Good day, and welcome to the Republic Services First Quarter 2022 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Stacey Mathews, Vice President of Investor Relations. Please go ahead.
Hello. I would like to welcome everyone to Republic Services' First Quarter 2022 Conference Call. Jon Vander Ark, our CEO, and Brian DelGhiaccio, 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 recording of this conference call, you should be sensitive to the date of the original call, which is May 5th, 2022. Please note that this call is the property of Republic Services, Inc.
Any redistribution, retransmission, or rebroadcast of this call in any form without the 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 a recording of this call, are available on Republic's website at republicservices.com. On today's call, we will provide forward-looking Non-GAAP measures related to recent acquisitions and projects under development. We are unable to reconcile these estimates to relevant GAAP measures without unreasonable efforts because purchase accounting adjustments are not complete and the timing of development projects can vary. I want to remind you that Republic's Management Team routinely participates in investor conferences. When these events are scheduled, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to Jon Vander Ark.
Thanks, Stacey. Good afternoon, everyone, and thank you for joining us. We had a strong start to the year, which keeps us well-positioned to achieve our full-year goals. The outcomes we are delivering reflect our focus on profitably growing the recycling and solid waste business and expanding our environmental solutions business so we can offer the most complete set of products and services to our customers. The investments we are making in the business are taking hold and creating undeniable value while further strengthening our three differentiated capabilities of customer zeal, digital, and sustainability. During the first quarter, we delivered revenue growth of 14%, generated adjusted earnings per share of $1.14, which is a 23% increase over the prior year, and produced $531 million of adjusted free cash flow, which is a 14% increase over the prior year.
We continue to believe that investing in acquisitions is the best use of free cash flow to create long-term value. Earlier this week, we closed the acquisition of US Ecology. This acquisition propels Republic into a leading position in the environmental solutions and adds a platform of high-quality assets. We have customer overlap between our $1.5 billion manufacturing vertical and US Ecology's $1 billion book of business. We estimate our cross-selling opportunity at $75 million-$100 million. We're excited to welcome US Ecology employees to the Republic team and will benefit from their deep expertise in specialty waste handling. We also invested $66 million in other acquisitions during the quarter. We also have approximately $400 million of deals in the advanced stages of closing, all of which are in the traditional recycling and solid waste space.
In addition to investing in acquisitions, we returned $349 million to our shareholders. This includes $203 million in share repurchases and $146 million in dividends. We are experiencing meaningful traction developing our differentiated capabilities where actions are leading to outcomes. Our aspiration is to deliver a world-class customer experience, which we call Customer Zeal. Our customer retention rate remains at a record-setting level of 95%. This has enabled us to generate the highest level of pricing retention in company history and generate outsized revenue growth throughout the business. During the first quarter, core price reached an all-time high of 6% and average yield increased to 4.2%. Volumes increased 3.6% compared to the prior year, and acquisitions contributed an incremental 390 basis points to total revenue growth.
Regarding digital, we completed the rollout of RISE tablets in our small and large container fleet. We continue to see tangible benefits of this proprietary technology for our customers and within our operations. We will begin deploying tablets in the residential fleet later this month and expect to be complete by mid-2023. We recently went live with the finance and procurement modules of our new ERP system, which will streamline back-office activities and empower our local leaders with enhanced data. Next, turning to sustainability. We continue to believe that environmental sustainability and economic sustainability go hand in hand. We are passionate about doing things that are good for the future generations in a way that generates profitable growth for our business. In March, the company announced our plans to expand our participation in the plastics value chain with the nation's first integrated plastics recycling facility.
The Republic Services Polymer Center will address the growing demand for recycled plastics while enabling CPG brands to meet their sustainability goals. Based in Las Vegas, this will be the first of three to five centers nationwide and is scheduled to open in late 2023. We expect this Polymer Center will generate an incremental $50 million of revenue with an EBITDA margin at or above total company performance. Earlier today, we announced our joint venture with Archaea to develop 39 renewable natural gas projects at our landfills. These projects generate attractive returns and accelerate achievement of our ambitious 2030 sustainability goal of increasing biogas sent for beneficial reuse by 50%. The projects are expected to come online between 2023 and 2027, at which point approximately 70% of our total landfill gas collected will be beneficially reused.
This joint venture, together with our 17 landfill gas to energy projects under development, are expected to generate approximately $100 million of incremental EBITDA. We continue to be recognized for our commitment to sustainability. Republic Services was named to Barron's 100 Most Sustainable Companies list for the fourth time. I will now turn the call over to Brian.
Thanks, Jon. Core price during the first quarter was 6%, which included open market pricing of 7.6% and restricted pricing of 3.5%. The components of core price included small container of 9%, large container of 6.8%, and residential of 5.3%. Average yield on total revenue was 4.2%, which represents an increase of 80 basis points when compared to our fourth quarter performance. Average yield on related revenue was 4.5%. The outperformance in average yield is a direct result of higher core price increases in the face of more persistent cost inflation, dynamically adjusting rates for new work to match demand, and increased price retention, which illustrates customer willingness to pay for our high-value services.
We expect average yield to remain above 4% for the remainder of the year. First quarter volume increased 3.6%. The components of volume included an increase in small container of 4.1%, an increase in large container of 4.6%, and an increase in landfill of 4.7%. This level of volume performance was in line with our expectations. Moving on to recycling. Commodity prices were $201 per ton in the first quarter. This compares to $133 per ton in the prior year. Recycling, processing, and commodity sales contributed 40 basis points to internal growth during the first quarter. Next, turning to our environmental solutions business. First quarter environmental solutions revenue increased $64 million from the prior year.
This was driven by organic growth from increased activity and the contribution from acquisitions. On a same-store basis, environmental solutions contributed 40 basis points to internal growth during the first quarter. Adjusted EBITDA margin for the first quarter was 30.4%. This compared to 30.7% in the prior year. Margin performance during the quarter included underlying margin expansion of 70 basis points and a 40 basis point increase from recycled commodity prices, which was offset by a 70 basis point headwind from net fuel and a 70 basis point decrease from recent acquisitions. Within the underlying business, we are seeing wage inflation of approximately 4%. Price increases more than offset this level of cost inflation before considering the impact from productivity improvements. SG&A expense, excluding US Ecology deal and integration costs, was 10.2% of revenue.
This was flat with the prior year. Adjusted free cash flow for the quarter was $531 million and increased $67 million or 14% compared to the prior year. This was driven by EBITDA growth in the business. Capital expenditures of approximately $200 million during the first quarter represents 15% of our projected full year spend. We remain on track to spend our full year budgeted capital expenditures. Total debt was $9.6 billion, and total liquidity was $2.8 billion. Our leverage ratio at the end of the quarter was 2.8x . With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 25% during the first quarter. As Jon mentioned, we closed the acquisition of US Ecology earlier this week.
Our initial perspective on the contribution from US Ecology for the remaining eight months of the year is as follows: revenue of approximately $720 million and Adjusted EBITDA of approximately $130 million, which includes $5 million of realized synergies. We also expect EPS contribution to be flat to slightly positive. As a reminder, EPS includes the impact of intangible amortization and relatively higher interest expense as debt associated with the acquisition is expected to be highest during the first year. Annualized, this would represent a year-one contribution of $1 billion of revenue and approximately $170 million of EBITDA, which includes $10 million of first-year synergies. We still believe there are at least $40 million of cost synergies that will be realized during the first three years.
We intend to incorporate the contribution from US Ecology into our full year guidance in July once the impact of purchase accounting is better known and other areas subject to valuation are substantially complete. With that, operator, I would like to open the call for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. In the interest of time, please limit yourself to one question and one follow-up. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Tyler Brown with Raymond James. Please go ahead.
Hey, good afternoon.
Good afternoon, Tyler.
Hey. The landfill gas announcement, obviously pretty exciting. I think in your sustainability report, you guys already have something like 75 projects operating today. If my math is right, which is always scary, but I think that maybe makes up a little more than half of the municipal solid waste landfills that you collect gas on. Number one, am I close? Am I in the right ballpark? Two, does this deal with the 17 projects in development pretty much account for the remaining landfills in your fleet with enough waste to support a project, or are some of these 39 at existing, I'm gonna call them dirt gas operations, where you're upgrading to RNG?
Yeah, good question. The 75, right, eight of those are solar projects. We put those together in our sustainability. We have 67 today, right? We talked about another 17 in development, right? This project we announced with Archaea is another 39. Four of those projects of the 39 are basically recapping existing projects of the
Okay.
67 I talked about. It's mostly new and incremental. That kind of, if you fast-forward to 2027, you know, you got a few more that become inert because that's the goal of a landfill, obviously, is to sunset it. That would take us from 67 a day to 116 in 2027 with everything we're talking about.
Okay, perfect. Yeah, very helpful. Then just financially, what will we kinda see? Will you put up the money in one big chunk, or do you do that as we go along? Then, Brian, will you just recognize it as like an income in non-controlling interest, and then they'll basically pay you a dividend back? Or how exactly will the mechanics work?
Yeah. No, we'll do it ratably investing. It's not just one big chunk, right, into this joint venture. Essentially we get, you know, there's two forms of our return on that. There's a royalty agreement, which is more typical of what we have on our typical projects, or existing projects rather. We'll be a minority equity investor in these. Brian, you can talk about where it's gonna hit the geography.
Yeah. For the royalty, similar to what we have today, Tyler, the royalty will just come through revenue, right? You'll see that then there's really no cost offset, so most of that flows down to the EBITDA line item. Then for the portion where we've got that minority interest, that'll be a one-line pickup, which will be, you know, again, it'll be included in our EBITDA, but it'll be separately distinguished so that you can actually see what its contribution is.
Okay. Okay, that's helpful. That was way, but very helpful. My last one here, just we were kind of, you know, perusing the US Ecology 10-Q. It looked like they kinda struggled this quarter, got really pinched on cost. I think EBITDA was maybe down 10%, year-over-year. What's the kind of confidence around turning that business around quickly? I think you gave some color around the contribution, which seems like you're kind of expecting things to get a little bit better as the year plays out. Just maybe talk about the first 100 days there, what the plan is to really kinda get that business turned for, you know, positive momentum.
Yeah, no, listen, their first quarter was kinda right on what we had in the pro forma, right, in terms of how we valued that business. As you know, we're relatively conservative how we think about things. Listen, integration begins now. We had teams all over the country welcoming our colleagues together. Frankly, it's been going on for weeks, within the parameters of what we can do with DOJ and antitrust in terms of pre-planning for the integration. We're already driving that through. We've got the four areas outlined geographically. We've got those teams defined, the leader and the direct reports, right, and where all the assets and divisions flow up through that. That includes integrating our own environmental solutions business into that.
We took the best of best in terms of both, you know, assets and, people, in terms of how those businesses are structured. We are, you know, well on our way on that front. You know, one of the big opportunities there is to integrate the great set of post-collection assets they have with the field, services resources. You know, COVID was kind of a trip up for them to be able to do that in a full way. We've got the benefit of, you know, not being out of COVID, but being in a very different stage of COVID. Again, integrating those things together and, you know, applying our considerable revenue management capabilities to that business.
Looking at the go-to-market approach, all those things are underway right now.
Yeah. One thing I would add too, just on the performance in the first quarter, Tyler, as well, is that the performance got better throughout the quarter.
Okay. Just real quickly, just to clarify, Jon, I thought you said $75 million-$100 million in synergies, and Brian, you said $40 million.
Yeah.
Is the $40 million just cost? Or what was
Yeah. The $40 million is just cost. Like, we value every deal, right? We really understand the standalone intrinsic value of an enterprise, and then, right, we value cost synergies because we've got line of sight to that. Incremental to that $40 million, right, we see $75 million-$100 million of cross-sell opportunities, right? Probably realized over about a two and a half to three year period. All right? Revenue synergies. Sorry. Then in addition to that doesn't include any pricing. We'll take a very hard look immediately in terms of understanding that we're getting a return on all the work we do and where there's an opportunity, especially in an inflationary environment, to make sure that we're getting our costs covered and more.
Right. Okay, great. I'll pass it on. Thanks.
The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Thanks so much. You mentioned the 4% wage inflation, and that seemed really good for this environment and what we've heard from others. Can you give any color on maybe how you've been able to limit wage inflation, if you've had any strategies around that, et cetera?
Yeah. I would say the seeds of that were sown many years ago, right? We think about being the place where the best people come to work and making sure that our people get a fair increase every year. Even in very low inflationary environments, where, you know, CPI was running sub 1%, we always gave our people, you know, a 2%-3% increase in their wages. If you add benefits, it's probably north of that. I would say very fit and healthy cost structure coming into this inflationary environment. We're very disciplined and surgical. We believe in market pay, and so we understand market pay and market dynamics, right, across all the 800 dots on our map of where we operate.
Again, we've made individual and, you know, across the board kind of ratable cost of living increases every year, and then we go in and do additional moves where we need to make sure that we are staying very competitive in the market. We're still going through that, right? That's an ongoing process, ongoing science, and we believe in the local team. We also believe in the discipline and the expertise of our HR team and to be able to do a centralized review that we're doing things in a smart way. I think you'll see us, you know, do some more of that in the third and fourth quarter here, all of which will result in us, you know, pricing ahead of our cost inflation outside of productivity, which will allow us to expand our margins.
That sounds great. Wanted to ask also on the renewable energy side, just given the really strong increase in gasoline and diesel prices, you know, has that changed your approach to renewable energy projects? Has it caused any thoughts about pulling forward investments in new facilities or more alternative fuel vehicles? Thanks.
Yeah. One of the reasons we're really excited about this joint venture is we think it allows us to get after a portfolio of landfills, right? We bid this out in a very competitive process and really excited about our partner. That we take on all of those projects, and those projects have varying returns, and some of those things probably we wouldn't have independently gone after on a standalone basis, just given the size and scale. We're able to go deeper into our fleet of landfills with projects, which is exciting. We're also able to go faster, right? We can get after all 39 of these. In addition to the 17 we have in flight.
We feel really excited to be able to go after that opportunity that quickly because of that market. As it relates to fleet, you know, we are long on electrification. About 20% of our fleet is CNG, and we certainly have that as part of the portfolio, but all of our energy going forward is on electric vehicles.
Perfect. Thank you.
The next question comes from Michael Hoffman with Stifel. Please go ahead.
Hi. Thank you. I also wanna thank you for the very kind gesture you did a few weeks ago. I appreciate it. The 4% wage inflation, how does that translate into internal cost of inflation, total internal cost inflation?
Relatively consistent, Michael. You know, when you take a look. I mean, look, I think just to put it into perspective, I talked about expansion in the underlying business of 70 basis points. I think you take that 4% cost inflation and compare that to that yield on related revenue, which is 4.5, and then you get a, you know, 10-20 basis points of productivity, that is the expansion that we're seeing in the quarter.
Okay. You anticipated part B of that. I will ask, so RISE is fully rolled out in small and large container. Does it take that rate of productivity improvement and walk it up now because you have it more comprehensively distributed? I mean, this is all about taking minutes out and lowering engine hours and the like.
Yeah. Listen, when you first put it in, right, there's a little learning curve, and then you get your biggest wave of productivity improvement, right? When you can start to standardize the work and get the routing efficiently. Then in those existing sites, you just start to see incremental improvement over time. We're really happy about our productivity number this quarter, given that, you know, we had this, a lot of the headwinds of traffic coming back, right? Stifel coming back to work, society opening up, and still be able to overcome that and still see some productivity is a great signal to us or indicator of what RISE is delivering.
Listen, we'll see this more in the residential fleet. Then as we go forward, there's a kind of a 2.0 of RISE starting to get more into advanced analytics. How do we even, you know, take the analytics and build those routes more scientifically? How do we start to do more benchmarking across geographies to understand what the true, you know, performance improvement opportunities are? Yeah, I think you'll see steady ratable improvement as we go forward.
Yeah, the way we're looking at it right now, Michael, is that we probably have more opportunity left than we've realized, you know, life to date.
Got it. Last one. On the landfill gas to energy development, you're putting up 27% of the capital. Are you? I'm assuming you control the gas, and these other guys need the gas. They can't do what they wanna do, even if they got a lot of money. What’s the economic split?
For that investment, we have a 40% ownership in the JV.
Okay. Jon, you've talked about that $100 million number over and over again very consistently, but it now looks like the whole thing is a lot bigger. 'Cause I thought the $100 million related to your 17 you were developing, and now or is this an incremental $100 million plus a $100 million for the 17?
No, this is 100 total, Michael. So again, the you know the 17 was, you know, call it about $25 million incremental, and then this new JV, call it, you know, 75 for a total of 100 for all 56 projects that are under development.
Okay.
Keep in mind, Michael, these are. You know, we're into medium-sized sites. These are kind of, you know, sub-2,000 SCFM sites. You know, what we'll see over time is kinda ratably going through some of the legacy projects we have on bigger sites. You know, they'll reach their natural end of, you know, the project needs to be recapped. Many times it'll be an electricity project that we'll take into RNG, and then those will be bigger sites that we'll roll into this joint venture.
Got it. All right. Thank you.
The next question comes from Hamzah Mazari with Jefferies. Please go ahead.
Hi, this is Hans Hoffman filling in for Hamzah. My first question is, could you just comment on the quarterly cadence of operating leverage and margins this year, and then just what your labor turnover is running versus pre-pandemic?
Yeah, let me take that, you know, the margin question here. You know, again, if you take a look at the first quarter and how we performed, you know, what we see going forward more on a sequential basis is that the, you know, fuel really started increasing in March, right? Now we're kinda saying it's gonna stay elevated. That's the assumption right now for the rest of the year. Sequentially, we see a 30 basis point headwind from the impact of fuel. Now we're also seeing better level of pricing, so we think that, you know, we can mostly offset that. That margin would stay relatively flat, if you will, from our Q1 performance. That's on the traditional recycling and solid waste space.
If you then layer in the, you know, the US Ecology acquisition, that's gonna create about a 70 basis points impact to margin for the remainder of the year.
Okay. Got it. Yeah.
Yeah, in terms of labor, in terms of labor turnover, it's a little bit of a mixed picture, right? Slightly elevated to pre-pandemic levels in some roles, certainly down in other roles. I'd say, listen, the labor market remains tight, right? In that, you know, we would hire some more drivers for sure, right, if we could get them. Back to we're running the business for the quarter or the year, we're running it for the long term, right? We're looking at all the markets and seeing where we have any elevated turnover, understanding, right, if we need to put a little more wage into those markets, we will. Now wage is not always the answer. It's part of why people work. It's not all the reason why, right? It could be shift schedule, it can be their leader, it could be lots of things.
We're very mindful of that. Again, we feel like we've got certainly a very good handle on inflation relative to pricing and our ability to cover our costs.
Okay. Then, just, you know, on the hazardous, you know, waste exposure, you know, can you just talk about, you know, what that level of exposure is, you know, compared to what your, you know, your portfolio is right now, you know, and how big it could get, you know, understanding that the solid waste portfolio will also grow. Then just, you know, if you could touch on the cyclicality of that hazardous waste business.
Well, I'd say hazardous, we didn't have any exposure technically. I think your question more broadly is environmental solutions versus recycling and solid waste. Right now, we got about a $400 million business in that space. With the acquisition of US Ecology fast forward, that takes us to about a $1.4 billion opportunity in that space. Listen, we think when integrating field services and the post-collection side of that, it's got a relatively similar profile in terms of, you know, volatility in that space, and that there's a mix of project-based work and a mix of recurring revenue. Probably slightly higher, but when you mix the two parts of the business together, right, it doesn't meaningfully change our profile in any respect. In terms of growth prospects, listen, we start with recycling and solid waste.
We've never been more excited about our growth prospects there, both organically and through M&A. In addition, this platform with US Ecology gives us great geographic coverage and opportunity to do follow-on tuck-in acquisitions to build out some product and service lines or to, you know, fill out a few smaller geographies.
Got it. Thank you.
The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Yes, hi. Good afternoon, everyone.
Hi, Jerry.
Hi, Jerry.
I'm wondering if you could just talk about on US Ecology. Look, maybe it's too soon, but what's the nature of their landfill agreements? You know, how quickly can you apply RSG's pricing mechanism to the landfill part of the business based on the contract structure. Is that something you're comfortable discussing on this call?
Yeah. Look, these are very well-run assets. We start with compliance, right? Great compliance, great set of assets, right, that are well-maintained. Great compliance culture, great compliance capability and technical capability that we've acquired with US Ecology. We're really excited about that, and that is really the foundation, right? That allows us to go to customers and offer them solutions that they're comfortable with, that we, 'cause they have producer liability, right? We will maintain, right, their waste streams in a way that is very compliant, that they feel good about, that doesn't create liability for our customers. That allows us then to price for the value that we're delivering to our customers. We'll take a hard look at that. Again, we start with not the asset, we start with the customers, and we work our way back into the assets.
That begins right away, and it's a mix of contracted business and spot. Obviously, the spot we can look at very quickly. The contracted side of that, you know, will take a little more time. Over time, you'll see, I think, steady improvement in that area.
Okay. Then, you know, on the RNG contracts, the $100 million assumption, can you just touch on what that assumes in terms of gas price per MMBtu? Would you mind just commenting on if you have any offtake agreements at this point or how you're thinking about the opportunity set?
Yeah. The JV just got announced, right? We haven't developed the project yet, so we don't have any agreements. I can give you some of the assumptions, right? We got pretty conservative assumptions about gas flow, which we think we could probably beat over time. This assumes a $2 RIN price. It will be a mix of, you know, fixed versus spot, probably more fixed than spot over time, but we'll decide what that looks like together.
Okay. Super. Lastly, can you talk about how you expect the pricing cadence to play out over the course of the second quarter based on actions that you've announced to customers? You know, if you can touch on when you expect inflation to peak, if you have that type of visibility.
Yeah. Jerry, as I mentioned in my comments, we expect average yield to remain above 4%. Again, if you could take a look at the restricted portion of the business where we have those index-based price resets, 60% of our portfolio resets in the second half of the year. You can look for relatively consistent, you know, performance, you know, throughout the year, but I would sit there and say probably slightly higher in the second half than we saw in the first half.
Terrific. Thanks.
You bet.
The next question comes from Kevin Chiang with CIBC. Please go ahead.
Hi. Thanks for taking my question. If I look at your average yield to core price, I guess, conversion rate, I know that's not a great way to look at it, but, you know, that's been trending up nicely. You hit 70% in the first quarter here. I think in your prepared remarks, you mentioned retention at 95%. Does that suggest this is close to an upper bound of that conversion rate, or are there things you can do to continue to narrow that gap?
There's certainly things we can do to improve it, which is this, when we talk about our strategy around customer zeal and digital and sustainability, those are all things our customers value deeply, and we think are differentiated, and not every provider can offer that. As we create a better offering, right, our customers are willing to pay more and stay longer. That's the essence of what we do. Now, there is a structural bound. There are things like, you know, people move, right, or businesses close. There's things structurally, right, that I don't think we'll ever get to 100% loyalty. You know, at one point we were sub 90, and then we got to 92, and then, you know, we kept climbing the curve.
That's the aspiration, to continue to get a little bit better because the offering is that much stronger. As you know, the economics of loyalty in this industry are very, very strong. When customers stay longer, that's certainly very valuable for us.
Yeah. There's two components to that calculation. There's retaining more, but there's also pricing at a higher level for new business, right? Both of those go into the equation. As we expand the environmental solutions business, as we have the most complete set of products and offerings, we think that we offer to our customers, you know, we have a better, you know, value proposition, and we can then charge more for those services from a new business perspective.
Right. No, that makes sense. You're obviously seeing great momentum there. Just my second question. You know, I think you mentioned earlier you're all in, or at least you're focused on electric vehicles here. I'm just wondering, as you know, as a buyer of that technology, you know, what do you think the bottleneck right now is for mass adoption? I guess when you're evaluating what's in front of you, like, what are the KPIs that matter the most? Is it just things like battery density, or do things like supply chain resiliency, given all that's happened, you know, the past nine months, like, does that play a greater role?
Like, would you prefer a vendor that, for example, had vertically integrated their battery technology so that they're not dependent on somebody else, which creates execution risk on your orders? Just wondering how you kinda look at that evolution here.
Yeah. Both. Yeah, good question. Both are relevant. Certainly functionality, right? And the bottlenecks, weight and range, right? For us, the operative metric is a truck has gotta be able to deliver a full route in a day, right? Without having a midday charge. That kind of craters the economics of it because whatever benefit you get, you burn up in productivity on a midday charge. And again, we feel very optimistic about where we're headed on that front. Weight, we are working really hard on some short-term exemptions with the state and local municipalities. Again, I've already made some progress on that front as well and don't think that will be a hurdle or a barrier. We're very mindful of the supply chain with our partners to understand that, hey, what's our confidence in them being able to deliver this over time?
Obviously, the world's changed a lot in the last not only two years, but last 71 days. We're cognizant of that and certainly bake that into our plans. Still, all that being said, optimistic about the progress of starting to buy electric vehicles at scale, you know, within the next, two and a half three years.
Perfect. That's it for me. Thank you for taking my questions.
The next question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.
Hi, guys. Nice start to the year here. Would it be possible to drop the US Ecology outlook commentary to free cash flow, both for this year and on an annualized basis?
Yeah. Look, in these first couple years, you know, let's just take this year, for example. We're thinking conversion in, call it, the 20% range. Again, there's some elevated capital spending, in particular with a landfill. We're building out landfill disposal capacity, which takes us into 2022 and 2023. That then modulates. As we talked about before, you know, we still see 47% conversion as a consolidated company by 2024.
Okay. Got it. Helpful. Maybe putting US Ecology aside and just looking at, you know, standalone RSG, could you refresh any of the components of the year-over-year margin bridge for the full year? You know, we had the 60-70 from pricing ahead of inflation. You know, I think we had 50 from normalizing incentive comp, and then that was offset by 40 basis points from net fuel and 40 basis points from acquisitions. Is there anything in that bridge you'd be able to refresh for us here?
Yeah. What I would probably say is the big things that change relative to our initial assumption is that fuel at current prices creates an additional 50 basis point headwind. Think about pricing in excess of cost inflation offsetting that outside of US Ecology. Relatively consistent expectation for the full year, just getting there a slightly different way.
Okay. Got it. Very helpful. Thanks.
The next question comes from Noah Kaye with Oppenheimer. Please go ahead.
Thanks very much. Want to ask about some of the volume trends in the quarter. You know, I know that the comps weren't too tough, but you did outperform, I think, you know, relative to the industry. Wondering if you could touch on what you're seeing in the markets. What are net new business trends? What are you seeing in terms of business formation? Where might have actually surprised a little bit to the upside on volumes in the quarter? I guess the last part of that is, you know, how much of this is really just being in the right markets and how much of it is potentially attributable to share gains?
Yeah. Look, I think you're seeing the company or the country rather open up, kind of post-COVID, and some of that we saw last summer, but some we didn't. I think I mentioned this before. California, right, didn't really open up because as they were thinking about opening up, you know, the Omicron variant hit them, right? We didn't see quite the lift, seasonal lift we do there. You're certainly seeing some of that come back, and that is we're benefiting from our, you know, geographic footprint on that, including where population is growing, right? Our Sun Belt exposure helps as you see people going into, you know, Texas and Arizona and other places at large volumes. Listen, all of our investments into customer zeal and digital, right, are showing up in terms of organic growth.
That, you know, we're winning on the street. I think it's very tough to compete right now in a challenged labor environment. I think there's some people who have equipment challenges, right, given supply chain shortages. We feel very good about our equipment deliveries, feel good about our team. But it is a tight labor market, so we would take more drivers if we could in this place, but feel pretty good about how we're being able to, you know, sell and service customers.
Yeah. That leads into my next question, which is, you know, on the M&A front, you mentioned, and I don't want it to get lost here, the $400 million of, you know, short-term potential pipeline. You know, what do you think about the current challenging operating environment in terms of its impact on M&A? We've certainly seen some pretty healthy activity to start the year, but how do you see that potentially affecting the pace and the pipeline of the M&A opportunity?
Yeah. I think it remains strong, and we remain very encouraged about our outlook in that space. Listen, I think a number of things have helped us and probably helped the industry in the last three years, right? First, you had, you know, the fear around tax reform and that driving some selling activity. You had COVID and that making it a very challenging environment. Now you've got an inflationary environment with a constrained labor market where it's just getting tougher to compete, right? Add to that all the digital investments we're making at a scale that's very tough for other people to replicate, that are, you know, providing a better product to our customers. I think that drives the opportunity for us to not only grow organically, but also have a very attractive M&A pipeline going forward.
Great. Thanks. Nice quarter.
Thank you.
Thanks.
The next question comes from Mike Feniger with Bank of America. Please go ahead.
Hey, everyone. Thanks for taking my question. Brian, I think you mentioned Ecology. I think it's 70 basis points dilutive to margins for this year. How do we think about your margins now as you guys integrate Ecology, especially this year? In context of your 31%-32% target getting back there. Is it push it out a year? How can we kind of think about it with the integration now of this business?
Yeah. Mike, we're gonna sit there, and we are gonna separate. As we think about reporting, we are going to separate the environmental solution space into its own segment. As we think about the recycling and solid waste space, we have direct line of sight to that 32% margin. Look, this is structurally, you know, the business is different on the environmental solution space, but we think there's opportunity. This is something where will it take longer to get there on a consolidated company basis? Sure. We look at continual improvement, not only the realization of the synergies, the cost synergies, but as Jon mentioned, we didn't include any of the revenue synergies, whether it was cross-sell or any additional price into that performance.
Again, you'll be able to see it and you'll be able to see the cadence, and we'll talk about, you know, our expectations, how that moves as we provide annual guidance.
Perfect. That's helpful. Then just lastly, Brian, I think US Ecology reported $150 million of EBITDA in 2021. So the $130 million of EBITDA over the eight months, what level of organic growth are we assuming? And the margins look like it's a little higher than last year. I might not be comparing apple to apples there. So any color you can address on that pickup. Just lastly, I know I think Jerry asked it earlier. I'm just curious, like how does pricing work on this business? We know the restricted and the CPI and the open market on the solid waste side. Curious if you could add color on how that kind of plays out on that environmental services book. Thanks, guys.
Yeah. Let me talk a little bit about the EBITDA. Again, there's seasonality in the business. Let's talk about what we're expecting for a full first year contribution or an equivalent. Before any synergies, we would sit there and say we were expecting about $160 million worth of EBITDA. That would compare to the $150-odd million that you were referring to. That would be the year-over-year growth. We then layered in. Again, a full year would be about $10 million of first year synergies. What that means for the eight months based on the acquisition date, that's what translates into that $130 million of EBITDA, which includes $5 million worth of realized synergies.
Then Mike, on pricing, I think the best analog is think about the, you know, solid waste and recycling space. You think about the post-collection assets of US Ecology and special waste, right? Those are event-based deals, and special waste has some recurring streams, and it has some event-based streams. If you're only in post-collections, right, you're a taker on both of those, and you're typically giving more spot-based pricing. Sometimes, more continued streams are contracted, but contracted typically for shorter periods of time. Then the generator or the collector of those streams bids that out, right? The opportunity here is to integrate into field services, right? To have the assets, but driving that full integration, which allows you then to drive pricing from the customer, which drives more longer contracted and more consistency in the price, right? Reduces the volatility of that demand.
That is the focus, right? Understanding generators of consistent streams of, you know, specialty waste, hazardous handling, and being able to supply them, right, and integrating that, right, into the landfills. Over time, we saw this over a decade and a half in the solid waste and recycling space. That's how pricing power, right, emanated, is integrating those two things and not thinking about those two things as separate.
As a reminder, if you would like to ask a question, please press star, then one to join the question queue. The next question comes from Stephanie Yee with JPMorgan. Please go ahead.
Hi, good afternoon. I wanted to ask how the team came up with the $75 million-$100 million of cross-selling opportunity. Specifically, is that kind of a realistic estimate or is there conservatism in that number?
Yeah. It was certainly bottom-up. It wasn't a top-down one. We're in this space, right? We've been in pretty big footprint in the Gulf Coast now for few years. Last year, we acquired ACV, which gave us a footprint in the Northeast and the Mid-Atlantic. We're seeing it, right? We've already gone to market together, and we're seeing opportunities to serve customers because we now have the broadest set of environmental services, you know, product and services. Customers, bigger customers value that one-stop shop offering, right? They want fewer suppliers in their facility. They like the assurance of what we can do with those materials. We're seeing that winning in that space. When you think about US Ecology, now you just have much bigger patch of land, right?
We've got about a $1.5 billion manufacturing business. They're about $1 billion in revenue, right? We lay that across in terms of number of customers and take a fairly conservative estimate in terms of types of penetration we can get across that. That's how we came up with $75 million-$100 million.
As Jon mentioned, the proof points have been there with the acquisitions that we've already done in our existing business to be able to see that cross-sell opportunity is real.
Okay, that's helpful. If I can ask, now that you've closed on the acquisition, do you feel comfortable talking about whether you would consider divesting any parts of US Ecology's business, or whether, you know, that's even part of the consideration that you're evaluating down the line?
Sure. Yeah. They have a smaller international business, and they have a standby business. Both are good businesses. I think the question is, are we the natural owners of those assets? We'll start with international and put that under review and understand, hey, how integrated is that in whatever else we do, and given, again, we're not an international player, right? We're a North American player. We'll take a hard look there, and then we'll evaluate the standby business. Again, we always start with the customer. What's the customer interaction and overlap? Then we go into assets in terms of are we sharing facilities, right? Then we'll get into the ability to, you know, disintegrate that. Sometimes if something's so tightly connected, right, it's tough to divest of that.
If it's unrelated on the customer side and the asset side, typically the answer is it's easier to divest of that. We'll put both of those under review in that sequence, and we'll update you accordingly.
Okay. Okay, great. Thank you.
At this time, there appear to be no further questions. Mr. Vander Ark, I'll turn the call back over to you for closing remarks.
Thank you, Betsy. In closing, we are proud of our first quarter performance, which demonstrates the value our strategic investments are creating. We continue to manage the business to create long-term value for all stakeholders. I would like to thank all our employees for their continued hard work and commitment to partnering with customers to create a more sustainable world. We look forward to seeing everyone at WasteExpo next week as we proudly recognize our four drivers of the year and celebrate Don Slager's well-deserved induction into the NWRA Hall of Fame. Have a good evening and be safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.