Republic Services Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

There are 14 speakers on the call.

Operator

Please note this event is being recorded.

Operator

I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations.

Speaker 1

Thank you. I would like to welcome everyone to Republic Services' Q1 2024 Conference Call. Don Vander Aark, our CEO and Brian DelGachio, our CFO are on the call today as we discuss our performance.

Speaker 2

I would like to take

Speaker 1

a moment to remind everyone that some of the information we discuss on today's call contains forward looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If in the future, you listen to our rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is April 30, 2024. Please note that this call is property of Republic Services, Inc.

Speaker 1

Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with a recording of this call are available on Republic's website at republicservices.com. I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website. With that, I'd like to turn the call over to John.

Speaker 2

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Our strong first quarter results demonstrate our focus on profitably growing the business. We produced revenue growth both organically and through acquisitions, while enhancing profitability across the enterprise. During the quarter, we achieved revenue growth of 8%, generated adjusted EBITDA growth of 12%, expanded adjusted EBITDA margin by 120 basis points, reported adjusted earnings per share of $1.45 and produced $535,000,000 of adjusted free cash flow.

Speaker 2

The results we delivered are made possible by executing our strategy supported by our differentiated capabilities. Regarding customer zeal, our efforts to provide best in class essential services and sustainability offerings continue to drive customer loyalty and organic growth in the business. Our customer retention rate remained high at over 94%. And we continue to see favorable trends in our Net Promoter Score as customers value our broad service offerings and the quality of our service delivery. Strong organic revenue growth during the Q1 was underpinned by core price on related revenue of 8.5% and average yield on related revenue of 7.3%.

Speaker 2

This level of pricing exceeded our internal cost inflation and resulted in over 100 basis points of EBITDA margin expansion. Organic volume on related revenue declined 1.1%. Large container and disposal volumes were negatively impacted by severe weather across most of our geographies during the Q1. Most of the weather impact occurred in January and we saw a notable rebound in volume performance in February March as weather conditions normalized. Turning to our digital capabilities.

Speaker 2

The team continues to advance the implementation of digital tools that improve the experience for both customers and our employees. Our RISE digital operations platform is driving improved route optimization and safety performance and providing more predictable service delivery to our customers. Development of our new asset management system is underway, which is expected to increase maintenance technician productivity and enhance warranty recovery. We expect to begin deploying the new system later this year using a phased approach, which we estimate will result in $20,000,000 of annual cost savings by 2026. We continue to benefit from advanced technology on recycling and waste collection routes.

Speaker 2

Our platform utilizes cameras to identify overfill containers and contamination in recycling containers. This technology will reduce contamination in our recycling centers and is expected to generate approximately $60,000,000 in incremental annual revenue. To date, we have already achieved $30,000,000 of annual benefit. Moving on to sustainability. We believe that our sustainability innovation investments in plastic circularity and renewable natural gas are a platform for profitable growth.

Speaker 2

Development of our Polymer Centers and Blue Polymers joint venture facilities remains on track. Our Las Vegas Polymers Center's operational and delivery of plastic slate to our offtake partners began in March. Construction is progressing on our Indianapolis Polymer Center with equipment installation plan to begin in June. This operation will be co located with a Blue Polymers production facility. The renewable natural gas projects being co developed with our partners continue to advance.

Speaker 2

One project came online during the Q1 and we expect at least 7 additional projects to be completed in 2024. We continue to advance our efforts to support decarbonization, including our industry leading commitment to fleet electrification. We currently have 15 collection vehicles in operations. We expect to have more than 50 additional EVs to be added to our fleet in 2024. We now have 7 facilities with commercial EV charging infrastructure.

Speaker 2

Development of 40 additional locations is underway with more than 10 new sites expected to be completed in 2024. As part of our approach to sustainability, we continually strive to be the employer of choice in the markets that we serve. Employee turnover continues to improve with our Q1 turnover rate improving 70 basis points

Speaker 3

compared to the prior year.

Speaker 2

As a result, we are better staffed to optimize our operations and capitalize on growth opportunities in the market. Our comprehensive sustainability performance continues to be widely recognized as Republic Services was recently named to Barron's 100 Most Sustainable Companies List, Ethisphere's World's Most Ethical Companies List and Fortune's Most Innovative Companies list. With respect to capital allocation, we invested $41,000,000 in acquisitions during the Q1. Our acquisition pipeline remains supportive of continued activity in both the recycling and waste and environmental solutions businesses. We continue to see opportunity for $500,000,000 of investment in value creating acquisitions in 2024.

Speaker 2

Additionally, we returned $168,000,000 shareholders through dividends in the Q1. I will now turn the call over to Brian who will provide details on the quarter.

Speaker 3

Thanks, John. Core price on total revenue was 7%. Core price on related revenue was 8.5%, which included open market pricing of 10.2% and restricted pricing of 5.7%. The components of core price on related revenue included small container of 12.2%, large container of 7.7 percent and residential of 8.1%. Average yield on total revenue was 6% and average yield on related revenue was 7.3%.

Speaker 3

1st quarter volume on total revenue decreased 90 basis points and volume on related revenue decreased 1.1%. The components of our volume performance included a decrease in large container of 0.4%, primarily due to severe weather in January along with continued softness in construction related activity and a decrease in residential of 2.6%. During the quarter, landfill MSW volume was up 1.6% and small container volume increased 30 basis points. Moving on to recycling. Commodity prices were $153 per ton during the Q1.

Speaker 3

This compared to $105 per ton in the prior year. Recycling processing and commodity sales increased revenue by 40 basis points during the quarter. Commodity prices are exceeding our initial expectations as current commodity prices are approximately $160 per ton. Now turning to our Environmental Solutions business. 1st quarter Environmental Solutions revenue increased $15,000,000 compared to the prior year.

Speaker 3

The growth was due to the rollover impact from an acquisition that closed in the Q4 of 2023. Adjusted EBITDA margin in the Environmental Solutions business was 20.5%, which compared to 21% in the prior year. After considering the dilutive impact from a recent acquisition of 110 basis points, EBITDA margin in the Environmental Solutions business increased 60 basis points. Total company adjusted EBITDA margin for the 1st quarter expanded 120 basis points to 30.2 percent which was driven by margin expansion in the underlying business of 110 basis points. Other changes in margin performance during the quarter included a 20 basis point increase from recycled commodity prices and a 20 basis point increase from net fuel.

Speaker 3

This was partially offset by a 30 basis point decrease from acquisitions. Adjusted free cash flow was $535,000,000 in the Q1. Free cash flow conversion was 45.9%. Total debt was $13,000,000,000 and total liquidity was $2,800,000,000 Our leverage ratio at the end of the quarter was approximately 2.8 times. With respect to taxes, our combined tax rate and impact from equity investments and renewable energy resulted in an equivalent tax impact of 25.4% during the quarter, which was in line with our expectations.

Speaker 3

We also received a $12,000,000 state grant associated with renewable energy investment. This benefit was recorded in other income and added $0.03 of EPS. This did not impact EBITDA or EBITDA margin during the quarter. With that operator, I would like to open the call to questions.

Operator

Your first question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 4

Hi, this is Adam on for Jerry today. Thanks for taking our question. So your first Palmer Center recently opened. Just wondering how that plan tracking versus your initial expectations? Any surprises there?

Speaker 2

No. It probably opened a month later than we thought all around related permitting and infrastructure issues. The core operations are actually exceeding our expectation. We're shipping to customers. They think it is some of the, if not the cleanest recycled PET flake in the world.

Speaker 2

So the facilities, the team are executing really, really well and happy with our equipment providers, happy with everything and we're up and running in Indianapolis and we're probably should shortly announce our 3rd location on the East Coast.

Speaker 4

Terrific. And then shifting to U. S. Ecology, just wondering if you can update us on how you're thinking about what level of margin upside is feasible for that business once you fully integrated the systems just based on your experience on optimizing route profitability and pricing for your base business? What's the level of margin upside potential there?

Speaker 2

Yes. We're targeting a 25% EBITDA margin there in the midterm and that's really going to be a series of levers, right? We're going to think about mix and making sure that we have customers that are willing to pay. We'll obviously think about pricing for the value we deliver on that. We'll drive additional revenue through cross sell, which we've talked about.

Speaker 2

And then and the IT investments help there. They also help us manage the middle, just better labor utilization, more efficiency in terms of disposal optimizing disposal assets and getting the material into the right spot. And then as we grow, we'll certainly get more leverage on our SG and A. So we've got a series of levers that we think get us to 25% in the midterm.

Speaker 4

Great. Thanks so much.

Operator

Thank you. The next question is from Toni Kaplan with Morgan Stanley. Please go ahead.

Speaker 5

Thanks so much. You mentioned the weakness in volume related to weather. I was hoping that you could give the weather impact in the quarter?

Speaker 3

We think overall that was about a 50 basis point drag on total volume performance. So you can think about that being down circle 1%, half of which was weather related and then just half more in those cyclical volumes as we talked about construction activity and the like.

Speaker 5

Yes. Okay. Makes a lot of sense. And then just wanted to ask about pricing, strong core price again this quarter, maybe a little bit above expectation. I think you mentioned it exceeded your expectation as well.

Speaker 5

I think last quarter you talked about trajectory of 1Q being the high point, 4Q likely being the low end. Is that still your expectation? And has anything in the inflationary backdrop changed your view on how price plays out or how good price was in the Q1?

Speaker 2

Thanks. Yes. I think it modestly exceeded our expectations. And I think that cadence we laid out is still right as we see the well, it sort of come down. Could we extend that a little higher as the interest rates remain high?

Speaker 2

And I think inflation has been a little stickier than people expected. Yes, I think there's certainly potential for that.

Speaker 5

Terrific. Thanks.

Operator

Thank you. The next question is from Michael Hoffman with Stifel. Please go ahead.

Speaker 1

Hi, good afternoon. Thanks for taking my questions. So I guess the one on ES would be the cross sell. When you bought it, you didn't expect you didn't put that in the plan, but it's been proving to be a positive contributor. How do we track against where you are now in that cross sell?

Speaker 1

What's that incremental total dollar we picked up?

Speaker 2

Yes. I think we're making great progress on that, Michael. Listen, ES was a little softer in the quarter or certainly weather impacted them and they were also coming off a pretty tough comp because we had a great Q1 last year. But that pipeline remains strong. I think we stopped talking about the pipeline at $150,000,000 that pipeline has grown from there.

Speaker 2

Now that pipeline is over a couple of years that builds out as these opportunities develop, either the work initiate from a recurring generator or sometimes it's a project that has a scheduled start that is pushed out a few months. So we feel really good about that. And frankly, there's another wave of upside as we get integrated on the IT side and then we get our sales organization kind of optimized against those customer lists and that information. We think there's strong pull through. I think what's been undeniable for us is that customers want and desire a single source solution.

Speaker 2

And this integrated offering is something that we could sell very profitably in the marketplace.

Speaker 1

Okay. And then switching gears back to the solid waste business, so that opportunity to capture surcharges and overages through the digital platform, what's the point of conversion of that into a permanent revenue? So you get the eventually salesperson shows up says, hey, your container is always overflowing and you convert it into a permanent upgrade. What's that look like? How do we think about that?

Speaker 3

Michael, to your point, the obvious solution to that is to sit there and either get an increased level of service, whether it the size of the container or just the number of times, the frequency that we're providing that service. But when you take a look just at those incremental revenues, they've been fairly sticky. Meaning, even though we've had these because they're not consistent, they tend to be somewhat episodic as well. So again, when we're providing the service based on a certain amount of volume within that container, if there's those overages, we're going to charge for that and same with contamination. Ultimately, could that change behavior over time?

Speaker 3

Yes, and we would want that. And at which point then, that probably just results in increased frequency, which positively impacts the top line as well.

Speaker 2

And that is the protocol, right? If somebody's got multiple overages, right, the protocols that's pushed through sales force and the salesperson calls on that customer and says, hey, it's time to go from twice a week to 3 times a week or a larger container or whatever the right solution is. To Dell's point, I think it's still early days and we've seen it's across a variety of customers, right? It's not like we're getting all this from the same small set of customers. It's kind of onesie twosie on that front.

Speaker 2

So it's a little early to tell. Okay.

Speaker 1

Thank you. We'll Okay. Thank you.

Operator

Thank you. The next question comes from Brian Bergmeier with Citi. Please go ahead.

Speaker 6

Good afternoon. Thanks for taking the question. In the prepared remarks, you touched on a revenue opportunity in recycling. I guess just what's kind of driving the biggest tailwinds there right now? Is it capturing maybe different materials such as plastic?

Speaker 6

Are you increasing the throughput speed? And is there any opportunity maybe on the labor side as well?

Speaker 3

Well, I think what we talked about, Brian, on the recycling side a little bit was on those fees we were just talking about more on the contamination side. So again, when you take a look at how we're deploying AI into the business, we're doing it on overages, right, on the traditional waste. And then on the recycling, it's more about contamination. So that's what we're talking about there. When you just talk about where you saw the uplift in recycling, that was really a function of just the recycled commodity prices and the lift in the overall basket.

Speaker 3

So our overall basket was $153 per ton in the Q1. We exited the year at around 130 So that's that uplift, which is really what's driving that increase in recycled commodities.

Speaker 6

Got it. Got it. That makes sense. Yes, I was inquiring about the $60,000,000 opportunity there. So thanks for the detail.

Speaker 6

And then maybe just in solid waste like really nice margin performance in 1Q. What are your expectations for costs now versus at the start of the year based on the public data, maybe wages are cooling a little bit. I'm not sure if that's really accurate for you guys and any view on kind of M and R costs. Thanks. I'll turn it over.

Speaker 2

Sure. Yes. I think we're the team's executing well in the middle. The outlook is favorable in terms of cost. But on the wage side, that cake is already baked.

Speaker 2

We give our colleagues all their annual increase at the end of February, right? And even if inflation cools, we don't call them up in September and say we want some of that back. So that forms it's more of a step function in terms of cost. Same thing on 3rd party transportation. I'd say the most dynamic parts of the cost structure are landfill operating and maintenance.

Speaker 2

And on maintenance, again, teams executing well. We're taking more truck deliveries and that will certainly have a positive aspect as we park some older trucks and replace those with newer trucks. The maintenance cost is obviously substantially lower on those newer trucks. So that should provide a nice benefit toward the second half of the year.

Operator

Thank you. The next question comes from Noah Kaye with Oppenheimer. Please go ahead.

Speaker 7

Hi, all. Thanks for taking the questions. Really nice OpEx leverage here, as others have alluded to. And at this point, 30 bps margin expansion at midpoint for the full year looks pretty conservative to us, at least in light of 1Q results and the trends. So can you kind of comment on margin expectations and at least how we should be thinking about kind of the typical step up in margins as we get into the stronger seasonal quarters?

Speaker 2

Yes, we certainly feel comfortable with how the team is executing and our plan for the rest of the year on that front. Listen, the overall environment, keep in mind, we're in a pretty much a 0 growth volume environment on recycling and waste over the last couple of years. If you think about housing starts and the correlation of that to volume on that front And certain parts of the economy are a little slower, like construction for sure with interest rates remaining elevated both commercial and residential construction has been softer on that front. Manufacturing has certainly been softer as well. Now there's some certainly positive signs that that activity is picking up at the plant level, which is encouraging.

Speaker 2

So we remain pretty confident in our plan, but also mindful of the external environment election year sometimes special waste time can push out a little bit on that front. So we'll update you more as we get into the seasonal upswing here after Q2.

Speaker 7

Absolutely. I think the spirit of the question is that despite volumes being down more than expected, I mean, margin performance in 1Q was definitely stronger. I think perhaps maybe even in your internal forecast certainly than The Street. Is there any reason why some of the underlying tailwinds to margins excluding volumes shouldn't continue into future quarters? So as you said, you have pretty good visibility on things like labor costs.

Speaker 7

Is there anything on the cost side of the equation that should give us pause?

Speaker 3

No, to your question, right, we got off to a nice strong start, but it's the Q1, right? So again, we like to see that continue, that seasonal uptick. We've got some strength right now in recycled commodity prices, but we're a quarter of the way through. So to your observation, we've gotten us to a really good start to the year, which would suggest there's some modest upside, but we've got to sit there and see it play through the remainder of the year. But we're very pleased with our results in the Q1.

Speaker 7

Yes, very fair. Thank you. And then just a quick housekeeping item. The release and your comments mentioned $41,000,000 spent on acquisitions in the period. The line item in the cash flow statement, obviously, well north of that.

Speaker 7

And I assume the delta is primarily related to the sustainability investments, maybe some renewable energy projects. Can you maybe just help us with that bridge and how to think about full year spending even excluding the M and A that you hope to do in the balance of the year?

Speaker 3

Yes. Most of that is the investments that we're making in those JVs. So we would expect between what we're doing on the landfill gas to energy as well as the investments in Blue Polymers

Speaker 7

to be about

Speaker 3

$230,000,000 of investments in those JVs in 2024.

Speaker 7

Okay. Dollars 230,000,000 and so it sounds like you spend a good chunk of that then already just doing some quick math here. So that tapers off as we move to the back half?

Speaker 2

It does, yes.

Speaker 7

All right. Excellent. Thank you.

Operator

Thank you. The next question comes from David Manthey with Baird. Please go ahead.

Speaker 8

Thank you. Good afternoon. Could you provide us with some details on the timing, size and type of acquisition that you did in Environmental Solutions? It looks like volume growth was about 3.2% this quarter and wondering how much of that was the acquisition?

Speaker 3

Well, the acquisition that we completed was in the Q4 of 2023. So most of what you're seeing there on the Environmental Solutions side is the rollover impact of a company that we bought out on the West Coast. And we talked about that in our Q4 release. But when you think about the total rollover impact right now of acquisitions, so that which closed in 2023 together with the deals that closed in the Q1 is about 220 basis points of rollover impact to revenue in 2024.

Speaker 2

Okay. Thank you. And

Speaker 8

this enterprise asset management initiative you have, you talk about maintenance productivity and warranty recovery. Could you explain to me what that means and maybe size the opportunity there?

Speaker 3

Yes. Well, now you've got a system which is going to be seamlessly integrated. So when you think about the platform that we put on both the financial and the procurement side now being seamlessly integrated with an asset management system. So our ability to track parts and to be

Speaker 2

able to sit there and

Speaker 3

make sure that we're getting warranty recovery on every single part that we take off a truck greatly enhanced. Right now it's a very manual manual exercise in order to sit there and to get those warranty dollars as well as just greater efficiency for the technician. So what that means is with that extra time and that capacity that's created, we can in source more of those repairs. So instead of outsourcing at a multiple in order to sit there and have those repairs done with a 3rd party shop, we can do those in house.

Speaker 7

Thank you very much.

Operator

Thank you. The next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Speaker 9

Great. Thanks and good afternoon. Just maybe if we could get a little bit of color on sort of the volume cadence you expect for the rest of the year. Couple of peers have called out a bit of a softer Q2 there. Maybe just your expectation on cadence and if that's changed versus what you might have expected at Q4 reporting a bit earlier?

Speaker 3

Yes, we would expect obviously a sequential improvement from what we saw in Q1 just because we don't we're not expecting the weather impact again. Q2, yes, we would expect it to be a little bit negative given what we're seeing with some of the construction related activity. We're not seeing a rebound there yet. As we get into the second half of the year, we start to anniversary some of those construction related declines. So we would expect that to be flat to even potentially slightly positive.

Speaker 9

Okay, great. And then on the PFAS front, you guys have obviously a bit of a unique exposure with the environmental business. Maybe if you look at the puts and the takes across your entire business, obviously, it's a bit early, but just curious how you're sort of approaching that opportunity and kind of the net impact of any additional costs? Just how do you view that entire opportunity given your two business lines? Yes.

Speaker 2

We're it's a net positive for sure. We talked about kind of $70,000,000 to $90,000,000 last year of PFAS related revenue. We'll have that number better this year with a pipe on this building. So we offer a very unique set of products and services to our customers to help them remediate all the way from the service to multiple opportunities for disposal, solid waste, landfill obviously. For low levels of P5, hazardous landfills, deep well and that solution is certainly resonating with our customers.

Speaker 2

But on the other side of the business and that's a multi year opportunity that's going to play out over time and there's certainly the size and scale of that opportunity is hard to size yet because it does depend a bit on the regulatory environment. And likewise on the waste and recycling side, there's certainly could be some headwinds there if this thing is poorly executed. I think the industry is doing a good job of pushing back and making sure that we don't get penalized as being a passive receiver. And I would say from a litigation standpoint and more broadly as regulation increases in the industry, if you think about the last 25, 30 years, And I And I think over time given the nation complexity, it favors the larger players. So we want regulation to be thoughtful and intelligent, but we see that again over time we're net winner through PFOS.

Speaker 9

Great. Thanks very much.

Operator

Thank you. The next question is from Tony Bancroft with Gabelli Funds. Please go ahead.

Speaker 10

Great job, gents, on the quarter. Regarding the plastics, maybe just step up climb up to 30,000 feet and just sort of long term view on it. With these with regulations that have been implemented on plastics like the ones that, wanted to affect in Canada, I see maybe assume as goes to Canada or in California, so goes the rest. How do you see those maybe stricter regulations and what can be made and thrown out versus what needs to be recycled and the restrictions on that. How does that impact in the long term your Palmer centers and maybe how it changes producer behavior and what they'll produce and how does that maybe impact your long term net return on investment for those facilities?

Speaker 7

Yes. Listen, the consumer packaged

Speaker 2

goods companies for a long time have talked about minimum content goals. I think when the regulatory environment came online with California and the other states that followed, that's really what's driven different activity in the market we always do. We're going to be good stewards of capital and we've certainly exceeded our expectations there and I think there's more upward opportunity as we go. We could sell out that facility 5 times over and the same will be true in Indianapolis and the other centers. The market is structurally short supplied of recycled PET and we've got the unique capability of collecting something 5,000,000 times a day, right?

Speaker 2

And so we can be the anchor tenant of our own facility on that front. So over time, I think think about innovating on collections. So how do we get more PET and more olefins into the system? And then that might spark the opportunity to create a fit or a sick polymer center and we'll take that on as we go.

Speaker 10

Great answer. Thanks so much. Great job.

Operator

Thank you. The next question is from Tobey Sommer with Truist Securities. Please go ahead.

Speaker 1

Thanks. A question for you on the hazardous side. How is sort of pipeline and overall demand? And do you think it's sufficient to easily absorb new incinerator capacity coming towards the end of this calendar year?

Speaker 2

Yes, pipeline is strong. Looks like activity, like I said, was certainly weather related impact in the Q1. Pipeline is strong. We had a number of attractive things in both on recurring streams and some event work in the pipeline. The market is structurally short supplied on incineration.

Speaker 2

And even with the new capacity coming online, I think it's likely to be tight for the foreseeable future in that front. And then just think about any kind of medium to even a bearish case on PFAS is going to push more volume in the liquid side into incineration. So we see that again market being tight supplied for the foreseeable future.

Speaker 1

Appreciate that. And then if I could ask a question on the expense side beyond wages, in terms of hiring, training and the safety events that tend to happen more frequently with new employees, are those other elements around direct compensation also sort of seeing less growth and sort of a benefit to margins this year?

Speaker 2

Yes, we're seeing certainly great tracking great safety numbers. We talked about turnover. We talked about NPS. And listen, all these things are connected. Done this a long time and we know that when you are fully staffed and you've got trained and tenured drivers, they provide great customer service, right?

Speaker 2

It lowers your risk costs. Those customers are happy with the product offering and they're willing to pay more and stay longer. So we're certainly seeing some of the benefits of reduced turnover as well.

Operator

Thank you. The next question is from James Shum with TD Cowen. Please go ahead.

Speaker 11

Hey, thanks. Good afternoon. Just curious if you guys are seeing any trends in the residential business with respect to competition or pricing?

Speaker 2

Yes. Listen, I think that Mark, that's talked about this at length. That's over the last decade as the business has improved and transformed in lots of ways, that's one of the parts of the business that hasn't made as much progress. And we have a very strong belief that we need to raise returns in that part of the business. And listen, on balance, I'd say competitive conduct is improving in terms of people getting a fair return for the work they do.

Speaker 2

It still has room to improve. And we're going to be disciplined in that space and we're not going to do work for low returns. And if a city wants a different provider, who might be cheaper, but doesn't provide as much benefit, so be it. We're going to put our allocate our capital to places where we get a very attractive return.

Speaker 11

Got it. Thanks for that. And then I'm assuming turnover is trending lower, but did you give any specifics there? And what's your target for turnover if you have one? And apologies if I missed it.

Speaker 2

No problem. We don't talk about public, it's sub-twenty percent. And there's a seasonal curve to turnover obviously, it kind of goes up in Q2 and Q3 just like volumes do and comes down in Q4 and Q1. Was it running the business sub 20%, right, is again very attractive in terms of all the operating metrics I talked about earlier, including the financial performance of the business.

Speaker 11

Okay. Thank you very much.

Operator

Thank you. The next question is from Stephanie Moore with Jefferies. Please go ahead.

Speaker 12

Hello. This is Harold Onto on for Stephanie Moore. I guess just on the M and A side, do you expect this year to be above average M and A? We've heard so many other competitors say M and A this year may be a little bit more active. And I guess in terms of your verticals, which verticals would you look to see would you look to make the biggest gains in M and A?

Speaker 12

Thank you.

Speaker 2

Listen, we had a really outsized we're coming off $5,500,000,000 of M and A spend over the last 3 years. There's also there's always some episodic nature of that. We closed 2 really big transactions last year in the 4th quarter. And I think last year was a $1,800,000,000 spend, dollars 1,400,000,000 of it was in recycling and waste. So there's a natural ebb and flow of just when those deals close.

Speaker 2

And we don't time any of those things around a quarter a year, right? We do that when the seller is ready to sell. On that front, the pipeline remains strong in recycling and waste and environmental solutions. The only place I'd say we're slightly self constrained is on the environmental solutions field services side of the business, only because we're doing so much IT integration work that we're letting that team get focused there. And again, the pipeline is certainly building and we could close more opportunities right now.

Speaker 2

We're pausing until 2025 on that when we have a really solid foundation integrate companies into because that's when we think we maximize the synergies of those acquisitions.

Speaker 12

Thank you. And I believe that you said recycled commodities are trending at $160 per ton. Is that what you're baking in for 2Q? And if not, I guess, what are you baking in there? And I guess, one housekeeping is what is internal inflation run-in right now?

Speaker 3

Yes. I mean, right now, we're just pegging to what we see, which is running right around that $160 per ton. But back to my earlier comment, we want to see that stay for a longer period of time before we sit there

Speaker 2

and say that that's where

Speaker 3

it's going to be for the remainder of the year.

Speaker 12

Thank you.

Operator

Thank you. The next question is from Mike Feniger with Bank of America. Please go ahead.

Speaker 13

Hey, everyone. Thanks for taking my questions. Just a quick one. I apologize if you already addressed it, but I think EBITDA was a little bit down in environmental solutions or environmental services. Margin was down a little bit.

Speaker 13

You might have it earlier, but apologies if there was something you would want to call out of why that happened and how we kind of think about how that plays through the full year? Thanks, everyone.

Speaker 2

Sure. Yes. No, most of that's the acquisition we did in the Q4, ACT. And as you know, when we do acquisitions, right, we always invest heavily in Q1 or in the 1st year rather, the pro form a to integrate on that front. So that's what's the drag on that.

Speaker 2

But again our margin outlook for ES is certainly positive for the year.

Speaker 3

Yes. So we would expect that to abate that margin headwind on the acquisition and we ultimately expect to see margin expansion in that business on a full year basis.

Speaker 13

And would it be, Brian, would it be above what you would expect for the solid waste business?

Speaker 3

Well, look, solid waste ran at 120 points in the Q1. So again, we've talked about that cadence on Environmental Solutions moving in that 75 to 100 basis points per year, right? And we see that on a sustained basis in the medium term until we hit that medium term target of circa 25%. So I think you can think of it in that zip code.

Speaker 13

And lastly, guys, just to wrap up. Brian, obviously, there's a lot of focus on CPI, either inflation staying sticky, rolling over, moderating. Can you just remind us when we think of CPI, there's obviously the headline CPI, there's what you guys have kind of converted over time. Can you just remind us where we are in that process? That'd be helpful.

Speaker 13

Thanks, everyone.

Speaker 2

Yes. So if you just

Speaker 3

take a look again, if you look at our entire revenue stream, about 45% of our revenue has some sort of contractual pricing restriction, 55% in the open market. So of that 45% that has that contractual pricing mechanism, 23% is directly linked to CPI, headline CPI. 27% are alternative indices like water, sewer, trash, garbage trash and then the remaining 50% are either a fixed rate increase, some sort of rate review, things of that nature. So we've continued to move, right, the book away from headline CPI to alternative indices, where now we have more on alternative indices than we do on headline.

Operator

Thank you. The next question is a follow-up from Michael Hoffman with Stifel. Please go ahead.

Speaker 1

Hey, I just wanted to play a little cleanup. So one of the roll off this temporary container business, is it not correct that you would park equipment pretty quickly, reposition drivers, raise price? So this may show up as a volume calculation as not that big of an impact to profitability because you can pivot so quickly?

Speaker 2

Yes, certainly, Michael. I mean, we're dynamic in that market. And if you look at the quarter, volume was down 10.8%, but price was up 7.1%. And I just think that speaks to the strength of execution and frankly that strength of the industry, right? In an environment where volume is declining, if you go back a decade or 2, you might see behavior change and pricing be flat or even pricing go negative.

Speaker 2

And I think people understand the value of the products and services they're delivering and the ability to flex and scale in that business is quicker than almost any and certainly our team has done a great job of that.

Speaker 1

And then the other would be, while the incineration comment I concur with is will remain tight for a while. U. S. Ecology was predominantly inorganic chemistry play on the disposal side and the incineration world is predominantly organic. So it's less impactful to you anyway.

Speaker 1

It's not that you don't have organics, but you're much more of an inorganic play. But can I Yes, I would

Speaker 2

say historically that was true, Michael? But as we provide again a broader set of products and services, we certainly expanded the offering, right? And we're a significant player in that space in terms of liquids because we're going to recurring revenue generators and handling 5, 6, 7, 8, 10 products in their facilities and it can certainly be on the organic and inorganic side.

Speaker 1

Right. Okay. But the disposal landfill disposal side is still predominantly in inorganic. So this is the fuel blending and liquids side

Speaker 9

is

Speaker 1

getting into the organics. Okay, great. Thank you.

Operator

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

Speaker 2

Thank you, M. J. I would like to thank the entire Republic Services team for their efforts and commitment to driving lasting value for all of our stakeholders. I'd also like to make a special acknowledgment to Michael Hoffman, Senior Statesman on the call. He's been with the industry for decades.

Speaker 2

And as he's announced, he's starting a new chapter, certainly supporting the industry in a different capacity. But over the last number of decades has certainly seen a lot of transformation in the industry and has handled this environment and this community with a lot of excellence and professionalism. So congratulations Michael in your next chapter. Have a good evening everyone and be safe.

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Earnings Conference Call
Republic Services Q1 2024
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