Republic Services - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered resilient profitability despite topline headwinds: adjusted EBITDA rose to $1.27B with 140 bps margin expansion to 31.6%, driven by pricing ahead of cost inflation and cost discipline. EPS was $1.58 vs $1.44 YoY; net income margin expanded 50 bps to 12.3%.
• Versus Wall Street consensus, EPS beat ($1.58 vs $1.533*) while revenue modestly missed ($4.009B vs $4.049B*), as cyclical volume softness, severe winter weather ($25–$30M impact), and one fewer workday weighed on the top line while price/cost spread lifted margins.
• Guidance was implicitly reaffirmed; company remains on track for FY 2025 targets (revenue $16.85–$16.95B, adjusted EBITDA $5.275–$5.325B, adjusted EPS $6.82–$6.90, adjusted FCF $2.32–$2.36B); average yield assumptions (~4% total; ~5% related revenue) and volume (−25 bps to +25 bps) unchanged.
• Strategic catalysts: accelerating sustainability investments (Polymer Centers ramp in Indianapolis; seven RNG projects targeted for 2025), strong customer retention (>94%), and active M&A pipeline (> $1B target), underpinning multi-year margin and cash flow trajectory.

What Went Well and What Went Wrong

What Went Well

• Pricing ahead of inflation and mix benefits expanded adjusted EBITDA margin by 140 bps to 31.6%; management highlighted underlying 110 bps expansion plus 40 bps from one fewer workday.
• Customer retention remained >94%, with improving NPS; quote: “Our focus on delivering world-class essential services continues to support organic growth and enhance customer loyalty”.
• Sustainability momentum: Indianapolis Polymer Center opening with ramp and strong demand; seven RNG projects expected to commence in 2025; quote: “We could sell out both Las Vegas and Indianapolis multiple times over… pricing appropriately”.

What Went Wrong

• Organic volumes fell (−1.2% total; −1.5% related), pressured by shedding underperforming residential contracts and softness in construction/manufacturing; weather reduced volume by $25–$30M.
• Environmental Solutions margin slipped to 20.1% from 20.5% YoY due to project timing and severe winter weather; management expects YoY expansion for FY 2025 but cautioned quarterly lumpiness.
• Topline was constrained by one fewer workday (−50 bps impact) and continued macro uncertainty (tariffs/trade policy), contributing to the slight revenue miss vs consensus.

Transcript

Operator (participant)

Welcome to the Republic Services First quarter 2025 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants on this call will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Aaron Evans, Vice President of Investor Relations. Please go ahead.

Aaron Evans (VP of Investor Relations)

Good afternoon. I would like to welcome everyone to Republic Services first quarter 2025 conference call. Jon Vander Ark, our CEO, and Brian DelGhiaccio, our CFO, are on the call today to discuss our performance. I would like to take a moment to remind everyone that some information we discuss on today's call contains forward-looking statements, including forward-looking financial information which involves 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 April 24, 2025. Please note that this call is property of Republic Services.

Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. 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 available on Republic's website at republicservices.com. In addition, Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our investor website. With that, I'd like to turn the call over to Jon.

Jon Vander Ark (CEO)

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. We are pleased with our first quarter results, which demonstrated our ability to price ahead of inflation and effectively manage costs. We produced strong earnings growth and expanded margins while overcoming top-line headwinds from challenging winter weather and continued softness in cyclical volumes. During the quarter, we achieved revenue growth of 4%, generated adjusted EBITDA growth of 9%, expanded adjusted EBITDA margin by 140 basis points, delivered adjusted earnings per share of $1.58, and produced $727 million of adjusted free cash flow. These strong results were supported by our differentiated capabilities. Regarding customer zeal, our focus on delivering world-class essential services continues to support organic growth and enhanced customer loyalty. Our customer retention rate remains strong at more than 94%.

We continue to see favorable trends in our Net Promoter Score due to the value of our offerings and quality of our service delivery. First quarter organic revenue growth was driven by solid pricing across the business. Average yield on total revenue was 4.5%, and average yield on related revenue was 5.4%. This level of pricing continued to exceed our cost inflation and helped drive 140 basis points of adjusted EBITDA margin expansion during the quarter. Organic volume on total revenue declined 1.2% in the quarter. Volume losses were concentrated to shedding underperforming contracts in the residential business and continued softness in construction and certain manufacturing end markets. Challenging winter weather also impacted volume results during the quarter. Turning to our expanding digital capabilities, we continue to advance the implementation of digital tools to improve the experience for both customers and employees.

Development and deployment of MPower, our fleet and equipment management system, is progressing. MPower is designed to increase maintenance technician productivity and enhance warranty recovery. Today, we have implemented MPower at nearly 40% of our facilities. Moving on to sustainability, we believe that our sustainability innovation investments in plastic circularity and decarbonization position us for growth and long-term value creation. Development of our Polymer Centers and Blue Polymers joint venture facilities continues to move forward. In March, we hosted the grand opening of our Indianapolis Polymer Center. Product quality testing is progressing well. We expect to begin ramping commercial production volume in June, with earnings contribution beginning in the second half of this year. This operation is co-located with a Blue Polymers production facility that is expected to be completed in the coming months. Construction on the Blue Polymers production facility in Buckeye, Arizona, continues to progress.

This facility will complement our Las Vegas Polymer Center. We expect the completion of this facility early next year. The renewable natural gas projects we're developing with our partners are advancing. One project came online during the first quarter, and two projects came online in April. We still expect a total of seven RNG projects to commence operations in 2025. We continue to advance our commitment to fleet electrification. We had 80 electric collection vehicles in operation at the end of the first quarter. We expect to have more than 150 EVs in our fleet by the end of this year. We now have 27 facilities with commercial-scale EV charging infrastructure. We expect to have more than 30 facilities with charging capabilities by the end of 2025. As part of our approach to sustainability, we continually strive to be the employer where the best people want to work.

Our employee engagement score continues to improve, and our turnover rate continues to trend lower compared to the prior year. Our comprehensive sustainability performance continues to be widely recognized, as Republic Services was named to Barron's 100 Most Sustainable Companies list, Fortune's Most Innovative Companies list, and Ethisphere's World's Most Ethical Companies list. With respect to capital allocation, we invested $826 million in strategic acquisitions during the first quarter. This includes the acquisition of Shamrock Environmental, a leader in industrial waste and wastewater treatment services. This acquisition further strengthens our capabilities to provide high-demand services to our customers. Our acquisition pipeline remains supportive of continued activity in both the recycling and waste and Environmental Solutions businesses. We continue to see opportunity for more than $1 billion of investment in value-creating acquisitions in 2025.

As part of our balanced approach to capital allocation, we returned $226 million to shareholders in the quarter, including $45 million of share repurchases. I will now turn the call over to Brian, who will provide more details on the quarter.

Brian DelGhiaccio (CFO)

Thanks, Jon. Core price on total revenue was 6.1%. Core price on related revenue was 7.3%, which included open market pricing of 9% and restricted pricing of 4.6%. The components of core price on related revenue included small container of 9.1%, large container of 7.9%, and residential of 6.5%. Average yield on total revenue was 4.5%, and average yield on related revenue was 5.4%. First quarter volume performance on total revenue decreased 1.2%, and volume on related revenue decreased 1.5%. Volume results on related revenue included a decrease in large container of 3.3%, primarily due to continued softness in construction-related activity in certain manufacturing end markets, and a 2.9% decrease in residential due to shedding underperforming contracts. We estimate that severe weather negatively impacted volume performance by $25 million-$30 million during the quarter. The weather impact was isolated to January and February.

Moving on to recycling, commodity prices were $155 per ton during the first quarter. This compared to $153 per ton in the prior year. Recycling processing and commodity sales increased revenue by 30 basis points during the quarter. This was primarily driven by increased volumes at the Las Vegas Polymer Center and reopening a recycling center on the West Coast. Current commodity prices are approximately $160 per ton. Total company adjusted EBITDA margin expanded 140 basis points to 31.6%. Margin performance during the quarter included margin expansion in the underlying business of 110 basis points and a 40 basis point increase from one less workday. This was partially offset by a 10 basis point decrease from acquisitions. With respect to environmental solutions, first quarter revenue increased $25 million compared to the prior year, driven by both organic growth in the business and the contribution from recent acquisitions.

Adjusted EBITDA margin in the environmental solutions business was 20.1%. This compares to 20.5% in the prior year. Margin performance in the environmental solutions business was impacted by project timing and severe winter weather. Adjusted free cash flow was $727 million, an increase of 36% compared to the prior year. This increase was driven by EBITDA growth in the business and the timing of working capital. This level of performance was in line with our expectations. Total debt was $13.4 billion, and total liquidity was $2.6 billion. Our leverage ratio at the end of the quarter was approximately 2.6 times. Yesterday, Moody's upgraded our credit rating to A3. The upgrade recognizes the stability of our revenue base, strong EBITDA margin profile, and robust free cash flow generation.

With respect to taxes, our combined tax rate and impact from equity investments and renewable energy resulted in an equivalent tax impact of 26.5% during the quarter. With that, operator, I would like to open the call to questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. In the interest of time, we ask that you limit yourself to one question and one follow-up question today. If your question has been answered and you would like to withdraw your request, you may do so by pressing star, then two. If you are using a speakerphone, please pick up your handset before pressing the keys. Your first question today will come from Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan (Analyst)

Great. Thanks, and good afternoon. Maybe if we could just start by commenting on maybe what you're seeing out there, maybe more cyclical parts of the overall business, any change in trends through the quarter and Q1, and anything that might have evolved into Q2. Thank you.

Jon Vander Ark (CEO)

Sure. Yeah. Like we've mentioned, cyclical volumes have been down. That's really been true for the last three years. We're kind of in a negative demand environment, really led by construction and manufacturing. It's a little difficult to tell when you mix in the weather what's happening. Certainly, January and February were softer on that front, and March has picked up, and April is following that trend, so we feel good about that. I think on the construction side, we're expecting more flatness throughout the rest of the year, just given where the 10-year interest rate is. We've got to get mortgage rates down. I think manufacturing is more of a wait and see. Obviously, there's a lot of uncertainty right now with tariffs to the extent that we get a trade policy clarified.

I think there could certainly be some pent-up demand, but for now, it's more of a wait and see.

Sabahat Khan (Analyst)

Great. Maybe just continuing around that as my follow-up, maybe just comment on your outlook on 2025, the guidance metrics, any changes in the puts and takes on the top line or the margin guidance provided at the last quarter. Thank you.

Jon Vander Ark (CEO)

Yeah. Maybe just as a matter of principle going forward, right? If we do not formally update our guidance, we are implicitly and explicitly reaffirming our guidance on that front. It is always cyclical. Our seasonality in the business is important because you have got to see how demand comes in the second and the third quarter, which are our strongest quarters. We have seen a nice pickup on that front. We will update you more in the following quarter based on what we see coming in here in April, May, and June.

Sabahat Khan (Analyst)

Thanks very much.

Operator (participant)

Your next question today will come from Bryan Burgmeier with Citi. Please go ahead.

Bryan Burgmeier (Equity Research Analyst)

Good afternoon. Thanks for taking the question. I was just wondering if you could maybe talk through some of the puts and takes in margin expansion for solid waste in the first quarter. It's quite a bit better than our forecast. I'm just curious how it kind of compared to your expectations, maybe what went better than you expected. It seems like it's maybe all-time high margins, and I guess we normally don't think about one Q being the high point. Just any kind of detail you can add would be great.

Jon Vander Ark (CEO)

Yeah, Brian, it was a good quarter, obviously, with the level of margin expansion. We've talked about this, that we're still reaching back to relatively higher pricing, and there is this spread between that and the cost inflation, which we're realizing more on a real-time basis. Most of that is just driven by price in excess of our cost inflation. That said, a little bit of this was arithmetic as well. Again, when we saw some of the softness in things like construction activity, which is good work, but it tends to be a little bit below our corporate average, we saw some pretty strong special waste volumes in the quarter as well. That change in mix can actually have a positive impact on your overall margin performance.

Again, slightly ahead of our initial expectations, and we'll see where this goes through the balance of the year.

Bryan Burgmeier (Equity Research Analyst)

Got it. Got it. Thanks for that. Just maybe broadly, just kind of curious on your appetite for further M&A. I guess on one hand, leverage is still pretty low, but on the other hand, the macro outlook is quite uncertain. You've already done quite a few deals year to date. Just further views on that. Thank you. I'll turn it over.

Jon Vander Ark (CEO)

Yeah. The prepared remarks, we've mentioned that our pipeline is strong. Listen, we're active in the space, both in recycling and waste and across environmental solutions. It's got to meet two screens. One, it's got to meet our strategic screen. Are we the natural owner of this? Is it a good fit for our business? Then our financial screen as well, where we're going to look for double-digit, unlevered cash-on-cash returns. Most of the things that fit those screens then have some level of permanence associated with them, either permits on infrastructure or density and small and large container permanent routing, things that stand the test of time. We're not going to buy a completely cyclical business. For example, that's just not a good fit for us. We're buying these things forever, right?

We're not being opportunistic and saying we're going to buy it and sell it. We're going to keep it forever. We'll take that through cycle mindset, and I think you'll see us be active the rest of the year.

Operator (participant)

Your next question today will come from Tyler Brown with Raymond James. Please go ahead.

Patrick Tyler Brown (Managing Director)

Hey, good afternoon, guys.

Jon Vander Ark (CEO)

Good afternoon.

Patrick Tyler Brown (Managing Director)

Hey, Jon. I think you've owned US Ecology for a while, but I guess technically you haven't owned it through a cycle. Like you kind of mentioned, I guess you could argue the last couple of years have been an industrial malaise, to say the least. Big picture, what are the KPIs that you're kind of looking at to assess the end market health for that business? Is that business still about three-quarters recurring revenue and about one-quarter project or event work?

Jon Vander Ark (CEO)

Yeah. Maybe I'll start at the end. Broadly speaking, yes. Now, I think putting those two things in discrete categories is a little less clear. For example, you may have a contract with a large industrial player to do something like emergency response. There's going to be some variability year to year in that contract, and those are technically events. Overall, across years, it's a pretty stable stream on that front. That 75/25, for your purposes, I think, is a fair marker on that front. Listen, we look at the same thing other people do. We look at PMI from a manufacturing output standpoint. We look at industrial activity or permitting, right, for more some type of event-based work on that front. Again, you look at all those things, and they've been suggesting historic softness, right? Those markets are not disasters either.

They've just been soft for the last two, three years.

Remember, Tyler, too, there's a lot of overlap between our recycling and waste business and the environmental solutions business. We see it on both sides. Same customer, just a different waste stream.

Patrick Tyler Brown (Managing Director)

Yeah. Exactly. Okay. That's helpful. Jon, can you just talk a little bit more about the Shamrock deal? Can you just talk about what it brings to the table, what exactly they do? Maybe is it levered to PFAS? Just how it fits in that environmental service mosaic?

Jon Vander Ark (CEO)

Yeah. Good question. Yeah. They have commercial water treatment facilities, and we've had some of those through the US Ecology deal. We're in that business. The primary reason we got into it is we had a lot of—they were a big, or we are a big customer of theirs. We have a lot of industrial water on our back because when we go to serve our most complex customers, they have a lot of different needs and different waste streams, water being one of those. We knew the assets incredibly well on that front. Great infrastructure base. It also fills out some dots on the map for us in terms of field services on that front. It felt really good. They do have PFAS technology. We actually were taking some leachate to them as well.

That wasn't the primary driver of the deal, but that certainly will be supportive over time as PFAS becomes a bigger and bigger part of our service offering.

Patrick Tyler Brown (Managing Director)

Okay. Yeah. That's very interesting and very helpful. My last one here, real quick, Brian. I know you guys are going to address the guidance in July, but I think you had said last call to expect a point, like one point from M&A for revenue. Is that kind of number still intact? I think I just want to make it clear that your guidance had already contemplated this heavy spend in Q1. Is that right?

Jon Vander Ark (CEO)

Yeah. That's fair. It's right. It's still around a point. That is correct that our guidance, because we had already closed a majority of the transactions by the time that we were providing the guidance, we had included the revenue from those closed transactions in the guidance itself.

Patrick Tyler Brown (Managing Director)

Yep. Perfect. Very clear. Thank you, guys.

Jon Vander Ark (CEO)

Thanks.

Operator (participant)

Your next question today will come from Toni Kaplan with Morgan Stanley. Please go ahead.

Toni Kaplan (Executive Director and Equity Research Analyst)

Thanks so much. Wanted to ask on the margins side again, just really strong quarter there, seemed driven by price-cost spread, and you mentioned the mix. Just, I guess, conceptually, that level of expansion has to moderate through the year in order to get to the guide. Just maybe just help bridge, what do you think gets a little bit worse? I know there's a little bit of arithmetic, as you mentioned, but is there anything that sort of gets worse, or is it conservatism just given maybe some uncertainty with regard to lighter volumes, etc.?

Jon Vander Ark (CEO)

Yeah. We think that the spread between the two, the price-cost spread, we had said all along that we still anticipate pricing ahead of our cost inflation, but that spread is going to somewhat modulate over time. As you also move throughout 2024, you can see the cadence that we had there. You start getting into tougher comps. Again, you saw a big sequential uptick from Q1 into Q2, then again up into Q3, and again, Q4 being 80 basis points higher than where we were in the first quarter. This year, we still expect that natural seasonal progression, but a little bit flatter, if you will, with respect to the absolute throughout the year.

Toni Kaplan (Executive Director and Equity Research Analyst)

Terrific. Just on the volume side, you mentioned the resi shedding. Should that continue through the next few quarters, or when does that lap? Was that related to prior M&A, or I guess what are the big drivers there? Thanks.

Jon Vander Ark (CEO)

Yeah. That maybe lasts for a few quarters here. Part of that is intentional shedding from M&A deals. Again, we've talked about this a lot. When we do a deal, we know there's a certain part of that revenue we're not going to retain, and we don't pay for it in the deal. That's going to come out of the system typically 6, 12, 18 months later. We're not always going to honor those contracts, but we know they're unlikely to renew. Some of that is us putting upward pressure on price. The municipal vertical in this market is the one that has returns that need to go up, right? Lots of capital, lots of investment in terms of people on the front line. We're going to look for customers that are willing to pay for the value that we deliver over time.

Many, many customers do. Those that do not will continue to take our investments in our human resources and financial resources and place them in other parts of the market.

Toni Kaplan (Executive Director and Equity Research Analyst)

Thank you.

Operator (participant)

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

Jerry Revich (Analyst)

Yes, hi. Good afternoon, everyone. I just wanted to ask on your pricing and retention rates, both really impressive numbers. Pricing was, I think, half a point ahead of most expectations. Can you just talk about what you're seeing in the business that's driving such attractive retention rates while pricing is at high levels as well? That really stood out in the results and the sustainability into the second quarter based on what you're seeing. Thanks.

Jon Vander Ark (CEO)

Yeah. Jerry, we continue to just see improvements in overall service delivery, which is leading to overall better NPS. When you have that backdrop and the customer can realize the value of the service you're providing, they're much more receptive to the price increase and staying with you longer. That is why we say all of these things that we do are so interconnected as far as making sure that we're meeting the promises that we make to our customers each day. We're seeing the benefits, and you're seeing it manifest itself in higher levels of pricing and ultimately dropping to the bottom line.

Jerry Revich (Analyst)

Super. On the polymer centers, there's discussions about potentially increasing plastics use by your customers from aluminum. Can you just talk about—I don't know if it's too early or not to talk about where pricing could ultimately go for the polymer center output, given what seems like rising adoption and the transition towards recycled plastic from aluminum? What's that opportunity look like for you folks? How much higher could pricing go when you folks do ramp up across the facilities?

Jon Vander Ark (CEO)

Yeah. It's certainly a tailwind versus a headwind. Why we got in the space is we understood that the market and demand was there for recycled PET, and the supply was constrained. That still proves to be true. I think we could sell out both Las Vegas and Indianapolis multiple times over. That's the strength of the customer demand. Obviously, we're pricing appropriately for that. We'll see where pricing goes as we move forward. Most of our contracts are of shorter duration on that front because we're understanding price discovery and where that market moves. As the market moves up, we'll be able to capture that premium.

Jerry Revich (Analyst)

Jon, are you willing to share just the order of magnitude? How much higher could it be versus the initial contracts?

Jon Vander Ark (CEO)

No. We will wait and see. We want to see where the market evolves and develops on that front. I think the upward trend is undeniable.

Jerry Revich (Analyst)

Thank you.

Operator (participant)

Your next question today will come from Noah Kay with Oppenheimer & Co. Please go ahead.

Noah Kaye (Managing Director and Senior Analyst)

Thanks for taking the questions. I'm not sure if it was a record, but it certainly felt like your script to start off the call was maybe the tightest and most concise I can remember. Thanks for giving us more time to ask questions. I guess I wanted to start with ES, picking up on Tyler's line and questioning. It looked like it was about maybe 70 basis points or so organic growth within the segment. Was that all price? What happened with volumes? I mean, obviously, weather was called out as an impact, some project delays. Maybe you can kind of go from there to talk about what you expect kind of moving here into 2Q.

Jon Vander Ark (CEO)

Yeah. No. What we saw there, we kind of mentioned a combination of a little bit of project mix, but also weather. The reason we're mentioning that and the isolation to January and February is the results were very different in those two months than what we saw in March. March is more of what we would have expected, where again, we saw good organic growth and margin expansion. When you think about that business, it carries a little bit of a higher fixed cost base than what you tend to see in the recycling and waste business. When you have those days when you're down, it's a little bit tougher to overcome.

We are again optimistic about what we saw in March and based on some of the early results of what we're seeing in April, that it really was more of a weather issue. As well as we mentioned, there were some project items where, again, when you take a look at the mix, we had a little bit more on the field services. And again, when you bring some of that in, which is good work, but at a relatively lower margin than the post-collection side, you can see a little bit of the impact that you saw in the margin.

Noah Kaye (Managing Director and Senior Analyst)

Yep. Yep. Makes sense. We kind of see a pickup back to good organic growth. The margin question's been asked a couple of ways. I want to ask slightly different because you do report by line item on the cost side. Some real leverage there on the fuel line, also some of the gains were in transfer and disposal, then on maintenance. I suppose some of that is kind of related to the workday, but maybe you can just sort of parse out fuel like for like what that was as a benefit to margins in the quarter.

Jon Vander Ark (CEO)

Yeah. If you actually take a look within the quarter, the impact of net fuel, because remember, you've got fuel expense, and then you've got our fuel recovery fee, it had no impact on margin year over year. Again, the 140 basis points of margin, right, most of which being in the underlying business, that 110 basis points that I mentioned is just going to be, again, that price in excess of cost inflation. It's coming from all of these line items. It's somewhat across the board once you actually normalize for the impact of net fuel. The workday itself was 40 basis points of the 140.

Noah Kaye (Managing Director and Senior Analyst)

Yep. Yep. Okay. This is very clear. Thanks. Last one, I just got to ask. You already commented that the pipeline's strong. The $1 billion of M&A spend for the year, just given the 1Q activity, feels like a low bar. At this point, any reason to anticipate that it couldn't meaningfully exceed that? It sounds like the pipeline is strong and the activity levels in the sector are very good. Just your bias towards the $1 billion.

Jon Vander Ark (CEO)

Yeah. I like our chances to beat it.

Noah Kaye (Managing Director and Senior Analyst)

All right. Stay tuned. Thanks very much.

Operator (participant)

Your next question today will come from Tami Zakaria with JP Morgan. Please go ahead.

Tami Zakaria (Executive Director)

Hi. Good afternoon. Thanks for taking my questions. My first question is on the environmental solutions. EBITDA margin, I think it was down year over year. Are you able to isolate how much of that was due to, I think you mentioned, weather and project timing? Related to that, are you expecting that segment's EBITDA margin to eventually be up year over year in 2025?

Jon Vander Ark (CEO)

Yes. To answer your last question first, yes. Listen, from quarter to quarter, there's going to be some mix that moves that margin around and the nature of the work because some of that work, for example, field services, could be very, very low capital work. That might have downward pressure on the margin, but that's still value-creating work over time. I would encourage you to look at the trends across years, not quarters, on environmental solutions. I think what you've seen over three years of getting into this business and scale is really nice margin expansion. I think we'll consistently deliver on that trend, albeit at a slower pace in the first three years, but we'll continue to expand margins. The quarter to quarter, I don't think, is going to be a great signal.

Tami Zakaria (Executive Director)

Got it. That's super helpful. One question on the guide. I appreciate you mentioned you're going to probably talk about it after the second quarter. In your current guide, the volume growth of slattish at the midpoint, did that range of volume outcomes embed any recessionary scenario or any incremental slowdown in the broader economy for the year?

Jon Vander Ark (CEO)

No. I did not anticipate a hockey stick rebound either, but I anticipated kind of slow and steady recovery in manufacturing and construction. As I mentioned, right, we certainly did not see that in January and February. March and start of April looked more promising on that front. That is why we will update you more after the next quarter.

Tami Zakaria (Executive Director)

Great. Thank you.

Operator (participant)

Your next question today will come from Kevin Chiang with CIBC. Please go ahead.

Kevin Chiang (Executive Director and Institutional Equity Research Analyst)

Hi. Good afternoon. Maybe I can ask the ES margin question a little bit differently. It sounds like you had some weather issues in Q1. Just wondering if some of the work that you're seeing pick up in March here, some of that project work that's pushed out, or it seems like it is getting pushed out into Q2. If I look at the short history you've had, this looks like sequential margins move up about 200-300 basis points quarter over quarter from Q1 into the second quarter. Is that a good seasonal range? Just given some of the movement of the timing of some of this revenue, do you think you kind of track towards the upper end of that just as some of that work normalizes in April and hopefully May and June versus what you saw in January and February?

Jon Vander Ark (CEO)

Yeah. Hey, Kevin, just real quick. We've talked about taking a through-cycle mindset with the environmental solutions business. With what we're doing and the opportunities there, we said we saw margin expansion in the 75-100 basis points per year, right, in contrast to the recycling and waste business in kind of the 30-50. There was a little bit of this weather impact early in the first quarter, but we still think there's that trajectory as we move forward. I think you can think about that for the year as well as for the next several years just because, again, it's a little bit more opportunity in that business, recycling and waste being a little bit mature. We still see that opportunity going forward.

Kevin Chiang (Executive Director and Institutional Equity Research Analyst)

That's helpful. I know tariffs will have a significant impact on your business, but just wondering as you think of your capital plan for this year, maybe even to 2026, are you thinking about changing the cadence of how some of the capital comes through to maybe avoid the risk of tariffs, or is the planned outlay as we get through the next three quarters here relatively intact from what you would have thought four to six months ago for 2025, and maybe as you kind of early thoughts into 2026?

Jon Vander Ark (CEO)

Yeah. In 2025, it'll have minimal impact, right? It won't be zero, but we're going to have plans to mitigate that and other initiatives. I think 2026 is TBD, right? We are working really, really hard, including things like asking our suppliers to spell out or specify any tariff-related surcharges on that front because this will be an environment where it would be easy to try to pass through price increases that end up sticking if we have a different trade policy and come 30 days or 60 days or three months. We're working really hard on that front. I think it's too early to tell. There are some minor things we're doing about moving things around the supply chain to make more things that land in here on that front to minimize the tariff impact. We'll have better visibility in the next three months.

Kevin Chiang (Executive Director and Institutional Equity Research Analyst)

Perfect. Thank you very much.

Operator (participant)

Your next question today will come from Trevor Romeo with William Blair. Please go ahead.

Trevor Romeo (Research Analyst)

Hi. Good afternoon. Thanks for taking the questions. One quick one back to volumes. Just noticed that the MSW and the volumes were down, I think, 4% in the quarter. Just wondering if there was anything specific or maybe lumpy, you'd call it, as a driver there. What's your view on MSW volumes to come back going forward?

Jon Vander Ark (CEO)

Yeah. Look, that's where you're certainly going to see some weather, right, impact on that front. Again, that's what we think most of that was for the first quarter. I want to point out at the same time that the yield in that business was 6.8%. Total MSW as a line of business increased over 3% from an organic growth perspective. We think that that volume comes back as we look forward into the future quarters.

Trevor Romeo (Research Analyst)

Okay. Great. Thank you for that. I just wanted to follow up on, I guess, appreciate the comments here on the polymer center so far, but maybe on your more traditional recycling facilities. I was just wondering if you could talk about the upgrade opportunity there across your footprint. I think you had the one in Anaheim that just reopened this month. Just wondering if you could talk about how much further opportunity you see there to increase efficiency and take some labor benefits. Thank you.

Jon Vander Ark (CEO)

Sure. Yeah. Most of what we do there, there's just a continual movement across our 75-plus recycling centers to upgrade capital, certainly to maintain it. Every time we do that, you put in more automation, and it takes out some labor on that front. Anaheim was unique because it was a complete retool and rebuild, and there's advantages to that because you can get everything designed perfectly. We are constantly going through the fleet and the system to take first of all, we're trying to create a better product. That is all where the investment goes. Inevitably, that takes out some jobs along with it.

Trevor Romeo (Research Analyst)

All right. Thank you very much.

Operator (participant)

Your next question today will come from Stephanie Moore with Jefferies. Please go ahead.

Stephanie Moore (SVP of Equity Research)

Hi. Good afternoon. Thank you. I was hoping you could talk a bit about your Polymer Centers, maybe if you talk about how the ones that are open are performing, maybe hitting the certain kind of rates or efficiency rates or output that you've been targeting. Any updates there? Also, just given the change of administration and potential for deregulation, anything that could cause an impact as you see now in terms of some of your RNG plants coming live? Thanks.

Jon Vander Ark (CEO)

Sure. Yeah. Polymer Centers have been exciting in the sense they've met our assumptions on inbound volume. We have most of it on our back, so that's easy. We do take some third-party volume, and we could certainly take more if we needed to. Very exciting on the demand standpoint in terms of customers willing to buy them multiple facilities out if they could and hitting our price points. From an operating standpoint, absolutely in terms of can we produce the product? Vegas has had some learnings in terms of getting the product quality completely dialed in to the specific specs of customers. Listen, innovation's hard. It's not a straight line. We've learned some things on that and feel really excited about where that's going and then captured all those learnings into Indianapolis.

That startup has been much quicker and taken all advantage of the product quality learnings and other lessons on that front. Administration change. Listen, the predominant regulatory structure in this industry is state. That is where we spend the vast majority of our energy. There could be some puts and takes on the federal level around tax incentives or other types of incentives. RINs is a good example where we had landfill gas energy in the first Trump administration, right? We are having it in this administration, and RINs prices are hanging right in there. Could they be a little higher in a different administration? Probably on that front. Broadly speaking, those projects are still hitting their financial marks. Stephanie, if you remember, when we announced the investments in both RNG and fleet electrification, that was prior to the Inflation Reduction Act.

Those credits came out after we actually made that decision to invest. They were going to be additive. They were going to take a good return and even make a better return. We obviously want those credits to stay in place, but it would not have changed our decision or the return that we anticipated when we made those investments if they were to be repealed.

Stephanie Moore (SVP of Equity Research)

Got it. Actually, just a follow-up there, Jon, I guess to your point, what would cause you to consider bringing in external or outside volumes into those Polymer Centers?

Jon Vander Ark (CEO)

The plan is to take more and more. It's just building up. These things have about a 12-month build to get to full run rate capacity on that front. We'll get to, after we have our four facilities completed, then I think we'll get to a decision point, do we need a fifth facility or not on that front?

Stephanie Moore (SVP of Equity Research)

Great. Appreciate the time.

Operator (participant)

Your next question today will come from Tobey Sommer with Truist. Please go ahead.

Tobey Sommer (Managing Director)

Thank you. On the M&A opportunity in front of you, any shuffling of the motivations of the sellers, anything changing in their motivation to sell at this time?

Jon Vander Ark (CEO)

Not really. Given what I talked about earlier, these are high-quality assets. These are great operators. They've run the business for decades on that front, so they know what they have. That being said, broader uncertainty is probably helpful for us on the margin in terms of M&A, which is uncertainty makes people think about taking chips off the table and cashing out on decades of investment. That's not a big driver of our pipeline.

Tobey Sommer (Managing Director)

Okay. Thank you. Just curious if you're, with all that's going on in DC with DOGE, proposed budget changes, mostly cuts, and prospective regulatory changes, anything you're observing in evolving customer behaviors that you'd call out?

Jon Vander Ark (CEO)

Not that I can think of at this point. Okay. Did not think so, but I appreciate the response. Thank you.

Operator (participant)

Your next question today will come from Tony Bancroft with Gabelli Funds. Please go ahead.

Tony Bancroft (Research Analyst)

Thanks for taking my call, gentlemen. Obviously, you've done a wonderful job. This environment you're in, this industry is very well set up. I guess in the position you're in, margin performance, where do you go from here over the next few years? Maybe talk about something potential transformational. Obviously, the US Ecology business has been a great win for you. And then maybe also, what is it keeping you up at night right now, obviously, with the uncertainty going on? Looking forward, maybe you can just talk about some of those things.

Jon Vander Ark (CEO)

Yeah. Listen, we think we've got a lot of growth potential ahead of us. We're a relatively small share player, broadly speaking, right? It's about 15% recycling and waste. Same thing in environmental solutions. And we're just getting started in sustainability and innovation is really our third engine for growth on that. You'll see us grow there organically. You'll see us grow there through price, and you'll see us grow there through M&A. We really have a lot of avenues and pathways to grow going forward. We benefit from being a recession-resilient business. Obviously, we've talked about some of the challenges, but the challenges are very modest compared to the macro context of other businesses where they're facing 20%-30% drops in demand. We feel fortunate to be in the space on that. Obviously, the macro environment does impact our business, right?

If a company or the country or the world goes into recession, we're going to feel some of that, and we'll adjust accordingly. Again, we're running the business through the cycle for the long term on that. You'll see us continue to invest and make value creating both organic and inorganic investments.

Tony Bancroft (Research Analyst)

Thanks so much. Great job, Jon and team. Appreciate it.

Jon Vander Ark (CEO)

Thanks, Tony.

Operator (participant)

Your next question today will come from Michael Feniger with Bank of America. Please go ahead.

Michael Feniger (Managing Director of Equity Research)

Yeah. Thanks, guys, for getting me in. Just Brian, I appreciate you've mentioned the look-back on the pricing side a few times on the call. I also know you guys have kind of changed a lot of the mix of your contracts. Just to be kind of clear, you had a really strong start to Q1. When we even look at the open or restricted, are we thinking more of a gradual step down, Brian, or is there a bigger falloff that we should kind of be anticipating just because you had such a good start to the year? Just trying to kind of think about how that plays out through the year.

Brian DelGhiaccio (CFO)

No, I would say it's more gradual. Again, to your point earlier on some of the work that we've done, going back to where we were in 2016 when we were predominantly linked to headline CPI and some of the moves that we made to alternative indices, whether it be Water, Sewer, Trash, Garbage, Trash, or a fixed rate. As I said, we've moved about 63% of that portfolio. If you take a look right now on a six-month look-back, Water, Sewer, Trash is running close to 5%, Garbage, Trash 4.5% relative to headline CPI in the high twos, 2.7%. That has certainly given us, again, a nice floor from which we're sitting here able to price when you take a look at the 4.6% that we saw in restricted pricing.

We would expect that to be more gradual, I would say, as we move sequentially, just because of the way that the pricing mechanism works itself. It will be in and around that range.

Michael Feniger (Managing Director of Equity Research)

Great. Brian, just last one. If you touch on this, I apologize, but the free cash flow conversion was really strong. I know there's always some moving pieces. Anything we should be thinking about there when we look at that conversion rate, either from the cash from upside, but also the free cash flow side, it was just a really strong start. Anything you want to flag there and how we should kind of think about that through the year?

Brian DelGhiaccio (CFO)

Yeah. Look, the biggest component of that growth was the EBITDA growth in the business. As you also can see, there was a benefit from working capital. Just some timing things, quite honestly. We had one less payroll period in the quarter itself. Some things normalize throughout the year. Really good start to the year. Pleased with that outcome, but we would sit there and say it was on our marks. That is why I mentioned in the prepared remarks that it was in line with our expectations.

Michael Feniger (Managing Director of Equity Research)

Perfect. Thank you, guys.

Operator (participant)

Your next question today will come from James Schumm with TD Cowen. Please go ahead.

James Schumm (Senior Equity Research Analyst)

Hey, guys. Nice quarter. Just one for me. As I look at your recycling revenues, how much of what portion of the mix is a fee-based structure versus the other portion, which would be commodity price sensitive? Is it like half and half? How should I think about that?

Jon Vander Ark (CEO)

When you take a look just overall, when you take a look at our business, we've got about 60% of our business, both on the collection as well as the recycling side, the recycling processing side, that's going to be a fee for service, right? And then you've got, obviously, the sale of the commodities as well. When you take a look just the way that the math works, you're looking at about 50/50 mix between the two on just the recycling book of business because most of that's on the recycling processing side, which would be the combination of the fee for service as well as the sale of the recycled commodity.

James Schumm (Senior Equity Research Analyst)

Okay. Great. Thank you very much. That's all I had.

Operator (participant)

At this time, there appear to be no further questions. Mr. Vander Ark, I'll turn the call back over to you for closing remarks.

Jon Vander Ark (CEO)

Thank you, Nick. As we close out the call, I want to thank the entire Republic Services team for their continued focus on safety, sustainability, and service. Through their efforts, we are positioned for continued success. Have a good evening and be safe.

Operator (participant)

The conference has now concluded. Thank you for attending today's conference. You may now disconnect.