Good day, and welcome to the Republic Services first quarter 2021 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. 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.
I would like to welcome everyone to Republic Services' first quarter 2021 conference call. Don Slager, our CEO, Jon Vander Ark, our President and incoming 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, 2021. 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 all available on Republic's website at republicservices.com. I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to Don.
Thanks, Stacey. Good afternoon, everyone, thank you for joining us. We are very pleased with our strong start to 2021. The momentum in our business is undeniable. Our strong foundation and consistent execution have allowed us to turn that momentum into meaningful, sustainable results and shareholder value. In the first quarter, we delivered adjusted earnings per share of $0.93, which represents a 24% increase over the prior year, generated $464 million of adjusted free cash flow, and expanded EBITDA margin 270 basis points to 30.7%. As you know, next month will be my last as CEO at Republic Services. This will be my final quarterly earnings call with the company. Having said that, I expect the bulk of the questions on today's call to be taken by Jon and Del as they tell you about the solid results in Q1.
Also, they'll share a glimpse of the future and the exciting trajectory of Republic. I am more than proud of what this team has accomplished over the last decade, and I am extremely confident in how we are positioned to go forward from here. Now, I could give you a long list of accomplishments and important milestones that we have achieved, and frankly, surpassed. I could go on and on about the foundation we have built. More importantly, let me tell you this. The team we have in place is the strongest team in the history of the company. Not only did they establish this foundation we are standing on, but they have the energy and the capability to build it from here. Republic has been tested many times. 2020 was no different.
The stability of our business, the power of the portfolio, the capability and dedication of our people were all once again defined and proven. The resiliency and predictability of our operating model and the strength of our culture and the spirit of our people shined brightly. I have a poster that hangs in my home gym. It's been there for 20 years. It is a simple photograph of an old brick wall with a pair of well-worn boxing gloves hanging on a hook. It displays one of my all-time favorite quotes: "The fight is won or lost far away from the witnesses, behind the lines, in the gym, and out there on the road long before I dance under those lights." Those words were attributed to the great and one and only Muhammad Ali.
This team, this Republic team, also knows how to prepare for and how to win the fight, and you are seeing that in these results. The five most enjoyable things for me as a leader are these. First, casting and collaborating toward a shared vision. Second, assembling a purpose-built team. Third, creating an effective work environment. Fourth, ushering in the future, along with necessary change, new energy, and next-gen leaders. Fifth, and finally, keeping a promise. Appropriately, this is where I leave you. Republic is on solid ground and operating from a position of strength. Republic has plenty of traction, horsepower, and motivation. Republic's leadership is proven, aligned, and invigorated. Republic's workforce is professional, well-equipped, and highly engaged. Republic looks pretty darn good under those lights. I am so very grateful for the opportunity I've had to serve and to lead here at Republic.
To all my teammates and trusted advisors, thank you for your perseverance, passion, and your friendship over the years. To those of you on the phone with us today, the analysts and our investors, I appreciate you putting your faith in us, and thank you for constructively challenging us along the way. It makes us better. As I have said before, at Republic, we all have the same job. We may have different roles, but we all have the same job. All 35,000 of us are united in support of each other every day as we safely and reliably serve our customers and our communities, and as we responsibly steward our resources. I know Jon feels the same way. Jon has a clear vision for the road ahead. He also has the strong character and relentless focus to do the hard work that ultimately delivers the victory.
Which means my role at Republic is concluded, and my purpose here is complete. Jon and his team are well on their way to write a wonderful and rewarding new chapter of the Republic story. With that, I'll turn things over to Jon.
Thanks, Don. I appreciate the kind words, and I am honored to have this opportunity to be Republic's next CEO. Turning to the first quarter results. We continue to see improvement in the business and report a positive revenue growth for the first time since the beginning of the pandemic. The pricing environment remains strong, which allowed us to deliver double-digit earnings growth and margin expansion. Total core price was 4.3%, and average yield was 2.3%. Core price included open market pricing of 5.2% and restricted pricing of 2.28%. As discussed on our last earnings call, average yield was expected to be relatively lower in the first quarter. We remain confident in our ability to achieve average yield of at least 2.5% for the full year. During the first quarter, volume decreased 80 basis points versus the prior year.
This is a 100 basis point improvement from the fourth quarter, with nearly all lines of business showing improvement. We expect volume to turn positive in the second quarter and remain positive for the remainder of the year. We continue to drive profitable growth and believe that investing in acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value. Earlier today, we closed the acquisition of Santek. We welcome these new employees to the Republic team, and we look forward to integrating these high-quality assets into our business. Our pipeline of acquisition opportunities is strong, and we remain on track to invest at least $600 million in acquisitions for the full year. Now, turning to our Environmental Solutions business. First quarter Environmental Solutions revenue decreased $17 million from the prior year. This resulted in a 70 basis point headwind to total revenue growth.
We continue to focus on the downstream portion of this business, where customers are looking for integrated solutions, and we can leverage our broad capabilities and sustainability platform. Moving on to recycling. Recycled commodity prices increased 75% to $133 per ton in the first quarter. This compared to $76 per ton in the prior year. Turning to margin. Our adjusted EBITDA margin in the first quarter was 30.7% and increased 270 basis points versus the prior year. We continue to successfully manage our costs for changes in underlying demand and leverage our new, more efficient ways of working. This includes utilizing our RISE platform and accelerating the use of technology to drive efficiencies and improve the customer and employee experience. In the first quarter, we continued our high-performing safety record, reducing safety incidents 18% versus the prior year.
We continue to see the positive contribution from our maniacal focus on the customer experience. In the first quarter, our NPS increased four points over the prior year, and we achieved a record-setting customer retention at 94%. During the first quarter, we made further progress towards our long-term sustainability goals. As part of our sustainability platform, we recognize the importance of identifying and managing opportunities and risks related to climate change. We remain committed to transparency and metrics that are important to all our stakeholders. We are proud to be the first in the industry to disclose our climate-related opportunities and risks through a comprehensive TCFD report. We were also recently named to Fortune's 2021 Most Admired Companies list. This is an award recognizing our team-focused management, innovation, and socially responsible business practices.
Looking ahead, we expect to outperform our original guidance through our strong start and outlook for the remainder of the year. As a result, we are raising our full-year financial guidance as follows. Adjusted EPS is now expected to be in the range of $3.74-$3.79. Adjusted free cash flow is now expected to be in the range of $1.35 billion-$1.4 billion. I will now turn the call over to Brian.
Thanks, Jon. First quarter volume decreased 80 basis points. Additionally, there was one less workday, which reduced revenue by 50 basis points compared to the prior year. The components of volume included a decrease in small container volume of 2.8%. This represents a 70 basis point improvement from the fourth quarter. A decrease in large container volume of 2.1%. This represents a 130 basis point improvement from the fourth quarter. An increase in landfill volume of 2.5%. The increase in landfill volume includes a 3.5% increase in MSW volume and a 1.9% increase in special waste. Within the quarter, volume performance was negative in January and February and turned positive in March. We expect volume will remain positive for the remainder of the year. Adjusted EBITDA margin for the first quarter was 30.7% and increased 270 basis points versus the prior year.
This included underlying margin expansion of 210 basis points, a 20 basis point benefit from net fuel and recycled commodity prices, and a 40 basis point benefit from one less workday. The outsized margin expansion is a direct result of pricing in excess of our cost inflation and effective cost management. SG&A expense for the first quarter was 10.2% of revenue, an improvement of 70 basis points over the prior year. While SG&A costs have decreased, expressed in both dollars and as a % of revenue, we continue to make investments to drive growth and generate efficiencies in future periods. Adjusted free cash flow for the quarter was $464 million and increased $178 million compared to the prior year. This increase is the result of EBITDA growth, positive contribution from working capital, and the timing of capital expenditures.
Working capital included a one-day improvement in DSO and a two-day improvement in DPO. Capital expenditures of approximately $200 million during the first quarter represents 17% of our projected full-year spend. The timing benefit of capital expenditures will flip over the remainder of the year. During the quarter, total debt was $8.9 billion, and total liquidity was $3 billion. Interest expense decreased $18 million as a result of our refinancing activities completed last year, and our leverage ratio decreased to 2.9 times. With respect to taxes, our first quarter adjusted effective tax rate was 26%. When you further consider non-cash charges from solar investments, we had an equivalent tax impact of 28.4%. I will now turn the call back over to Jon.
Thanks, Brian. I'm excited about the company's future. However, we can't go forward without looking back. It is impossible to overstate Don's impact on Republic Services. He is the architect and champion of the Republic Way. Don will always be known as a visionary who successfully integrated the several hundred acquisitions that have formed the current-day Republic. He strengthened Republic's foundation while investing in the capabilities that allow us to drive profitable growth and shareholder value. During the last 10 years, Don has led the company to more than triple our stock price and market capitalization, which now approaches $35 billion. Among everything Don has accomplished, his biggest achievement is the culture he created. He made Republic Services a place where the best people come to work. He professionalized our company and motivated our talent along the way by modeling a purpose-driven approach to the business.
He took care of the team, and in turn, they have taken care of one another. We should all be so lucky to have a career like this. 35 years of service to a company that has created tremendous value for all. No one has driven value creation for their employees, customers, communities, and shareholders like Don. On behalf of our 35,000 team members across the country, as well as our industry, thank you, Don, for your leadership, your perseverance, and your vision. With that, operator, I would like to open the call to questions.
We will now begin the question-and-answer session. To ask your question, you may press star, then one on your touchtone phone. In the interest of time, we ask that you limit yourself to one question and one follow-up question today. If your question has been answered and you would like to withdraw your request, you may do so by pressing star then two. If you are using a speakerphone, please pick up your handset before pressing the keys. We will now pause momentarily as we assemble our roster. Our first question today will come from Tyler Brown with Raymond James. Please go ahead.
Hey, good afternoon.
Good afternoon, Tyler.
Hey, Jon, congrats on the new role. Don, thanks so much for everything over the years. Jon, I figure Republic is a little bit like a cruise ship, and this is a compliment, but it's probably not the fastest-moving ship. How should we think over time? Should we or maybe investors think over time, should we expect any noticeable changes in focus or strategy?
Well, thanks for the question, Tyler. I like the analogy in terms of the durability and stability. I think you will see us pick up speed. Listen, there'll be no right or left turns, in part because the business has lots of momentum. I've had the privilege of being part of a team that's driven the current strategy that's led to the set of results. At the same time, we're at an inflection point. All the hard work we talked about in the prepared remarks in terms of building the foundation, has produced a level of performance that allows us, we think, to move faster going forward. You're going to see us focus a lot on three core capabilities, customer zeal, digital, and sustainability.
We think that's going to allow us to drive growth opportunities, certainly in our traditional waste and recycling business, but also more broadly in environmental services over time. We're going to do that, again, with a balanced approach on organic and inorganic growth, always with an eye toward returns and putting the shareholder at the top of our priority list in terms of how we think about making investments.
Okay, great. That's very helpful. Maybe to drill down here, Brian, so I think our Q1 was $133, but specifically, what is in the guide for the full year?
Yeah, Tyler, we actually just maintain that recycled commodity price at about that $130 a ton, over the remainder of the year.
Okay. If I look at my notes, I think you were around $100 for 2020. I'm going to do the math on the fly here, but it sounds like it's about a $30 delta, and I think it's a $0.03 per 10, so it's something like $0.09. You've raised your guidance by $0.10. Was the whole guide raise effectively just commodities, and we're not really touching the volume at this point?
Yeah, a couple questions there, let me kind of break it apart. First of all, in our original guidance, we had it pegged at $110 a ton. It's actually a $20 per ton increase that is included in this new guide. To your point, really, this guidance, the new guidance, is a reflection of a strong start in the first quarter, relatively higher commodity prices. We want to wait and see that normal seasonal uptick before we address some of those other assumptions like the price and the volume and the margin. Right now we feel optimistic about what we see coming out of the first quarter, but we want to see it before we address those assumptions, which we plan to do in July on our second quarter call.
Yeah, obviously, Tyler, we're cognizant of the fact we're still coming out of a pandemic, and there's certainly some uncertainty that goes with that. Again, we feel really good about the momentum we have and that the outlook is positive. Looking around the world, this thing is certainly moving in uncertain ways. We want to have the appropriate level of caution and wait until we see that volume come back to Brian's point.
Okay. No, that's very fair. My last one. I think you mentioned Santek closed today. Brian, can you give us the expected revenue contribution from all M&A that closed last year and so far to date this year here in 2021? I know that was something that you did not give on the last quarter call.
Yeah. Let me give it to you this way. What we talked about was for the deals that closed in 2020, the rollover impact of that was 150 basis points. Okay. What we're seeing now, when you take Santek plus some of the other, I would say, smaller acquisitions that we anticipate on closing over the balance of the year, we would expect total contribution, so rollover plus in-year impact of 250-300 basis points.
Perfect. Okay. That's what I needed. Thank you.
Thanks, Tyler.
Our next question comes from Hamzah Mazari with Jefferies. Please go ahead.
Hi, this is Mario Cortellacci filling in for Hamzah Mazari. I also want to congratulate Jon Vander Ark, and also Don Slager. I wanted to wish you the best from Hamzah Mazari and our team. It's definitely been a pleasure. Could you just walk us through how you're thinking about operating leverage in your model on a go-forward basis? Maybe specifically with some of the investment spend coming off, better pricing with higher inflation, and exit of low-margin business that you were doing for a while being behind you.
Sure. I'll start and then Brian DelGhiaccio can fill in the pieces. Listen, we feel good about all the hard work we've achieved. Our results from the first quarter aren't the results of just the last three months. They're results of the prior three years and all the heavy lifting we've done to optimize the business. Again, we've always pursued returns and profitable work, and that caused us to take a hard look and make sure that customers that weren't willing to pay their fair share, we've rotated out of the portfolio. We feel great about that. As volume comes back, obviously, we've gotten really tight from an operating and a cost standpoint, and we think we have capacity to take on that volume.
Not limitless, of course, but we'll make the appropriate investment with the appropriate return into our fleet and landfill capacity as we see the growth come back.
I would sit there and just add, we think we've found a new gear here. Right? The work that Tim Stuart and the entire operating team did throughout the pandemic to find these new levels of profitability, we don't plan on giving that back. Again, it's throughout the P&L. It's the operating costs. It's the SG&A expenses. We found new ways to work. We've talked all along that we expect to emerge from this pandemic more profitable than we entered it, and we feel more confident than ever in that statement.
Great, thanks. For my follow-up, I just want to touch on recycling. What percentage of your contracts have been restructured post the recycling downturn you had a few years ago? Maybe I missed it earlier in the call, but what was the EBITDA for recycling in Q1? I know it's small. I guess just trying to gauge where that can go with the contract restructuring longer term.
Yeah, we've restructured about 60% of our processing contracts and about 50% of our collection contracts on the recycling side. That just tells us we have more work to do, right? Because we have to move the model to one that becomes economically sustainable, where we get paid an appropriate return to collect the recycling, we get paid an appropriate return to process it, and then we can share in the commodity value. Frankly, the customer, we think, is the natural owner of most of that and the volatility associated with that. I think we've done a good job of reducing the volatility on that front, but I also think there's more upside as we move forward.
EBITDA-wise?
Yeah, we don't actually disclose the EBITDA by line of business. What I can tell you is just the contribution to margin from higher commodity prices during the quarter was 50 basis points.
Got it. Appreciate it. Thank you.
Thank you.
Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.
Good afternoon, Don Slager, Jon Vander Ark, congratulations.
Thank you, Jerry.
I'm wondering if we could just talk about the ESG theme. Obviously, landfill gas economics look pretty attractive at spot RIN prices. I'm wondering if you could just talk about how many additional plants over the next couple of years are you folks considering transitioning to tying into pipelines to achieve the full benefit of RIN economics, and how are you thinking about the sustainability of D3 RIN prices anywhere close to the current range? Thanks.
Yeah. Thanks, Jerry. We have about 70 projects today. We've got a dozen or more in flight of additional projects. Today, those projects, as you know, are a mix of some pure electricity, some are more high-BTU ones, and as we go forward, we're looking at those to capture the RINs opportunity. Our primary model historically has been to work with partners on the development. We think that just gets us there faster, right? Certainly, we don't get all the upside of the RIN pricing, but it also helps us kind of manage the volatility of that. It's more of a royalty model going forward. Again, we're always looking at the model, and we've pursued some of those on our own, but I think our predominant model going forward will be working with third parties, and we don't think we're done at a dozen.
Those are just the ones we have right in front of us now, right? We're going through more of our medium-sized landfills. We think there's other opportunities to unlock there going forward as well.
Okay, thank you. From a cost structure standpoint, really impressive continued performance in landfill operating costs and maintenance and repairs. I'm wondering, as volumes come back, what's the magnitude of the recovery in these types of costs that we should be looking at with volumes? You alluded to it earlier in terms of some things are going to be done differently going forward. I'm wondering, can we just talk about that within the context of how strong the performance has been within those areas and to what extent we might mitigate the impact of a volume recovery on those types of expenses?
Yeah, listen, I think there are going to be some things that don't look exactly like they are today. Some costs come back. Obviously, we're still largely in a no-travel mode, and there is going to be some travel that comes back. At the same time, it's not going to come back to pre-pandemic levels. We're going to take advantage of the tools that we have, our virtual meetings, that certainly save us some costs. That shows up in SG&A, frankly, much more on opportunity cost, right? One of the reasons that we're driving great performance on the front line of the business is our people are focused on day in and day out, right? They're not getting tied up or distracted with other things on that going forward.
On the operating side, listen, we'll have to see what happens with work from home going forward and what traffic patterns do. We may give up a little bit of productivity, but I think that will be more than offset by the further rollout of our RISE platform and digital ops and pushing that through our operations where we continue to get an incremental load on a route and just continue to be more and more efficient while maintaining a great customer experience and our safety record that we think, again, allows us to kind of claim the ground overall that we've gotten from an EBITDA margin standpoint, and hopefully look upwards.
Okay. I appreciate the discussion. Thank you.
Thanks, Jerry.
Our next question will come from Sean Eastman with KeyBanc Capital Markets. Please go ahead.
Hi, guys. Jon, Don, many congratulations, and great retirement remarks there. Don, great. I just wanted to try and sort of figure out what the kind of midpoint of the updated earnings guidance reflects from an EBITDA perspective. I think the old guidance, you had 10 basis points of margin expansion, 50 basis points underlying, offset by 20 from the acquisition dilution, and then a net 20 headwind from fuel and recycled commodities. Would you be able to help update that for us? Off to a pretty big head start here.
Yeah. Sean, as I mentioned before, off to a strong start. We're going to wait until we actually see that normal seasonality uptick, which tends to happen in that May and June timeframe, and then we're going to come back in that Q2 call. We'll talk about price, volume, and margin assumptions. What I can tell you is that we did get off to a stronger start, than we originally anticipated. We are optimistic about what the next few quarters hold. Again, we want to actually have that in hand before we make a full update with respect to those major assumptions.
Okay, fair enough. Maybe with Santek close, it'd be great just to hear sort of what's exciting about that from a strategic perspective, synergy potential over the next couple of years. Any color around the acquisition, since it's a larger one, would be great.
Yeah. We're really excited about the acquisition. It's unique in the sense of, you rarely find an acquisition that has kind of this level of post collections, assets, and infrastructure. We're taking on 11 landfills, which is so about, and it fits perfectly into our footprint. Kind of layers into the Southeast Mid-Atlantic, Sun Belt part of the country where we've got lots of strong assets, and again, we think provides a platform. We pick up a few new communities as well. That provides a platform for a follow on M&A and tuck-in deals that allows us to grow further on that front. It was a well-run company for a long, long time. It was a protracted close to it as we went through the DOJ process. I think the pandemic did us no favors just in terms of the process on that front.
The great news is we came out exactly where we expected. We knew that there were going to be some small divestitures associated with that, and we ended up right on our numbers. We feel really excited about having those team members join our team.
Excellent. Thanks. I'll turn it over.
Our next question will come from Walter Spracklin with RBC Capital Markets. Please go ahead.
Thanks very much. Both Don and Jon, I echo the same sentiments. Congrats and good luck. Starting with volume, obviously the year-over-year compare is not as instructive as it would be in other years. I'm wondering if you could talk a little bit, therefore, about the sequential cadence and how that compares to normal years, in its cadence. In other words, how are you looking at April, and into May, and how would you judge that performance relative to where you'd be in April and May in a typical year? Are you feeling like things are getting sequentially stronger, faster? Are we starting to slow with some of the things that you mentioned on the recovery front? Just curious on the cadence side.
Yeah. Obviously, it's an unprecedented time, it's hard to perfectly compare to history. There's two different things going on. Obviously, we're coming out of a pandemic, you're going to start to see really positive comps as we move forward. You also have weather episodically hits us. In this case, we had a fine start in January, kind of on plan. February, we were certainly off plan. For example, the state of Texas was largely closed for a week, with some of the weather they endured. March was really, really strong, we feel very good about the momentum into April as well. I think from just a top-down look, we think the February event, again, was more weather related than it was pandemic related, right?
Now we're seeing pretty strong momentum in the business, but still waiting to see kind of a normal, seasonal uptick that really starts to take off into May.
Yeah. I would sit there and just add, when you take a look at March into April, so again, we're not closed at this point, but so far the sequential increase looks very similar to what we saw back in 2019.
Perfect.
That's a good sign. Again, usually, the real acceleration, the real seasonality happens April into May and then May into June. That's why, again, we're going to come back in July and be able to report what we saw and be able to then talk to the other assumptions and talk to the guide at that point.
Yeah. Okay. Just on that note, understanding you're not giving specifics around any of those inputs, though you are increasing guidance, is there something that you would, without getting into the details, you'd just call out that this one element was the biggest variance? I mean, this one element, be it price or costs or volume or whatever, was the main driver of the better quarter here in terms of what you were expecting when you laid out your guidance.
Yeah, I think, listen, we had a really very solid start across the board in terms of the underlying performance of the business. I think to Brian's earlier point on the guide, the commodity prices, just $20 above our expectations, and I think the outlook is pretty strong on that front. That's what gave us the confidence at this point, to raise the guide and to kind of just do the flow through math on that. It kind of took us into that territory.
Yeah, I would just sit there and say, as you talk about just Q1 though, and outperformance relative to our initial expectations, I would also just sit there and say, the performance on the cost side as well. Again, if you remember when we gave the full year guidance, we talked about those macro benefits modulating as volume returns. We're hanging on to some of those benefits more than we originally anticipated. We're going to see if that holds, which again, we can actually talk to that again when we get together in July, because that would be relative upside to what we originally anticipated.
Great. Appreciate the time, as always.
Thank you, Walter.
Our next question will come from Kyle White with Deutsche Bank. Please go ahead.
Hey, good afternoon. Thanks for taking the questions. Don Slager, congrats. I hope you enjoy your retirement. Jon Vander Ark, congrats on the new role. I wanted to talk about the CPI book of business, understanding that you have the 37% tied to a CPI waste index or a fixed rate increase of 3% or more. Are you seeing maybe a slowdown in terms of conversions on this initiative due to kind of the inflationary environment we're in right now?
Yeah. I think there's probably a bit of a slowdown just because as you go through one of these initiatives, obviously, you go and talk to everybody, and there's gonna be some first movers, and then there's gonna be some slow movers. We don't stop. We're relentless, so we just keep marching right into City Hall, and eventually we get everybody to turn. Sometimes the reality of that is it's gonna turn when the contract is up, there's a normal cadence of that. In reality, the pandemic hurt us in that respect because you couldn't have as many face-to-face meetings and cities were working on other priorities at the time. Now that we see people kind of come out of it, the economy opening up, we're back at it.
That's a normal part and it's part of the performance incentive, frankly, of our municipal sales team, that they're working on to get what we think is a fair and favorable price index for us.
Yeah. I would even sit there and say, even though that's the challenges we face, we made great progress in the quarter. That 37% represents $930 million of revenue. When we reported that at the end of 2020, it was $875. We actually moved $55 million of revenue during the quarter.
Got it. That's helpful. Going back to M&A, just curious about the pipeline and if you're seeing any kind of increased activity, just given some of the speculation on tax changes. Regarding the Santek and the length it took to close, does that make you kind of rethink your M&A strategy at all in terms of maybe what you're targeting from a size or region standpoint?
We haven't seen, I would say, a huge increase because of the looming tax law changes, only because I think the pipeline has been strong now for a number of months. We've stayed really active during the pandemic, obviously meeting with potential sellers in new ways, virtually. Now our team is getting back out on the road and meeting people face to face. The pipeline continues to be strong on that front. We feel good about that. Listen, the Santek in terms of the DOJ process and that taking longer than we said, not really. We're still targeting those types of opportunities. There's not a ton of those opportunities versus the smaller tuck-ins, obviously. That's just kind of a numbers game. We're not deterred at all from pursuing those types of opportunities.
Again, we'll go in eyes wide open in terms of the length of time, but I think the great headline story of Santek is it took us longer than we wanted, but we ended up where we expected, and their business performed very well in the process. We're buying exactly what we paid for.
Got it. Thank you. I'll turn it over.
Our next question will come from Michael Hoffman with Stifel. Please go ahead.
Thank you very much. Don and Jon, best to both of you. Don, I have a question for you. Could you talk about one or two actions that you've taken in this tenure that Jon and Brian are going to be talking about two or three years from now, that will be part of why the growth rate or the margin or the cash conversion looks the way it does?
Well, look, I think there's a couple things. First of all, my goal was to say very little today. I think talent is gonna be the top of the list here forever. We put the talent agenda front and center a decade ago. We focused on composite strength. We focused on building the best place for the best people come to work. We're not done yet. You're never done because the world turns. It's the people of the company, the talent of the company, and the dedication of those people and the fact that they're all growing and developing continuously. There's waves and waves of generations of really top talented people here, and many who Jon's already got his eye on to do their next assignment. We're gonna talk a lot about that. That's not ever gonna go away. That is embedded in the Republic Way.
The broader Republic Way of really getting the best out of our scale and then getting the best out of our local density. When we first started a decade ago, we were a collection of various companies with the trucks were 40 different colors and 35, 50 different names. I don't even remember anymore, we used to argue about silly things that took time and energy, and we don't do any of that anymore. The speed that Jon talks about, speed becomes a differentiator. Speed becomes a strategic strength. The speed at which our team now can change and roll out new things, and RISE is an example of that speed. We're gaining speed all the time. Jon is starting his new position from a running start. That really bodes well for the future of the company.
Many of the things that we've been doing over the last several years, Jon Vander Ark was very involved in. The operating structure of the team that he's inheriting, he has been playing a big part in developing and choosing and directing.
Back to speed is going to be a big deal. Republic Services is not going away. It's just going to get bigger and brighter. It's going to help us. We talked about things like customer zeal. We're going to be the best service provider in the space, and people are going to compare us to world-class in the same way they do on safety today and fleet operations and those other things. Those are my final words, Michael.
Okay. Thank you. I hung it up in the ring, and it scared the hell out of my young horse the first time he saw it.
There you go.
Brian DelGhiaccio and Jon Vander Ark, it's been 10 years since this company has produced a 40% or better gross margin in the first quarter. The trend in the three years it did that, 2009, 2010, and 2011, you were consistently above 30% EBITDA margins. What I'm hearing throughout the call, and I'm asking a question that's been asked in different ways, this is secular and structural. There's no giveback here. You hold onto this. Between the gross margin, a 10%-10.5% SG&A, a 40.5%-41% gross margin. This is structural.
Absolutely. We feel good about the ground that we gained. again, we're setting our sights on new heights. while there's going to be some headwinds short term that we had talked about earlier, there's still plenty of upside, right? We're still working on a lot of our price initiatives on the municipal side, which we talked about earlier. We think as we'll probably get a little more inflationary here, that creates upside in the business. We're still improving the recycling side of the business. We think there's more leverage on operating costs through the digital tools we're putting out. We think we can make customers even more loyal, even though we achieved a record loyalty rate this quarter. yeah, we're optimistic about the future, and we think the financial results, again, are a great sign of our achievement.
Certainly not something we're going to go down from. We're going to go up from here.
Thank you, and good luck to all of you in each of your varying new roles.
Thanks, Michael. Thanks, Michael.
The next question will come from Jeff Goldstein with Morgan Stanley. Please go ahead.
Hey, good afternoon. I'll echo all the previous comments here and say congrats, Don, on a long and successful tenure, and congrats, Jon, on the new role. I know you used to give this figure, but any sense of what % of customers who reduced service have now resumed? On those customers who haven't reached out, what are you really seeing in those business? Are a subset of those likely to be permanent closures or at least permanent service reductions? Maybe they realize they can get by at a lower service level here. Just how are you thinking about the path back of those remaining customers?
Yeah. If you take our small container business, which I think is the best place to look. Obviously, residential didn't really change, right? That went the other direction, right? We've maintained those customers, they just got a little heavier. Small container, I think that's the nature of your question. It's 0.6%, so less than 1% are still paused. If you look at that, the mix of that, it really falls into three verticals. It's schools, which shouldn't be any surprise. It's entertainment and hospitality. It's restaurants. Look, schools are going to come back, right? The pace and timing, we can debate that offline, but schools are going to come back in person at some point here. Restaurants have been shockingly resilient from our perspective. It doesn't mean there haven't been any closures, but there's been some openings, too.
People have expanded their capacity at restaurants as they've started to have outdoor dining combined with their indoor dining, and they're probably going to try to maintain that ground. then entertainment, I think that that's going to move, but probably going to be the most interesting to watch. I think you're going to see a boom back in some pent-up business travel and personal travel. Everyone's got the Disney vacation and the business conference that has gotten pushed out now for 18 months. That'll come back. I also think over time, there'll be some modulation in some of these small meetings that people were flying around the country for that may now just decide to take advantage of the technology just like we are going forward. again, that's going to be relatively de minimis in our overall results in terms of volume.
Okay. That was all very helpful. How should we think about the $45 million of financial support you were providing to frontline employees last year? Does that number come down this year, and if so, to what extent? In the first quarter, were any of those costs still baked into your operating expenses? Just how should we think about that?
Yeah. We still have a little bit of that into the system because that's just the heightened protocol around PPE, cleaning facilities, et cetera. We are incredibly cautious on that front. I think one of the successful things that we did during the pandemic was we took care of our people in all respects. Certainly their safety we put as our number one priority and their health, as well as facility cleaning and everything else. We still have a bit of that cost. I think it's about $8 million in the first quarter. That will modulate, and we'll have some of that in the second and third quarter. Hopefully, we don't have any of it in the fourth quarter, but we'll spend it as long as we need it. It's certainly coming down off of that $45 million from last year.
Okay. Thanks a lot.
Thank you.
Our next question will come from David Manthey with Baird. Please go ahead.
Thank you. Good afternoon, and congratulations, everyone. My question is also on the indices here. When you look at CPI and the water, sewer, trash index, they've kind of converged lower lately. When you think about the components that make up each of those, if we do see generalized inflation in the economy
Is it your expectation that the water sewer trash index is going to increase at the same magnitude as regular old CPI?
I don't know that we know that it will be identical to the same magnitude. It will certainly be in the same direction. Again, as there's inflation, that will put upward pressure. Exactly how that moves, if you look at the history of this index, which hasn't been around forever, but it hasn't always been perfectly correlated to CPI, but it's certainly connected directly to CPI. It's a sub-component of headline.
David, yeah. the water sewer trash is an element, it's one of the components of the basket that makes up headline.
I see. Okay. second, I apologize if this is a simple question, but how does maintenance and repair work at Republic? Is there a set maintenance schedule for each period and then repairs would be sort of the unplanned swing factor? if that's the case, what percentage of the overall is that sort of unplanned piece? If you could just help me understand the dynamic there.
Yeah, obviously this is a big part of Don's legacy, of we were very reactive historically on maintenance, and everybody figured out maintenance themselves. Part of the cornerstone of the Republic Way from a functional standpoint was One Fleet. The idea that we ought to leverage our scale and figure out how to do maintenance one way across our 165 business units, and that we ought to shift our focus to preventative maintenance, right? Being scheduled versus reactive. Now more than 80% of our maintenance work is scheduled, and proactive, and we think that one, helps with lower cost, but more importantly, that keeps our fleet moving. It keeps our employees in the trucks, keeps them productive, and keeps us servicing customers and providing great customer service.
Great. I appreciate it. Thank you.
Thank you.
Our next question will come from Noah Kaye with Oppenheimer & Co. Please go ahead.
Thanks so much for taking the questions. The prepared remarks were really eloquent and we appreciate everything you've brought to the industry, Don, so we wish you well. Good luck, John, on your new role.
Thank you.
Thanks.
One of the themes so far, I think, this quarter for the industry has been the open market price strength and stickiness. Clearly you saw a good result this quarter. Curious for your view, number one, on what is driving the open market price retention and strength. As you look to future quarters, where do you see the greatest opportunities to push price across which lines of business?
Yeah, I think the pricing this quarter, I think you have to look back during the pandemic, and I think the pricing held up incredibly well. I think you can go back to the Great Recession and where we saw a lot of drag on price and people probably getting a little bit nervous and panicking. I don't think you saw that behavior. We've certainly always prioritized price over volume. We have to get a return on the work we do. It allows us to continue to invest in our assets and continue to give our people what we think is a fair raise every year. We remain very disciplined and very focused on price. I think the outlook on price is certainly very strong. As we go forward, I think you're going to see continued momentum on landfill pricing.
That's the place where we're making major investments in those assets to continue to prioritize environmental compliance, which is the top of our list, and we need to get a return on those assets. that's where pricing emanates from the collection side of our business. I think just nominally, you'll see our large container pricing improve. There's some kind of technical things that go on there with price volume. That number looks a little bit low. overall, you got to look at the top-line view of look at the revenue and then look at 270 basis points of margin expansion. That just shows you our discipline on price and the fact that we're getting quality revenue that's dropping to the bottom line.
That's super helpful. just a quick question on CapEx. Obviously, trucks are always a major component of that, and just given the tightness in the trucking industry in terms of backlog and length from orders to fulfillment, how are you positioned for the year? Clearly, you have a very large fleet, so you have scale, but do you believe you'll be able to spend your CapEx targets this year? Will you have to essentially shift any spend from trucks to other line items?
No, we feel good about it. Listen, there's always a little bit of lumpiness quarter-to-quarter in the CapEx, and I think we maybe anticipated a bit of this, and so we were pretty aggressive in Q4 last year on getting ahead of the truck order to make sure we were prepared as volume came back and that we could service our customers. We feel good about that and we feel there is a little bit of slippage in the order board, but frankly, I've never been here when there wasn't a little bit of slippage in the order board, right? That's normal course, and we feel pretty good that direction will be at our number for the year.
Okay, great. Thank you.
Thank you, Noah.
If you'd like to ask a question, it's star then one. Our next question will come from Mike Feniger with Bank of America. Please go ahead.
Hey, guys. Thanks for squeezing me in, and Don and Jon, all the best and congrats. I'm echoing all the sentiment there. Just maybe, Brian, you could help me with this.
The margins were exceptional, and I'm just trying to understand, the yield has actually gone from 2.6 in Q3 to 2.5 in Q4, and I think 2.3 in Q1, yet your margins are exceptional. is there anything why the yield has actually not been going up in the first quarter, or is that kind of on the come right now? How do we think about that yield number with these exceptional margins?
Well, first of all, I would sit there and say, I think what the outcome's demonstrating is that we are pricing in excess of our cost inflation. Let's start there. In order to get 270 basis points of margin expansion, that has to be true. What I would say, though, John mentioned it just a second ago, one of the things, when you look at our large container yield at 1.1%, we do a change in price per unit. Okay? the weights that are in the large container system, so about 70% of our large container business has a combination of both the haul plus the disposal charge. lighter container weights drive the average yield calculation.
That anniversary is beginning in Q2, which is why we made the commentary that we believe we're going to achieve at least 2.5% average yield for the full year. We see that accelerating. We knew that was coming, which is why we made that comment on our Q4 call, that average yield was going to be the lowest in the first quarter.
Mike, just to dimension that, if it was 1.1% large containers quarter, we were at 3.5% Q1 of 2020. If we kind of get back to that rate, that would add about 40 basis points of yield. That takes us north of that 2.5%, and hence the comments on the outlook for the year.
Got it. That makes sense. As you guys discussed, getting to the yield of two and a half, which has always been kind of looked at as like the benchmark for margins, which you guys are clearly expanding. Are you seeing any signs of inflation, early inflation, either at the landfill or in the labor markets? What are you baking in for cost inflation for the year to be able to get this type of margin expansion with a yield of two and a half?
Yeah, we're seeing, I would say, in small pockets, so container pricing is going up, for example. Again, hence the outlook for the year. We'll see whatever else happens on the balance of the year. From a labor standpoint, we feel good. Our turnover number, we think, is in a really attractive spot for us. Again, small pockets here with some subsidization going on with the federal government. We think that'll fade over the next quarter or beyond. We feel pretty good on that front. To the extent the inflation comes in, we'll continue to price in the open market. We feel confident that for whatever inflationary pressures we see on the purchase goods side, that we'll certainly be able to recover that more from our open market pricing.
I'll answer one of Michael Hoffman's earlier questions to Don about something he was glad he did. We have a centralized pricing tool that's been put in place. We've been able to take that increased cost that we're seeing on the containers, and we've been able to push that through our Capture pricing tool. All new business that we're basically quoting today is already reflective across the country of some of the increased costs we're seeing for containers.
It appears that's it from Mike. This will conclude our question and answer session. I would like to turn the conference back over to Mr. Vander Ark for any closing remarks.
Thank you, Grant. I'm excited to lead the talented Republic team to achieve new heights. We are motivated and ready. As you've heard, this year is off to a great start. We produced the highest level of margin expansion in the company's history, and there's strong momentum in the business. I would like to thank all of our employees for their continued hard work servicing our customers and communities. Once again, I would like to thank Don for his incredible leadership and enormous contributions to the company. Have a good night, everybody, and be safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.