Republic Services Inc (RSG) — Q1 2022 Earnings Call Transcript

Hello. I would like to welcome everyone to Republic Services' first quarter 2022 conference call. Jon Vander Ark, our Chief Executive Officer; and Brian DelGhiaccio, our Chief Financial Officer, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is May 5th, 2022. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings; our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities; along with the recording of this call, are all available on Republic's website at republicservices.com. On today's call, we will provide forward-looking non-GAAP measures related to recent acquisitions and projects under development. We are unable to reconcile these estimates to relevant GAAP measures without unreasonable efforts, because purchase accounting adjustments are not complete, and the timing of development projects can vary. I want to remind you that our public management team routinely participates in investor conferences. When these events are scheduled, the dates, times, and presentations are posted on our website. With that, I'd like to turn the call over to Jon.

Thanks Stacey. Good afternoon everyone and thank you for joining us. We had a strong start to the year, which keeps us well-positioned to achieve our full year goals. The outcomes we're delivering reflect our focus on profitably growing the recycling and solid waste business and expanding our environmental solutions business, so we can offer the most complete set of products and services to our customers. The investments we're making in the business are taking hold and creating undeniable value, while further strengthening our three differentiated capabilities of customer zeal, digital, and sustainability. During the first quarter, we delivered revenue growth of 14%, generated adjusted earnings per share of $1.14, which is a 23% increase over the prior year, and produced $531 million of adjusted free cash flow, which is a 14% increase over the prior year. We continue to believe that investing in acquisitions is the best use of free cash flow to create long-term value. Earlier this week, we closed the acquisition of US Ecology. This acquisition propels Republic into a leading position in the environmental solutions and adds a platform of high-quality assets. We have customer overlap between our $1.5 billion manufacturing vertical and US Ecology's $1 billion book of business. We estimate our cross-selling opportunity to be between $75 million to $100 million. We're excited to welcome US Ecology employees to the Republic team and will benefit from their deep expertise in specialty waste handling. We also invested $66 million in other acquisitions during the quarter. We also have approximately $400 million of deals in the advanced stages of closing, all of which are in the traditional recycling and solid waste space. In addition to investing in acquisitions, we returned $349 million to our shareholders; this includes $203 million in share repurchases and $146 million in dividends. We are experiencing meaningful traction developing our differentiated capabilities where actions are leading to outcomes. Our aspiration is to live in a world-class customer experience which we call Customer Zeal. Our customer retention rate remains at a record-setting level of 95%. This has enabled us to generate the highest level of pricing retention in company history and generate outsized revenue growth throughout the business. During the first quarter, core price reached an all-time high of 6%, and average yield increased to 4.2%. Volumes increased 3.6% compared to the prior year, and acquisitions contributed an incremental 390 basis points to total revenue growth. Regarding digital, we completed the rollout of RISE tablets in our small and large container fleet. We continue to see tangible benefits of this proprietary technology for our customers and within our operation. We will begin deploying tablets in the residential fleet later this month and expect to be complete by mid-2023. We recently went live with the finance and procurement modules of our new ERP system, which will streamline back office activities and empower local leaders with enhanced data. Next, turning to sustainability. We continue to believe that environmental sustainability and economic sustainability go hand-in-hand. We are passionate about doing things that are good for future generations in a way that generates profitable growth for our business. In March, the company announced our plans to expand our participation in the plastics value chain with a nation's first integrated plastics recycling facility. The Republic Services Polymer Center will address the growing demand for recycled plastics, while enabling CPG brands to meet their sustainability goals. Based in Las Vegas, this will be the first of three to five centers nationwide and is scheduled to open in late 2023. We expect this polymer center will generate an incremental $50 million in revenue with an EBITDA margin at or above total company performance. Earlier today, we announced our joint venture with Archaea to develop 39 renewable natural gas projects at landfills. These projects generate attractive returns and accelerate the achievement of our ambitious 2030 sustainability goal of increasing biogas for beneficial reuse by 50%. The projects are expected to come online between 2023 and 2027, at which point approximately 70% of our total landfill gas collected will be beneficially reused. This joint venture, together with our 17 landfill gas to energy projects under development, are expected to generate approximately $100 million of incremental EBITDA. We continue to be recognized for our commitment to sustainability; Republic Services was named to Barron's 100 Most Sustainable Companies list for the fourth time. I will now turn the call over to Brian.

Thanks Jon. Core price during the first quarter was 6%, which included open market pricing of 7.6% and restricted pricing of 3.5%. The components of core price included small container pricing of 9%, large container pricing of 6.8%, and residential pricing of 5.3%. Average yield on total revenue was 4.2%, which represents an increase of 80 basis points compared to our fourth quarter performance. Average yield unrelated to revenue was 4.5%. The outperformance in average yield is a direct result of higher core price increases in the face of more persistent cost inflation, dynamically adjusting rates for new work to match demand and increased price retention, which illustrates customer willingness to pay for high-value services. We expect average yields to remain above 4% for the remainder of the year. First quarter volume increased by 3.6%. The components of volume included an increase in small container of 4.1%, an increase in large container of 4.6%, and an increase in landfill of 4.7%. This level of volume performance was in line with our expectations. Moving on to recycling, commodity prices were $201 per ton in the first quarter. This compares to $133 per ton in the prior year. Recycling processing and commodity sales contributed 40 basis points to internal growth during the first quarter. Next, turning to our Environmental Solutions business. First quarter Environmental Solutions revenue increased by $64 million from the prior year. This was driven by organic growth from increased activity and the contribution from acquisitions. On a same-store basis, Environmental Solutions contributed 40 basis points to internal growth during the first quarter. Adjusted EBITDA margin for the first quarter was 30.4%. This compared to 30.7% in the prior year, margin performance during the quarter included underlying margin expansion of 70 basis points and a 40 basis point increase from recycled commodity prices, which was offset by a 70 basis point headwind from net fuel and a 70 basis point decrease from recent acquisitions. Within the underlying business, we are seeing wage inflation of approximately 4%. Price increases more than offset this level of cost inflation before considering the impact from productivity improvements. SG&A expense excluding US Ecology deal and integration costs was 10.2% of revenue. This was flat with the prior year. Adjusted free cash flow for the quarter was $531 million and increased $67 million, or 14% compared to the prior year. This was driven by EBITDA growth in the business. Capital expenditures of approximately $200 million during the first quarter represent 15% of our projected full year spend, we remain on track to spend our full year budgeted capital expenditures. Total debt was $9.6 billion and total liquidity was $2.8 billion. Our leverage ratio at the end of the quarter was 2.8 times. With respect to taxes, our combined tax rate and non-cash charges from solar investments resulted in an equivalent tax impact of 25% during the first quarter. As Jon mentioned, we closed the acquisition of US Ecology earlier this week. Our initial perspective on the contribution from US Ecology for the remaining eight months of the year is as follows: revenue of approximately $720 million and adjusted EBITDA of approximately $130 million, which includes $5 million of realized synergies. We also expect an EPS contribution to be flat to slightly positive. As a reminder, EPS includes the impact of intangible amortization, and relatively higher interest expense, as debt associated with the acquisition is expected to be highest during the first year. Annualized, this would represent a year one contribution of $1 billion of revenue, and approximately $170 million of EBITDA, which includes $10 million of first year synergies. We still believe there are at least $40 million of cost synergies that will be realized during the first three years. We intend to incorporate the contribution from US Ecology into our full year guidance in July once the impact of purchase accounting is better known, and other areas subject to evaluation are substantially complete. With that operator, I would like to open the call for questions.

Hey, good afternoon.

Good afternoon, Tyler.

The landfill gas announcement is certainly exciting. I believe your sustainability report mentions around 75 projects currently in operation. If I’m counting correctly, that would be over half of the municipal solid waste landfills you track. So first, am I in the right range? And secondly, do the 17 projects currently in development essentially cover the remaining landfills in your portfolio, or are some of the 39 existing operations, which I’ll refer to as dirt gas operations, upgrading to RNG?

Yes, that's a good question. Out of the 75 projects, eight are solar initiatives. We currently have 67 in our sustainability portfolio, and we mentioned an additional 17 in development. The project we announced with Archaea adds another 39 projects. Of those 39, four are updates to existing projects within the current 67. So, looking ahead to 2027, we anticipate a few more projects will become inactive, as the aim is to phase out the landfill. This would increase our total from 67 today to 116 by 2027 with all the discussed projects.

Okay, perfect. Yes, very helpful. And then just financially, what will we kind of see? Will you put up the money in one big chunk? Or do you do that as we go along? And then Brian would you just recognize it as like an income in non-controlling interest? And then they'll basically pay you a dividend back? Or how exactly what the mechanics were?

Yes, no, we'll do it ratably investing; it's not just one big chunk, right, into this joint venture. And then essentially, we get, you know, there's two forms of our return on that: there's a royalty agreement, which is more typical of what we have on our typical projects or existing projects, rather. And then we'll be the minority equity investor in these and then Brian, you could talk about, we're going to hit the geographies.

Yes. The royalty will come through revenue as it does now, with no significant cost offsets, allowing most of it to flow down to the EBITDA line item. For the minority interest, it will be recorded as a single entry, included in our EBITDA but distinctly identified to highlight its contribution.

That's helpful. I noticed that US Ecology seemed to have struggled this quarter, which significantly impacted costs. I believe EBITDA was around 10% lower compared to last year. What is your level of confidence in quickly turning that business around? You mentioned some expectations for improvement as the year progresses. Could you share your plans for the first 100 days to create positive momentum?

Yes, no, listen there first quarter was kind of right on what we had in the pro forma, right in terms of how we valued that business. And we're relatively conservative how we think about things. Integration begins now; we had teams all over the country, welcoming our colleagues together. And frankly, it's been going on for weeks within the parameters of what we can do with DOJ and antitrust in terms of pre-planning for the integration. So, we're already driving that through, we've got the four areas outlined, geographically, we've got those teams defined the leader and the Director for, right and where all the assets and divisions flow up through that. And so that includes integrating our own environmental solutions business into that. So, we took the best of both assets and people in terms of how those things are structured. So, we are well on our way on that front. One of the big opportunities there is to integrate the great set of post-collection assets that have with the field services resources. And you know, COVID was kind of a trip-up for them to be able to do that in a full way. And we've got the benefit of you know, not being out of COVID, but being in a very different stage of COVID. And so again, integrating those things together and applying our considerable revenue management capabilities to that business, looking at the go-to-market approach, all those things are underway right now.

Yes, one thing I would add to just on the performance in the first quarter, Tyler, as well as that the performance got better throughout the quarter.

Okay, just to clarify, Jon, I thought you mentioned $75 million to $100 million in synergies, but Brian said $40 million was just in terms of cost.

Yes, the $40 million is just the cost, and we need to assess the intrinsic value of the enterprise for each deal. We also evaluate cost synergies that contribute to that $40 million. We anticipate $75 million to $100 million in revenue synergies from cross-selling opportunities, likely realized over a two-and-a-half to three-year period. Additionally, we are focused on maximizing pricing strategies. We will closely examine our efforts to ensure we are achieving a return on all our work, and seek opportunities to cover our costs, particularly in an inflationary environment.

Right, right. Okay, great. I'll pass it on. Thanks.

Thanks so much. You mentioned the 4% wage inflation, and that seemed really good for this environment and what we've heard from others. Can you give any color on maybe how you've been able to limit wage inflation if you've had any strategies around that et cetera?

Yes, I would say the seeds that were sown many years ago, right? We think about being a place where the best people come to work and making sure that our people get a fair increase every year. So even in very low inflationary environments, where CPI was running sub 1%, we always gave our people a 2% to 3% increase in their wages, and the added benefits probably north of that. And so I would say, very fit and healthy cost structure coming into this inflationary environment. And then we're very disciplined and surgical; we believe in market pay. And so we understand market pay and market dynamics, right across all the 800 dots on our map of where we operate. And so we've made individual indelible across the board kind of ratable cost of living increases every year. And then we go in and do additional moves, where we need to make sure that we're staying very competitive in the market. And we're still going through that, right. That's an ongoing process, an ongoing science. And we believe in the local team. We also believe in the discipline and the expertise of our HR team. And we'll be able to do a centralized review that we're doing things in a smart way. And I think you'll see us do some more of that in the third and fourth quarters here. All of which will result in a scale pricing ahead of our cost inflation of better productivity, which will allow us to expand our margins.

That sounds great. I wanted to ask also on the renewable energy side, just given the really strong increase in gasoline and diesel prices, has that changed your approach to renewable energy projects? Has it caused any thoughts about pulling forward investments in new facilities or more alternative fuel vehicles? Thanks.

Yes, one of the reasons we're really excited about this joint venture is we think it allows us to get after a portfolio of landfills, right that we bid this out, and in a very competitive process, and really excited about our partner, but that we take on all of those projects, and those projects have varying returns. And some of those things, probably we wouldn't have independently gone after in a standalone basis, just given the size and scale. So, we're able to go deeper into our fleet of landfills with projects, which is exciting. We're also able to go faster, right? We can get after all 39 of these in the next, in addition to the 18 that we have in flight, or something we haven't flight, we feel really excited to be able to go after that opportunity that quickly because of that market. As it relates to fleet, we are long on electrification, about 20% of our fleet is CNG, and we certainly have that as part of the portfolio. But all of our energy going forward is on electric vehicles.

Perfect. Thank you.

Hi. Thank you. I also want to express my gratitude for the kind gesture you made a few weeks ago. I appreciate it. How does the 4% wage inflation impact our total internal cost inflation?

Relatively consistent, Michael. To put it into perspective, I mentioned a 70 basis points expansion in the underlying business. When you compare the 4% cost inflation to the 4.5% yield from unrelated revenue, and then add 10 to 20 basis points of productivity, that reflects the expansion we've observed during the quarter.

Okay. You anticipated part B of that. But I will ask you to RISE is fully rolled out in small and large containers? Does it take that rate of productivity improvement and walk it up now because you have it more comprehensively distributed? And then this is all about taking minutes out and lowering engine hours and the like?

Yes, listen, when you first put it in, right there's a little learning curve, and then you get your biggest wave of productivity improvement, right? When you can start to standardize the work and get the routing efficiently. And then in those existing sites, you just start to see incremental improvement over time. We're really happy about our productivity number this quarter. Given that we had a lot of the headwinds of traffic coming back, right, people coming back to work society opening up and still be able to overcome that and still see some productivity is a great signal to us or indicator of what RISE is delivering. We'll see this more in the residential fleet. And then as we go forward, there's a kind of a 2.0 of RISE of starting to get more into advanced analytics. How do we even take the analysts and build those routes more scientifically? How do we start to do more benchmarking across geographies, to understand what the true performance improvement opportunities are? And yes, I think you'll see steady radical improvement as we go forward.

And the way we're looking at it right now, Michael, is that we probably have more opportunity left than we realized life-to-date.

Got it. And then last one on the landfill gas to energy development, you're putting up 27% of the capital? I'm assuming you control the gas and these other guys need the gas, they can't do what they want to do, even if they got a lot of money. So, what's the economic split?

For that investment, we have a 40% ownership in the JV.

Okay, and Jon, you've talked about that $100 million number over and over again, consistently, but it now looks like the whole thing is a lot bigger. Because I thought the $100 million related to your 17, you were developing, and now it were, or is this an incremental $100 million plus or $100 million for the 17?

No, this is $100 million in total, Michael. So, again, the 17 was about $25 million incremental. And then this new joint venture is about $75 million, bringing the total to $100 million for all 56 projects that are under development. Hey, keep in mind, Michael, these are medium-sized sites. So these are kind of, sub 2,000 SCFM sites. Over time, we will randomly go through some of the legacy projects we have on larger sites, and they will reach their natural end. The project needs to be recapped. Many times, it will be an electricity project that will transition into RNG, leading to larger sites that will be included in this joint venture.

Got it, All right. Thank you.

Hi, this is Han filling in for Hamza. So my first question is, could you just comment on the quarterly cadence of operating leverage and margin this year? And then just what your labor turnover is running versus pre-pandemic?

Yes, let me take that, you know, the margin question here. So, again, if you take a look at the first quarter, and how we performed, what we see going forward, and we're on a sequential basis is that the fuel really started increasing in March, right now, we're kind of saying it's going to stay elevated. That's the assumption right now for the rest of the year. So sequentially, we see a 30 basis point headwind, from the impact of fuel. Now, we're also seeing better levels of pricing. So we think that we can mostly offset that. But that margin would stay relatively flat, if you will, from our Q1 performance; that's on the traditional recycling and solid waste space. If you then layer in the US Ecology acquisition, that's going to create about a 70 basis point impact margin for the remainder of the year.

Labor turnover presents a mixed picture, with some roles slightly elevated compared to pre-pandemic levels while others have seen a decrease. The labor market remains tight, and we would definitely hire more drivers if they were available. We are focused on running the business for both this quarter and the long term. We are examining all the markets for any increased turnover and are open to adjusting wages in those areas if necessary. However, wages aren't the sole reason people choose to work; factors like shift schedules and leadership also play significant roles. We are attentive to this. Overall, we believe we have a strong grasp on inflation in relation to pricing and our ability to manage costs.

Okay, and then just, on the hazardous waste exposure, can you just talk about what that level of exposure is compared to what your portfolio is right now? And how big it could get, understanding of the solid waste portfolio will also grow? And then just, you know, if you could touch on the cyclicality of that hazardous waste business?

Well, I'd say hazardous, we didn't have any exposure. Technically, I think your question more broadly is environmental solutions versus recycling and solid waste. Right now, we've got about a $400 million business in that space with the acquisition of US Ecology fast forward that takes us to about a $1.4 billion opportunity in that space. We think when integrating field services and the post-collection side of that, it's got a relatively similar profile in terms of volatility in that space, and that there's a mix of project-based work and a mix of recurring revenue, probably slightly higher, but when you mix the two parts of the business together, right doesn't meaningfully change our profile any respect. And in terms of growth prospects, we start with recycling and solid waste. We've never been more excited about our growth prospects; they're both organically and through M&A. In addition, this platform with US Ecology gives us great geographic coverage and an opportunity to do follow-on tuck-in acquisitions to build out some product and service lines or to fill out a few smaller geographies.

Got it. Thank you.

Good afternoon, everyone.

Hi, Jerry.

Hi, Jerry.

I'm wondering if you could just talk about US Ecology. Look, maybe it's too soon, but what's the nature of their landfill agreements? How quickly can you apply RSG's pricing mechanism to the landfill part of the business based on the contract structure? Is that something you're comfortable discussing on this call?

Yeah. Look, we are very well-run assets. So we start with compliance, right? Great compliance, a great set of assets, right, that are well maintained, great compliance culture, great compliance capability that we've acquired with US Ecology. So we're really excited about that and that really is the foundation, right? That allows us to go to customers and offer them solutions that they're comfortable with that we – because they have producer liability, right? So we will maintain right, their waste streams in a way that is very compliant that they feel good about, that doesn't create liability for our customers. That allows us then to price for the value that we're delivering to our customers. So we'll take a hard look at that. Again, we start with not the asset. We start with the customers, and we work our way back into the assets. And that begins right away, and it's a mix of contracted business in spot. And obviously, the spot, we can look at very quickly. The contractor side of that will take a little more time. But over time, you'll see, I think, steady improvement in that area.

Okay. And then on the RNG contracts, the $100 million assumption can you just touch on what that assumes in terms of gas price per MMBTU? And would you mind just commenting on if you have any off-take agreements at this point or how you're thinking about the opportunity set?

Yeah, the JV just got announced, right? And we haven't developed the project yet. So we don't have any agreements. But I can give you some of the assumptions, right? We've got pretty conservative assumptions about gas flow, which we think we could probably beat over time. This assumes a $2 Brent price. It will be a mix of fixed versus spot, probably more fixed than spot over time, but we'll decide what that looks like together.

Okay, super. And lastly, can you talk about how you expect the pricing cadence to play out over the course of the second quarter based on actions that you've announced to customers? And if you can touch on when you expect inflation to peak if you have that type of visibility?

Yeah. Jerry, as I mentioned in my comments, we expect average yield to remain above 4%. Again, if you can take a look at the restricted portion of the business, where we have those index-based price resets, 60% of our portfolio resets in the second half of the year. So if you can look for relatively consistent performance throughout the year, but I would sit there and say probably slightly higher in the second half than we saw in the first half.

Terrific. Thanks.

You bet.

Hi, there. Thanks for taking my question. If I look at your average yield to core price, I guess, conversion rate, I know that's not a great way to look at it. But that's been trending up nicely. You hit 70% in the first quarter here. And I think in your prepared remarks, you mentioned retention at 95%. Does that suggest this is close to an upper bound of that conversion rate? Or are there are there things you can do to continue to narrow that gap?

There's certainly things we can do to improve it, which is just when we talk about our strategy around customer zeal and digital and sustainability, those are all things our customers value deeply, and we think are differentiated. And not every provider can offer that. And as we create a better offering, right, our customers are willing to pay more and stay longer. So that's the essence of what we do. Now there are structural – there are things like people move, right, or businesses close. So there are things structurally, right, that I don't think we'll ever get to 100% loyalty. But at one point, we were sub 90% and then we got to 92%, and then we kept climbing the curve, and that's the aspiration to continue to get a little bit better because the offering is that much stronger. And as you know, the economics of loyalty in this industry are very, very strong. When customers stay longer, that's certainly very valuable for us.

Yeah, and there's two components to that calculation. There's retaining more, but there's also pricing at a higher level for new business, right? Both of those go into the equation. So as we expand the environmental solutions business, as we have the most complete set of products and offerings, we think that we offer to our customers, we have a better value proposition, and we can then charge more for those services from a new business perspective.

Right. No, that makes sense. You're obviously seeing great momentum there. Just my second question, I think you mentioned earlier you're all in or at least you're focused on electric vehicles here. And I'm just wondering as a buyer of that technology, what do you think the bottleneck right now is for mass adoption? And I guess when you're evaluating what's in front of you, like what are the KPIs that matter the most? Is it just things like battery density? Or do things like supply chain resiliency, given all that's happened in the past nine months, like does that play a greater role? Or would you prefer a vendor that, for example, had vertically integrated their battery technology so that they're not dependent on somebody else, which creates execution risk on your orders? Just wondering how you kind of look at that evolution here.

Yeah. Well, good question. Both are relevant. Certainly, functionality, right, and the bottlenecks of weight and range, right? But for us, the operative metric is a truck has got to be able to deliver a full route in a day, right, without having a mid-day charge. That kind of creates the economics of it because whatever benefit you get, you burn up on productivity on a midday charge. And again, we feel very optimistic about where we're headed on that front. Of late, we are working really hard on some short-term exemptions with state and local municipalities. Again, I've already made some progress on that front as well, and I don't think that will be a hurdle or a barrier. We're very mindful of the supply chain with our partners to understand that, hey, what's our confidence in them being able to deliver this over time and obviously, the world has changed a lot in the last, not only two years, but the last 71 days. So we're cognizant of that and certainly baked that into our plans, but still all that being said, optimistic about the progress of starting to buy electric vehicles at scale within the next two and half, three years.

Perfect. That's it for me. Thank you for taking my questions.

Hi, guys. Nice start to the year here. Would it be possible to drop the US Ecology outlook commentary to free cash flow both for this year and on an annualized basis?

Yeah. Look, in these first couple of years, let's just take this year for example, we're thinking conversion in call it, the 20% range. And again, there's some elevated capital spending in particular with the landfill. We're building out landfill disposal capacity, which takes us into 2022 and 2023 that then modulates. And as we've talked about before, we still see 47% conversion as a consolidated company by 2024.

Okay. Got it, helpful. And maybe putting US Ecology aside, and just looking at stand-alone RSG, could you refresh any of the components of the year-over-year margin bridge for the full year? We had the $60 million to $70 million from pricing ahead of inflation. I think we had $50 million from normalizing incentive comp, and then that was offset by 40 basis points from net fuel and 40 basis points from acquisitions. Is there anything in that bridge you'd be able to refresh for us here?

Yeah. What I would probably say is that, the big things that change relative to our initial assumption is that fuel at current prices creates an additional 50 basis point headwind, and think about pricing in excess of cost inflation offsetting that outside of US Ecology. So, relatively consistent expectation for the full year, just getting there a slightly different way.

Okay. Got it. Very helpful. Thanks.

Thanks very much. I want to ask about some of the volume trends in the quarter. I know that the comps weren't too tough, but you did outperform, I think, relative to the industry. So I wonder if you could touch on what you're seeing in the markets. What are net new business trends? What are you seeing in terms of business formation? Where might have actually surprised a little bit to the upside on volumes in the quarter? And I guess the last part of that is how much of this is really just being in the right markets? And how much of it is potentially attributable to share gains?

Yes, you can see that the company is gradually reopening post-COVID. We experienced some of this last summer, but there were areas, like California, that didn't fully open up due to concerns over the Omicron variant. Consequently, we didn’t see the expected lift there. However, there is definitely a recovery happening, and we are benefiting from our geographic presence, particularly in regions where the population is expanding. Our exposure in the Sun Belt is advantageous, especially as people move to states like Texas and Arizona, which have significant volumes. Additionally, our investments in customer service and digital capabilities are paying off in terms of organic growth, allowing us to thrive in the current market. Competing in this difficult labor environment is challenging, especially with issues related to equipment due to supply chain shortages. However, we are confident in our equipment deliveries and our team, though the labor market remains tight. We would gladly hire more drivers if possible, but we are pleased with our ability to serve our customers effectively.

Yes. Now that leads into my next question, which is on the M&A front, you mentioned, and they wanted to get last year, the $400 million of short-term potential pipeline. But what do you think about the current challenging operating environment in terms of its impact on M&A? We certainly seen some pretty healthy activities start the year. But how do you see that potentially affecting the pace and the pipeline of the M&A opportunity?

Yeah, I think it remains strong. And we remain very encouraged about our outlook in that space. And as I think a number of things have helped us and probably helped the industry in the last three years, right? First, you had the fear around tax reform, and that driving some selling activity. You had COVID, and that making it a very challenging environment. And now you got an inflationary environment with a constrained labor market, where it's just getting tougher to compete, right? Add to that all the digital investments we're making at a scale that's very tough for other people to replicate, that are providing a better product to our customers. And I think that drives the opportunity for us to not only grow organically but also have a very attractive M&A pipeline going forward.

Great, thanks. Nice quarter.

Thank you.

Thanks.

Hey, everyone. Thanks for taking my question. Brian, I think you mentioned Ecology, I think it's 70 bps dilutive to margins for this year. How do we think about your margins now, as you guys integrate Ecology, especially this year? And in context of your 31%, 32% target getting back there, is pushing out a year? How can we kind of think about it with the integration now this business?

Yes. So Mike, we're going to sit there and we are going to separate when we think about reporting, we're going to separate the environmental solutions space into its own segment. So as we think about the recycling and solid waste space, we have direct line of sight to that 32% margin. But this is structurally that the business is different on the environmental solution space, but we think there's opportunity. And so this is something where we'll take longer to get there on a consolidated company basis, sure. But we look at continual improvement, not only the realization of the synergies, the cost synergies, but as Jon mentioned, we didn't include any of the revenue synergies, whether it be any additional price into that performance. So, again, you'll be able to see the case, and we'll talk about our expertise as we provide annual guidance.

Perfect. That's helpful. And then just lastly, Brian, I think, eco reported $150 million of EBITDA in 2021. So the $130 million of EBITDA over the eight months, what level of organic growth are we assuming and the margins look like it's a little higher than last year? I might not be comparing apples-to-apples there. So any calls you can address on that pick up? And just lastly, I know I think Jerry asked earlier. I'm just curious, like, how does pricing work on this business? We know the restrictive and the CPI in the open market. And on the solid waste side curiously, if you can add color on, on how that kind of plays out on that environmental services book. Thanks, guys.

Yes. So let me talk a little bit about the EBITDA. So again, there's seasonality in the business. So let's talk about what we're expecting for a full first year contribution on an equivalent. So before any synergies, we would sit there and say, we were expecting about $160 million worth of EBITDA that would compare to the 150 odd million that you were referring to. So that would be the year-over-year growth. We then layered in again, a full year would be about $10 million of first year synergies. What that means for the eight months based on the acquisition date, that's what translates into that $130 million of EBITDA, which includes $5 million worth of real-life synergies.

And then, Mike on pricing, I think the best analog is think about the solid waste and recycling space. So you think about the post-collection assets of US Ecology and special waste, right? Those are event-based deals, and special waste has some recurring streams. And it has some event-based streams; if you're only in post collections, right? You're a taker in both of those, and you're typically giving more spot-based pricing; sometimes more continuous streams are contracted, but contracted typically for shorter periods of time. And then the generator or the collector of those streams bids that out. The opportunity here is to integrate into field services, right? They have the assets, but driving that full integration, which allows you then to drive pricing from the customer, which drives more longer contracted and more consistency in the price, right, reduces the volatility of that demand. And so that is the focus right understanding generators of consistent streams of specialty waste, hazardous handling, and being able to supply them, right, and integrating that, right, into the landfills. And overtime again, we saw this over a decade and a half. And it's always recycling space. That's how pricing power emanated is integrating those two things and not thinking about those two things as separate.

Hi, good afternoon. I wanted to ask how the team came up with the $75 to $100 million of cross-selling opportunity. Specifically, is that kind of a realistic estimate, or is there conservatism in that number?

Yes, our approach was definitely bottom-up rather than top-down. We've been established in the Gulf Coast for several years now, and our acquisition of ACB last year expanded our reach into the Northeast and the Mid-Atlantic regions. We have already started collaborating in the market and are identifying opportunities to serve our customers better because we now offer a comprehensive range of environmental services and products. Larger customers appreciate our one-stop-shop model; they prefer to deal with fewer suppliers and value the reliability of our materials. We're finding success in this area. Our ecological approach has expanded significantly, with our manufacturing business generating around a billion dollars in revenue. When we consider the number of customers and apply a conservative estimate for penetration potential, that's how we arrived at the opportunity of $75 million to $100 million.

And as Jon mentioned, the proof points have been there with the acquisitions that we've already done in our existing business to be able to see that that cross-sell opportunity is real.

Okay. That's helpful. And if I can ask, now that you closed on the acquisition, do you feel comfortable talking about whether you would consider divesting any parts of U.S. Ecology's business? Or whether that's even part of the consideration that you're evaluating down the line?

Sure, yes. There’s a smaller international business, and they have a standby business. Both are good businesses. The question is whether we are the national owners of those assets. We will start by looking at the international aspect and assessing how integrated it is with what we do. While we’re not an international player and focus on North America, we will thoroughly evaluate this. We always begin with the customer and analyze the customer interactions and overlaps. Then we assess the shared facilities and consider the feasibility of separating them. If something is tightly connected, it’s challenging to divest, but if it’s unrelated from the customer perspective, it’s usually easier to sell off. We’ll review both aspects in that order and keep you updated.

Okay, okay, great. Thank you.

Thank you, Betsy. In closing, we are proud of our first-quarter performance, which demonstrates the value our strategic investments are creating. We continue to manage the business to create long-term value for all stakeholders. I would like to thank all our employees for their continued hard work and commitment to partnering with customers to create a more sustainable world. We look forward to seeing everyone at Waste Expo next week, as we proudly recognize our four drivers of the year and celebrate Don Slager's well-deserved induction into the NWRA Hall of Fame. Have a good evening and be safe.