Republic Services, Inc. (RSG) CEO Don Slager on Q1 2021 Results - Earnings Call Transcript

Republic Services, Inc. (NYSE:RSG) Q1 2021 Earnings Conference Call May 5, 2021 5:00 PM ET

Company Participants

Stacey Mathews - Vice President of Investor Relations

Don Slager - Chief Executive Officer

Jon Vander Ark - President & Incoming Chief Executive Officer

Brian DelGhiaccio - Chief Financial Officer

Conference Call Participants

Tyler Brown - Raymond James

Mario Cortellacci - Jefferies

Jerry Revich - Goldman Sachs

Sean Eastman - KeyBanc Capital Markets

Walter Spracklin - RBC Capital Markets

Kyle White - Deutsche Bank

Michael Hoffman - Stifel

Jeff Goldstein - Morgan Stanley

David Manthey - Baird

Noah Kaye - Oppenheimer & Co

Mike Feniger - Bank of America

Operator

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. [Operator Instructions] Please not, this event is being recorded.

I would now like to turn the conference over to Stacey Mathews, Vice President of Investor Relations.

Stacey Mathews

I would like to welcome everyone to Republic Services' first quarter 2021 conference call. Don Slager, our CEO; Jon Vander Ark, our President and Incoming CEO; and Brian DelGhiaccio, our CFO are joining me as we discuss our performance.

I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

The material that we discuss today is time-sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is May 5th, 2021. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the 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. 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.

Don Slager

Thanks Stacey. 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 in shareholder value.

In the first quarter, we delivered adjusted earnings per share of $0.93, which represents a 24% increase over the prior year, generated $464 million of adjusted free cash flow, and expanded EBITDA margin 270 basis points to 30.7%.

As you know, next month will be my last as CEO at Republic Services. 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 Jon and Del, 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 to find improvement, the resiliency and predictability of our operating model and the strength of our culture and the spirit of our people shine 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 lights 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 five most enjoyable things for me as a leader are these. First, casting and collaborating towards a shared vision; second, assembling a purpose-built team; third, creating an effective work environment; fourth, ushering in the future, along with necessary change, new energy and next-gen leaders; fifth and finally, keeping a promise. 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 advisers, thank you for your perseverance, 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 to 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.

Jon Vander Ark

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 first quarter 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%. The 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 first quarter. We remain confident in our ability to achieve average yield of at least 2.5% for the full year.

During the first quarter, volume decreased 80 basis points versus the prior year. This is a 100 basis point improvement from the fourth quarter with nearly all lines of business showing improvement. We expect volume to turn positive in the second quarter and remain positive for the remainder of the year.

We continue to drive profitable growth and believe that investing in acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value. Earlier today, we closed the acquisition of Santek. We welcome these new employees to the Republic team, and we look forward to integrating these high-quality assets into our business. Our pipeline of acquisition opportunities is strong, and we remain on track to invest at least $600 million in acquisitions for the full year.

Now turning to our Environmental Solutions business. First quarter Environmental Solutions revenue decreased $17 million from the prior year. This resulted in a 70 basis point headwind to total revenue growth. We continue to focus on the downstream portion of this business where customers are looking for integrated solutions, and we can leverage our broad capabilities and sustainability platform.

Moving on to recycling. Recycled commodity prices increased 75% to $133 per ton in the first quarter. This compared to $76 per ton in the prior year. Next, turning to margin. Our adjusted EBITDA margin in the first quarter was 30.7% and increased 270 basis points versus the prior year. We continue to successfully manage our costs for changes in underlying demand and leverage our new, more efficient ways of working.

This includes utilizing our RISE platform and accelerating the use of technology to drive efficiencies and improve the customer and employee experience. In the first quarter, we continued our high-performing safety record, reducing safety incidents 18% versus the prior year. We continue to see the positive contribution from our maniacal focus on the customer experience.

In the first quarter, our NPS increased four points over the prior year, and we achieved a record set in customer retention at 94%. During the first quarter, we made further progress towards our long-term sustainability goals. As part of our sustainability platform, we recognize the importance of identifying and managing opportunities and risks related to climate change.

We remain committed to transparency on metrics that are important to all our stakeholders. We are proud to be the first in the industry to disclose our climate-related opportunities and risks through a comprehensive TCFD report. We were also recently named to Fortune's 2021 most Admired companies list. This is an award recognizing our team focused management, innovation and socially responsible business practices.

Looking ahead, we expect to outperform our original guidance 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 $1.35 to $1.4 billion.

I will now turn the call over to Brian.

Brian DelGhiaccio

Thanks, Jon. First quarter volume decreased 80 basis points. Additionally, there was one less workday, which reduced revenue by 50 basis points compared to the prior year.

The components of volume included a decrease in small container volume of 2.8%. This represents a 70 basis point improvement from the fourth quarter, a decrease in large container volume of 2.1%.

This represents a 130 basis point improvement from the fourth quarter and an increase in landfill volume of 2.5%. And the increase in landfill volume includes a 3.5% increase in MSW volume and a 1.9% increase in special waste.

Within the quarter, volume performance was negative in January and February and turned positive in March. We expect volume will remain positive, for the remainder of the year.

Adjusted EBITDA margin for the first quarter was 30.7% and increased 270 basis points versus the prior year. This included, underlying margin expansion of 210 basis points, a 20 basis point benefit from net fuel and recycled commodity prices and a 40 basis point benefit from one less workday.

The outsized margin expansion is a direct result of pricing in excess of our cost inflation and effective cost management. SG&A expense for the first quarter was 10.2% of revenue, an improvement of 70 basis points over the prior year.

While SG&A costs have decreased, expressed in both dollars and as a 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 million and increased $178 million, compared to the prior year. This increase is the result of EBITDA growth, positive contribution from working capital and the timing of capital expenditures.

Working capital included a one-day improvement in DSO and a two-day improvement in DPO. Capital expenditures of approximately $200 million during the first quarter, represents 17% of our projected full year spend.

The timing benefit of capital expenditures will flip, over the remainder of the year. During the quarter, total debt was $8.9 billion and total liquidity was $3 billion. Interest expense decreased $18 million, as a result of our refinancing activities completed last year. And our leverage ratio decreased to 2.9 times.

With respect to taxes, our first quarter adjusted effective tax rate was 26%. When you further consider, non-cash charges from solar investments, we had an equivalent tax impact of 28.4%.

I will now turn the call back over to Jon.

Jon Vander Ark

Thanks, Brian. I'm excited about the company's future. However, we can't go forward without looking back. It is impossible to overstate Don's impact, on Republic Services. He is the architect and champion of the Republic way.

Don will always be known as a visionary, who successfully integrated the several hundred acquisitions. And have formed the current Day Republic. He strengthened Republic foundation, while investing in the capabilities that allow us to drive profitable growth and shareholder value.

During the last 10 years, Don has led the company to more than triple our stock price and market capitalization, which now approaches $35 billion. Among everything that has accomplished, as big as achievement is the culture he created.

He made Republic Service as 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 are taking 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. So 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.

Question-and-Answer Session

Operator

We will now begin a question-and-answer session. [Operator Instructions] Our first question today will come from Tyler Brown with Raymond James. Please go ahead.

Tyler Brown

Hey good afternoon.

Don Slager

Good afternoon Tyler.

Tyler Brown

Hey. Jon, congrats on the new role. Don, thanks so much for everything over the years. But Jon, I figure Republic is a little bit like a cruise ship, and this is a complement, 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?

Jon Vander Ark

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 rider left turns in part because the business has lots of momentum. I have the privilege of being part of the team that's driven the current strategy that's led to the set of results. At the same time, we're at an inflection point. 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 three 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.

Tyler Brown

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?

Brian DelGhiaccio

Yes. Tyler, we actually just maintain that recycled commodity price at about that $130 a ton over the remainder of the year.

Tyler Brown

Okay. So if I look at my notes, I think you were around $100 for 2020, I'm going to do the math on the fly here. But it sounds like it's about a $30 delta, and I think it's a $0.03 per ton, so it's something like $0.09. You've 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?

Brian DelGhiaccio

Yes. A couple of questions there. So let me kind of break it apart. First of all, in our original guidance, we had that pegged at $110 a ton. So it's actually a $20 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 first quarter, relatively higher commodity prices, we want to wait and see that normal seasonal uptick before we address some of those other assumptions like the price and the volume and the margin. So right now, we feel optimistic about what we see coming out of the first quarter, but we want to see it before we address those assumptions, which we plan to do in July on our second quarter call.

Jon Vander Ark

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 to that. Again, we feel really good about the momentum we have and the outlook is positive. But looking around the world, this thing is certainly moving in, in certain ways. So we want to have the appropriate level of caution and wait until we see that volume come back to Brian's point.

Tyler Brown

Okay. No, that's very fair. And then my last one. So I think you mentioned Santek closed today. Brian, can you give us the expected revenue contribution from all M&A that closed last year and so far today, this year here in 2021? I know that was something you did not give on the last quarter call.

Brian DelGhiaccio

Yes. 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 Santek plus some of the other, I would say, smaller acquisitions that we anticipate on closing over the balance of the year. We would expect total contribution to rollover plus in year impact of 250 to 300 basis points.

Tyler Brown

Perfect. Okay. That's what I needed. Thank you.

Brian DelGhiaccio

Thanks, Tyler.

Operator

Our next question comes from Hamzah Mazari with Jefferies. Please go ahead.

Mario Cortellacci

Hi. This is Mario Cortellacci calling in for Hamzah. I also want to congratulate John and also, Don, I 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 no margin business that you were doing for a while being behind you?

Jon Vander Ark

Sure. I'll start and Brian can fill some pieces. Listen, we feel good about all the hard work we've achieved. This is in our results in the first quarter earned the results of just the last three months. The results of the prior three years and all the heavy lifting we've done to optimize the business. Again, 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 rotated out of the portfolio. So we feel great about that.

As volume comes back, obviously, we've gotten really tight from an operating and a cost standpoint. And we think we have capacity to take on that volume. I'm not limitless, of course, but we'll make the appropriate investment with the appropriate return into fleet -- our fleet and landfill capacity as we see the growth come back.

Brian DelGhiaccio

I would sit there and just to 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&L. It's the operating cost. It's the SG&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.

Mario Cortellacci

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 yet a few years ago? And then, maybe I missed it earlier on 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 -- sorry, restructuring longer-term?

Jon Vander Ark

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 in the commodity value. But frankly, 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 on that front, but I also think there's more upside as we move forward.

Mario Cortellacci

And then EBITDA-wise?

Brian DelGhiaccio

Yes. We don't actually disclose the EBITDA by line of business. What I can tell you is just the contribution to margin from higher commodity prices during the quarter was 50 basis points.

Mario Cortellacci

Got it. Appreciate it. Thank you.

Brian DelGhiaccio

Thank you.

Operator

Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Jerry Revich

Good afternoon. And Don, Jon, congratulations.

Jon Vander Ark

Thank you, Jerry.

Jerry Revich

I'm wondering if we could just talk about the ESG theme. Obviously, landfill gas economics look pretty attractive at spot RIN prices. I'm wondering if you could just talk about how many additional plants over the next couple of years. Are you folks considering transitioning to tying into pipelines to achieve the full benefit of RIN economics? And how are you thinking about the sustainability of RIN 3 prices anywhere close to the current range? Thanks.

Jon Vander Ark

Yes. 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 pure electricity. Some are more high BTU ones. And as we go forward, we're looking at those to capture the RINs opportunity.

As our primary model, historically has been to work with partners on the development. We think that just gets us there faster, right? It also certainly, we don't get all the upside of the room 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've pursued some of those on our own.

But I think our predominant model going forward will be working with working with third parties, and we don't think we're done at a dozen. Those are just the ones we have right in front of us now, right? We're going through more of our medium-sized landfills, and we think there's other opportunities to unlock there going forward as well.

Jerry Revich

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 that you alluded to earlier in terms of some things that are going to be done differently going forward. I'm wondering, can we just talk about that within the context of how strong the performance has been within those areas? And to what extent we might mitigate the impact of volume recovery on those types of expenses?

Jon Vander Ark

Yes. Listen, I think there are going to be some things that don't work exactly like they are today. So some costs come back. Obviously, we're still largely in a no travel mode. And there is going to be some travel that comes back at the same time, it's not going to come back to pre pandemic level. We're going to take advantage of the tools that we have around virtual meetings that certainly save us some cost that shows up in SG&A, frankly, is much more on opportunity cost, right?

One of the reasons that we're driving great performance on the front line of the business is our people are focus in day in and day out, right and they are not getting tied up or distracted with other thing 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 eyes 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 got from an EBITDA margin standpoint and hopefully look upwards.

Jerry Revich

Thanks. I appreciate the discussion. Thank you.

Brian DelGhiaccio

Thanks Jerry.

Operator

Our next question will come from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Sean Eastman

Hi guys, Don, many congratulations and great retirement remark 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.

Jon Vander Ark

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 and June timeframe, and then we're going to come back in that Q2 call. We'll talk about price volume and margin assumptions.

What I can tell you, 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.

Sean Eastman

Okay. Fair enough. And maybe with Santek close, it'd be great just to hear sort of what's exciting about that from a strategic perspective, synergy potential over the next couple of years. Any color around the acquisitions since it’s a larger one would be great?

Jon Vander Ark

Yes, we’re really set with the acquisition. It's unique in the sense of, you've rarely find an acquisition that has kind of this level of post collections, assets and infrastructure, but we're taking on 11 landfills. I would say that, and it fits perfectly into our footprint, kind of layers into the Southeast, mid-Atlantic, so now part of the country where we've got lots of strong assets. And again, we think provides the platform, we feel -- we pick up a few new communities as well. So that provides a platform for follow-on M&A and tuck-in deals that allows us to grow further on that front.

It was a well-run company for a long, long time. It was a protracted close to it as we went through the DOJ process. I think the pandemic did us no favors just in terms of the process on that front. 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. So we feel really, really excited about having those team members join our team.

Sean Eastman

Excellent. Thanks. I will turn it over.

Operator

Our next question will come from Walter Spracklin with RBC Capital Markets. Please go ahead.

Walter Spracklin

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 and 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.

Jon Vander Ark

Yes. Obviously, it's an unprecedented time. So it's hard to perfectly compare the history. There's two 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 turn on plan. February, we were certainly off plan.

For example, the state of Texas was largely closed for a week with some of the weather that they endured. And then March was really, really strong, and we feel very good about the momentum in April as well. 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.

Brian DelGhiaccio

Yes, I would sit there and just add, when you take a look at margin 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.

Walter Spracklin

Perfect.

Brian DelGhiaccio

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.

Walter Spracklin

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 was the biggest variance. I mean this one element be a price or costs or volume -- what was the main driver of the better quarter here in terms of what you were expecting when you laid out your guidance?

Jon Vander Ark

Yes. I think -- listen, we had a fairly, very solid start across the board in terms of the underperformance of the business. I think to Brian's earlier point on the guide, high commodity prices right is $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 I kind of just do the flow-through math on that, right? It kind of took us into that territory.

Brian DelGhiaccio

Yes. And 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 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.

Walter Spracklin

Great. Appreciate your time as always.

Brian DelGhiaccio

Thank you, Walter.

Operator

Our next question will come from Kyle White with Deutsche Bank. Please go ahead.

Kyle White

Hi. Good afternoon. Thanks for taking the questions. Don, congrats and hope enjoy your retirement. Jon, congrats on the new role.

Don Slager

Thank you.

Kyle White

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?

Jon Vander Ark

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 fast 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 the 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 we're working on other priorities at the time. But now that we see people kind of come out of it, the economy opening up, we're back at it. That's a normal part and its part of the performance incentive, frankly, of our municipal sales team that they're working on what we to get -- what we think is a fair and favorable price index for us.

Brian DelGhiaccio

Yes. I would even say there and say, even though, right, that that's the challenges we faced, we made great progress in the quarter. So that 37% represents $930 million of revenue. When we reported that at the end of 2020, it was $875 million, right? So we actually moved $55 million of revenue during the quarter.

Kyle White

Got it. That's helpful. And then going back to M&A, just curious about the pipeline and if you're seeing any kind of increased activity, just given some of the speculation on tax changes? And then also regarding the Santek and the length that took to close, does that make you kind of rethink your M&A strategy at all in terms of maybe what you're targeting from a size or region standpoint?

Jon Vander Ark

So we haven't seen, I would say, a huge increase because of the looming tax law changes, only because I think the pipeline has been strong now for a number of months, right? We stayed really active during the pandemic, obviously, meeting with potential sellers in new ways, virtually, and now our team is getting back out on the road and meaning people face-to-face, but the pipeline continues to be strong on that front. So we feel good about that.

And this is the Santek in terms of the DOJ process and that's taking longer. 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 we'll go in eyes wide open in terms of the length of time. But I think the great the headline sort of Santek is, it 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.

Kyle White

Got it. Thank you. I will turn it over.

Operator

Our next question will come from Michael Hoffman with Stifel. Please go ahead.

Michael Hoffman

Thank you very much, Don and Jon. Best to both of you. Don, I have a question for you. Could you talk about one or two actions that you've taken in this tenure that Jon and Brian are going to be talking about two or three years from now, that will make -- be part of why the growth rate or the margin or the cash conversion looks the way it does?

Don Slager

Well, look, I think there's a couple of things. First of all, my goal was to say, very little today. The -- I think talent is going to be the top of the list here forever. We put the talent agenda from the center a decade ago. We focused on composite strength. We focus 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 to those people. And the fact that they're all growing and developing continuously.

There's waves and waves and generations of really top talented people here, and many genres got his eye on to do their next assignment. So they're talking a lot about that. That's not they were going to go in. That is embedded in the Republic way.

They're a 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 anything anymore.

So the speed that Jon talks about, speed 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 so Jon 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, Jon was very involved in. The operating structure of the team that he's inheriting. He has been playing a big part of developing and choosing and directing. So back to speed is going to be a big deal. But we probably way is not going away. It's just going to get bigger and brighter. It's going to help us -- now he talks about things like customer zeal.

We're going to be the best service provider in the space, and people are going to compare us to world-class in the same way they do on safety today and fleet operations and those other things. So -- no, I mean, those are my final words, Michael.

Michael Hoffman

Okay. Thank you. And I hung it up in the ring, and it scared the hell out of my young horse the first time he saw it.

Don Slager

There you go.

Michael Hoffman

So Brian and Jon, it's been 10 years since this company has produced a 40% or better gross margin in the first quarter. And the trend in the three years that did that 8, 9 and -- 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, a 10% to 10.5%, SG&A of 40.5% to 41% gross margin. This is structural.

Jon Vander Ark

Absolutely. We feel good about the ground that we've gained. And again, we're setting our sights on new heights. And while there's going to be some headwind 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, right. 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 -- we're optimistic about the future, and we think the financial results, again, are a great sign of our achievement, but certainly not something that we're going to go down from. We're going to go up from here.

Michael Hoffman

Thank you. And good luck to all of you in each of you bearing new roles.

Jon Vander Ark

Thanks, Michael.

Brian DelGhiaccio

Thanks, Michael.

Operator

Our next question will come from Jeff Goldstein with Morgan Stanley. Please go ahead.

Jeff Goldstein

Hey, good afternoon. And I'll echo all the previous comments here and say, congrats on a long and successful tenure. And congrats, Jon, on the new role.

Jon Vander Ark

Thanks, Jeff.

Jeff Goldstein

I know you used to -- I know you used to give this figure, but any sense of what percent of customers who reduce 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 buy at a lower service level here. Just how are you thinking about the path back of those remaining customers?

Jon Vander Ark

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. We just got a little heavier. Small container, I think that's a nature of your question. It's 0.6% to less than 1%, are still paused. And if you look at that, the mix of that, right, it really falls into three verticals at 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 off-line, 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 the most interesting to watch. I think you're going to see a boom back in some pent-up business travel and personal travel. And 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 will be some modulation in some of these small meetings that people are 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.

Jeff Goldstein

Okay. That was all very helpful. And then how should we think about the $45 million of financial support you were providing to frontline employees last year. Does that number come down this year? And if so, to what extent? And then in the first quarter, were any of those costs still baked into your operating expenses? Just how should we think about that?

Jon Vander Ark

Yes. We still have a little bit of that into the system because that's just the heightened protocol around PPE, clean facilities, et cetera. 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 is our number one priority in their health as well as facility cleaning and everything else. And so we still have a bit of that cost. I think it's about $8 million in the first quarter, 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 fourth quarter, but we'll spend it as long as we need it. But it's certainly coming down off of that $45 million from last year.

Jeff Goldstein

Okay. Thanks a lot.

Jon Vander Ark

Thank you.

Operator

Our next question comes from David Manthey with Baird. Please go ahead.

David Manthey

Thank you. Good afternoon and congratulations, everyone.

Jon Vander Ark

Hi David.

David Manthey

My question is also on the indices here. So when you look at CPI. And the water sewer 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 inflation in the economy, is your expectation that the water sewer trash index is going to increase, at the same magnitude as regular old CPI?

Jon Vander Ark

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 directionally to CPI. It's a subcomponent of headline, David, yes. So the water sewer trash is an element. It's one of the components of the basket that makes up headline.

David Manthey

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, asset 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?

Jon Vander Ark

Yes. Obviously, this is a big part of Don's legacy. We were very reactive historically on maintenance and everybody figured out maintenance, themselves. And part of the cornerstone the Republic way, from a functional standpoint was one fleet.

The idea that we ought to leverage our scale and figure out how to do maintenance one way, across our 165 business units and that we ought to shift our focus to preventative maintenance, right, and being scheduled versus reactive.

So now more than 80% of our maintenance work is scheduled and proactive. And we think that one helps us lower cost, but more importantly, that keeps our fleet moving. It keeps our employees and the trucks, keeps them productive and keeps the servicing customers and providing great customer service.

David Manthey

Great, I appreciate it. Thank you.

Jon Vander Ark

Thank you.

Operator

Our next question will come from Noah Kaye with Oppenheimer & Co. Please go ahead.

Noah Kaye

Hi. Thanks so much for taking my 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, Jon, on your new role.

Jon Vander Ark

Thank you.

Brian Bales

Thanks.

Noah Kaye

One of the themes so far, I think, this quarter for the industry has been the open market price strength and stickiness. And clearly, you saw a good result this quarter. Curious for your view, number one, on what is driving the open market price retention and strength? And then as you look to, future quarters, where do you see the greatest opportunities to push price across which lines of business?

Brian Bales

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. If you can go back to the Great recession and where we saw a lot of drag on price and people probably getting a little bit nervous and panicking, I don't think you saw that behavior.

We've certainly always prioritized price over volume. We have to get a return on the work we do 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. If 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 low -- that number looks a little bit low. But overall, you got to look at the top line view of, we look at the revenue and then look at 270 basis points of margin expansion. That just shows you our discipline on price and the fact that we're getting quality revenue that's drive, dropping to the bottom line.

Noah Kaye

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 scaled, 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.

Jon Vander Ark

No, we feel good about it. Listen, there's always a little bit of lumpiness quarter-to-quarter in the CapEx. And I think we maybe anticipated a bit of this, and so we were pretty aggressive in Q4 of last year on getting out of the truck order to make sure we were prepared, right, as volume came back and that 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 have never been here when there wasn't a little bit of slippage in the order board, right? That's normal course, and we feel pretty good that the direction will be a number for the year.

Noah Kaye

Okay. Great. Thank you.

Jon Vander Ark

Thank you.

Operator

[Operator Instructions] Our next question will come from Mike Feniger with Bank of America. Please go ahead.

Mike Feniger

Hey, guys. Thanks for squeezing me in Don and Jon, all the best and congrats, echoing all the sentiment there. Just maybe, Brian, you could help me with this. The margins were exceptional. And I'm just trying to understand, like the yield has actually gone from 2.6 in Q3 to 2.5 in Q4. I think Q3, yet your margins are exceptional. So is there anything why the yield has actually not been -- been going up in the first quarter? Or is that kind of on the come right now? How do we think about that yield number with these exceptional margins?

Brian DelGhiaccio

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, right, let's start there in order to get 270 basis points of margin expansion that has to be true. I say though, Jon mentioned it just a second ago, 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 hall plus the disposal charge. So lighter container rates drive the average yield calculation, that anniversary is beginning in Q2, which is why we made the commentary that we believe we're going to achieve at least a 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 first quarter.

Jon Vander Ark

So Mike, just to mention that, if it was -- it's 1.1% large container this quarter. We were at 3.5% in Q1 of 2020, right? If we kind of get back to that rate, that would add about 40 basis points, north of that 2.5%, and hence, the comments on the outlook for the year.

Mike Feniger

Got it. That makes sense. And as you guys discussed, like getting to a yield of 2.5%, which is even kind of looked at 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 type of margin expansion with a yield of 2.5%?

Jon Vander Ark

Yes. Look, we're seeing, I would say, in small pockets, so container pricing is going up, for example. And I hate outlook 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 in a really attractive spot for us.

Again, small pockets here with some subsidization going on with the federal government. We think that I make -- 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.

Brian DelGhiaccio

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 quoting today is already reflective across the country of some of the increased costs we're seeing for containers.

Operator

It appears Mike is -- that’s it from Mike. So this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Vander Ark for any closing remarks.

Jon Vander Ark

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. And once again, I would like to thank Don for his incredible leadership and enormous contributions to the company. Have a good night, everybody, and be safe.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.