cornerstone of the Republic way from a functional standpoint was one fleet the idea that we ought to leverage our scale and figure out how to do maintenance one way across our 165 business units and that we ought to shift our focus to preventative maintenance.
And being scheduled versus reactive so now more than 80% of our maintenance work is scheduled.
So active and we think that one helps us lower cost, but more importantly that keeps our fleet moving it keeps our employees and the trucks keeps a productive and keeps us servicing customers and providing great customer service.
Yes.
Alright I appreciate it thank you.
Yes.
Our next question will come from Noah Kaye with Oppenheimer <unk> co. Please go ahead.
Thanks, so much for taking the questions and the prepared remarks were really eloquent.
We appreciate it.
Everything you've brought to the industry done so we wish you well and good luck John on your new role.
Thank you.
One of the themes so far I think this quarter for the industry has been the open market price strength and stickiness.
Clearly you saw a good result this quarter.
Curious for your view number one on what is driving the open market price retention in strength and then as you look to future quarters, where do you see the greatest opportunities to push price across which lines of business.
Yes, I think it's <unk>.
This quarter I think you have to look back during the pandemic and I think the pricing held up.
Credibly well if you go back to the great recession, and where we sell a lot of drag on price and people, probably getting a little bit nervous and panicking I don't think you saw that behavior, we certainly always prioritize price over volume we have to get a return on the work we do and allows us to continue to invest in our assets and continue to give our pea.
People that we think is a fair raise every year. So we remain very disciplined and very focused on price I think the outlook on price is certainly very strong.
As we go forward I think youre going to see continued momentum on landfill pricing if that's the place where we're.
We're making major investments in those assets to continue to prioritize environmental compliance, which is the top of our list and we need to get a return on those assets and that's where pricing emanates from the collection side of our business and then I think just nominally youll see our large container pricing improve there is some kind of technical.
Things that go on there with the price volume.
But look that number looks a little bit low.
But overall Jim.
Look at the top line view.
Look at the revenue and then look at 270 basis points of margin expansion that just shows you our discipline on price and the fact that we're getting quality revenue that's drive dropping to the bottom line.
That's super helpful.
And then just a quick question on Capex.
Obviously trucks are always a major component of that and.
Just given the tightness in.
The trucking industry in terms of backlog in length from orders to fulfillment. How are you positioned for the year clearly you have a very large fleet. So you have scale, but.
Do you believe you'll be able to kind of spend your capex targets. This year and we have to potentially shift any spend from trucks. The other line items.
No we feel good about it theres always a little bit of lumpiness quarter to quarter and the Capex and I think we maybe.
Maybe anticipated a bit of this and so we were pretty aggressive in Q4 of last year I'm getting out of the truck order to make sure. We were prepared for it as volume came back and that we could service our customers. So we feel good about that and we feel there is a little bit of slippage in the order board, but frankly I have never been here when there wasn't a little bit of slippage from the order board.
Normal course, and we feel pretty good that direction will be on a number for the year.
Okay, great. Thank you.
Thank you.
And if you'd like to ask a question Thats Star then one.
Our next question will come from Mike Feniger with Bank of America. Please go ahead.
Hey, guys. Thanks for.
Squeezing me in.
John and John all the best and congrats echoing.
Echoing all the sentiment there.
Just.
And maybe Brian you could help me with this.
The margins were exceptional and I'm just trying to understand like the yield has actually gone from two six in Q3 to two five in Q4 I think two three in Q1.
Yet your margins are exceptional so is there anything why the yield has actually not been going up in the first quarter or is that kind of on the come right now how do we think about that yield number with these exceptional margins.
Well first of all I would sit there and say I think what the outcomes demonstrating that we are pricing in excess of our cost inflation I guess, let's start there in order to get 270 basis points of margin expansion that has to be true.
What I would say, though John mentioned that.
Just a second ago, one of the things when you look at our large container yield right at one 1% right. We do a change in price per unit.
Okay. So the weights that are in the large container system. So about 70% of our large container business has a combination of both the hall plus the disposal charge, so lighter container weights drive the average yield calculation that anniversaries beginning in Q2.
Which is why we made the commentary that we believe we're going to achieve at least two 5% average yield for the full year. So we see that accelerating we knew that was coming which is why we made that comment on our Q4 call that average yield was going to be the lowest in the first.
First quarter, so Mike just to dimension that if it was one 1% loans continuing this quarter. We were three 5% in Q1 of 2020 right. If we kind of get back to that rate that would add about 40 basis points.
Yield so that takes us.
North of that two 5% and hence the comments on the outlook for the year.
Got it that makes sense.
As you guys discussed like getting to the yield of two and a half which is always been kind of looked at as like a benchmark for from.
From margins, which you guys are clearly expanding so are you seeing any signs of like inflation early inflation either at the landfill.
Or in the labor markets.
What are you baking in for cost inflation for the year to be able to get this type of margin expansion with a yield of two and a half.
Yes, we're seeing I would say in small pockets. So container pricing is going up for example.
Hence the outlook for the year, we will see whatever else happens on the balance of the year, but from a labor standpoint, we feel good our turnover number we think is.
And a really attractive spot for us again small pockets here with some subsidization going on with the federal government, we think that abates.
Over the next quarter or beyond so we feel.
Pretty good on that front and to the extent that you place. It comes it will continue to price in the open market and so we feel confident that for whatever inflation.
Inflationary pressures, we see in the purchased goods side that will certainly be able to recover that more from our open market price and I'll answer one of Michael Hoffman as earlier questions to Don about something he was glad he did we have a centralized pricing tool that's been put in place we've been able to take that increased cost that we're seeing on the containers and we've been able to push that.
Through our capture pricing tool, so all new business that we're basically floating today is already reflective across the country of some of the increased costs, we're seeing for containers.
The parents.
Mike.
That's it from Mike.
So this will conclude our question and answer session.
I turn the conference back over to Mr. Vander Ark for any closing remarks.
Thank you grant I am excited to lead the talented Republic team to achieve new Heights.
We are motivated and ready.
As you've heard this year is off to a great start with.
We produced the highest level of margin expansion in the company's history and there is strong momentum in the business.
I would like to thank all of our employees for their continued hard work servicing our customers and communities.
Once again I would like to thank Don for his incredible leadership and enormous contributions to the company have a good night, everybody and be safe.
Ladies and gentlemen, this concludes conference call.
For attending you may now disconnect.