Republic Services Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2022

There are 14 speakers on the call.

Operator

Good day, and welcome to the Republic Services First Quarter 2022 Investor Conference Call. Republic Services is a traded on the New York Stock Exchange under the symbol RSG. All participants will be in a listen only mode. In. After today's presentation, there will be an opportunity to ask questions.

Operator

To ask a question. 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.

Speaker 1

Hello. I would like to welcome everyone to Republic Services' Q1 2022 conference call. John Vander Ark, our CEO and Brian DelGaccio, our CFO are joining me as we discuss our performance. I'd like to take a moment to remind everyone that some of the information we discuss on today's call contains forward looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss of factors that could cause actual results to differ materially from expectations.

Speaker 1

The material that we discuss today is time sensitive. If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is May 5, 2022. Please note that this call is the property of Republic Services Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press in.

Speaker 1

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 publicservices.com. On today's call, we will provide forward looking non GAAP measures related to recent acquisitions and projects under development. We are unable to reconcile these estimates to relevant GAAP measures without unreasonable efforts because purchase accounting adjustments are not complete and the timing of development projects can vary. I want to remind you that Republic's management team routinely participates in investor conferences. Call.

Speaker 1

When these events are scheduled, the dates, times and presentations are posted on our website. With that, I would like to turn the call over to John.

Speaker 2

Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. We had a strong start to the year, which keeps us well positioned to achieve our full year goals. The outcomes we are delivering reflect our focus on profitably growing the recycling and solid waste business and expanding our Environmental Solutions business, so we can offer the most complete set of products and services to our customers. The investments we are making in the business are taking hold and creating undeniable value, while further strengthening our 3 differentiated capabilities of customer zeal, digital and sustainability.

Speaker 2

During the Q1, we delivered revenue growth of 14%, generated adjusted earnings per share of $1.14 which is a 23% increase over the prior year and produced $531,000,000 of adjusted free cash flow which is a 14% increase over the prior year. We continue to believe that investing in acquisitions is the best use of free cash flow to create long term value. Earlier this week, we closed the acquisition of U. S. Ecology.

Speaker 2

This acquisition propels Republic into a leading position in the environmental solutions and as a platform of high quality assets. We have customer overlap between our $1,500,000,000 manufacturing vertical and U. S. Ecology's $1,000,000,000 book of business. We estimate our cross selling opportunity at $75,000,000 to $100,000,000 We're excited to welcome U.

Speaker 2

S. Ecology employees to the Republic team and will benefit from their deep expertise in specialty waste handling. We also invested $66,000,000 in other acquisitions during the quarter. We also have approximately $400,000,000 in deals in the advanced stages of closing, all of which are in the traditional recycling and solid waste space. In addition to investing in acquisitions, $146,000,000 in dividend.

Speaker 2

We are experiencing meaningful traction developing our differentiated capabilities where actions in. Our aspiration is to deliver a world class customer experience, which we call customer zeal. Our customer retention rate remains at a record setting level of 95%. This has enabled us to generate the highest level of pricing retention in company history and generate outsized revenue growth throughout the business. During the Q1, core price reached an all time high of 6% and average yield increased to 4.2%.

Speaker 2

Volumes increased 3.6% compared to the prior year and acquisitions contributed an incremental 3.90 basis points to total revenue growth. Regarding digital, we completed the rollout of RISE Tablets in our small and large container fleet. We continue to see tangible benefits of this proprietary technology for our customers and within our operations. We will begin deploying tablets in the residential fleet later this month and expect to be complete by mid-twenty 23. We recently went live with the finance and procurement modules of our new ERP system, which will streamline back office activities and empower our local leaders with enhanced data.

Speaker 2

Next, turning to sustainability. We continue to believe that environmental sustainability and economic sustainability go hand in hand. We are passionate about doing things that are good for the future generations in a way that generates profitable growth for our business. In March, the company announced our plans to expand our participation in the plastics value chain with the nation's 1st integrated plastics recycling facility. The Republic Services Polymer Center will address the growing demand for recycled plastics, while enabling CPG brands to meet their sustainability goals.

Speaker 2

Based in Las Vegas, this will be the first of 3 to 5 centers nationwide and is scheduled to open in late 2023. We expect this Polymer Center will generate an incremental $50,000,000 of revenue with an EBITDA margin at or above total company performance. Earlier today, we announced our joint venture with Arkia to develop 39 renewable natural gas projects at our landfills. These projects generate attractive returns and accelerated achievement of our ambitious 2,030 sustainability goal of increasing biogas sent for beneficial reuse by 50%. The projects are expected to come online between 2023 2027, at which point approximately 70% of our total landfill gas collected will be beneficially reused.

Speaker 2

This joint venture together with our 17 landfill gas to energy projects under development Are expected to generate approximately $100,000,000 of incremental EBITDA. We continue to be recognized for our commitment to sustainability. Republic Services was named to Barron's 100 Most Sustainable Companies list for the 4th time. I will now turn the call over to Brian.

Speaker 3

Thanks, John. Core price during the Q1 was 6%, which included open market pricing of 7.6 percent and restricted pricing of 3.5%. The components of core price included small container of 9%, large container of 6.8% and residential of 5.3%. Average yield on total revenue was 4.2%, which represents an increase of 80 basis points when compared to our 4th quarter performance. Average yield unrelated revenue was 4.5%.

Speaker 3

The outperformance in average yield is a direct result of higher core price increases in the face of more persistent cost inflation, dynamically adjusting rates for new work to match demand and increased price retention, which illustrates customer willingness to pay for our high value services. We expect average yield to remain above 4% for the remainder of the year. 1st quarter volume increased 3.6%. The components of volume included an increase in small container of 4.1%, an increase in large container of 4.6% and an increase in landfill of 4.7%. This level of volume performance was in line with our expectations.

Speaker 3

Moving on to recycling. Commodity prices were $201 per ton in the Q1. This compares to $133 per ton in the prior year. Recycling Processing and Commodity sales contributed 40 basis points to internal growth during the Q1. Next, turning to our Environmental Solutions business.

Speaker 3

1st quarter Environmental Solutions revenue increased $64,000,000 from the prior year. Contributed 40 basis points to internal growth during the Q1. Adjusted EBITDA margin for the Q1 was 30.4%. This compared to 30.7% in the prior year. Margin performance during the quarter included underlying margin expansion of 70 basis point and a 40 basis point increase from recycled commodity prices, which was offset by a 70 basis point headwind from net fuel and a 70 basis point decrease from recent acquisitions.

Speaker 3

Within the underlying business, we are seeing wage inflation of approximately 4%. Price increases more than offset this level of cost inflation before considering the impact from productivity improvements. SG and A expense excluding U. S. Ecology deal and integration costs was 10.2% of revenue.

Speaker 3

This was flat with the prior year. Adjusted free cash flow for the quarter was $531,000,000 and increased $67,000,000 or 14% compared to the prior year. This was driven by EBITDA growth in the business. Capital expenditures of approximately $200,000,000 during the Q1 represents 15% of our projected full year spend. We remain on track to spend our full year budgeted capital expenditures.

Speaker 3

Total debt was $9,600,000,000 and total liquidity with $2,800,000,000 Our leverage ratio at the end of the quarter was 2.8 times. With respect to taxes, Our combined tax rate and non cash charges from solar investments resulted in an equivalent tax impact of 25% during the Q1. As John mentioned, we closed the acquisition of U. S. Ecology earlier this week.

Speaker 3

Our initial perspective on the contribution from U. S. Ecology and adjusted EBITDA of approximately $130,000,000 which includes $5,000,000 of realized synergies. We also expect EPS contribution to be flat to slightly positive. As a reminder, EPS includes the impact of intangible amortization and relatively higher interest expense as debt associated with the acquisition is expected to be highest during the 1st year.

Speaker 3

Annualized this would represent a year one contribution of $1,000,000,000 of revenue and approximately $170,000,000 of EBITDA, which includes $10,000,000 of 1st year synergies. We still believe there are at least $40,000,000 of cost synergies that will be realized during the 1st 3 years. We intend to incorporate the contribution from U. S. Ecology into our full year guidance in July once the impact of purchase accounting is better known and other areas subject to valuation are substantially complete.

Speaker 3

With that operator, I would like to open the call for questions.

Operator

In. We will now begin the question and answer session. In.

Speaker 2

In.

Operator

At this time, we will pause momentarily to assemble our roster. The first question today comes from Tyler Brown with Raymond James. Please go ahead.

Speaker 4

Hey, good afternoon.

Speaker 2

Good afternoon, Tyler.

Speaker 4

Hey. So the landfill gas announcement, obviously, pretty exciting. I think in your sustainability report, you guys already have something like 75 projects operating today. And if my math is right, which is always scary, but I think that maybe makes up a little more than half of the municipal solid waste landfills that you collect gas on. So number 1, am I close, is that am I in the right ballpark?

Speaker 4

And 2, Does this deal with the 17 projects in development pretty much account for the remaining landfills in your fleet with enough for a project or some of these 39 at existing, I'm going to call them dirt gas operations where you're upgrading to RNG?

Speaker 2

Yes, good question. So the 75, right, 8 of those are solar projects. We put those together in our sustainability. So we have 67 today, right? We talked about another 17 in development, right?

Speaker 2

And then this project Renowned with Arkia is another 39. 4 of those projects of the 39 are basically recapping existing projects Of the $67,000,000 I talked about. So it's mostly new and incremental. So that kind of if you fast forward to 20 27, you got a few more that come become inert because that's the goal of Elantra obviously is to sunset it. So that would take us from 67 today to 116 in 2027 with everything we're talking about.

Speaker 4

Okay, perfect. Yes, very helpful. And then just financially, what will we kind of see? Will you put up the money in 1 big chunk or do you do that as we go along? And then Brian, would you just recognize it as like an income in non controlling interest?

Speaker 4

And then they'll basically pay you a dividend back or how exactly will the mechanics work?

Speaker 2

Yes. No, we'll do it ratably investing. It's not just one big chunk Right into this joint venture and then essentially we get, there's 2 forms of our return on that. There's a royalty agreement, Which is more typical of what we have on our typical projects our existing projects rather. And then we'll be a minority equity investor in these.

Speaker 2

And then Brian, you could talk about where it's going to hit the geography. Yes.

Speaker 3

So for the royalty, similar to what we have today, Tyler, the royalty will just come through revenue, right? And you'll see that then there's really no cost So most of that flows down to the EBITDA line item. And then for the portion where we've got that minority interest that will be a one line pickup, which will be again, it will be included in our EBITDA, but it will be separately distinguished so that you can actually see what its contribution is.

Speaker 4

In. Okay, okay. That's helpful. It's way, but very helpful. The last one here, just we were kind of perusing the U.

Speaker 4

S. Ecology 10 Q, it looked like they kind of struggled this quarter, got really pinched on cost. I think EBITDA was maybe down 10% year on year. So What's the kind of the confidence around turning that business around quickly? I think you gave some color around the contribution, Which seems like you're kind of expecting things to get a little bit better as the year plays out.

Speaker 4

But just maybe talk about the 1st 100 days there, what the plan is to really kind of get that business turn for positive momentum.

Speaker 2

Yes. No, listen, their Q1 was kind of right on what we had in the pro form a, Right, in terms of how we value that business. As you know, we're relatively conservative how we think about things. Look, the integration begins in. We have teams all over the country welcoming our colleagues together and frankly it's been going on for weeks within the parameters of what we can do with DOJ and antitrust in terms of pre planning for the integration.

Speaker 2

So we're already driving that through. We've got the 4 areas outlined. Geographically, we've got those in. The leader and the direct reports, right, and where all the assets and divisions flow up through that. And so and that includes integrating our own Environmental Solutions business into that, so we took the best of best in terms of both assets and people In terms of how those businesses are structured, so we are well on our way on that front.

Speaker 2

One of the big opportunities there is to integrate the great set of post collection assets they have with the field services resources. And COVID was kind of a trip up for them to be able to do that in a full way. And we've got the benefit of not being out of COVID, but being in a very different stage of COVID. And so again, integrating those things together and Applying our considerable revenue management capabilities to that business, looking at the go to market approach, all those things are underway right now.

Speaker 3

Yes. One thing I would add to just on the performance in the Q1, Tyler as well is that the performance got better throughout the quarter.

Speaker 4

In. Okay. And then just real quickly just to clarify. John, I thought you said $75,000,000 to $100,000,000 in synergies and Brian you said 40 Yes. The

Speaker 2

$40,000,000 is just cost. And like we value every deal, Right. We have really understand the standalone intrinsic value of an enterprise and then right we value cost synergies because we've got line of sight to that. Incremental to that $40,000,000 right? We see $75,000,000 to $100,000,000 of cross sell opportunities, right, probably realized over about 2.5 to 3 year period, All right.

Speaker 2

In addition to that, that doesn't include any pricing. And we'll take a very hard look immediately in terms of understanding that we're getting a return on all the work we do and where there's an opportunity especially in an inflationary environment To make sure that we're getting our costs covered and more.

Speaker 4

Right, right. Okay, great. I'll pass it on. Thanks.

Operator

The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Speaker 5

Thanks so much. You mentioned the 4% wage inflation and that seemed really good for this environment and what we've heard from others. Can you give any color on maybe how you've been able to limit wage inflation, if you've had any strategies around that, etcetera?

Speaker 2

Yes. I would say the seeds of that were sown many years ago, right? We think about being a place where the best people come to work And making sure that our people get a fair increase every year. So even in very low inflationary environments, where CPI was running sub-one percent. We always gave our people a 2% to 3% increase in their wages.

Speaker 2

And if you had benefits, probably a little north of that. In. And so I would say very fit and healthy cost structure coming into this inflationary environment. And then we're very disciplined and We believe in market pay and so we understand market pay and market dynamics, right, across all the 800 dots on our map in. And so we've made individual and all of across the board kind of ratable cost of lien in.

Speaker 2

And then we go in and do additional moves where we need to make sure that we are staying very competitive in the market. And we're still going through that, in. That's an ongoing process, ongoing science and we believe in the local team. We also believe in the discipline and the expertise of our HR team and we'll be able to do a centralized review, that we're doing things in a smart way. And I think you'll see us do some more of that in the 3rd Q4 here, all of which will result in us pricing ahead of our cost inflation outside of productivity, which will allow us to expand our margins.

Speaker 5

That sounds great. I wanted to ask also on the renewable energy side, just given the really strong increase in gasoline and diesel prices. Has that changed your approach to renewable energy projects? Has it cause, any thoughts about pulling forward investments in new facilities or more alternative fuel vehicles? Thanks.

Speaker 2

Yes. One of the reasons we're really excited about this joint venture is we think it allows us to get after a portfolio of landfills, Right. We bid this out and had a very competitive process and really excited about our partner. But that we take on all of those projects and those projects have varying returns in. And some of those things probably we wouldn't have independently gone after in a standalone basis just given the size and scale.

Speaker 2

So we're able to Go deeper into our fleet of landfills with projects, which is exciting. We're also able to go faster, right? And we can get after all 39 of these in the next In addition to the 18 that we have in flight or 17 we have in flight, we feel really excited to be able to go after that opportunity that quickly because of that market. As it relates to fleet, we are long on electrification. About 20% of our fleet is CNG and we certainly have that as part of the portfolio, But all of our energy going forward is on electric vehicles.

Speaker 1

Perfect. Thank you.

Operator

The next question comes from Michael Hoffman with Stifel. Please go ahead.

Speaker 6

Hi, thank you. And I also want to thank you for the very kind gesture you did a few weeks ago. I appreciate it. The 4% wage inflation, how does that translate into internal cost of inflation, total internal cost inflation?

Speaker 3

Relatively consistent, Michael. When you take a look, I mean, look, I think just to put it into perspective, I talked about expansion in the underlying business of 70 basis I think you take that 4% cost inflation and compare that to that yield on related revenue, which is 4.5% and then you get 10, 20 basis points of productivity, that is the expansion that we're seeing in the quarter.

Speaker 6

Okay. You anticipated Part B of that. But I will ask, so RISE is fully rolled out in small and large container. Does it take that rate of productivity improvement and walk it up now because you have it more comprehensively distributed? I mean, this is all about taking minutes out and Lowering engine hours and the like.

Speaker 2

Yes. Listen, when you first put it in, right, there's a little learning curve and then you get your biggest wave of productivity improvement, Right, when you can start to standardize the work and get the routing efficiently. And then in those existing sites, you just start to see incremental improvement over time. We're really happy about our productivity number this quarter given that we had a lot of the headwinds of traffic coming back, right? People coming back to work, society opening up and still be able to overcome that and still see some productivity is a great signal to us or indicator of what Rise is delivering.

Speaker 2

We'll see this more in the residential fleet. And then as we go forward, there's a kind of a 2.0 rise of starting to get more into advanced analytics. How do we even take the analysts and build those routes more scientifically? How do we start to do more benchmarking across geographies to understand what the true performance improvement opportunities are and I think you'll see steady ratable improvement as we go forward.

Speaker 3

Yes. The way we're looking at it right now, Michael, is that we probably have More opportunity left than we've realized life to date.

Speaker 6

Got it. And then last one on the landfill gas to energy development, You're putting up 27% of the capital. Are you I'm assuming you control the gas and these other guys need the gas. They can't do what they want to do even if they got a lot of money. So what's the economic split?

Speaker 3

For that investment, we have a 40% ownership in the JV.

Speaker 6

In. Okay. And John, you've talked about that $100,000,000 number over and over again very consistently, but it now looks like the whole thing is a lot bigger, Because I thought the $100,000,000 related to your $17,000,000 you were developing and now it were or is this an incremental $100,000,000 plus $100,000,000 for the $17,000,000

Speaker 3

No, this is 100 total, Michael. So again, the 17 was call it about 25,000,000 incremental and then This new JV call it 75 for a total of 100 for all 56 projects that are under development.

Speaker 6

Okay.

Speaker 2

Hey, keep in mind, Michael, these are we're into medium sized sites. So these are kind of sub-two thousand SCFM sites. And what we'll see over time is kind of ratably going through some of the legacy projects we have on bigger sites. They'll reach their natural end of the project needs to be recapped. Many times it will be electricity project that will take into RNG And then those will be bigger sites that will roll into this joint venture.

Speaker 6

Got it. All right. Thank you.

Operator

The next question comes from Hamzah Mazari with Jefferies. Please go ahead.

Speaker 7

Hi, this is Hans Hoffman filling in for Hamzah. So my first question is, could you just comment on the quarterly cadence of operating leverage and margins this year? And then just what your labor Overrunning versus pre pandemic.

Speaker 3

Yes. Let me take the margin question here. So again, if you take a look at the first quarter and how we performed. What we see going forward more on a sequential basis is Fuel really started increasing in March. Right now, we're kind of saying it's going to stay elevated.

Speaker 3

That's the assumption right now for the rest for the year. So sequentially, we see a 30 basis point headwind from the impact of fuel. Now, We're also seeing better level of pricing, so we think that we can mostly offset that. But that margin would stay flat if you will from our Q1 performance. That's on the traditional recycling and solid waste space.

Speaker 3

If you then layer in the U. S. Ecology acquisition, that's going to position that's going to create about a 70 basis point impact to margin for the remainder of the year.

Speaker 2

Yes, in terms of labor turnover, it's a little bit of a mixed picture, right, slightly elevated to prepandemic levels in some roles, Certainly down in other roles. I'd say, look, the labor market remains tight, right? And that we would hire some more drivers for sure, Right. If we could get them and so back to we're running the business for the quarter or the year running it for the long term, right. So Wage is not always the answer.

Speaker 2

It's part of why people work, if not all the reason why. It could be shift schedule, it can be their leader, it can be lots of things. So we're very mindful of that, but again we feel like we've got certainly a very good handle on inflation relative to pricing and our ability to cover our costs.

Speaker 7

Okay. And then just on the hazardous waste exposure, can you just talk about what that level of exposure is compared to what your portfolio is right now and how big it could get understanding that the solid waste portfolio will also grow. And then just if you could touch on the cyclicality of that hazardous waste business.

Speaker 2

Well, I'd say hazardous, we didn't have any exposure technically. I think your question more broadly is environmental solutions versus recycling and solid waste. Right now, we've got about a $400,000,000 business in that space with the acquisition of U. S. Ecology Fast Forward that takes us to about 1,400,000,000 dollar opportunity in that space.

Speaker 2

Look, we think when integrating field services and the post collection side of that, It's got a relatively similar profile in terms of volatility in that space. And if there's a mix of project base, work and a mix of recurring revenue, Probably slightly higher, but when you mix the two parts of the business together, right, it doesn't meaningfully change our profile in any respect. In terms of growth prospects, Listen, we start with recycling and sell waste. We've never been more excited about our growth prospects there, both organically and through M and A. In addition, this platform with U.

Speaker 2

S. Ecology gives us great geographic coverage and opportunity to do follow on tuck in acquisitions To build out some product and service lines or to fill out a few smaller geographies.

Speaker 7

Got it. Thank you.

Operator

The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 8

Yes. Hi. Good afternoon, everyone. Hi, Jerry.

Speaker 2

Hi, Jerry.

Speaker 8

Hi. I'm wondering if you could just talk about on U. S. Ecology, look, maybe it's too soon, but what's the nature of their landfill agreements? How Quickly, can you apply RSG's pricing mechanism to the landfill part of the business based on the contract structure?

Speaker 8

Is that something you're comfortable discussing on this call?

Speaker 2

Yes. Look, these are very well run assets. So we start with compliance, right? Great compliance great set of assets, right, that are well maintained, great compliance culture, great compliance capability and technical capability that we've acquired with US Ecology. So we're really excited about that and that is really is the foundation, right?

Speaker 2

That allows us to go to customers and offer them solutions that they're comfortable with that we in. That we because they have producer liability, right? So we will maintain, right, their waste streams in a way that is very compliant that they feel good about. In. It doesn't create liability for our customers.

Speaker 2

That allows us then to price for the value that we're delivering to our customers. So We'll take a hard look at that. Again, we start with not the asset, we start with the customers and we work our way back into the assets. In. And that begins right away and it's a mix of contracted business and spot.

Speaker 2

And obviously, the spot we can look at very quickly. The contracted side of that in. We'll take a little more time, but over time you'll see I think steady improvement in that area.

Speaker 8

Okay. And then on RNG contracts, the $100,000,000 assumption, can you just touch on what that assumes in terms of gas price For MMBtu and would you mind just commenting on if you have any offtake agreements at this point or in. How you're thinking about the opportunity set?

Speaker 2

Yes, the JV just got announced, right? We haven't developed the project yet, so don't have any agreements, but I can give you some of the assumptions. We've got pretty conservative assumptions about gas flow, which we think we could probably beat over time. This assumes a $2 rent price. It will be a mix of fixed versus spot, probably more fixed than spot over time, but we'll decide what that looks like together.

Speaker 8

Okay. Super. And lastly, can you talk about how you expect the pricing cadence in. Play out over the course of the second quarter based on actions that you've announced to customers and if you can touch on when do you expect inflation to peak if you have that type of visibility?

Speaker 3

Yes. Jerry, as I mentioned in my comments, we expect average yield to and above 4%. Again, if you could take a look at the restricted portion of the business where we have those index based price resets, 60% of our portfolio resets in the second half of the year. So you can look for relatively consistent performance Throughout the year, but I would sit there and say probably slightly higher in the second half than we saw in the first half.

Speaker 8

Terrific. Thanks.

Speaker 4

You bet.

Operator

The next question comes from Kevin Chiang with CIBC. Please go ahead.

Speaker 9

Hi. Thanks for taking my question. If I look at your average yield to core price, I guess conversion rate, I know it's not a great way to look at it, but that's been trending up nicely. You hit 70% in the Q1 here. And I think in your prepared remarks, you mentioned retention at 95%.

Speaker 9

Does that suggest This is close to an upper bound of that conversion rate or are there things you can do to continue to narrow that gap?

Speaker 2

There's certainly things we can do to improve it, which is this when we talk about our strategy around customer zeal and digital and sustainability, those are all things our customers value deeply and we think are differentiated and not every provider can offer that. And as we create a better offering, right, our customers are willing to pay more and stay longer. So that's the essence of what we do. Now, There is a structural bond. There are things like people move, right, or businesses close.

Speaker 2

So there's things structurally Right. That I don't think we'll ever get to 100 percent loyalty, but at one point we were sub-ninety percent and then we got to 92 percent and then we kept in. Climbing the curve and that's the aspiration to continue to get a little bit better because the offering is that much stronger and as you know the economics of loyalty in this We are very, very strong. When customers stay longer, that's certainly very valuable for us.

Speaker 3

Yes. And there's 2 components to that calculation. There's retaining more, but there's also Pricing at a higher level for new business, right? Both of those go into the equation. So as we expand the Environmental Solutions business, as we have the most complete set of Products and offerings we think that we offer to our customers.

Speaker 3

We have a better value proposition and we can then charge more for those services from a new business perspective.

Speaker 9

Right. No, that makes sense. You're obviously seeing great momentum there. Just my second question. I think you mentioned earlier your all in or at least your focus on electric vehicles here.

Speaker 9

And I'm just wondering as a buyer of that technology, what do you think the bottleneck right now is For mass adoption. And I guess when you're evaluating what's in front of you, like what are the KPIs that matter the most? Is it just things like battery density or do things like supply chain resiliency given all that's happened the past 9 months, like does Does that play a greater role? Like would you prefer a vendor that, for example, had vertically integrated their battery technology so that they're not dependent on somebody else, which Great execution risk on your orders. Just wondering how you kind of look at that evolution here?

Speaker 2

Yes. Good question. Both are relevant. Certainly, functionality, Right and the bottlenecks weight and range, right? So for us the operative metric is a truck has got to be able to deliver a full route in the day, Without having a midday charge.

Speaker 2

That kind of craters the economics of it because whatever benefit you get, you'd burn up on productivity on a midday charge. In. Again, we feel very optimistic about where we're headed on that front. Late, we are working really hard on some short term exemptions with The state and local municipalities, again, have already made some progress on that front as well and don't think that will be a hurdle or a barrier. We're very mindful of the supply chain with our partners to understand that hey, what's our confidence in them being able to deliver this over time.

Speaker 2

And obviously the world's changed a lot in the last not only 2 years, but last 71 days. So we're cognizant of that and certainly baked that into our plans, but still All that being said, optimistic about the progress of starting to buy electric vehicles at scale within the next 2.5, 3 years.

Speaker 9

Perfect. That's it from me. Thank you for taking my questions.

Operator

The next question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Speaker 10

Hi, guys. Nice start to the year here. Would it be possible to drop the U. S. Ecology outlook commentary to free cash flow both for this year and on an annualized basis?

Speaker 3

Yes. Look, in these 1st couple of years, let's just take this year for example, we're thinking conversion in call it the 20% range and again there's some elevated capital spending in particular with the landfill. We're building out landfill disposal capacity, Which takes us into 2022 and 2023 that then modulates. And as we've talked about before, we still see 47% conversion as a consolidated company by 2024.

Speaker 10

Okay, got it. Helpful. And Maybe putting U. S. Ecology aside and just looking at standalone RSG, could you refresh any of the components Of the year over year margin bridge for the full year, we had the 60% to 70% from pricing ahead of inflation.

Speaker 10

I think we had 50 from normalizing incentive comp and then that was offset by 40 basis points from net fuel and, 40 basis points from acquisitions. Is there anything in that bridge you'd be able to refresh for us here?

Speaker 3

Yes. What I would probably say is that the big things that change relative to our initial assumption is that fuel at current prices creates an additional 50 basis headwinds and think about pricing in excess of cost inflation offsetting that outside of U. S. Ecology. So relatively consistent expectation for the full year, just getting there slightly different way.

Speaker 10

Okay, got it. Very helpful. Thanks.

Operator

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

Speaker 11

Thanks very much. I want to ask about some of the volume trends in the order. I know that the comps weren't too tough, but you did outperform, I think, relative to the industry. So Wonder if you could touch on what you're seeing in the markets? What are net new business trends?

Speaker 11

What are you seeing in terms of business formation? In. We might have actually surprised a little bit the upside on volumes in the quarter. And I guess the last part of that is, how much of this is really just being in the right market How much of it is potentially attributable to share gains?

Speaker 2

Yes. Look, I think you're still you're seeing that company of the country rather open up kind of post COVID and some of that we saw last summer, but some we didn't. I think I mentioned this before California, Right. Didn't really open up because as they were thinking about opening up the Omicron variant hit them, right. And we didn't see quite the lift seasonal lift we do there.

Speaker 2

So you're certainly seeing some of that come back and that is we're benefiting from our geographic footprint on that including where population is growing, right? Our Sunbelt exposure helps as you see people going into Texas and Arizona and other places at large volumes. And then all of our investments into customer zeal and digital, right, are showing up in terms of organic growth. And that we're winning on the street. I think it's very tough to compete right now in a challenged labor environment.

Speaker 2

I think there's some people over equipment challenges, right, given supply chain in. And we feel very good about our equipment deliveries, feel good about our team, but it is a tight labor market. So we would take more drivers if We could misplace, but feel pretty good about how we're being able to sell and service customers.

Speaker 11

Yes. And that leads into my next question, which is on the M and A front, you mentioned and I don't want to get lost here the $400,000,000 of short term potential pipeline. But in. What do you think about the current challenging operating environment in terms of its impact on M and A? We've certainly seen some pretty healthy activity to start the year, but how do you see that potentially affecting the pace and the pipeline of the M and A opportunity.

Speaker 2

Yes. I think it remains strong and we remain very encouraged in. About our outlook in that space. And I think a number of things have helped us and probably helped the industry in the last 3 years, right? First, you had the fear around tax reform and that driving some selling activity.

Speaker 2

You had COVID and that making it a very challenging environment. And now you've got an inflationary environment with a constrained labor market where it's just getting tougher to compete, right? Add to that all the digital investments we're making at a in. That's very tough for other people to replicate that are providing a better product to our customers. And I think that drives opportunity for us to not only grow organically, but also have a very attractive M and A pipeline going forward.

Speaker 2

In. Great, thanks. Nice quarter.

Speaker 6

Thank you. Thanks.

Operator

The next question comes from Mike Senager with Bank of America. Please go ahead.

Speaker 12

Hey, everyone. Thanks for taking my question. Brian, I think you mentioned Ecology, I think it's 70 bps dilutive to margins for this year. How do we think about your margins now as you guys integrate Ecology, especially this year? In.

Speaker 12

And in context of your 31%, 32% target getting back there, is it push it out a year? How can we kind of think about it with integration now of this business.

Speaker 3

Yes. So Mike, we're going to sit there and we are going to separate as we think about We are going to separate the environmental solutions space into its own segment. So as we think about the recycling and solid waste space, We have direct line of sight to that 32% margin. Look, this is structurally the business is different on the environmental solutions space, but we think there's opportunity. And so this is something where will it take longer to get there on a consolidated company basis?

Speaker 3

Sure. But we look at continual improvement, Not only the realization of the synergies, the cost synergies, but as John mentioned, we didn't include any of the revenue synergies, whether it be the price into that performance. So again, you'll be able to see it and you'll be able to see the cadence and we'll talk about our excesses by that as we provide annual guidance.

Speaker 12

Perfect. That's helpful. And then just lastly, Brian, I think Ecoll reported $150,000,000 of EBITDA in 2021. So the $130,000,000 of EBITDA over the 8 months, What level of organic growth are we assuming? And the margins look like it's a little higher than last year.

Speaker 12

I might not be comparing apples to apples there. So any color you can address on that pickup? And just lastly, I know I think Jerry asked earlier. I'm just curious like how does pricing work on this business? We know the restrictive and the CPI in the open market on the solid waste side.

Speaker 12

Curious if you could add color on how that kind of plays out on that environmental services book? Thanks guys.

Speaker 3

Yes. So let me talk a little bit about the EBITDA. So again, there's seasonality in the business. So let's talk about what we're expecting for a full 1st year contribution or an equivalent. So before any synergies, we would sit there and say we were expecting about 100 $60,000,000 worth of EBITDA.

Speaker 3

That would compare to the $150 odd 1,000,000 that you were referring to. So that would be the year over year growth. We then layered in again a full year would be about $10,000,000 of 1st year synergies. What that means for the 8 months based on the position date, that's what translates into that $130,000,000 of EBITDA, which includes $5,000,000 worth of realized synergies.

Speaker 2

And then Mike on pricing, I think the best analog is think about the solid waste and recycling space. So you think about The post collection assets of U. S. Ecology and Special Waste, right? Those are event based deals and Special Waste has some recurring streams and it has some event based streams.

Speaker 2

If you're only in post collections, right, you're a taker in both of those and you're typically giving more spot based pricing. Sometimes more continued streams are contracted, but contracted typically for shorter periods of time. And then the generator or the collector of those streams bids that out, right? The opportunity here is to integrate in the field services, right, to have the assets, but driving that full integration, which allows you then to drive pricing from the customer, Which drives more longer contracted and more consistency in the price, right, reduces the volatility of that demand. And so that is the focus, right?

Speaker 2

Understanding generators of consistent streams of specialty waste, hazardous handling and being able to supply them, right, and integrating that, right, into the landfills. And over time, we saw this over a decade and a half And it's always a recycling space. That's how pricing power emanated is integrating those two things and not thinking about those two things as separate.

Operator

In. The next question comes from Stephanie Yee with JPMorgan. Please go ahead.

Speaker 13

Hi, good afternoon. I wanted to ask how the team came up with the $75,000,000 to $100,000,000 cross selling opportunity. Specifically, is that kind of a realistic estimate or is there conservatism in that number?

Speaker 2

Yes. So it was certainly bottom up. It wasn't a top down one. And we're in this space, Right. We've been in pretty big footprint in the Gulf Coast now for a few years.

Speaker 2

Last year, we acquired ACV, V, which gave us a footprint in the Northeast and the Mid Atlantic. And so we're seeing it, right? We've already gone to market together and we're seeing opportunities to serve customers because we now have the broadest set of environmental services, product and services. And so customers Bigger customers value that one stop shop offering, right? They want fewer suppliers in their facility.

Speaker 2

They like the assurance of what we can do With those materials, so we're seeing that winning in that space. When you think about use of ecology, now you just have much bigger patch of land, right? We've got about $1,500,000,000 manufacturing business, There are about $1,000,000,000 in revenue, right? And we lay that across in terms of number of customers and take a fairly conservative estimate in terms of types of penetration we can get Across that, that's how we came up with 75 to 100.

Speaker 3

And as John mentioned, the proof points have been there with the acquisitions that we've already done in our existing business to be able to see that cross sell opportunity is real.

Speaker 13

Okay. That's helpful. And if I can ask, now that you've close on the acquisition. Do you feel comfortable talking about whether you would consider divesting any parts of U. S.

Speaker 13

Ecology's business, or whether that's even part of the consideration that you're evaluating down the line?

Speaker 2

Sure. Yes, there's a smaller international business and they have a standby business. Both are good businesses. I think the question is, are we the national owners of those assets? So We'll start with international and put that under our view and understand, hey, how integrated is that and whatever else we do and given we're not an international player, right?

Speaker 2

We're a North American player. We'll take a hard look there. And the next step, we'll evaluate the Standby business. Again, we always start with in. What's the customer interaction and overlap and then we go into assets in terms of are we sharing facilities, right?

Speaker 2

And then we'll get into The ability to disintegrate that. Sometimes it's something so tightly connected, right? It's tough to divest to that. But if it's unrelated on the customer side and the asset side, typically answer is easier to divest. So we'll put both of those under review in that sequence and we'll update you accordingly.

Operator

In. 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, Betsy. In closing, we are proud of our Q1 performance, which demonstrates the value our strategic investments are creating. We continue to manage the business to create long term value for all stakeholders. I would like to thank all our employees for their continued hard work and commitment to partnering with customers to create a more sustainable world. We look forward to seeing everyone at Waste Expo next week as we proudly recognize our 4 drivers of the year and celebrate Don Slager's well deserved in.

Speaker 2

Have a good evening and be safe.

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Earnings Conference Call
Republic Services Q1 2022
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