Republic Services Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, and welcome to the Republic Services First Quarter 2023, Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG.

[Operator Instructions]

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

[Aaron Evans, Vice President of Investor Relations at Republic Services]

I would like to welcome everyone to Republic Services First Quarter 2023 Conference Call. John Vander, our CEO; and Brian DelGhiaccio, our CFO, for joining me as we discuss our performance. I would like 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 our actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or rerecording of this conference call, you should be sensitive to the date of the original call, which is April 27th, 2023. 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 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 tables, and a discussion of business activities, along with the recording of this call, are available on our public 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 would like to turn the call over to John.

[John Vander, Chief Executive Officer at Republic Services]

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. We started the year strong and are pleased with our first quarter results. Our performance reflects our ability to grow across our business while enhancing profitability. We remain well positioned to capitalize on additional growth opportunities in the marketplace by providing the most complete set of products and services to customers.

During the quarter, we delivered revenue growth of 21%, including 11% from acquisitions, generated adjusted earnings per share of $1.24 and produced $496 million of adjusted free cash flow. We continue to believe that investing in acquisitions is the best use of free cash flow to create long-term value. We invested $224 million in acquisitions during the first quarter. All transactions were in the recycling and solid waste space. Our acquisition pipeline remains supportive of outsized levels of activity in both recycling and solid waste, and environmental solutions businesses. We continue to see opportunity for well over $500 million of investment in value-creating acquisitions in 2023.

We are making great progress on the integration of US Ecology and increasing the profitability of our Environmental Solutions business. We continue to adjust prices, to earn an appropriate return on the valuable services we provide. The acceptance of our pricing actions remains high, with very little customer defection. Cross-selling our complete set of products and services continued to run ahead of plan, with more than $60 million in new sales today. We have now achieved of $40 million of annualized cost service. As a result of actions taken in the Environmental Solutions business, EBITDA margin improved to just over 20% during the first quarter. We continue to generate outsized growth by executing our strategy, supported by our differentiating capabilities, customer zeal, digital and sustainability.

Regarding customers' yield, we remain laser-focused on providing a world-class customer experience to drive increased loyalty and organic growth. Our customer retention rate remained at 94%. We continue to see positive trends in our Net Promoter Score, supported by improved service delivery. Our front-line colleagues, including drivers, technicians and the customer experience team are determined to fulfill our daily commitments to our customers. We delivered robust organic revenue growth during the quarter and simultaneously increased in both price and volume. For price and related revenue increased to 9.3% and average yield on related revenue increased to 7.4%. Organic volume growth on related revenue was 1.8%. Volume growth was broad based across our market verticals and geographies. Turning to digital, we continue to make progress on deploying rise tablets in our collection business. Over 75% of our residential routes are operating with rise tablets. The remaining routes are on track to be completed by mid year. This technology is the foundation that will allow us to further enhance our digital service offerings and improve our customer's experience.

Moving on to sustainability, we are investing in differentiated capabilities to leverage sustainability as a platform for profitable growth. In February, we announced our plans to significantly scale our electric fleet through our long term agreement with Oshkosh. We will begin operating two fully integrated electric recycling and solid waste collection prototypes later this year, and expect to start buying at scale in 2025. This announcement supports our industry leading commitment to fleet electrification through a multi supplier strategy.

Development of our polymer centers in Las Vegas and the Midwest remain on track, with the centers becoming operational in late 2023 and late 2024, respectively. The 57 renewable natural gas projects being co-developed with our partners are advancing. We expect at least six of these projects to commence operations this year. Our approach to sustainability includes our aspiration to be the employer of choice in the markets that we serve, and we are seeing positive results. Turnover rates continue to improve and we are now below 2019 levels. As a result, we are better staffed to capitalize on growth opportunities in the market.

We continue to be widely recognized for our comprehensive sustainability performance. For example, we recently named to Barron's 100 most sustainable Companies list, Ethisphere's world's most ethical companies list and Fortune's list of the world's most admired companies.

A positive momentum in our business continues to build, as we harness the power of our differentiated capabilities. We will continue to invest for the future profitable growth to deliver the results that creates unmistakable value for our stakeholders.

I will now turn the call over to Brian, who will provide financial details for the quarter.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Thanks, John. Core price on total revenue was 8.2%. Core price on related revenue was 9.3%, which included open market pricing of 11.7% and restricted pricing of 5.4%. The components of core price on related revenue included small container of 12.6%, large container of 9.6% and residential of 8.4%. Average yield on total revenue was 6.5%. Average yield on related revenue was 7.4%, an increase of 70 basis points when compared to our fourth quarter performance.

We continue to price new and existing business ahead of cost inflation to drive margin expansion in the underlying business. Volume on total revenue increased 1.6%, while volume on related revenue increased 1.8%. The components of volume on related revenue included an increase in small container of 1.6%, and increase in large container of 80 basis points and an increase in landfill of 8.6%. Landfill was primarily driven by a 21.7% increase in special waste revenue.

Moving on to recycling, commodity prices were $105 per ton in the quarter, this compared to $201 per ton in the prior year. Recycling processing and commodity sales decreased revenue by 90 basis points during the quarter. Current commodity prices are approximately $115 per ton. We believe that commodity prices will continue to recover in the second half of the year as the global supply/demand imbalance continues to correct.

Next, turning to our Environmental Solutions business. First quarter Environmental Solutions revenue increased $309 million over the prior year, which primarily relates to the acquisition of US Ecology. On a same-store basis, Environmental Solutions contributed 50 basis points to internal growth during the quarter. Adjusted EBITDA margin for the Environmental Solutions business was 20.6%, a sequential increase of 350 basis points. Total company adjusted EBITDA margin for the first quarter was 29%. This compares to 30.4% in the prior year.

Margin performance during the quarter included a 130 basis point decrease from acquisitions, which includes 90 basis points related to U.S. ecology, a 60 basis point decrease from recycled commodity prices and a 30 basis point decrease from an additional work day. Partially offset by a 40 basis point increase from net fuel and margin expansion in the underlying business of 40 basis points. Adjusted free cash flow was $496 million in the first quarter, or approximately 25% of the midpoint of our full year guidance. Free cash flow conversion was 47.6%. Total debt was $12.1 billion, and total liquidity was $2.5 billion. Our leverage ratio at the end of the quarter was approximately 3.1 times.

With respect to taxes, our combined tax rate and effects from solar investments resulted in an equivalent tax impact of 26.3% during the first quarter, which was in line with our expectations.

With that, operator, I'd like to open the call to questions.

Questions and Answers

[Operator]

Thank you. We will now begin the question-and-answer session.

[Operator Instructions]

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

[Toni Kaplan, Analyst at Morgan Stanley]

Hi, there. Thanks, so much. Pricing seemed really strong this quarter. I know you talked about it, sort of decelerating through the year, but just wanted to get your latest thoughts. Any additional color on pricing and how second quarter looks as well, thanks?

[John Vander, Chief Executive Officer at Republic Services]

Hi, there. Thanks, so much. Pricing seemed really strong this quarter. I know you talked about it, sort of decelerating through the year, but just wanted to get your latest thoughts. Any additional color on pricing and how second quarter looks as well, thanks?

[Toni Kaplan, Analyst at Morgan Stanley]

Terrific. And I wanted to ask, if you could just give us an update on how you're thinking about the specialty waste opportunity? Talk about any of the synergies and areas of potential future opportunity there. Thanks.

[John Vander, Chief Executive Officer at Republic Services]

Yeah, a really strong quarter for us, obviously, right, over 20%. And broad-based, and a portion of that is certainly the cross-sell opportunities that I talked about in my prepared remarks, and that we're offering customers a comprehensive and integrated offering. And part of that is showing up in our recycling and salt waste business and going so specialists into our landfill. And that's the benefit of our offering, right. We can take things into liquid hazardous waste, we can take solid hazardous waste, we can take special waste, so we can provide a range of solutions to customers. And that's to put us in a pretty differentiated position in the marketplace and excited about the momentum that the team has.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yes. And also what I would add to that is that our pipeline for special waste opportunities remains very strong. And about 20% of that pipeline is a direct result of cross-sell opportunities.

[Toni Kaplan, Analyst at Morgan Stanley]

Perfect. Congrats, again.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Thank you.

[Operator]

The next question comes from Tyler Brown, with Raymond James. Please, go ahead.

[Tyler Brown, Analyst at Raymond James]

Hey, good afternoon, guys. Hey, I just want to be clear. So are you effectively just reiterating all the pieces of the guidance?

[John Vander, Chief Executive Officer at Republic Services]

Yeah, we feel we're certainly. Feel good about the guidance at this point.

[Tyler Brown, Analyst at Raymond James]

Okay. This wasn't totally 100% clear. But, kind of going back and following on the previous question, I know pricing was strong out of the gate. But can you talk a little bit about unit cost inflation? So I think you guys guided to something like 5% to 5.5% unit cost inflation for '23, I think on the last quarter call, you kind of still see that? Or you still seeing maybe inflation starting high and then it kind of easiness as the year goes on?

[John Vander, Chief Executive Officer at Republic Services]

Yeah, start where you ended. It's certainly starting higher and modulating throughout the course of the year. I think it's going to be a little higher than the 5.5%, probably closer to 6%, would be our best look at this point, right now. And a few different factors on that, certainly, truck delivery would be one. Where we got about 90% of our trucks last year, and we think we're going to get probably that 10% from last year and about 90% of this year, and we're growing. So that means we're buying some older trucks. Operating some older trucks to service those growth opportunities, and they have a higher cost per engine hour. And so that's elevated maintenance costs, it's higher cost, not necessarily unit cost inflation on the part, for example. It's just operating more expensive vehicles, and hopefully, in 2024, the suppliers catch up, but we can kind of get back on track. So that would be one example why it's just a little bit higher than we predicted.

[Tyler Brown, Analyst at Raymond James]

Okay. All right. That's perfect. Just one last one here, going back to environmental services, so there's a lot of traction there. It seems like that franchise is maybe run rating $1.5 billion in total revenues, and I don't have the calculation on the fingertips here. But is that kind of like a low, low 20% margin today? I think you had talked about maybe getting that to 30% longer term. So do you still see that, John?

And kind of what are the couple of the key drivers to get you there? Is it just we need to go through a couple more cycles of pricing? Or just any thoughts on timing and how we go from, call it, 20 to circa 30.

[John Vander, Chief Executive Officer at Republic Services]

Yeah. Listen, I think pricing is certainly going to be a huge lever, in terms of how we get there and the primary lever. I think a little bit of scale benefit, obviously, which allows us to leverage our overhead. We've built this thing for growth. So as we continue to grow, we get some leverage on our overhead spend in that space as well.

And just additional integration opportunities across recycling and solid waste business, right. We haven't really taken advantage of all of those things yet. And then, the last one will be just cost management, right. Cost discipline and making sure that we are pricing work appropriately in understanding the cost position of all that work, so that all of our individual opportunities and projects are profitable. We've made great progress on that, but there's more room in front of us. And this was the investment thesis when we did the deal, obvious. So we did it based on Intrinsic, and $40 million of cost synergies. We've just gotten there quicker than we expected, right. We've gotten the 40 rate, I think we're going to end up closer to 50%, when we're said and done.

And then we thought there was upward pressure on pricing, we thought there was cross-sell opportunities. And we said we'd get $75 million to $100 million over three years. We've already gotten 60, which tells you with a good pipeline, which tells you that we're going to get to that 75 to 100, quicker than we expected. And we know that when we price, we anticipate there will be some customer fallout churn. But the net dollars work over time, we've just seen very, very little churn, which speaks to the fact that this is a valuable offering. It's a very small portion of the vast majority of our customers' cost structure, and that we're going to continue to price for the value we deliver.

[Tyler Brown, Analyst at Raymond James]

Yeah, perfect. No, lot's of momentum there. Appreciate the time, guys. Thanks.

[Operator]

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

[Noah Kaye, Analyst at Oppenheimer]

Good afternoon. Thanks for taking the questions. There's been, maybe some mixed messages today in earnings -- previous earnings around the macro, the health of the macro. I have a feeling your answer may be not so mixed, maybe a little more unambiguous. But can you talk today about the health of the customer, the sustainability of your pricing? You mentioned that your retention rates are at 94%, so they're sticking. But looking at your -- both the pricing and some of the volume trends you reported, they're very robust. So, would just love your perspective on what you're seeing in the staying power of some of these trends.

[John Vander, Chief Executive Officer at Republic Services]

Yeah. Let me put a caveat on first, which is we remain humble and dynamic, right. The last three years, have bought a lot of people that there's fundamental uncertainty in the market. And I read the same things you do, which is people have been talking about a recession, you're announced for 12 to 18 months. So, we have our eyes and ears open, and that will be nimble should that occur. All that being said, we see a lot of positive signs, right. We're seeing strong growth and pricing. Let me give you a number or a perspective, in our open market, right, we're sending out more higher gross price increase, than we ever had before. And our realization rate, which is the percentage of that pricing that sticks, right.

Customers don't call back to negotiate, etc. It's the highest it's ever been, which is somewhat of an astounding number to think about. They were putting a lot of price, that price is sticking in the marketplace for growing. We talked about special waste in that pipeline, being strong. We're starting to see a commodity rebound, which we put a modest rebound in our plan, and I think we feel really good, that the outlook there looks strong. On that front we've seen a little decline in temp units. Year-over-year, we anticipated that in our plan, which where residential and commercial construction were going at the end of last year. But our yield number is very, very strong there. So we're doing some of that to ourselves, in terms of yielding on those assets. So we're pretty confident in the very near term and cautiously optimistic around the demand environment for the remainder of the year.

[Noah Kaye, Analyst at Oppenheimer]

Yeah. And then, maybe just a little bit of a follow-on, but also housekeeping. Can you comment to what MSW tons did? And then, did the quarter have any benefit on the cleanup related to the train derailment in Ohio? I don't know, if remediation work ended up being significant.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah. Let me address the MSW. So, MSW volume was up 1.2%. I think more importantly, though, MSW yield was up 5.6%. So, very strong pricing in that portion of our business.

[John Vander, Chief Executive Officer at Republic Services]

And then the specific to derailment in Ohio, I think is the one you're referring to, a de minimis impact in the quarter.

[Noah Kaye, Analyst at Oppenheimer]

Okay. So it was really all just strong demand, and kind of, the environmental services part of the business. And can you give us sort of a sense of how much of that was price?

[John Vander, Chief Executive Officer at Republic Services]

Very strong, very broad based. Listen, we've gone out with multiple double-digit price increases, which is sticking. Obviously, that business is more unique, and there's a lot of mix elements. Because, you're doing a lot of individual project work and a lot of things like special waste on the hazard side that come in, right. So we haven't yet developed our yield metric, which we aspire to do over time in that portion of the business. And I'd say the industrial economy from our seat in the park is still very strong.

Now it's not universally strong on boarded, for example, would be a spot that's a little bit down. So we're seeing some of that in the Midwest, which has a lot of manufacturing capacity there, but other parts are very, very strong on the industrial side.

[Noah Kaye, Analyst at Oppenheimer]

Great, thanks for the colour.

[Operator]

The next question comes from Walter Spracklin, with RBC Capital Markets. Please, go ahead.

[Walter Spracklin, Analyst at RBC Capital Markets]

Yeah. Thanks very much, operator. Good afternoon, everyone. So, I wanted to go back to the recession question, and really talk about, I know your resiliency is quite admirable during the cycle. Just curious with, you have a little bit of a different book of business now compared to 0809 [Phonetic]. And just wondering what your thoughts are on, whether the resiliency of your earnings profile is, as good as it was back then? Or, if the addition of US Ecology has added any volatility there? And particularly on special waste, I don't know if you've answered many questions about your sensitivity to a recessionary environment on your special waste volumes, if you have any color on that?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah, Walter. I would say that, the first thing to keep in perspective is that Environmental Solutions revenue in total is about 10% of our book, right. You got to keep that in mind. That being said, a good portion of this revenue stream is as a consistent and recurring nature to it, right. And increasingly more, we're trying to get closer to the customer to make that more of an annuity type revenue stream. So, is it exactly the same? Maybe not, but is it pretty close, I would say yes.

[Walter Spracklin, Analyst at RBC Capital Markets]

And sensitivity on special waste, any sense there?

[John Vander, Chief Executive Officer at Republic Services]

As far as, yeah, I think you got moving pieces there. Obviously, when the economy goes down, right, people will get cautious and things that have discretion to them, you're going to see some delays. But the vast majority of our special waste, those are jobs that need to get completed. They need to get done. So it's not a matter of the job getting canceled. It's a matter of the job getting pushed. And I'd say the counterbalance of that right now is just all of the infrastructure spending and government funding. We see a lot of those opportunities just starting to emerge, but we really haven't taken advantage of a lot of that. Spending hasn't flowed all the way through to jobs being committed.

[Walter Spracklin, Analyst at RBC Capital Markets]

Okay, those are my two questions. Thanks very much. Appreciate that.

[Operator]

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

[John Vander, Chief Executive Officer at Republic Services]

Jerry, you might be on mute.

[Operator]

Jerry, is your line muted?

[John Vander, Chief Executive Officer at Republic Services]

Why don't we move on to the next question?

[Operator]

Okay. The next question comes from Sean Eastman, with Keybanc Capital Markets. Please, go ahead.

[Sean Eastman, Analyst at Keybanc Capital Markets]

Hi, team, nice start to the year. I kind of, hate to do this, but just pressing on the guidance. I mean, not much of a mention on kind of where we stand. To me, it kind of, feels like we're running ahead of schedule. So I just wanted to run that by you, is it fair to say that, you know, perhaps with the momentum and environmental solutions. Clearly, price volume, looking strong, that we're kind of tracking a little ahead of that initial outlook for the year.

[John Vander, Chief Executive Officer at Republic Services]

Hey, we feel really good about the start to the business, and sets in outlook remains quite positive. As you know, it's a seasonal business, so you get a ramp up here in Q2 and Q3. And, you know, we'll want to see that ramp-up, and fully take hold. We're starting certainly to see some of that already. But that gets into full swing here in May and the summer months in the northern part of the country. And so we'll come back in July, when we talk again and see our progress there, and we'll tell you if we have any update at that point.

[Sean Eastman, Analyst at Keybanc Capital Markets]

Okay. Understood. And perhaps, the moving parts on the year-on-year margin bridge in the first quarter would be helpful to assess. I mean, did those kind of, commodity inputs come through as expected? That one would be good to jump into.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah. From a commodity perspective, we're tracking almost exactly the way that we thought we would, right. So we thought we would start the year right around this, call it, $100 a ton, sequentially increasing with a full year average of about $125 per ton. And so, right now, we would say with what we saw in the first quarter on average, plus where current prices are at $115 per ton. It's playing out exactly the way we thought it would. And so when you think about the margin cadence of that, you look, in this quarter, it was a 60 basis point headwind. We think it's a relatively consistent headwind in Q2. That drops to, call it, a 20 basis point headwind in Q3 and then flip positive in Q4 at those levels.

[Sean Eastman, Analyst at Keybanc Capital Markets]

Okay. Perfect. And one last quick one for me, I just want to make sure, I understand this big special waste print in the quarter. I mean, are you guys saying that as a reflection of the cross-sell opportunity, really coming through on the Environmental Solutions strategy?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Certainly in part, right. That's why you're going to see it. When you actually sell into the recycling and solid waste business, what you're going to see is that's where a good portion of it is going to come in. That's a lot of the volume aspect of it. But at the same time, we're seeing that again, we're talking about total revenue being up about 22%. It's a pretty good split between both price and volume. So it's a combination of both, and that's going to be a reflection again of just healthy activity, which includes the benefits of that cross-sell.

[Sean Eastman, Analyst at Keybanc Capital Markets]

Okay, understood. I appreciate the insights, guys.

[Operator]

The next question comes from Stephanie Moore, with Jefferies. Please, go ahead.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Hi, good afternoon. Thank you. Hey there, I wanted to touch a little bit on the M&A environment. I think you noted that, you expected to execute on. I think close to $500 million in M&A this year, and not included in the guidance. So, maybe if you just wanted to touch on what you've seen for the first quarter of the year, and kind of any changes or expectations there? And I know, you noted that a lot of those acquisitions is in the recycling and solid waste business, but what about more so in the specialty waste? Is that an opportunity this year as well?

[John Vander, Chief Executive Officer at Republic Services]

So yeah, we put out in our initial guidance. We anticipated spending $500 million. I think, we'll exceed that number as we go throughout the year. We have a really attractive pipeline, both in recycling, and solid waste and environmental solutions. And so, I think you'll see some of those deals come across, through the remainder of the year. And we get things are at different stages, right. We're all the way in the front end of conversations to the back end of letters of intent, and we report on things once we start and close those deals. So you'll hear more in the second quarter.

And the exact timing of where that flows between Q2, Q3 and Q4, obviously, we don't predict that, because things can people forward or they can move out a few months here or there. The pipeline remains strong. I think both for '23, and all the way into '24 at this point, we feel really good about the pipeline.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Got it. And then, maybe touching back on the pricing, and the cost environment as well. And you just noted on 2024, obviously, a lot of things could happen between here and there. But how would you think about that, just general structural spread cost between pricing cost as we move through 2024, given some of the maybe, headwinds this year. And what next year in theory could be a more normalized environment, if that exists anymore, but how would you view, just how that spread has changed over time versus maybe historically?

[John Vander, Chief Executive Officer at Republic Services]

Yeah. Look, we remain committed to pricing ahead of our cost inflation, to allow us to expand margins across the business. So we've talked about 30 to 50 basis points of margin expansion. That's kind of the pace that we go after, and that would be our initial ingoing assumption in 2024. Now a lot can change between now and then in terms of could we get more than that, right. If we can do that and maintain and improve the health of our overall business, we'll certainly do that. But more to come down the road, here on 2024 perspective.

[Stephanie Moore, Analyst at Jefferies Financial Group]

Thank you so much.

[Operator]

The next question comes from Tony Bancroft, with Gabelli Funds. Please, go ahead.

[Tony Bancroft, Analyst at Gabelli Funds]

Yeah, thanks so much for the opportunity. A very nice quarter. Just a question on PFS, could you just sort of review, I know there's a lot of news articles coming out about that right now, and some potential rulings, and some regulation coming out. Just maybe review what that potentially means for you in landfill cost structure, potential opportunities, maybe that would be helpful.

[John Vander, Chief Executive Officer at Republic Services]

Yeah. Very important regulation, and again, we're not opposed to regulation. But we happen to, if it's well constructed. So we have a seat at that table. And we're involved in those conversations, to make sure that we don't, as a company, or even an industry get penalized for something that we catch, right. We didn't create the problem. People should be happy that we've got the modern infrastructure and systems to protect the environment.

Net-net, we see it as more of an opportunity over time. Especially with our Environmental Solutions business, and being able to serve customers. Could that have some elevated costs in our landfill? Yes, we've got a really good history of passing those types of costs, regulatory costs, on to customers. And so, more to come on that, as we move forward. But we're very much in the conversation and we'll be active in shaping the legislation in a way that it enhances the business, versus penalizes the business.

[Tony Bancroft, Analyst at Gabelli Funds]

Thank you for that. And then, I guess my second one, just on electrification, you touched on in your comments. Just maybe again, an update on that, you've talked about in the past, but how is that going? Is there been some, I think people are talking about infrastructure issues and making it all sort of work. What's your view on? Is it on track, is it off track? Or just maybe you could give us some thoughts on that.

[John Vander, Chief Executive Officer at Republic Services]

Yeah, very much on track, right. We've got more than 20 trucks right around the country right now, that are electrified through multiple manufacturers. We talked about our Oshkosh partnership, and that the first kind of bottoms up zero emission designed vehicle, and excited about that. And we'll be, that number of 20 will go North of 50 next year. By 2025, we'll have several hundred vehicles. And it is important, it's not just the vehicle, it's the system. So you need to have the infrastructure, you need to have understanding government regulations, you need to understand the incentives, and we've been working for years, on those things. And have multiple infrastructure projects already going on, anticipating where we're going to put vehicles in working closely with customers.

So we feel we're on track. And listen, innovation is hard. There will be some bumps in twists and turns, but we're really, really confident, that this is a product that the customers want to buy. And that this is very viable, for again, for us to operate in a way that enhances our business, versus penalized.

[Tony Bancroft, Analyst at Gabelli Funds]

Thanks so much. Congratulations, all the team.

[John Vander, Chief Executive Officer at Republic Services]

Thank, Tony.

[Operator]

The next question comes from Tobey Sommer, with Truist Securities. Please, go ahead.

[Tobey Sommer, Analyst at Truist Securities]

Thank you. When you look at your M&A bogey for this year, and you say you have pretty good visibility in the pipeline for next year, as well. What does the pipeline look like in terms of distribution across your businesses? Is it -- and has that changed, as you've engaged in conversations.

[John Vander, Chief Executive Officer at Republic Services]

Well, if you go back from five years ago, it certainly has changed. When we were predominantly, vastly recycling and solid waste player, and we've obviously grown the Environmental Solutions business. To Bill's point, right, that's still about 10% of the business broadly. The pipeline is probably an 80-20 mix, of 80% recycling and solid waste, and 20% environmental solutions. So that will grow faster, just because there's more geographies to fill in. There's a few product lines to build out. So there's more kind of inherent growth in that, in terms of our starting point.

But the balance of the business will still be recycling in solid waste, and feel really confident about that. In any given time period, right, that could ship a single deal could flip it to 80-20, in any given quarter. But if you look across a longer time horizon of three to five years, I think that 80-20 makes us a pretty good barometer.

[Tobey Sommer, Analyst at Truist Securities]

Right, thank you. And year-to-date, if you look at your employee base, what has the trend been like in, not just employee turnover, or perhaps improved turnover and attrition rates. But also the heavy lift that it is to recruit and hire new ads, and train them. Are both of those sides of the equation getting easier?

[John Vander, Chief Executive Officer at Republic Services]

Yes. Turnover is down. Employee engagement is up, from a very high watermark. So people are engaged, right, turnover is down, and this is the recruiting situation in the last four to five months, has substantially improved, right. Number of applicants per open rec, right has substantially improved. So there's still pockets of tightness around, so it could be very geographically dependent. But from a broad-based macro level, as the situation versus six months ago, is substantially better.

[Tobey Sommer, Analyst at Truist Securities]

Is there room for continued improvement? Or are we already at healthy metrics if you make a longer-term comparison, in more than just sort of the great recession in six month ago period.

[John Vander, Chief Executive Officer at Republic Services]

Yeah. We talked about turnover being below 2019 levels. We aspire to continue to grind that down, kind of, 30 to 50 basis points of product turnover, long term would be great for us. Turnover is never going to be zero, people move and have changes in life circumstances, and there's always opportunity bringing new talent. But we'll look to bring that down. But we feel like right now, we're at a very healthy level. and that we can continue to improve from here.

[Tobey Sommer, Analyst at Truist Securities]

Thank you.

[Operator]

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

[Jerry Revich, Analyst at The Goldman Sachs Group]

Good afternoon. Can you hear me now?

[John Vander, Chief Executive Officer at Republic Services]

Yeah, welcome back.

[Jerry Revich, Analyst at The Goldman Sachs Group]

I'm wondering, if you could talk about the performance in the quarter. So your margins were up about two points sequentially 1Q versus 4Q, which is a good, bit better-than-normal seasonality? Is it possible to parse how much of that was price cost and the municipal solid waste part of the business. You mentioned the ESPs, I wonder if you could just flesh out the rest of that bridge in terms of that performance, versus normal seasonality?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah, Jerry, we mentioned sequentially the Environmental Solutions business improving 350 basis points. But also in the fourth quarter, remember, as we outperformed the year, we had heavier incentive compensation expense in the fourth quarter. So I would say there were some things that were more unique in Q4, as far as expenses are concerned. Off to a strong start this year, I think that's why you're seeing more of that sequential improvement. This year, we would expect just more normal seasonality, and a Q4 that looks like what you've seen in the or three to four years as compared to what you saw last year, from a margin perspective.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Super helpful. And then, can I ask you, it feels like cost are stabilizing. Should we look for the price-cost gap sequentially to improve, in the second quarter as a result of that dynamic?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah. Some of -- when we think about some of the cost inflation, we see some of the anniversarying, which is just a little bit more of when we saw some of those cost increase going into play last year. So yes, we start to anniversary some of those things in the second quarter. We started seeing a lot of that more on the wage side. We also start to see some of that modulate from a comp perspective on transportation costs beginning in the third and fourth quarter. So we would expect the inflation levels to decrease as we move sequentially. Again, it's not that we're seeing a significant price decrease in the current period. It's just that we're anniversarying the cost increase that went in the prior year.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Got it. And lastly, can I draw you to share with us, the incremental tailwinds to your business from the plastics and landfill gas investments, that are scheduled to come online for '24 versus '23, and '25 versus '24? When do we get the most significant step up relative to the cadence?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah. So if you think about -- let me start with the plastic side, on the polymer center. So you start to see that in two start to layer in with, call it, $15 million or so of EBITDA. And then it really ramp up into $25 million and into $26 million, until you get to a run rate of, call it, somewhere in that $75 million plus type EBITDA range. When you take a look at from a gas perspective, again, most of that, you're starting to see -- again, you start to see the first projects come online towards the end of '23. So most of the contribution coming in '24, you could see $25 million plus type of incremental EBITDA in '24, and then sequentially in a $15 million to $20 million per year, until we get to that $100 million worth of total contribution by 2028.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Super appreciate it. Thank you very much.

[Operator]

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

[Kevin Chiang, Analyst at CIBC]

Hi, thanks for taking my question. Maybe, just on Environmental Services, obviously, a good showing in Q1 here. You continue to make good progress. I get the sense earlier on when you acquired U.S. Ecology, there was a fear that this business was more cyclical. Just wondering, as you cross-sell more and as you kind of pull this under the RSG umbrella, do you think it changes the cyclicality of that business? Like does the customer look at that service differently, they're also buying other RSG services. I know it's early days, but just wondering how that experience has been, just given the broader economy has been shaky here.

[John Vander, Chief Executive Officer at Republic Services]

I think two things are true. When you're just a -- predominantly a post-collections player, everything you see can look variable and cyclical, because it could be a recurring revenue stream. But that provider might farm that out, or source that out to a few different places looking for price. When you get closer to the generator, right, then you do you have control of that product. Now could they take that somewhere else? Of course, they could over time. But when you provide excellent service and you have an integrated offering, you become stickier. And so huge opportunity that we're seeing right now, to take things that might have looked more cyclical, or volatile, or variable to become more consistent and recurring,in the revenue stream. That doesn't mean that will be 100% of it like we have in our current business, right. We have some of that base work, on the landfill side, we'll certainly have some of that. But over time, the profile will migrate closer to the recycling solid waste side.

[Kevin Chiang, Analyst at CIBC]

Okay. That's helpful. I apologize, if this is somewhere in your release, but if I look at your organic growth composition, let's call it 80-20 split between yield and volume, or price and volume. What would that look like today in your Environmental Services business, if I deconstruct the organic growth between volume and price? I apologize, if I missed this earlier.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yes, I would probably say, it's probably relatively similar, just from the perspective of some of these are project-related jobs. We have seen, that being said, we've seen really good pricing in that business, but we've also just seen an increase of activity at the same time, which is really a function of now offering the most complete set of products and services in the space, right. So again, we're seeing a combination of both, and that's what's really driving the outsized revenue growth in that portion of the business.

[Kevin Chiang, Analyst at CIBC]

Excellent. That's it for me. Congrats on a great start to the year.

[Operator]

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

[Michael Feniger, Analyst at Bank of America]

Hi, everyone, thanks for squeezing me in. Brian, the growth on the ES side, and now layering in the incremental EBITDA from plastic recycling and the landfill DAS in '24 and beyond. Does that change, how we should be thinking about the free cash flow conversion and the improvement you guys are seeing there and potentially going forward?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Well, look, I mean, we said that we rewinding the clock two, three years ago. And we were up high 30% free cash flow conversion company. We've moved that into the mid-40s, and we said we have line of sight into the high 40% and beyond, right. And we're working on these things. And again, those are some of the things that we're going to do in order to achieve that level of performance, even while we're overcoming some headwinds to getting into that high 40% interest expense is a headwind to free cash flow conversion, the expiration of bonus depreciation, which is phasing out over the next five years. Those are all headwinds. And even in the face of those things, we think we can achieve that level of performance. And everything you just mentioned is the way we're going to get there.

[Michael Feniger, Analyst at Bank of America]

Great. And I realize that, the regional banking crisis, tightening lending standards is likely not an issue for you and your customers. Do you hear any issues for some of your smaller regional competitors, ability to finance and buy you trucks, trying to expand? Just curious how the changed competitive dynamic, or even some of the M&A opportunity going forward.

[John Vander, Chief Executive Officer at Republic Services]

And I don't think we've seen that show up specifically. There's probably an example somewhere in our M&A pipeline, of that being the case. I do think it's becoming more challenging, right? Because given supply chain challenges, right, because we got 90% of our trucks. If you were a spot buyer of trucks right, you're in a really tough spot. You're going to be driving that truck, not as a matter of months, but a matter of years before you can get allocation on that. So digital, we've talked about that a number of times. That being the second moat in the business, and our investments in that space, and the ability to service customers and connect it to our operations and core systems. I think, those are all things that make an attractive time for smaller players to sell.

[Michael Feniger, Analyst at Bank of America]

Thank you.

[Operator]

[Operator Instructions]

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

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

Hey, JV. Hey, Del. Thanks. On the ES business, there's a bunch of pieces here. One, can you help fill in the gaps on what contributed to the 350 basis points sequentially? And then the idea of margin improving, I just want to make sure, I understand mix. I mean, if I'm wrong, but I thought about one third of this was fixed asset disposals, so high margin. And two third, is sort of billable hour services that are good returns, but lower margin. I'm trying to figure out where that mix goes, in order to achieve the target, that was suggested earlier in the call.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yeah, Michael. First of all, I think that, it's a little bit more, I would sit there and say in the 50-50, rather than the 30-70, between those two aspects of the business. I think you have a combination of things. First, let's talk about what happened sequentially. So we talked about price increases that we put in late in '22, as well as early '23. So a certain aspect of that was certainly time. Also, as you just think about increasing utilization, as we're actually achieving the cross-sell, some of that is that we're utilizing some excess capacity that's in that system. So it's the flow-through of that incremental revenue is at a very high margin. We're seeing the combination of the both, so John mentioned it when we were on the call, some of the way that we're going to get there, is also just by scale.

When you take a look at the size of our areas, when you take a look at our four areas, they're managing less revenue, than their counterparts on the recycling and solid waste space, which gives us capacity to grow into that, and leverage that SG&A. So we built that area structure, to look a lot like the recycling and solid waste side, even though they're managing less revenue, which gives them opportunity to grow without adding any additional SG&A costs.

[John Vander, Chief Executive Officer at Republic Services]

And Michael, on the field services side of the business, but some of that would be getting MSAs with large industrial customers, who we know are going to have a set of projects throughout the year. They're going to be in different spots. But if you look over a 10 year period, you've got a relatively consistent demand profile of their level of project spend, cleanup, plant turnarounds, etc. That you can, when you have the MSA and the relationship, right, that revenue stream then look starts to look very recurring, versus it's just an event or a job.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

Okay. And that's always been the secret challenge, or challenge for the billable hours world, as they struggle with utilization of their billable hour resource. So what I'm hearing you say is, you're striking a balance on how to maximize that.

[John Vander, Chief Executive Officer at Republic Services]

Correct.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

Okay. On the price cadence for the remainder of the year to get to the 55. Can you help us with the mix between open and restricted through the remainder of the year, so we sort of understand how to think about that, that gets us to the total of 55 for the year?

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yes. So, if you think about, we expect sequential increase into Q2, on the restricted portion of the book, and that kind of hit high watermark. And then it will decrease sequentially. Our expectation is it will decrease sequentially into Q3 and Q4. We think the high watermark on the open market is here in Q1, and it decreases sequentially, but modestly. So again, I would sit there and as we talked about earlier, I guess, 60 days ago at this point, that the spread between the high and the low by quarter is not that significant. Call it, 50, 60 basis points, plus or minus, from the midpoint, and that's what we would expect for the full year.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

Okay. And just to be clear, so I got these numbers in numbers coming at us, high watermark for the beginning of the year. Sorry, I'm flipping pages. There's 117 in the open, and 54 for restricted.

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

Yes, that is correct. That's on core price, Michael.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

That's core. Not yield. What was the yields?

[John Vander, Chief Executive Officer at Republic Services]

Correct. Well, the yield in total, we don't break the yield up between the two yield, in total with 7.4% on related revenue. On total revenue, it was 6.5%. And again, if you're building it into a most.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

No, go ahead. That's what I was [Speech Overlap]

[Brian DelGhiaccio, Chief Financial Officer at Republic Services]

I was going to say the reason we do. We break the two out that, if you're building it on a model and you're using the base, the entire base period revenue. Probably have to use the total revenue number. Again, we disclosed the related revenue, because we don't calculate price on all components of revenue. So again, do you want to get the true effectiveness of our pricing programs, that's where related revenue is applicable.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

Okay. And then, John, you made a comment earlier to an answer to your question, said 6%, and I missed. Is that 6% inflation, or you thought yield would maybe land at 6% by the end of the year?

[John Vander, Chief Executive Officer at Republic Services]

No. We said cost inflation, we think, throughout the year, right, we'll be end up around 6%. Were going into the year, 5.5%, right. So we're seeing a little elevation there, primarily here in the second quarter. But again, we're pricing ahead of our expectations as well. So we're getting the performance that we expected, just a little bit different path to get there.

[Michael E. Hoffman, Analyst at Stifel Nicolaus]

Right. Which would suggest the guide of 5.5%, probably works its way up to stay on top of that.

[John Vander, Chief Executive Officer at Republic Services]

We'll update you in July.

[Operator]

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

[John Vander, Chief Executive Officer at Republic Services]

Thank you, [Indecipherable]. I would like to thank our 40,000 employees for their commitment to deliver, and essential service in the markets we serve. Our results are a direct reflection of the team's ongoing efforts to deliver best-in-class service, to all our customers. Have a good evening, and be safe.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Aaron Evans, Vice President of Investor Relations
• John Vander, Chief Executive Officer
• Brian DelGhiaccio, Chief Financial Officer

Analysts

• Toni Kaplan, Morgan Stanley
• Tyler Brown, Raymond James
• Noah Kaye, Oppenheimer Holdings Inc.
• Walter Spracklin, RBC Capital Markets
• Sean Eastman, Keybanc Capital Markets
• Stephanie Moore, Jefferies Financial Group Inc.
• Tony Bancroft, Gabelli Funds
• Tobey Sommer, Truist Securities
• Jerry Revich, The Goldman Sachs Group, Inc.
• Kevin Chiang, CIBC
• Michael Feniger, Bank of America Co.
• Michael E. Hoffman, Stifel Nicolaus