Waste Connections (TSX:WCN) Q1 2020 Earnings Call

0:00 Welcome to the Waste Connections first quarter 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, May 7, 2020. I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

0:33 Okay. Thank you, Operator, and good morning. I would like to welcome everyone to this conference call to discuss our first quarter results and provide an update on the current operating environment. We certainly hope everyone is doing well and staying safe during this unprecedented time. I'll begin the call with an update on our response to COVID-19 and its impact on our business. focusing specifically on our efforts to take care of the health and welfare of our employees and communities. Mary Anne Whitney, our CFO, will briefly review our Q1 results and strong financial position. I will then wrap up with the few trends we are currently seeing in our business and potential implications for the full year before heading into Q&A. Let me first turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

1:22 Thank you, Worthing, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meeting of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement in our May 6th earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business.

2:14 We make no commitment to revise or update any forward-looking statements in order to or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to waste connections on both a dollar basis and per diluted share, and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Worthing.

2:55 Thank you, Mary Anne. Understandably today, everyone's attention is very focused on the novel coronavirus pandemic and COVID-19 outbreak. As noted in our earnings release, an extremely strong start to the year, which had put us firmly on track to exceed our outlook, was interrupted in March by measures taken across the U.S. and Canada to limit or control the spread of COVID-19. In spite of the resulting significant slowdown in economic activity and impact to revenue, we exceeded our first quarter outlook for adjusted EBITDA and delivered adjusted free cash flow of $235.7 million, or 17.4% of revenue and 57.7% of adjusted EBITDA, while also shifting our focus to one of preparedness.

3:42 As you would expect, our priority has been the health and welfare of our over 18,000 employees as we maintain continuity of operations as an essential services provider across 42 states in the U.S. and six provinces in Canada where we operate. So I want to start today by recognizing and thanking our outstanding team, both frontline and working remotely, for their efforts and dedication during this uncertain and chaotic period. I also want to thank the customers and communities we serve whose flexibility with respect to health and safety consideration and whose outpouring of support and gratitude towards our employees have been both overwhelming and inspiring. At Waste Connections, we believe that our safety-focused, servant leadership-based culture drives differentiated results. Therefore, investing in people, our greatest asset, is always our highest priority. We'd like to look back on this period one, five or 20 years from now and know we did the right thing for our employees.

4:45 From the onset of this pandemic, we established protocols and implemented operational changes focused on health, hygiene, and safe distancing. On the home front, we looked to provide a safety net for income and family health, and to that end, have already incurred or committed almost $20 million in such labor-related expenses. Back in March, we began providing full wages for employees feeling ill, quarantined for any reason, or simply watching after a loved one, and up to 12 weeks for those with childcare issues. These accommodations put our employees in the position to make the right decisions about their own health and that of their colleagues, rather than feel compelled to show up for a paycheck or have to burn PTO.

5:30 In addition, we've been providing supplemental wages for all hourly employees, whether union or non-union, remote or onsite, and any temporary workers. We've also done the following. expanded our employee relief fund for those experiencing financial hardship, launched the Waste Connections Scholarship Program to assist our employees' children to pursue and achieve their vocational, technical, and university education goals, fully covered COVID-19-related testing and medical costs, and extended access to medical benefits. Waste Connections is also stepping up in our communities through additional charitable contributions to assist food banks and families at risk meals for healthcare workers in higher risk populations, and donations of critical PPE.

6:18 From a business standpoint, the revenue impact is mostly attributed to decreases in demand for collection and disposal services resulting from the shelter in place and other closure requirements imposed to limit or control the spread of COVID-19. As noted earlier, our Q1 results reflect the impacts that we started to see in March as commercial collection activity slowed down due to service reductions or suspensions by customers whose business activity was curtailed by such measures, with third-party disposal volumes following similar patterns to hauling activity. The impacts we have seen vary by geography, the size and customer mix in each market, and the timing and extent of shutdown requirements across markets. In general, our smaller, more suburban or rural markets have been less impacted and the larger, more densely populated markets where we operate.

7:11 Canada and the Northeast U.S. have been our hardest hit areas. In terms of operating costs, on the commercial side, the extent to which we can reroute or otherwise adjust our operations to reflect lower activity levels varies by market and depends on the pace and severity of reductions as well as the expected timing and shape of any recovery. That said, we are already realizing savings in many variable costs, including third-party brokerage and disposal, labor and fuel, along with reductions in discretionary and nonessential expenses. With regard to capital expenditures, we've proactively cut approximately $110 million for the year, or about 20% of CapEx, in light of the slowdown in activity.

7:56 However, we will remain opportunistic during this period if presented attractive offers to purchase additional fleet, equipment, or longer-term landfill expansion acreage. Mary Anne will provide more details about our Q1 results and the strength of our balance sheet, which we pre-positioned for this period to provide optionality around capital employment on M&A and share repurchases. We remain disciplined in our approach to evaluating and pursuing strategic growth opportunities, whether in good economies or bad, and believe that free cash flow generation remains highly correlated to shareholder value creation. We take a long-term view and look forward to a recovery as this economy continues to restart.

8:38 Now, I'd like to pass the call to Mary Anne.

8:40 I will then provide an update on the current environment and potential implications for the full year before we head into Q&A.

8:47 Thank you, Worthing. In the first quarter, revenue was $1.352 billion, up $108 million over the prior year. Acquisitions completed since the year-ago period contributed about $64 million of revenue in the quarter, for about 59.6 million net of divestitures. Results in the first two months of the quarter positioned us to easily exceed our Q1 revenue outlook, but COVID-19 related declines in solid waste activity in March impacted revenue in the period by an estimated $12 million or about 100 basis points of organic growth, primarily volume. As a result, solid waste price plus volume for the quarter was 5.2%. with price of 5.6% and volume of negative 40 basis points due primarily to lower commercial activity and third-party disposal volumes in regions where the COVID-19 related shelter-in-place orders and business closure requirements were imposed earlier in the quarter or were more stringent than in other markets.

9:51 Our most affected regions include Canada, where province-wide closures and suspension of construction activity drove outside slowdowns and our eastern region, which includes New York City, where commercial service reductions were over four times the level of overall reductions across all of our markets. On the other hand, volumes in our western region, another geography impacted by earlier closures, were positive, up over 3.5% in the quarter due to a strong start to the year, including the addition of new contracts. Looking at year-over-year results in the first quarter by line of business, Commercial collection revenue increased approximately 5.4%, mostly due to price increases. Roll-off revenue increased approximately 6% on a combination of higher pulls, up about 2.5%, and revenue per pull, up 3.5%. Solid waste landfill tonnage increased about 6% on higher MSW tons, up about 3%, led by increases in Florida and on the West Coast, and Higher Special Waste, up 17%, with increases across our regions in the U.S., with our largest increases in the Northeast.

11:04 C&D tons were down about 2% in Q1, primarily due to reductions in Canada and the Northeast. As noted earlier, trends started the quarter more favorably and deteriorated in March. Looking specifically at same-store, day-adjusted results in March, commercial revenue was up about 2%, less than half the increase for the quarter. Landfill tons were down 1% and roll-off tolls were down 4%. Looking at Q1 revenues from recycled commodities, landfill gas, and renewable energy credits or RINs. Excluding acquisitions in the aggregate, they were down about 5.4 million or 16% year over year. On OCC, down about 30% at $53 per ton and RINs down 25%.

11:54 averaging $1.34 in the quarter. With defermental margins of approximately 130% on recycling due to the combination of lower commodity values and higher recycling processing costs at third-party facilities, the margin impact from recycling in RINs was a drag of about 40 basis points and 2 cents in EPS in Q1. OCC prices have increased to over $100 per ton, In fact, some markets have seen prices of over $200 per ton. However, the collapse of oil prices has eroded the value of recycled plastics such that the net effect on the current value of the basket of commodities is an estimated increase of approximately 20% from Q1, but down about 15% year over year. RIN prices have also declined since quarter end, stepping down sequentially to about $1. due primarily to lower crude and resulting concerns about a potential slowdown in the demand for RIMS.

12:55 Moving next to E&P waste activity. We reported 59.4 million of E&P waste revenue in the quarter at the upper end of our outlook as activity held up in spite of further rig count declines and the collapse in the price of crude during the period. That said, E&P waste revenue in Q1 was down about 6% year over year and down about 5% sequentially from Q4, due primarily to lower pricing and activity levels in the Permian and Gulf of Mexico. Since quarter end, we have seen the monthly revenue run rate drop by over 45%. Adjusted EBITDA for Q1, as reconciled in our earnings release, was $408.5 million, about $3.5 million above our outlook for the period.

13:44 adjusted EBITDA as a percent of revenue in Q1 was 30.2%, down 80 basis points year over year, but exceeding our expectations by 40 basis points. Margins reflect the 40 basis point impact from lower recycled commodity values and RINs noted earlier, as well as an estimated 20 basis points impact from lower margin acquisitions completed since the year-ago period, and an estimated 50 basis point margin drag from the one additional day in the quarter due to leap year. Thus, underlying solid waste collection transfer and disposal margins were up around 30 basis points in spite of an estimated 20 basis point impact from the high margin deprimentals on COVID-19 related revenue losses and additional COVID-19 related expenses.

14:35 Fuel expense in Q1 was about 3.7% of revenue, down about 20 basis points due partly to a CNG credit of approximately $900,000. We averaged approximately 257 per gallon for diesel in the quarter, down two cents from the year-ago period and down 12 cents sequentially from Q4. Interest expense, net of interest earnings in the quarter increased by 1.8 million over the prior year period to 35.8 million. Due to a combination of higher total borrowings as compared to the prior year period, and lower interest earnings from invested cash balances. Our effective tax rate for the first quarter was 16.7%, slightly lower than expected due to a higher credit related to the vesting of equity grants in the period.

15:26 GAAP and adjusted net income per diluted share in Q1, as reconciled in our earnings release, were 54 cents and 65 cents respectively. Results in the current period reflect the previously noted $0.02 per share impact from year-over-year reductions in recycling and rinse, plus an additional $0.02 per share impact from the high decrementals on the estimated COVID-19-related revenue impact and incremental COVID-19-related expenses. Adjusted free cash flow in Q1 was $235.7 million, or 17.4% of revenues. Capital expenditures were 137.8 million, up 23.6 million and 20.7% year over year. In addition, we resumed our share repurchase program in the quarter and deployed about 106 million to repurchase approximately 1.27 million shares.

16:26 We completed two public debt offerings during the quarter, totaling 1.1 billion. 600 million of 2.6% 10-year senior notes in January, and 500 million of 3.05% 30-year senior notes in February, which further diversified our debt sources, extended the average tenor, and lowered our all-in average cost of debt to approximately 3.1%. Debt outstanding at quarter end was about 5.2 billion, and our leverage ratio, as defined in our credit agreement, ended the quarter at approximately 2.9 times debt to EBITDA with cash balances of approximately $1.2 billion.

17:11 We accumulated cash during March to maximize our flexibility during a period of heightened COVID-19 related concerns in the banking and capital markets. Since that time, we have paid down $500 million on our revolver. bringing down cash balances to approximately $725 million and compliance leverage to approximately 2.6 times debt to EBITDA. Regardless, on a net debt basis, our leverage is approximately 2.3 times net debt to EBITDA with liquidity of approximately $2 billion and no near-term debt maturities. And now, let me turn the call back over to Worthing to discuss the current environment and trends in the business.

18:00 Thank you, Mary Anne. There's still a good deal of uncertainty around the trajectory of the pandemic, its resulting macro and economic impact and the duration of that impact. The severity and continuation of varying impacts across markets, the pace and shape of any economic recovery and any additional acquisitions completed during the year will influence the extent to which our results are impacted. As such, Rather than providing outlook as we usually do based on current economic conditions, we believe it is appropriate to suspend the original outlook we provided for 2020 and we intend to update our full year 2020 outlook when we report our second quarter results. That being said, we think it's helpful to look at April as that month should reflect the depths of any COVID-19 related impact.

18:51 As noted in our earnings release, we are encouraged by our results in April as revenue on a reported basis was down approximately 6% year-over-year or 1.4% excluding Canada and the Northeast U.S., which were hardest hit. Solid waste collection, transfer, and disposal revenue on a same-store basis declined about 6.9% or down just 3.1% excluding Canada and the Northeast. E&P waste revenue was down about 33%. In the aggregate, adjusted EBITDA margins decreased by an estimated 200 basis points year-over-year in the month, primarily due to incremental costs related to COVID-19 and, to a lesser extent, the reduction in E&P waste activity.

19:37 Any economic recovery should reduce this impact going forward, and our daily tracker suggests that the worst may, in fact, be behind us. Our data indicates that the pace of declines in solid waste in our most affected markets peaked in late March and slowed considerably during April. In late April, we saw mid to high single-digit percentage upticks off of weekly lows in solid waste landfill volumes and roll-off activity, with over 70% of locations showing improvement. Additionally, about 12% of commercial customers and 9% of associated revenue in competitive markets we track that had suspended or reduced service due to COVID-19 have since reached out for either resumption of service or an increase in frequency.

20:26 New business track to competitive markets outweighed losses earlier this week, increases outweighed decreases, and net new business turned positive again. Of course, we recognize that our data is limited and the trajectory of any recovery is unpredictable. That said, we are encouraged by the improving trends we are seeing and look forward to gaining greater clarity as more states either begin or continue to relax restrictions when deemed prudent. As COVID-19 related revenue losses recover, so too should the estimated margin impact we saw in April. Recent revenue margin trends, along with reductions in capital expenditures, all of which were outlined in our earnings release and discussed today, should enable analysts and investors to better calibrate expectations for the full year.

21:18 We believe these recent trends could result in revenue of about $5.25 billion for the full year, with margins down about 200 basis points year over year and about a 50% conversion of adjusted EBITDA to adjusted free cash flow. But as previously noted, we are waiting until our second quarter results to update our official 2020 outlook as we'll be three months smarter about the pace of any recovery. In summary, we are extremely pleased with our results for the first quarter of 2020 and we are encouraged by recent solid waste trends. We recognized early on going into this period of uncertainty that our communities will count on us as an essential services provider and we on each other to honor our commitments.

22:03 Protecting the health, safety, and welfare of our employees has guided every decision we've made. knowing that reducing employee concerns regarding income, healthcare, and family obligations is critical to providing exceptional service. Our operating performance during this period reflects the benefit of that focus and is a testament to the dedication and tireless efforts of every Waste Connections employee, whether in the field or working remotely, which have been truly inspirational. Our frontline employees' attendance has been near perfect these past several weeks, and we saw sequential improvement in monthly safety related incidents, which decreased by approximately 24% in April. Waste Connections is well positioned to navigate this unprecedented period. We remain disciplined in executing our growth strategy and believe the strengths of our culture, our people and our financial profile will continue to differentiate our execution and financial performance.

22:59 We appreciate your time today. I'll now turn this call over to the operator to open up the lines for your questions. Operator. Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. Our first question comes to the line of Walter Sparkling with RBC Capital Markets. Please proceed with your question.

23:31 Thanks very much. Good morning, everyone. I hope everyone is safe and keeping well. My first question here is on the overall impact and insights you provided, Worthing, here into April. And judging by what we're seeing in the rest of the industry, certainly the peers that are reported, it sounds like your impact is less onerous in April. You're hitting higher lows than peers. I know at least one of your peers said that the end market is not really a determining factor, but Your opening comments suggest that it did. Could you give us some clarity as to why you think you're, if indeed you feel you're doing better than the industry and what would be some of the reasons?

24:13 Well, again, I think it goes back to our original strategy, right? We do believe longer term that franchise markets and rural and suburban markets outperform larger, more competitive, more fragmented markets. I think when you strip out, again, the impact of Canada, which was a national shutdown, and the Northeast, I think you see by revenue on a dollar basis being down as low as it is in the teeth of the pandemic in its worst month, prove that. And obviously the volume growth that Mary Anne discussed in Q1 coming off the West Coast and leading our company in volume growth also is indicative of that. So no, I think the strategy is right in good times and bad times. I would say that, you know, look, the other companies talked about, you know, trends and changes in landfill volumes or collection activity, hours, et cetera.

25:13 But I would say generally the broader you get in geographic reach, you know, in some areas, you know, the trends are similar by company. It's just that we probably have less revenue on an overall basis exposed to that, which differentiates the kind of consolidated results that we report.

25:31 My follow-up here is on acquisitions. Perhaps you could give us some insight as to how the tenor is proceeding here. Is it similar to your volumes where April things go very quiet and are you seeing any signs of life either from a seller's standpoint and multiples there? Talk a bit about how just logistically you go about Thank you for joining us.

26:26 and the ability to register real estate and things like that have slowed down. Obviously the back and forth is a little bit different between attorneys. Diligence rooms are already digital. And so from that standpoint, the information flow has still been strong. But quality companies are quality companies before a pandemic, during a pandemic and after a pandemic. And so the dialogue we're having, the companies that we're pursuing, again, it hasn't slowed down. I just think the pace of signing and closing, you know, is likely pushed, you know, two to three months at a minimum. Things that we thought would have signed or closed by this call, you know, are likely looking at, you know, late Q2 at the earliest.

27:09 Okay. I appreciate the time as always. Hope everyone's keeping safe. Thank you. Thank you. Our next question comes from the line of Hansa Mazri with Jefferies. Please proceed with the question.

27:23 Hi. It's John Phillips. Could you just talk about a commercial container, what they look like in early May or late April, and how relative the weights are in the first week of April?

27:35 Thanks. Yeah, I mean, I think that when people throw around stats like yards, weights, etc., you know, I think it's hard for you guys to calibrate that towards how do I fill a model in, right? And so, you know, I've always thought The best source is just looking at the actual dollars in revenue, right? I mean, if you look at commercial on the small container side, and if you look at what we would call kind of month-to-month or year-over-year, if you look at April as an example, April month-to-month was down about 9% over March. If you look at the permanent roll-off side, it was down almost 12% month-to-month. And so it's calibrating around that 10% or so number.

28:28 And again, as you're exiting April and moving into May, and we already talked about the net new business trends that we're seeing early this week and those numbers turning positive, I would expect the month-to-month trends to start improving as you look at May compared to April.

28:47 Great, thank you. That's very helpful. And for my last question, could you just give us a sense of landfill pricing and how to think about that figure going forward?

29:00 Sure, John. So I would say high level on pricing because, as you know, we always talk about pricing in the aggregate, given that half the waste at our landfills comes off of our own trucks, you know, similar to everyone in the industry. And so we think about it in the aggregate. And as you know, we got it to about 5% price for the year and said it would start higher and decrease over the course of the year. And the way we look at pricing, that hasn't changed much. There may be some instances where you don't push quite as hard in the depths of the pandemic in a market with a shutdown, certainly. And so maybe there's a few PIs that get delayed or pushed off to the subsequent quarter. But in general, as we think about pricing for the full year, maybe 5% ends up more like 4.5% for the full year, so down nominally. No real change in our outlook on how we think about pricing.

29:57 And as you may recall, we weren't emphasizing an opportunity in landfill pricing. We're always price-led in terms of our organic growth strategy, and this year is no different from others.

30:08 I think there's been a consistent theme throughout the industry in recognition of the cost to operate a landfill and expand a landfill that generally the pricing trends are moving higher, and we don't see that abating.

30:23 Great. Thank you. Our next question comes from the line of Kyle White with Deutsche Bank. Please proceed with the question.

30:34 Hey, good morning. Hope everyone's doing well. I know it's relatively early in this pandemic, and obviously companies are focused on more important things in terms of stabilizing their business. But just curious, have you seen any material change in pricing behavior among competitors? That is, any kind of cause for concern for you guys?

30:53 No. I mean, if you – again, from our standpoint, I think, you know, as we've consistently said, our pricing is mostly done for the year already. If you look at the competition, frankly, look, those – They've been hit really hard in this pandemic. I'm not surprised that, you know, probably many smaller companies are reaching out to the PPP loans and, you know, helping to subsidize their payroll. Look, I mean, you know, for those that do operating commercial, obviously those folks have been hit on the commercial side. Residential, remember most, many competitors on the residential side do not own landfills. And so, as weights have shifted to the residential side and heavier loads up 20 or 30%. That's pressure to cost structure within those companies on their P&L based on rising disposal costs.

31:48 And so there's nothing from a cost standpoint for those companies that is moving down that suggests they should be lowering prices. I mean this is a This is almost the second wave of pricing requirements in this industry, the first wave being the change in recycling recently. This is a second wave effect of the pressures that many companies are having on the cost side with the need to stay disciplined on the price side. So we have not seen any degradation in the discipline and the behavior of people really because of the macro.

32:25 That's helpful. And then obviously on the commercial side, it's really the wild card in terms of when businesses reopen. But curious if you can provide some more details on what you're seeing within temporary roll-off, particularly in regards to kind of construction activity and housing and just general expectations there going forward.

32:41 Sure. So, you know, if we look at roll-off, for instance, and look at the trough and how we've recovered since then, we saw pulls down 17% at the trough. They've recovered up 9% from there, so still down 10% from the peak, and over 70% of our lay patients have shown improvement. Interestingly, pretty broad-based in terms of the return, including markets in Canada, for instance, which were hardest hit. We are seeing construction start up again, and I would expect to see more in places like Quebec, where construction activity would begin again. And, of course, there's some seasonal impact as well from that. So that's an indication of polls. If I look at April polls specifically, they're down about 16% and revenues down around 20%, which would be consistent with your rate per poll declining on lower weights. So that all hangs together and roll off revenue in the aggregate down over about 20% year over year in April and down about 11% from March.

33:52 Got it. Thank you. Good luck in the balance of the year. Thank you. As a reminder, to register for questions, please press the 1 followed by the 4. Our next question comes from the line of Brian McGuire with Goldman Sachs. Please proceed with the question.

34:10 Hey, good morning, everyone. I hope you're all doing well. I just wanted to come back to the regional differences in April and the outlook. It just seems like some of it was in the more competitive legacy, maybe progressive markets, just by chance. But just wondering if you think there's anything to that other than the government restrictions and lockdowns and kind of where the virus was more acute and kind of back to the pricing question. These, I think, are more competitive markets in general. If you think that as businesses come back, if there will be any dislocations, or, you know, the fact that these are more competitive, that could be more challenging for pricing, the way that the volumes have kind of hit those markets.

34:59 Sure. Well, if you look, you know, a way to look at it is to focus on the volume activity. And if you look at those, you know, our eastern region and Canada, which include these hardest hit markets, you see volumes down 20% on average. and you contrast that with our central region, our western region and southern region. Again, kind of highlighting the differences in the types of markets. Those are all down in the six to eight percent range. And so it's very consistent with what we're seeing in that customer activity, whereas I mentioned, for instance, in New York, the reductions were four times The overall impact that we've seen suggesting, you know, with volumes, if you assume volumes down kind of 12% in April, four times that amount, meaning it's down 50%. That's the impact of that dramatic shutdown in a place like New York City.

35:58 So I think that those trends are consistent with the other data we've given you about where we're seeing those reductions.

36:07 and the areas where you've seen a little bit of a sequential pickup late in the month, are those more of the harder hit areas like New York and then the more milder areas like the central states? Are you seeing any degradation, any further degradation there? I guess I'm just starting to wonder if there's maybe some of the regions that have held up better, maybe it's just a delayed reaction versus the markets that were worse off coming back a little bit.

36:33 I tell you, the most confident folks we have with regards to the current activity and the outlook on the activity are in that 70% of the bucket that we've talked about before, meaning West Coast, Plain States, the South, the coastal Atlantic states. Really, it's just, again, what we call the Northeast, which in our mind is New York City, Rhode Island, and Hudson Valley. Thank you. Thank you. Thank you. Special Waste will still have some volatility here and there.

37:35 But again, it's just a nice, gradual increase in activity.

37:41 Okay, great. I'll turn it over. Thanks. Our next question comes from the line of Tyler Brown with Raymond James. He's with you with a question.

37:52 Hey, good morning, guys. Hey, good morning. Hey, Worthing. So I just want to start. Yeah, I just want to start with a big picture question on the franchises. So I know resi container weights have been a problem and there's maybe some stream shift going on, but aren't the franchises kind of governed by some sort of return on capital mechanism? So in theory, even if the complexion and the cost structure of the business inside of the franchise maybe changes, shouldn't you effectively be made whole over time?

38:22 Yeah, you'll see that. That's a good question, Tyler. You'll see that in... PriceLink next year, right? We incur the cost this year, and we're tracking that. We have a pretty good sense of what that is, and that will get submitted within our rate reviews in the upcoming year.

38:41 Okay, okay, so forward. Okay, that helps. And then, Mary Anne, so really appreciate the margin help in April, but at a high level, can you unpack the 200 basis points? Maybe how much of it was E&P? And then within solid waste, I think there's still a couple moving pieces. We've got M&A dilution, recycling, the incremental labor, maybe even fuel. But just any big pictures on how you build up to the 200 basis points?

39:07 Sure. So I would say stay with two big buckets and have E&P and then solid waste. E&P in the 50 to 70 basis point range for the drag. and, therefore, what's left is solid waste in, you know, call it, you know, 130 to 140 basis point drag. Within that, you're right, there's a drag from acquisition contribution, which will be similar to Q1, down a little bit, so maybe, you know, 15 basis points there, and a little drag from recycled commodities and RIMs.

39:41 But, Tyler, I think if you step back a little further, and really gauge how well are we doing, how well is the frontline doing with regards to flexing the cost model here given the decrementals. On the solid wayside, that 130 or so basis points that Mary Anne's referencing, that's all of the COVID-related costs that we have elected to put into our business to help the frontline, that accounts for all of that. In other words, if you really wanted to get down beneath it and say, how did we flex our business down You know, on a year-over-year basis, you know, solid waste, we've overcome all this. Now, we're not going to add back COVID-related costs as we communicate the business because obviously there are other costs that are gone from the business.

40:29 And so as we get to anniversary and COVID-related costs in the upcoming year, you know, those costs are likely to be backfilled by other things coming into the P&L. And so we think it'd be disingenuous for us as we think about it to cherry pick, you know, what's in an adjusted number, what's out of an adjusted number. And so we're just communicating this thing on an all-in basis.

40:52 Okay. Yeah.

40:53 Yeah, go ahead.

40:55 I was just going to add that when Worthing talked high level about talking about margins for the full year, You could envision that the breakdown of that 200 basis point could shift during the course of the year. As we mentioned, we gave you an E&P number for April, for instance, but we also said that Current rate, current run rate is down 45% from what we saw in Q1. So that implies we've stepped down, you know, in May from call it $14 million to the $10 to $11 million range. So you could see how during the course of Q2, you might have similar decrementals in the aggregate as April, but the mix shifts. And you could see that moving over the course of the year and E&P accounting for a larger component of the $200 million.

41:43 Okay, that's helpful. And then my last one, I'm going to give this a try because then I'm trying to calibrate. So if I take Q1 and I look at Q2, we've got, let's just call it mid-single digit decline in revenue, a couple hundred basis points of decline in EBITDA. That could hypothetically pan you out around 375 of EBITDA. And then if we just assume maybe some less bad trends in three and four, both on revenue and margins, I mean, Is it crazy to think that you possibly pan out in the 1516 range for the year, hypothetically?

42:21 Well, you know, Tyler, I'm an operating guy, so I'm going to hand this over to Mary Anne.

42:29 So I would say that that's consistent with Worthing's high-level suggestion of a calibration to the $5.25 billion with margins down 200 basis points. The way I would think about it would be from a volume perspective. As I mentioned, you could see E&P declining over the course of the year, and you could see if we start Q2 with volumes in that negative 12 to 13 percent, could what was implied be a step up to maybe it's negative 10 in Q3 and negative 8 in Q4? I think that's similar math that would get you to that same place.

43:07 Yeah, like we did, what, 31% margins on rounding last year, so 200 down is 29%. And that's simple math that gets you to that zip code. And obviously, if the pace of recovery improves, you know, you've got fewer and fewer months in the year to benefit from that. And so the volatility around a 5.25 number, you know, maybe it's within 1% or 1.5% on either side, but it's fairly tight.

43:33 Okay. Okay, and then just lastly on the CapEx. How much of that is EMP versus solid waste? I'm assuming EMP is basically in hibernation.

43:44 20 million of that. Okay. And we expect, I mean, I made sure I noted the fact that Look, this isn't a period of time where you just, you know, hunker down and don't take advantage of opportunities on the capital side. And so, obviously, we've flexed it down. We will look during the course of the year. Optimistically, we've already had a chance about a week ago to acquire a very nice piece of property to long-term expansion of one of our landfills. We will continue to look for that. This is an interesting time to be, you know, putting offers on the table for that. And frankly, I think given the amount of cancellations of fleet throughout this industry, as well as weakness in yellow iron demand from the caterpillars of the world, et cetera, I suspect we'll get an opportunity to look to put some of that back in and pull some of 21 this year at some potentially attractive pricing.

44:45 Or we won't, but obviously if we do get those opportunities, we won't be shy and we'll make sure you know about it. Okay. Appreciate it. Thank you. Our next question comes from the line of Michael Hoffman with Stifel. Please pursue the question.

45:03 Thank you, Mary Anne, for taking the questions. Let's talk about what Waste Connections looks like going forward because what I'm hearing is a lot of quick reaction, do the right thing by the people, but as we recover, I may actually end up with a better incremental. I doubt you add cost back at the pace you took them out. Is that the right way to think about who you are going forward?

45:31 No, that's absolutely right, Mike. I mean, first off, what I tell you is, you know, there's a lot of discussion about hours, reducing OT, total hours, et cetera. You know, that's in the rearview mirror. I mean, we know our cost structure. Ours have clicked up two consecutive weeks on a nominal basis, consistent with the inflection on the revenue side. Like any, call it correction, all companies typically come out of that with a slightly different cost structure and a way back up than the costs that were embedded when you previously got to that level, right? And so I definitely expect that the incrementals that come through on this revenue increase should be very attractive, and our folks are focused on that.

46:17 I want to follow up on one question about the behavior of the competitors. Is it a fair observation over the last 10 years the whole industry has learned the power of price, public and private, little, big, medium, and therefore more of the smalls understand they'd be better off 80% full at 100% price than 100% full at 80% price?

46:40 Well, again, I think a couple things on price. I mean, obviously, the Great Recession taught many companies that you can't fight the tide of volume, right? And so retaining price, because costs will go up, retaining price is very important. Obviously, as we talked earlier, what happened to reset and recycling also hit a lot of smaller companies who were dependent on recycling to as a source of revenue to avoid a tip fee, right? And as recycling reflected on a cost standpoint, all of a sudden tip fees at recycling facilities were, you know, two and three times or more a tip fee at a landfill that created pricing pressures again. And obviously what we all have already talked about for the pandemic.

47:28 I think it's human nature to understand that price is needed when costs go up, construction costs, equipment costs, operating costs, et cetera. Now, that said, look, there are always folks that will live on a lower margin, will run close to the edge. That will always happen in a fragmented industry like this. I mean, still there's $17 billion or more of revenue in private company hands, and that will always create some level of price check in various markets. But without a doubt, you know, when the tide goes out on volumes from an economic contraction, all you have left is price, because it's not like costs are going down significantly.

48:11 All right. And then last one for me. What is Canada saying about when they start reopening, given they did it on a national basis?

48:21 Yeah. So, so far, Quebec has been earlier to the table with regards to, you know, basically in this reopening. You know, we saw, for instance, construction started being allowed in Quebec again. And, you know, our business on the roll-off side was probably down, you know, 40 to 50% in number of pulls. And, you know, the early days of that being turned back on, you know, we've gotten half of that reduction back recently. And so the snapback quickly to kind of only down 20 or 25%, is the first reaction, and obviously as that market continues to reopen, so too will recovery in revenue. Ontario, which is also affected severely, I believe most people estimate that the early phasing of a reopening is going to happen in the middle of this month.

49:21 Similar expectations around British Columbia. You know, Calgary and the whole kind of Alberta province area, that's still going to be probably a little bit slower. And obviously, there are other economic factors impacting that province, as we all know, due to the oil and gas industry.

49:43 Okay. Thank you very much. Stay safe and healthy.

49:47 Thank you. Thank you. As a reminder, to register for questions, please press the 1, followed by the 4. Our next question comes from the line of Noah K. with Oppenheimer. Please proceed with the question.

50:01 Great. Thanks for taking the questions. And thanks for, by the way, providing your April revenue changes as well as all the illustrative color. I guess just to be done a little bit here, it looks like if I just sort of take that 6% April revenue decline and carry it forward for every quarter, then I do kind of get to that $5.25 billion. for the year, but I just want to make sure we're thinking about a few trends within that, right? So, you know, illustratively, and this is all hypothetical, you know, a little bit lower E&P, maybe a little bit of improvement on solid waste volumes, but there's probably another variable in there, right, which is M&A contributions.

50:46 So, I guess just as it stands today, you know, can you help us how you understand how you're thinking about those different levers, and can you confirm, you know, maybe M&A contribution does start to wane in the back half unless you're closing new deals?

51:01 Sure. So, you know, M&A, as you know, is around $60 million in Q1. That drops to $40, $30, $20 each sequential quarter there.

51:12 But there's no additional acquisitions yet to close that are in that estimate. Right. That's just already in place as we – entered this year, right?

51:22 Right. So that's correct. So where I think you were going, Noah, was then even though perhaps it's uniform what the year-over-year revenue is, the contribution, the buckets are different. And so there's less acquisition contribution, which means that there would be more of an impact to solid waste or E&P, for instance. And as I've said, what you could envision is that E&P gets sequentially worse in terms of the year-over-year declines. and that solid waste could, in a scenario, get sequentially better, meaning be less negative.

52:00 So I guess that's really helpful. And I guess the question that follows from that is, you know, if there's less contribution from dilutive acquisitions over the course of the year and solid waste is getting better, shouldn't that potentially overwhelm the impact in terms of, shouldn't there be a setup for margin to get better? over the course of the year versus the 200 BIPs we saw in April? Or is it just that there's really no kind of significant structural cost to strip out of E&P and that is going to be a bigger drag? Just trying to think about it. Thanks.

52:36 Yeah, but you do have the growing drag of E&P, as you pointed out, Mary Anne pointed out. But look, I think it's, you know, right now we're trying to calibrate, you know, folks' expectations and Frankly, once we know better around the trajectory of margins and the pace of the recovery, we'll know more when we give a formal outlook, and that would be the best time to kind of compare that formal outlook to what we tried to triangulate on today.

53:05 Yeah, I appreciate that. Thank you very much. Our next question comes to line with Stephanie Yee with J.P. Morgan. Please proceed with the question.

53:17 Hi, good morning. I was just wondering what kind of assumptions are you assuming about what the recovery might look like? So are you expecting customers to resume service to kind of the prior levels they were at in, let's say, February pre-COVID, or are you seeing customers kind of come back at a lower service rate?

53:41 Remember that, I think as Mary Anne laid out earlier, if you look at the volume reductions You know, just in April alone, you know, April was down 11 or 12% or so in volume. And, you know, as we said, look, maybe the quarter plays out in that same range. And perhaps that, you know, improves to down 10 or so or down 9 or so. And then maybe it improves a little bit more in Q4 to down 9 or down 8%. So, no, that kind of assumption is not assuming anything about getting back to prior levels. and my personal view has always been that this is going to be a longer versus shorter recovery. Obviously, some storefronts won't reopen.

54:28 Thirty-five million unemployed, you know, does impact the economy, and so I never would assume a V recovery, and I think the way we've laid out our current thoughts to be as transparent as possible reflect that.

54:45 Okay. No, that's helpful. And then I guess on recycling, so it's kind of along a similar vein. So if there are social distancing measures in place as kind of being the new normal, do you think we're seeing another structural change in that recycling business with maybe higher processing costs, but then also maybe higher OCC prices with less supply going forward?

55:12 Yeah, I think there's a couple observations on that. You know, obviously as, you know, in the current environment, you've got two things, you know, working against the supply of recycled materials and therefore pushing the value of them higher. And that is obviously as you've had more remote working, you've had, you know, a lot less of what I would call a clean stream coming out of the commercial customers, right? Office Buildings, etc. And that combined with the shift in volumes to the home. By the way, look at our MSW volumes. Our MSW volumes are flat, meaning the volume is still out there. The problem is that more people are jamming contaminated waste streams into their recycling bins because they need more bin capacity. So a long way of saying that you've got less of a clean stream, you've got more of a commingled stream coming out of the residential, and so that is increasing the contamination at much higher levels on the inbound stream. Oh, and then you distance more, and that causes some facilities to, for the contamination to go up even more relative to what they got as a finished product before.

56:35 Without a doubt, recycling is having its impacts, you know, varies by market. Obviously, different types of facilities are better equipped for social distancing or safe distancing than others, but that also has an impact. So, no, recycling overall, you know, it's got many challenges as we sit here today. And again, for us, that's a very, you know, small part of our revenue stream.

57:00 Okay. No, thank you. Appreciate that. There are no further questions registered at this time. However, as a reminder, please press the 1 followed by the 4 on your telephone to ask a question.

57:15 Okay, thank you. So if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and I are available today to answer any direct questions that we did not cover that we were allowed to answer under Regulation FD, Reg G, and applicable securities laws in Canada. Thank you again. We miss being able to meet with you all in person and look forward to speaking with you at upcoming virtual investor conferences or on our next earnings call. Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.