Good afternoon, everyone, and welcome to the Republic Services First Quarter 2018 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
And I would now like to turn the conference over to Nicole Giennonado, Vice President of Treasury and Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us. I would like to welcome everyone to Republic Services' Q1 2018 conference call. Don Slager, our CEO and Chuck Sirianni, our CFO are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.
The material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or re recording of this conference call, you should be sensitive to the date of the original call, which is May 2, 2018. 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 release, which includes GAAP reconciliation tables and a discussion of business activities, along with a recording of this call, are all available on Republic's website at republicservices.com.
Also included in our press release are unaudited supplemental schedules that include a pro form a review of 2017 revenue and costs as we adopted the new revenue recognition standard as of January 1, 2017. During today's call, all references to changes versus the prior year are based on the 2017 pro form a figures, which are comparable to our 2018 results. Finally, I want to remind you that Republic's management team routinely 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 Don.
Thanks, Nicole. Good afternoon, everyone, and thank you for joining us. We are extremely pleased with our strong start to the year. Through the team's relentless execution of our plan in the Q1, we grew revenue, expanded EBITDA margins, produced over 30% growth in earnings and free cash flow per share, and returned essentially all of our free cash flow to shareholders. The solid waste business performed exceptionally well in the quarter and contributed 140 basis points of EBITDA margin expansion over the prior year.
Within the solid waste business, we saw strong operating leverage in the disposal, small container, and large container businesses. Additionally, as expected, SG and A as a percent of revenue decreased 20 basis points, and landfill operating costs as a percent of revenue also decreased. Overall, our Q1 results position us well to achieve our full year EPS and free cash flow guidance. Additional highlights of the quarter include adjusted free cash flow of $0.74 an increase of 35% adjusted free cash flow of $356,000,000 an increase of 48%. EBITDA increased $45,000,000 or 7% over the prior year.
EBITDA margin expanded 30 basis points to 28.8 percent despite a 160 basis point headwind from recycling. Core price was 3.8% and average yield was 2.2%, both in line with our expectations. Average yield was strongest in our small container and large container businesses. The majority of these customers are in open markets where we can leverage increases in demand for service, our enhanced product offerings, and our digital platform. We now have approximately $570,000,000 in annual revenue that uses a waste related index or a fixed rate increase of 3% or greater for the annual price adjustment.
These waste indices are more closely aligned with our cost structure and have historically run higher than CPI. Volumes increased 2% and exceeded our expectations. We invested $26,000,000 in tuck in acquisitions in the Q1 and another $53,000,000 in April for a total investment of $79,000,000 to date. And finally, we returned $350,000,000 to our shareholders through dividends and share repurchases. Before turning the call over to Chuck, I'd like to make a few comments on our recycling business.
First, it's important to keep in mind that our recycling processing and sale of commodities business is only 4% of total revenue. 2nd, despite a $0.06 headwind in the Q1 from lower commodity prices and higher labor costs on our sorting lines, we still outperformed relative to our expectations given the strength of our solid waste business. 3rd, we continue to believe recycled commodity prices will increase from April levels and have already begun to see clear evidence of this in the last couple of weeks. And finally, we continue to make progress moving to a fee based pricing model with a more equitable risk sharing arrangement. We believe the current situation in China will serve as a catalyst in transitioning our municipal customers to this more durable model.
Our customers have told us recycling is important to them, and we remain committed to derisking this core service offering and ensuring its sustainability for generations to come. I'll now turn the call over to Chuck to discuss our financial results. Chuck?
Thanks, Don. First quarter revenue was approximately $2,400,000,000 an increase of $129,000,000 or 5.6 percent over the prior year. The increase in revenue includes internal growth of 3.8% and acquisitions of 1.8%. The components of internal growth are as follows: 1st, average yield increased 2.2% and was in line with our expectations. Average yield in the collection business was 2.4%, which includes 2.6% in the small container business, 2.6% in the large container business and 2.1% in the residential business.
Average yield in the post collection business was 1.7%, which includes landfill MSW of 2.2%. A majority of our 3rd party landfill MSW business is with municipal customers that have contracts containing pricing restrictions. Total core price, which measures price increases less rollbacks, was 3.8%. Core price consisted of 4.6% in the open market and 2.5% in the restricted portion of our business. The second component of internal growth is total volume, which increased 2% over the prior year.
Volumes increased 1.9% in our large container business and, as expected, were essentially flat in our small container business. Small container volumes included a 90 basis point impact from potentially shedding certain work performed on behalf of brokers, which we view as non regrettable. Excluding these losses, small container volumes would have increased 80 basis points. Volumes decreased 2.7% in the residential business. The decrease was expected and resulted from not renewing certain contracts that fell below our return criteria.
The post collection business made up of 3rd party landfill and transfer station volumes increased 11.1%. Landfill volume increased 12.7%, which included C and D of 5.7% and special waste of 35.9%. The strong growth in special waste exceeded our expectations and was due to a large project completed during the quarter. MSW volumes decreased 1.1% versus the prior year. The 3rd component of internal growth is fuel recovery fees, which increased 50 basis points.
The increase related to a rise in the cost of fuel. The average price per gallon of diesel increased to $3.02 in the Q1 from $2.57 in the prior year, an increase of 18%. The current average diesel price is $3.16 per gallon. The increase in the cost of diesel was partially offset by CNG tax credits. The credits contributed $0.04 to EPS and included a $0.03 benefit in cost of operations and a $0.01 benefit in the tax provision.
The next component, energy services revenue, increased 40 basis points. The growth in energy services revenue is primarily due to increase in drilling activity in the Permian Basin, where we continue to be well positioned. And the final component of internal growth is commodity revenue, which decreased 1.3%. The decrease in commodity sales revenue primarily relates to a decrease in recycled commodity prices. Excluding glass and organics, average commodity prices decreased 31% to $112 per ton in the Q1 from $162 per ton in the prior year.
Now I will discuss changes in margin. In the Q1, adjusted EBITDA margin increased 30 basis points to 28.8% versus 28.5% in the prior year. This included 140 basis points of expansion from the solid waste business and 50 basis points of expansion from the CNG tax credit, partially offset by 160 basis point headwind from recycling. As a reminder, the 30 basis points of margin expansion does not include a benefit from adopting the new revenue accounting standard in 2018. Q1 2018 interest expense was $95,000,000 which included $11,000,000 of non cash amortization.
Our adjusted effective tax rate was 23.5% and was lower than expected due to the CNG tax credit and unanticipated federal and state tax refunds. The refunds provided an approximate $0.02 benefit to EPS. Adjusted EPS was $0.74 an increase of $0.19 or 35% over the prior year. EPS included a $0.12 benefit from tax reform. Excluding the benefit from tax reform, EPS increased 13% versus the prior year.
1st quarter adjusted free cash flow was $356,000,000 an increase of 48% versus the prior year. The growth in free cash flow was due to strong growth in EBITDA and a favorable benefit from the timing of working capital and CapEx. Next, we returned $350,000,000 of cash to our shareholders through dividends and share repurchases. This included 3,500,000 shares repurchased for approximately $236,000,000 And finally, as Don mentioned earlier, we remain comfortable with our full year 2018 EPS and free cash flow guidance given our Q1 results, the underlying strength of our solid waste business and our ability to continue to effectively manage our costs. Now I will turn the call back to Don.
Thank you, Chuck. To conclude, we are very pleased with our Q1 performance. Strong solid waste fundamentals, together with relentless operational execution, resulted in double digit growth in both earnings and free cash flow. This performance keeps us well positioned to achieve our full year goals. Before opening the call to questions, I would like to congratulate the Republic team for being named to the 1st annual Barron's 100 Most Sustainable Companies list and recognized by Ethisphere as one of the world's most ethical companies for the 2nd year in a row.
These awards serve as external validation of strong ethical culture that we are building at Republic, which includes conducting our business with the highest levels of integrity and developing sustainable business practices to enhance long term value creation. At this time, operator, we're going to open the call to questions.
Thank you. And we will now begin the question and answer session. And our first questioner today will be Hamzah Mazari with Macquarie. Please go ahead.
Good afternoon. Thank you. The first question is just on the pricing side. Don, maybe if you want to just touch on where do you think going forward you see the most opportunity on pricing? Is it on commercial collection or is it on simply higher inflation is going to lift all boats going forward?
Good question, Anans. So there's a couple of things. 1, CPI is on the rise, right? So CPI has been usually a dog on us here for the last few years. As you know, we've got this we've been kind of punished by this compounding headwind of low CPI on that big $2,500,000,000 book of business.
So, 2 things are happening there. 1, as I said in my notes, we've got about $570,000,000 of that $2,500,000,000 now converted to an alternative index or a fixed rate increase of 3% or greater. So that's happening. You're seeing that layer into the business now. So you'll continue to see the year over year benefit of that.
And we're going to continue to go for more because as you've seen every quarter, we've improved that number. 2nd, absolute CPI is on the rise. I mean, there are people are now expecting about 2.5% CPI for the year. So as we get into the second half of the year, we'll see some of those contracts that are still tied to CPI start to roll over at a higher price. So, that's great.
The open market has been a very good place for pricing for us now for a number of quarters. We exited the year real strong. That's continuing now in the beginning part of the year. We think that's holding up fine. And frankly, historically, as CPI rises, open market pricing stays strong and frankly improves.
So that would that's a pretty good sign. Lastly, landfill pricing is still a little weak, frankly. I would have expected that landfill pricing would have rose a little faster than maybe it had because again just the high cost of landfills today, the higher cost of leachate, some of the costs that we're seeing in the business, we need to be revisiting our landfill prices and seeing what we can do there and starting to have those conversations with our municipal customers. Again, most of our third party volume in the landfills comes through municipal customers. Again, they're tied to these long term contracts that have been, again, subject to that lower CPI environment.
So as we're having renewal discussions with those customers, we're introducing some of these higher costs that we're facing. So we'd like to expect, over the longer term, better pricing there. But overall, we're seeing pricing across the board. Again, we've got good tools. We use our capture tool.
All of our salespeople are equipped with their tablets. They're all using the system properly. Frankly, pricing churn has continued to be a great story for us. Actually come down a little bit this quarter. We're seeing lower defection, so that's helping to drive price and, you know, kind of all systems go.
There's still some room to run here.
Okay, great. And just a follow-up question on just acquisitions. You mentioned $79,000,000 year to date investment. You still have a target of $100,000,000 to $150,000,000
But at
the same time, the industry seems very bullish on M and A. Some of your competitors have closed significantly above their targets in terms of deal flow. Is there anything you would sort of comment on in terms of RSG's focus is more return of cash or maybe there's antitrust issues in doing larger deals? Any kind of color you want to share on acquisitions and how you think about those?
Well, sure. I would start out by saying the pipeline is still robust. We're seeing a lot of deal flow. We're getting to look at a lot of good high quality companies. The majority of the companies we're buying tend to be smaller.
So the multiples we're paying are still in that 4.5% to kind of 5.5% range, very comfortable multiples. When we buy something a little bit bigger, the multiples get a little little higher. You start buying more real property, infrastructure, permits, things that you just got to spend a little bit more money for. I think the activity we've seen out there, I think maybe some of the other companies have made some bigger purchases than we have this year. I would tell you that we were in the hunt on a couple of those, so we're well aware of them.
But maybe somebody maybe it was a better fit for somebody else in their market, so they were willing to pay a little bit more than we were just because it fit their system better, maybe they needed something more than we did. As I always say, there tends to be natural buyer in these deals. And when we're the natural buyer and we've got relationships and it fits our business, we think we can get good deals at the right multiples. We're very focused on returns.
Okay, great. Thank you.
And our next questioner today will be Corey Greendale with First Analysis. Please go ahead.
Hey, good afternoon. Just a couple of quick ones. I realize your practice is to update guidance midway through the year, but just obviously did a nice job offsetting the impact of recycling in the quarter. Just can you give us some view as can you continue doing that? So in other words, are you still at least comfortable with the guidance you have put out there?
Yes. So I'm going to give you some color, and then I'll let Chuck give you some a little more on the number side. We've been saying, I think a lot of people in writing that April really was expected to be sort of the floor, the bottom this year. That's proving out to be true. As I said in my comments over these last couple of weeks, we've seen prices start to bounce.
The reality is the inventories in China are very low. We actually mentioned this last week when we spoke at Waste Expo. Our team went over to China a few weeks back and met with our mills there. Normally, they have about 30 or 60 days of material inventory. They were sitting on about 10 days of inventory.
Normally, they have a fair amount of inventory in transit, in ocean going vessels from port to port. There's very little, if any, in transit. So, this is very sort of what I would call sort of simple Econ 101, supply and demand economics. At some point, they need to make paper. And they're buying a lot of raw pulp, they're paying 8 times what they used to pay.
So we think that's the reason that prices are starting to come up. Chuck can give you kind of a color of where we were at the beginning of the year, where we were in April and where we think the year ends up for us.
Yes, sure. For the quarter, average price was dollars a ton. What we saw in April was closer to $105 And as we go forward, we think that the average will be closer to 115. So Corey, to your point, we were able to offset more than offset the headwind associated with commodities in Q1. And right now, we're estimating that we're going to be able to do the same thing for the rest of the year with commodities at $115 a tonne, that being a little bit of a headwind for us based upon our original guide.
But being able to offset that through continued outperformance in the solid waste business.
Okay. And then the second question I had is on the volume side, where you are intentionally shedding some broker volumes. I think I'm hearing that the underlying small container business is strong. So can you give us a sense like when you start to is there a part of your anniversary shutting those volumes? Or is that kind of a continual thing?
And as you anniversary that, do you think you can get to even higher volume growth levels than you're at now?
Yes. So if we take out what we call non regrettable losses, right, our volume would have been 100 and 10 basis points, so kind of in line with our expectations. As it relates specifically to broker, we by the end of the year, we'll have maybe only $100,000,000 or so left of broker business to shed. That's a little lumpy as it happens, but we're cutting through it. And again, my head here will be obviously near the end, but that will probably happen that last little bit will probably happen over 2 or 3 years.
All right. I will turn it over. Thank you.
Great.
And the next questioner today will be Michael Hoffman with Stifel. Please go ahead.
Hi. Thank you for taking my questions. If I could follow-up just a little bit to clarify. So from this point forward, we should go if we had $135,000,000 as our assumption for recycling, go take that down to $115,000,000 for 2Q through the remainder of the year, which is about $0.08 of incremental headwind and you feel that given the power of the first quarter and it was a great quarter in garbage that you can make that up. Is that the way
I am?
Yes, that's right, Michael. So yes, on average, dollars 115 for the remainder of the year. Your math is right, it's about $0.08 And we feel like we can make that up through the outperformance in the solid waste business.
And so to that end, you exceeded your own budget I mean, your own guidance on volume. So are we to look for we should walk volume up as part of the as we think about modeling? You had a 2.25 was your reported price for the year, but your volume assumption is going to be 0 to 0.25. So how do I think about volume in the guidance at this point?
Yes. So first quarter volume yes, Michael, first quarter volume was very strong because of special waste. And obviously, we'll take that into consideration when we do a broader update of guidance as we always do in Q2. But where you're going
with that, right, volume's good. I would say it's strong. We're seeing strong volume in CD landfill. We're seeing strong volume in large container. We're seeing strong volume in temp, good housing market.
I mentioned we're seeing lower customer defection, right? Our customer defection actually fell below 7% for the first time in our history, okay? So all of those things factor into volume, Michael, as you know. So as Chuck said, as we get through May June and understand our sort of normal seasonality and how things are coming back, we're going to come back to you in the Q2 call and have a clear picture for you.
Fair enough. But I'm interpreting it correctly that I get that
you're not changing guidance till it's Directionally, you are correct.
Okay. And the price seems to have a little bit better momentum as well. That's so that's the other part of it. If the volume trends that good, that gives you that much more room to push on the leverage on
price. Well, look, I've always said, look, when volume when organic volume growth is good, pricing goes along with that. When organic volume growth dips and goes negative, that's when pricing gets a little squirrely, right? So if volume growing, organics growing, housing is growing, all those things that we're seeing in the broader macro are good, we think holds up and it's a pretty good story for this year and pricing comes right alongside of it.
So on the recycling issue and your following comment, which I hope the industry is able to take advantage of this and fix this. From a fundamental standpoint, I look at this what's going on is we clear the deck in 2018 2019 whatever the lower number is, it's lower number and we just plow on with good garbage in the E and P business and this is the debt clearing year. How long do you think though it will take to get the customer to agree this has to change?
Well, let me help you. It's really slow historically. Okay. So I'm going to burn a little time on this answer, okay? So this is really important for everybody to try to understand.
Everyone listening on the call, we make 2 assumptions, and we would posit them as facts. The first fact is customers want to recycle, okay? Part B of that first fact is customers are showing us that they're willing to pay for recycling. I'll come back to that. The second important fact that we posit is that paper packaging demand is not decreasing.
In fact, most people would argue it's on the increase. So recycling, there's a business here, right? People want to do it, and there's a demand for paper packaging. Most of what we recycle is fiber. So, I mean, the lion's share of it is fiber.
So, we receive recycling through 3 channels or 3 lanes. The first inbound lane comes from in our open market collection business. So these are front load, rear load commercial customers where we put out 3 yarders, 4 yarders, 8 yarders, right? In that business, we've reported quarter after quarter that we've been increasing the price we charge for commercial recycling in our small container business. Started out 0.28 dollars 0.30 dollars or 30% of trash rates.
Now it's 90% -plus of trash rates, okay? So, customers are saying, I'm willing to pay for that and I want to do it. So that we've corrected that space. Customers are voting with their wallets, and we haven't lost any volume. And we're making money in that business.
We're making an appropriate return so we can continue to offer that important service to our customers. 2nd lane that we bring material into our company is through our recycling facilities, right? This is where 3rd parties who don't own their own manufacturing or processing capacity, they have their collection trucks. These are primarily cities. So, cities collecting waste from the curb and some other competitors or smaller haulers bring us material to our facilities.
In those cases, in that lane, the lion's share, 85% of those contracts of that volume now is coming in at what we would call kind of a fee based structure or a fair share arrangement. We're no longer holding all the risk. Now, we're giving away some of the upside, but we're getting a certain or a certainty of a return on that revenue. So those are the first two lanes. Now the 3rd lane is the biggest and it's most difficult.
That is municipalities where we go out and collect with our trucks and either bring them to our own facilities or to 3rd party facilities. And this is the same group of people who we're trying to move away from a CPI index to an alternative index. So you see the results we're having there. We've moved now well over 20% of that business to a fair share arrangement or an alternative index. So now we're going to have we're having that same conversation with those customers.
So it's going to take some time, but my comments in my prepared remarks, this chaos, if you will, this crisis, if you will, in China is the catalyst to fix this business. And if I look at the first two lanes of those first two customer groups, they've already demonstrated customers understand the economics, and they're willing to pay for it because they want sustainability, they want recycling. So we just have to do the work. And then, frankly, we're built for that. We get up every day.
We pick up the garbage. We get up every day and pardon the football analogy, but we run the ground game. And customers are going to have to understand, if you want to recycle, it's not free. This stuff is not worth gold, okay? We've got residual issues, too much trash in the garbage.
We've got glass, which is a contaminant at some point. We've got materials that don't have value that we have to deal with, okay? The fiber has value and has a market. So these are the discussions we're having with customers, and it's going to take some time, but we're very determined. And as I've said a few times now, it's kind of a perverse statement, but frankly, in one way, I kind of welcome this China chaos because it gives us the platform that we need to go have the conversation that we frankly probably should have been having 10 years ago, okay?
So it's going to be a good business. It is a good business in some markets, and some markets are lagging. So again, as we talk about return on invested capital, it can be a better business on that basis than the landfill business, than the solid waste business. And it is a growing segment. It's a growing waste stream.
So we want to get in front of the growth, but we're not going to do it for practice. So you'll see the returns improving in this business. You'll see the story change over time, and that's all I've got to say today. But that's the reality we're living in, and our team's poised to go out there and make it happen. We've got a strong team here.
They're getting good results in other ways. And I would say, lastly, that we've seen these issues before in solid waste. When fuel became volatile in 2004, we implemented a fuel recovery fee, which is a very fair way to deal with fuel costs with customers. It goes up and down based on fuel markets, so customers are treated fairly. We see CPI, which has become an unfair index.
We're going to a fair index, and customers are coming along with us. And now we have to deal with this last sort of issue, this sort of last frontier of volatility in our business, and we're going to be through that. And it may take a few years to do, but we're going to see progress. And how do I do, Michael? Are you still there?
Yes. No, I'm here. Okay. Well, and somehow I'm supposed to work in some corny analogy about football games are 1 but passing. So on the passing side, if you're I don't know how I'm drawing this all together this way.
So we'll scratch that and just go. Your $570,000,000 out of $2,500,000,000 it did in about 30 months. Is that about the way we should think about the pace of being able to fix the 80% of the recycling? Yes.
I don't know. Let us get going on it, and we'll see in a couple of quarters. But we're determined. Again, we don't need to we're pretty good at picking up trash and recycling. We don't need practice doing it for free, right?
Right. And then my final word on it, and I'm sort of the master of the obvious here, right, but my team has heard it a 1000 times. Sustainability, my customers, is not possible without profitability. Organizations like ours cannot invest in sustainable practices in recycling unless there is a return that we can count on. And that's the nature of the beast.
That's what we believe and that's what you'll see happen in our business. And anybody who doesn't believe that, it's kind of a fool's errand.
Right. And the only thing we care about is we don't want to see the price recover too fast so the customer won't come to the table. So at $115,000,000 that still leaves you room to argue, hey, you got to fix this?
Even if it goes to $200 we've got to fix it because here's what we know, it will go down again.
Right. Okay.
Okay. So again, this is just we've been doing a lot of other great work in the company over the last 7 or 8 years. We've been doing a lot of good things like Fleet, One Fleet and all the other good stuff and Capture and PBS. And so we've been doing a lot of great things to make the company better. This is is the great thing we're going to be doing over the next couple of years.
Okay, great. Thank you.
And the next questioner today will be Michael Feininger with Bank of America. Please go ahead.
Hey guys. Yes, thanks for taking my questions. Just first off, I mean EBITDA margin is up 30 basis points year over year despite the headwind on recycling. I know you guys aren't updating your guidance right now and the components, but is there anything we should be aware of the cadence of margins throughout the year? Is there anything that should stick out?
And with that, I mean, the landfill operating costs, I think, fell like 5% year over year. This was clearly an issue last year. Can you just provide us an update there? Is that something that's like sustainable and should be kind of the run rate going forward for the year? Thanks.
Yes. So, think about some of the major components, right? We told you last year that SG and A was going to some of the SG and A investments we made were going to anniversary. We're seeing that, right? So, we're we're very much in control of our SG and A spend, right?
So we've got a pretty good handle on that. So made those investments last year, the year before. Now they're coming down just as we said. We told you last year, we were doing some additional work at some of the landfills related to some various permit issues and some leachate issues. We're coming through that.
That's going to start working its way down. We've already seen that in the Q1, so we've got a good handle on that. I mentioned 1 fleet earlier. Our fleet costs are solid. Our labor costs are in line.
The core solid waste business is running well. The operating team is doing a fantastic job. And again, growth, right? We're seeing pretty consistent growth, positive sort of economic factors across the portfolio. So yes, we think it's sustainable.
And over the long term, we still are backing away from 30% EBITDA margins because we're going to see CPI improve. We're going to see our conversion to a better index continue. We're going to see improvement in this recycling business. We've got the courage and stamina to do we need to do there. And again, we've got customer willingness to pay on our side.
And then we're improving the products. We're improving the quality. We're improving service. We're improving fleet reliability. As I said, our defection has come down, all those kind of things.
A lot of really good stuff going on here. And someday we won't have to talk about recycling so much. But let's not. What else you got, Michael?
I guess I just wanted to follow-up on that. I mean, you mentioned, obviously, organic growth helps drive the pricing dynamic. We're also seeing it driving investment back into the fleet, your CapEx is up, some of your suppliers to the industry, they have pretty big backlogs. I guess I was just I guess big picture question here. You guys are clearly adding some routes.
Are you seeing anything in the open market of the small mom and pops adding trucks or maybe too many trucks? Is it the supply demand balance of that with the open market?
I would answer it this way. I think we're getting our fair share of the organic growth. And again, we target our sales force toward customers that we think we use some kind of a value equation in their thinking, people that like the idea of great service and solutions and recycling services and a broader suite of services. We don't expect to chase every account or have every new yard of growth, but we're getting our fair share. And as long as we're getting our fair share and maybe a little more because our products are strong, then we're okay with that.
Meanwhile, we're getting pricing to offset inflation and that's an important factor of the overall story. So nothing bad to report there.
That's great. And just my last question, I
mean, we saw an industrial company last week kind of make a comment about peak or near peak. Clearly, it's a different type of industrial company business. It sounds like from what you're seeing on the volume side and with your different aspects of what you guys touch in the economy, there's nothing that suggests to you that were any areas of the business that feel frothy to you or peakish in any way? Does it still feel like you have a runway ahead on a multiyear basis?
Yes. So simple answer is we think there's still room to run and we backed it up with some statistics. Why don't I let Chuck back it up with statistics? I've been doing all the talking. How's that?
So what we talk about is there being a 90% correlation to our volume growth overall, entire company, and single family housing starts when you lag single family housing starts by 1 year since we're late cycle, obviously. So as we look at single family housing starts, the print for March was 1,300,000 units on an annual basis. So it's been increasing slowly over time. Based on the experts that we talk to, we think there's nothing that will prevent us from getting back to a longer term average of close to 1,400,000,001,500,000 units. There's also been a number of articles written recently that say that there is actually a lack of supply of new single family housing throughout the United States.
And they estimated that to be an additional 7,300,000 units. So all of that in combination, we would say that back to Don's point that there's still plenty of room to run here in this economy.
That's great. And then just lastly, I mean, the special waste was really strong this quarter. You mentioned a big project. I was just wondering, do you guys quantify that big project that you completed this quarter? And how does the pipeline look in special waste?
Since I think that's one of the reasons why your volume outlook for the year was flat to up 25 bps.
Yes. So we've had tremendous growth in special waste over the course of the last several quarters, close to a year now. To grow on top of 30% type of growth year over year is really hard for us to do. Like you had mentioned, we a really strong special waste job that occurred during the quarter that's ended now. Looking forward, we still see some growth there, but I can't to grow 30% on top of 30% is difficult to do.
But what it does speak to though, right, this event work, it's a precursor to single family housing starts and to development in general. So that's another indication that we think that the economy still has room to run.
Great. Thanks, guys.
Thanks, Mike.
And the next questioner today will be Noah Kaye with Oppenheimer and Company. Please go ahead.
Yes. Thanks for taking the questions and a great quarter. I think free cash flow conversion this quarter really stood out. Historically, I think it tracked around 8% to 9% of revenue. Prior guidance probably implied something like 11% this year.
But for 1Q, it was almost 15% of revenue. And I'm not sure if that's a high watermark, but it looks very impressive. So can you comment on a couple of things here? First, you mentioned the working capital benefit. How to think about that maybe reversing over the course of the year?
And second, just to get into one particular line item, it looks like the capping closure and post closure expenditures were down pretty markedly to about $7,000,000 which is a much lower run rate than it had been in past quarters. Is that sort of $7,000,000 the right run rate for the balance of 2018? Thanks.
Yes. So a couple of questions here. The first one being the working capital. We think that, that is timing, and that will end up reversing kind of evenly throughout the rest of the year, not really a permanent benefit, but more of a timing benefit. To your point on the capping and closure for disclosure, that tends to be lumpy.
Obviously, we don't cap until we need to, right? And so that will depend upon when we need to do the capping and also the weather to a certain extent. So it does tend to be a little lumpy, but we don't expect there to be a significant change in that expenditure, that cash expenditure year over year.
Okay. That's very helpful. And you mentioned weather, obviously a strong quarter on a number of metrics, but I think most folks have been expecting a little bit of a weather related headwind this year. So can you comment on what extent any of it might have held back, how that might have impacted any of the business?
Yes. So the weather ended up being a little bit of an offset. We had a lot of rain on the West Coast last year. And this year, we had a little bit of weather, as you're aware, on the East Coast, so it tended to offset. So we didn't see a real significant impact in the business overall this quarter because of weather.
Okay. That's helpful. And then maybe one more. Really appreciate the adjustments on pro form a so we can compare like for like. But
a point I'm getting a bit
confused on, if we look at the recycled commodity revenue line, it's down 3% to 4% when the commodity basket is obviously down a lot more. I'm sure part of this is to do with rev rec and the changes. But could you just help us explain why the line didn't drop them?
Yes. Hi, Noah. This is Nicole. So when you look at the supplemental schedules and you kind of cut out a little bit, so hopefully I'm asking your question. When you look at the revenue dollars, there wasn't a significant decrease and that's because if you recall this time last year, we didn't have re community.
So that's kind of offsetting some of the decline in RSG legacy recycling commodity revenue. When you go to the kind of the components of internal growth and there you referred to the 1.3% decline. Again, that is more of a same store legacy Republic Services. The impact of ReCommunity is down in the acquisition line.
That's very helpful. Thanks so much. Sure.
And the next questioner today will be Jeff Silber with BMO Capital Markets.
It's Henry Chien calling for Jeff. Just wanted to follow-up on some of volume trends on the residential side and the small collection side. You mentioned some of the rationalizations or I guess the shedding of the broker business and some of the changes in contracts on the residential side. I'm just curious does that change the margin structure of those two businesses and how should we think about that going forward?
Yes. The business that we're shedding both on the small container side and on the residential side, that's business that's regrettable. I mean, it's not regrettable that we're shedding that business. That's because it's at lower margins. So part of the reason why we're doing that is because we didn't feel like we're getting an appropriate return on our investment.
And what we've always said is that we're very much focused in on ROIC. So, obviously, shutting that work and then deploying those assets and other pieces of business that provide us with a better return, obviously, will help us enhance our margins.
Yes. Keep in mind that those are small moves, right, but they're directionally going to improve the margins over time. Keep in mind that when we're the incumbent in a residential contract, we know all the costs right down to the nth degree, right. So we're very aware when the contract is sort of not meeting our threshold returns and when a customer doesn't really value what we're doing. And if we can't get the extensions at the right price or the right kind of built in indexes or as we relate to recycling, we just got to we got to move away from them.
And we're having a good success rate in converting and increasing and extending contracts as well. Every now and then we're going to cross one where we just can't get it done. And the good news is the team has the courage to walk within that business and go find another customer who wants to value great service.
Got it. Okay, great. That's good to hear. And just on the cost side, I mean, some companies seem to have some difficulties in transportation costs and labor costs. So just wondering how you're thinking about that.
Is that potentially an issue going forward or something that you're keeping in aware of? Thanks.
Well, certainly something we think about. We spend a lot of time and effort, energy, talking about thinking about working on employee engagement at Republic. So, our employee engagement rates are at all time highs. Our turnover has been flattish year over year. We think our employee turnover is best in class.
And even in light of a good or even an improving economy where you might lose more people who are actually holding our own quite nicely. So we're spending more and more effort in just making Republic Services a great place to work. We think this relates to our frontline people. Truck drivers appreciate our 1 Fleet initiative, having reliable, safe trucks. Our techs enjoy working in a shop where we take fleet seriously.
Our professional salespeople like the tools that we've created for them. Again, we're working on the work environment at the facilities. As I said last quarter, we're going to spend about $100,000,000 over the next few years improving frontline facilities, locker rooms, training rooms, break rooms, those kind of things. So, we put a lot of effort into just creating the best work environment, and we've got a number of external agencies and experts that have given us some acknowledgment and some accolades around that, but we certainly take really seriously. So it doesn't mean that we won't be affected by things to come, but I think we're ahead of the curve.
Got it. Okay. That's great. Thanks so much.
And our next questioner today will be Hamzah Mazari with Macquarie. Please go ahead.
Hey, I just had a quick follow-up for Chuck. Chuck, do you know what your updated tax rate is in your guidance given Q1 was lower? Is it still 27% or has that changed?
Yes, it is, Hans. It's still 27%. Okay. Thank you.
Just to clarify, 27% for the remainder of the year. So the full year average would be closer to 26%, just to clarify.
Okay. Thank you.
Hamzah said everybody else got 4 questions, so I didn't ask them. Yes. Okay. That's just 4.
Thanks, Hamzah.
Thank you.
And our next questioner today will be Tyler Brown with Raymond James. Please go ahead.
Hey, thanks guys for squeezing me in here. Hey, Chuck. Hey, Chuck, just real quick, it's a little unclear, but was the $0.04 CNG tax credit contemplated in the guidance from last quarter?
No, it wasn't.
Okay. If you remember,
that actually that was part of the budget reconciliation package that came out a couple of days after our conference call, our earnings call.
So do we tack on $0.04 to the guide or is it used to absorb some of the recycling?
Yes, it's actually that's what absorbed the recycling during the period. Keep in mind, we had about a $0.06 headwind from the recycling during the period. So we had about $0.04 of benefit from CNG and then another $0.02 benefit from the tax refunds that I talked about. So that's what offset the recycling.
Okay. Okay. That's helpful. And then I apologize, but can you go back over the margin math? So are you saying that if you exclude the tax credit re community dilution and recycling prices, basically solid waste margins were up 140 basis points, is that right?
Yes, right. So solid waste up 140 basis points. The CNG tax credit, as I had mentioned, was about 50 basis points. And then recycling operations, that was a negative, a headwind of 160 basis points. So the net of all of that is the 30 basis points that we called out of Experian.
Okay, perfect. And then I do want to kind of go back to the transportation question, but one of the line item we've been watching pretty close is the subcontractor hauling costs. And I think you guys saw pretty pronounced squeeze this quarter. I think some of your peers have as well. I know it's a pretty granular question, but can you guys talk about what the expectation there is?
I mean, transportation costs don't look like they're abating anytime soon, in my humble opinion, but should we expect that, that is a margin headwind for the rest of the year?
Not necessarily. So, what we saw in the Q1 was a little bit of a spike in our transportation subcontract costs because of business mix. So there's a little bit higher national accounts subcontract work that was performed that was in the mix and just a mix of the business kind of in general. And we're not necessarily saying that, that's a trend that's going to continue.
Yes. Also, Tyler, on a large group of those waste moves, if you will, we've got long term contracts with stable providers, and so we're in pretty good shape there.
Right. Okay. And then maybe my last one, I don't know if you can parse this out, but how much did the shedding of the broker business help margins, solid waste specifically?
Yes, Tyler, I don't have that at my fingertips. As Don mentioned before, it's small relative to the rest of the business. But incrementally, as we continue to do this over time, it is going to improve our margins.
Right. Okay. All right. Thank you.
Thanks, Tyler.
And the next questioner today will be Brian Maguire with Goldman Sachs. Please go ahead.
Hey, good afternoon.
Hey, Brian.
Just following on Tyler's question there, just to make sure I have it clear, the energy credit was about, I would say, about a $14,000,000 benefit to EBITDA, and we shouldn't think about that recurring in the future, right?
Yes. It was about $15,000,000 That's right. That was a onetime benefit. That actually pertained to 2017.
Got it. Okay. And it just wasn't included because the tax law clarification didn't come out until after you gave the original guidance, is that right?
That was part of the budget reconciliation package that came out a couple of days after we had already had our earnings call, correct.
Yes. Okay. Thanks for clarification there. And then not to belabor the recycling point too much, but just the contaminant levels that China is trying to get to. I know that's a big obstacle to try and get down to like 50 basis points of contamination.
Just wondering as you've changed your operations and you're incurring these additional costs, how close are you getting to that level? And sort of related to that, are you seeing sort of what we've seen is maybe some different markets develop in recycled fiber where some higher quality stuff like OCC 12 or DLK is trading in a little bit of a higher price than some of the more commodity grades. Is that what you're seeing too? And is that what you're referencing when you say you're starting to see some signs of uplift on recycled fiber?
Yes, that's fair. So, with OCC, we're doing a pretty good job. With the mixed paper and some other grades, it's still a bit tougher, as you can imagine. But again, we've opened up other outlets. So we're moving our export material to a number of other places now that we didn't previously.
So but again, ultimately, China has had to figure out that they've got to make paper and they have to decide whether they're going to deal with some of this contaminant or they're going to keep buying pulp and chopping up trees. So we're just going to keep working it out. But again, supply and demand, and we're already starting to see the bounce. As Chuck talked about the rates we experienced in Q1, where the April dip was, and now we're seeing a bounce already the last part of April and here in early May. So we're pretty confident it's going to come back, as we said, in line with that $115,000,000 number.
And our team is doing a great job getting the material moved. And again, we threw a little extra labor in Q1 to do a little bit of our job and clean it up, but I think it's going to come back for us.
Okay. Just one last housekeeping one. Appreciate the restated 2017 numbers. Just was wondering why the slightly adjusted EBITDA was a little bit lower than what we had in our model as the reported numbers from last year. Any reason why the accounting change would modestly lower the EBITDA in 2017?
Yes. So it was 110 basis point impact from the revenue recognition change. So I'm not really sure why that would be different than what you had in your models.
Okay. I'll follow-up with that later. I appreciate
it. And at this time, there appear to be no further questions. Slager, I'll turn the call over back to you for your closing remarks.
Thank you, William. In closing, we will continue to manage the business to create long term value and remain focused on executing our strategy of profitable growth through differentiation. I would like to thank all Republic employees for their hard work, their commitment and dedication to operational excellence and creating the Republic Way. Thanks, everybody. Thank you for spending time with us today.
Have a good evening, and be safe out there.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.