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 Stacy Matthews, Vice President of Investor Relations.
Please go ahead.
I would like to welcome everyone to Republic Services' Q1 2021 conference call. John Slager, our CEO John Vander Aart, our President and incoming CEO and Brian DelGaggio, 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 5, 2021. Please note Press 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, Stacy. Good afternoon, everyone, and 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 Q1, we delivered adjusted earnings per share of $0.93 which represents a 24% increase over the prior year, generated $464,000,000 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. So 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 John and Dell as they tell you about the solid results in Q1, but 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'm 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.
Now the 5 most enjoyable things for me as a leader are these: 1st, casting and collaborating toward a shared vision 2nd, assembling a purpose built team 3rd, creating an effective work environment 4th, ushering in the future, along with necessary change, new energy and next gen leaders. 5th and finally, keeping a promise. And so 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, Your passion and your friendship over the years.
And 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 John feels the same way. John 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. John 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 John.
Thanks, Don. I appreciate the kind words, and I'm honored to have this opportunity to be Republic's next CEO. Now turning to the Q1 results, we continue to see improvement in the business and reported 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 2.8%. As discussed in our last earnings call, average yield was expected to be relatively lower in the Q1. We remain confident in our ability to achieve average yield of at least 2.5% for the full year. During the Q1, volume decreased 80 basis points versus the prior year. This is a 100 basis point improvement from the 4th quarter with nearly all lines of business showing improvement.
We expect volume to turn positive in the Q2 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 Santech. 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 $600,000,000 in acquisitions for the full year.
Now turning to our Environmental Solutions business. 1st quarter environmental solutions revenue decreased $17,000,000 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 percent to $133 per ton in the Q1. This compared to $76 per ton in the prior year. Next, turning to margin. Our adjusted EBITDA margin in the first quarter 30.7 percent 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 Q1, 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 Q1, our NPS increased 4 points over the prior year, and we achieved a record setting customer retention at 94%. During the Q1, 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 1st 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 due to 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 to $3.79 And adjusted free cash flow is now expected to be in the range of $1,350,000,000 to $1,400,000,000 I will now turn the call over to Brian.
Thanks, John. 1st 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 4th quarter, a decrease in large container volume of 2.1%.
This represents a 130 basis point improvement from the 4th quarter and 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 February and turned positive in March. We expect volume will remain positive for the remainder of
the year. Adjusted
EBITDA margin for the Q1 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 1 less workday. The outsized margin expansion is a direct result of pricing in excess of our cost inflation and effective cost management. SG and A expense for the Q1 was 10.2 percent of revenue, an improvement of 70 basis points over the prior year. While SG and A costs have decreased expressed in both dollars and as a percentage of revenue, we continue to make investments to drive growth and generate efficiencies in future periods.
Adjusted free cash flow for the quarter was $464,000,000 and increased $178,000,000 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 2 day improvement in DPO. Capital expenditures of approximately $200,000,000 during the Q1 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 $8,900,000,000 and total liquidity was $3,000,000,000 Interest expense decreased $18,000,000 as With respect to taxes, our Q1 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 John.
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 100 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 $35,000,000,000 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. Our first question today will come from Tyler Brown with Raymond James. Please go ahead.
Hey, good afternoon.
Good afternoon, Don.
Hey, John, congrats on the new role, Don. Thanks so much for everything over the years. But John, 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. So how should we think over time, should we or maybe investors think over time, just should we expect any noticeable changes In focus or strategy?
Thanks for the question, Tyler. So 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 had the privilege of being part of the team that's kind of driven the current strategy that's led to the Fed results.
At the same time, we're at an inflection point. And 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. So you're going to see us focus a lot on 3 core capabilities, customer zeal, digital and sustainability. And 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. And 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. And then maybe to drill down here, Brian, so I think the arc in Q1 was $133 but specifically what is in the guide for the full year?
Yes, Tyler, we actually just maintained that recycled commodity price at about that $130 a ton over the remainder of the year.
Okay. So if I look at my notes, I think you were around $100 for 20.20. I'm going to do the math on the fly here, but it sounds like It's about $30 delta and I think it's a $0.03 per 10. So it's something like $0.09 You raised your guidance by $0.10 So Was the whole guide raise effectively just commodities and we're not really touching the volume at this point?
Yes, a couple of questions there. So let me kind of break it apart. First of all, in our original guidance, we had it pegged at $110 a ton. So it's actually a 20 Dollar per ton increase that is included in this new guide. But to your point, right, really this guidance, the new guidance is a reflection of A strong start in the Q1, 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.
So right now, we feel optimistic about what we coming out of the Q1, but we want to see it before we address those assumptions, which we plan to do in July on our Q2 call.
Yes. And obviously, 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. But looking around the world, this thing is certainly moving in uncertain ways. So we want to have the appropriate level of caution and wait until we see I'll let volume come back to Brian's point.
Okay. No, that's very fair.
And then my last one. So I think you mentioned Santech closed today. Brian, can you give us the expected revenue contribution from all M and A that closed last year and so far Today, this year here in 2021, I know that was something that you did not give on the last quarter call.
Yes, let me give it to
you this way, right. So what we talked about was for the Deals that closed, right, in 2020, the rollover impact of that was 150 basis points, okay? What we're seeing now when you take Santac 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 to 300 basis points.
Our next question comes from Hamzah Mazari with Jefferies. Please go ahead.
Hi, this is Mario Cortellacci filling in for
Hamzah. I also want to congratulate John and also Don, Wanted to wish you the best from Hamzah 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 Brian can fill in the pieces. Listen, we feel good about all the hard work we've achieved. This isn't the fun guide results in the Q1, aren't the results of Just the last 3 months, the results of the prior 3 years and all the heavy lifting we've done to optimize the business. And we've always Pursued returns, right, 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 rotate Out of the portfolio, so we feel great about that.
As volume comes back, obviously, we've gotten really tight from an operating 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'd sit there and just add, we think we've found a new gear here, Right. So the work that Tim Stewart and the entire operating team did throughout the pandemic to find these new levels of profitability, Right. We don't plan on giving that back, right. So again, it's throughout the P and L, it's the operating costs, it's the SG and A expenses, we found new ways to work. And 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. And then 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. And then 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 or strike I'm sorry, restructuring longer term?
Yes, we've restructured about 60% of our processing contracts and about 50% of our collection contracts on the recycling side. And 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 the commodity value, but The customer we think is the natural owner of most of that and the volatility associated with that. So I
think we've done a good job of reducing the volatility
That front, I also think there's more upside as we move forward.
And then EBITDA wise?
Yes, we don't actually disclose the EBITDA by line of business. What I can tell you is just a 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. And Don, John, 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 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 RIN three prices Anywhere close to the current range. Thanks.
Yes. Thanks, Drew. So 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 from a mix of Some are pure electricity, some are more high BTU ones and as we go forward, we're looking at those to capture the rents opportunity.
Our primary model historically has been to work with partners on the development. We think that just gets us there faster, right? And also Certainly, we don't get all the upside of the RIN pricing, but it also helps us kind of manage the volatility of that. So it's more of a royalty model Going forward, and again, we're always looking at the model and we pursued some of those on our own, but I think our predominant model going forward will be Working with 3rd 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.
We're going through more of our medium sized landfills and we think there's other opportunities to unlock there going forward as well.
Okay. Thank you. And then 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 earlier in terms of some things are going to be done differently going forward. I'm wondering can we 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
Yes. Listen, I think there are going to be some things that don't look exactly like they are today. So some costs 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 level. We're going to take advantage of the tools that we have around virtual meetings that certainly save us some costs that shows up in SG and A, frankly, much more on opportunity One of the reasons that we're driving great performance on the front line of the business is our
people are focusing day in and day out, Right, and
they're not getting tied up or distracted with other things on that going forward. On the operating side, we'll have to see what happens with work from home going forward and what Traffic patterns do, so 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. John, 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?
I mean clearly off to a pretty big head start here.
Yes. Sean, as I mentioned before, right 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 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, right, is that we did get off to a stronger start, Right, than we originally anticipated. We are optimistic about what the next few quarters hold.
But again, we want to actually have that in hand before we make a full update with respect to those major assumptions.
Okay, fair enough. And maybe with Santec 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.
Yes, 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, So, I'm not part of the country where we've got lots of strong assets and again, we think provides the platform, we pick up a few new communities as well, so that provides a platform for follow on M and 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, but 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. And both Don and John, 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 prior 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 May in a typical year? Is it 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, but just curious on the cadence side.
Yes. Obviously, it's an unprecedented time, so it's hard to perfectly compare the history. There's 2 different things going on. Obviously, we're coming out of a pandemic, and so You're going to start to see really positive comps as we move forward. And then you also have weather, and weather episodically hits us.
In this case, right, we had a fine start in January kind of unplanned. 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. And then March was really, really strong, and we feel very good about the momentum in So I think from just a top down look, we think the February event again was more weather related than it was pandemic related, Right. And now we're seeing pretty strong momentum in the business, but still waiting to see kind of the normal seasonal uptick that really starts to take off into May.
Yes, I would sit there
and just add, when you take a look at March into April, right, 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. So that's
a good sign. But again, usually the real acceleration, the real seasonality happens April into May and then May into June. And 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.
Yes. Okay. And 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 just call out that this one element It 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, Steve, 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 Commodity prices, right, are $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 kind of just do the flow through math on that, right, it kind of took us into that territory.
Yes. I would just sit there
and say, as you talk about just Q1, though, right, and outperformance relative to our initial expectations, I would also just sit there and say the performance on the cost side as well. So again, if you remember, when we gave the full year guidance, we talked about those macro benefits It's modulating as volume returns. We're hanging on to some of those benefits more than we originally anticipated. So 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.
Our next question will come from Kyle White with Deutsche Bank. Please go ahead.
Hey, good afternoon. Thanks for taking the questions. Don, congrats. Hope you John, 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.
But 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?
Yes, 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 going to be some first movers And then there is going to be some slow movers and 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 going to turn when the contract is up. So then 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. But now that we see people kind of come out of it, the economy opening up, Right. 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.
Yes, I would even sit there
and say, even though, right, that that's the challenges we face, We made great progress in the quarter. So that 37% represents $930,000,000 of revenue. When we reported that at the end of 20 was $875,000,000 Right. So we actually moved $55,000,000 of revenue during the quarter.
Got it. That's helpful. And then going back to M and A, just curious about the pipeline and if you're seeing any kind of increased Just given some of the speculation on tax changes, and then also regarding the Santac and the length it took to close, does that make you kind of rethink Your M and A strategy at all in terms of maybe what you're targeting from a size or region standpoint?
So we haven't seen, I would I'd 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, right? We Stay really active during the pandemic, obviously meeting with potential sellers in new ways virtually and now our team is getting back out in the road and Meeting people face to face, but the pipeline continues to be strong on that front. So we feel good about that. And Yes. Listen, this is Santac in terms of the DOJ process and that taking longer than we said.
Not really, right? 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 a Kind of a numbers game, but we're not deterred at all from pursuing those types of opportunities. And again, we'll go in eyes wide open in terms of the length of time, but I think the great headline story at Fantic is, took us longer than we wanted, but we ended up where we expected, and their business performed very, very well in the process. So 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. And Don and John, best to both of you. Don, I have a question for you. Could you talk about 1 or 2 actions that you've taken in this tenure that John and Brian are going to be talking about 2 or 3 years from now. That will make it 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 of things.
First of all, my
goal was to say very little today. I think talent is going to be at top of the list here forever. We put the talent agenda Front and center, a decade ago, we focused on composite strength, focused on building the best place, the best people come to work. We're not done yet. You're never done because the world turns, right?
And it's the people of the company, the talent of the company, 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 John has already got his eye on to do their next assignment. So, we're going to talk a lot about That's not ever going to go. 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, that was we were a collection of various companies with the trucks were 40 different colors and 35, 50 different names. I don't remember anymore, but we used to argue about silly things that took Time and energy, we don't do it anymore. So, the speed that John talks about, speed It becomes a differentiator. Speed becomes a strategic strength. And the speed at which our team now can change And roll out new things and RISE is an example of that speed.
So we're gaining speed all the time. And John is starting his new position from a running start. And That really bodes well for the future of the company. Many of the things that we've been doing over the last several years, John was very involved in. The operator structure of the team that he's inheriting, he has been playing a big part in developing and choosing And directing.
So back to speed is going to be a big deal. But Republic Way is not going away. It's just going to get bigger and brighter. It's going to help us. Now we talked about things like customer's yield.
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. So Now, those are my final words, Michael.
Okay. Thank you. And I hung it up in the ring and it scared the hell out of my young horse the first time you saw it. So Brian and John, it's been 10 years since this company has produced a 40% or better gross margin in the Q1. And the trend in the 3 years that did that, 8, 9 or 9, 10 and 11, you were consistently above 30% EBITDA margins.
So 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 give back here. You hold on to this. Between the gross margin, 10% to 10.5% SG and A, a 40.5% to 41% gross margin, this is structural.
Absolutely. We feel good about the ground that we gained. And again, we're setting our sights on new heights. And 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 pricing initiatives on the municipal side, which we talked about earlier, We think as the world probably gets 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. So, yes, we have more optimistic about the future and we think the financial results again are A great sign of our achievement, but certainly not something we're going to go down from. We're going to go up from here.
Our next question will come from Jeff Goldstein with Morgan Stanley. Please go ahead.
Hey, good afternoon. And I'll echo all the previous comments here and say congrats, Don, on a long and successful tenure and congrats, John, on the new role. I know you used to give this figure, but any sense of what percent of customers who reduced service have now resumed? And 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?
Yes. If you take our small container business, which I think is the best place to look, obviously residential didn't change, right? That went the Other direction, right, we've maintained those customers, it 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.
And if you look at that, the mix of that, it really falls into 3 verticals. It's Schools, which shouldn't be any surprise, it's entertainment and hospitality, it's restaurants. And the schools are going to come back, The pace and timing, right, 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 restaurant as they've started to have outdoor dining combined with their indoor dining and they're probably going to try to maintain that ground. And then entertainment, I think that's going to move probably going to be 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 will come back. But 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.
But again, that's going to be relatively de minimis in our overall results in terms of volume.
Okay. That was all very helpful. And then how should we think about the $45,000,000 of financial You were providing to frontline employees last year. Does that number come down this year? And if so, to what extent?
And then in the Q1, were any of those costs still baked into your operating expenses? Just how should we think about that?
Yes. We still have a little bit of that into the system because that's just a heightened protocol around PPE, clean facilities, etcetera. And 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 So we still have a bit of that cost.
I think it's about $8,000,000 in the Q1, right? 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 4th quarter, but We'll spend it as long as we need it, but it's certainly coming down off of that $45,000,000 from last year.
Okay. Thanks a lot.
Thank you.
Our next question comes from David Manthey with Baird. Please go ahead. Thank you. Good afternoon and congratulations everyone. My question is also on the indices here.
So when you look at CPI and the water So the trash index, they've kind of converged lower lately. And when you think about the components that make up each of those, if we do see generalized 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. So 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 CPS.
It's a subcomponent headline, David. Yes. So the water, sewer, trash It's an element. It's one of the components of the basket that makes up
headline. I see. Okay. And 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.
And if that's the case, What percentage of the overall is that sort of unplanned piece? Can you just help me understand the dynamic there? Yes. Obviously, this is
a big part Don's legacy, we were very reactive historically on maintenance and everybody figured out maintenance themselves. And part of the cornerstone of the Republic Way from standpoint was 1 fleet, the idea that we ought to leverage our scale and figure out how to do maintenance one way across our 100 and 5 business units and that we ought to shift our focus to preventative maintenance, right, and being scheduled versus reactive. So now more than 80% Our maintenance work is scheduled and proactive, and we think that it won't help us lower costs, but more importantly, that keeps our It keeps our employees in the truck, keeps them productive and keeps us servicing customers and providing great customer service.
Our next question will come from Noah Kaye with Oppenheimer and Co. Please go ahead.
Thanks so much for taking the questions. And I mean the prepared remarks were really eloquent and we appreciate everything you brought to the industry done. So we wish you well and good luck John, on your new role.
Thank you. Thanks.
One of the themes so far, I think this quarter for the industry has And the open market price strength and stickiness and clearly you saw a good result this quarter. Curious for your view, number 1, on what is driving the open market price retention and strength? And then as you look to future quarters, where do you see the greatest opportunities to push price across which lines of business?
Yes, I think it's 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 I'm going to 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 We have to get a return on the work we do and allows us to continue to invest in our assets and continue to give our people what we think is a fair Raise every year, so 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, because that's a place where we're making major investments Right.
In those assets, we continue to prioritize environmental compliance, which is the top of our list, and we need to get a return on Those assets and that's where pricing emanates from the collection side of our business. And then 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. But overall, you got to look at the top line view of look at the revenue and then look at 2 70 basis points of margin expansion.
That just shows you our discipline on price And the fact that we're getting quality revenue that's driving, dropping to the bottom line.
That's Super helpful. And then 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 kind of spend your CapEx targets this year and we have to potentially 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 We anticipated a bit of this and so we were pretty aggressive in Q4 of last year on getting out of the truck order to make sure we were prepared, right, as volume Came back and then we could service our customers. So 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 That's normal course and we feel pretty good that direction
will be a number for the year.
Okay, great.
Thank you. Thank
Our next question will come from Mike Feininger with Bank of America. Please go ahead.
Hey guys, thanks for squeezing me in. And Don and John, all the best and congrats Echoing all the sentiment there. Just maybe Brian you could help me with this. The margins were exceptional. I'm just trying to understand like the yield has actually gone from 2.6% in Q3 to 2.5% in Q4 and I think 2.3% in Q1, Yes, your margins are exceptional.
So is there anything why the yield has actually not been going up in the Q1? 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 outcomes demonstrated is that we are pricing in excess of our cost inflation. Let's start there. In order to get 2 70 basis points of margin expansion, that has to be true. What I would say though, John mentioned it just a One of the things when you look at our large container yield, right, at 1.1%, right, we do a change in price per unit, Okay. So 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.
So lighter container weights drive the average yield calculation that anniversaries 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. So 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 Q1.
So Mike, just to mention that, if it
was it's 1.1% large container this quarter, we were 3.5% in Q1 of 2020. If we kind of get back to that rate, that would add about 40 basis points of yield. So that takes us North of that 2.5% and hence the comments on the outlook for the year.
Got it. That makes sense. And As you guys discussed like getting to yield of 2.5%, which has always been kind of looked at as like the benchmark for margins, which you guys are clearly expanding. So Are you seeing any signs of like inflation, early inflation either at the landfill or in the labor markets? Like what are you baking in for cost inflation for the year to be able
to get this sort of
margin expansion with a yield of 2.5?
Yes. Look, we're seeing, I would say, in small pockets, so container pricing is going up, for example. And Again, thanks for the year. We'll see whatever else happens on the balance of the year. But from a labor standpoint, we feel good.
Our turnover number, we think, is And a really attractive spot for us. Again, small pockets here with some subsidization going on with the federal government. We think That abate over the next quarter or beyond. So we feel pretty good on that front. And to the extent the inflation comes in, we'll continue to price in the open market.
And so we feel confident that for whatever inflationary pressures we see on the purchased goods side, that we'll certainly be able to recover that more from our open market price.
And 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. So all new business That we're basically voting today is already reflective across the country of some of the increased costs we're seeing for containers.
So this will conclude our question and answer session. I would like to turn the conference back over to Mr. Vandorhe 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.