Waste Connections (TSX:WCN) Q2 2020 Earnings Call

0:00 Greetings and welcome to the Waste Connections second 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 Friday, August 7, 2020. I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

0:33 Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our second quarter results, the current operating environment, and our outlook for Q3 in the full year. I'm joined this morning by Mary Anne Whitney, our CFO. As noted in our earnings release, strong operational execution and continued recovery in solid waste volumes drove better than expected results in the second quarter. Adjusted EBITDA margin for solid waste collection, transfer, and disposal expanded year-over-year in spite of significant COVID-19-related costs incurred in the quarter. In fact, the reported year-over-year margin decline in the period was entirely attributable to reduced EMP waste activity. Its underlying solid waste margin expansion more than offset over $20 million in incremental COVID-related costs, primarily related to frontline supplemental wages and the margin dilutive impact of acquisitions in the quarter.

1:29 At the onset, we believe that our preparedness and execution during this pandemic will leave us better positioned when we emerge from it. Although only in the early stages of a recovery, we already are pleased to provide our outlook for the full year above the preliminary expectations we had communicated in May. Before we get into much more detail, let me turn the call over to Mary Anne for our forward look and disclaimer and other housekeeping items.

1:54 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 meaning 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 including in our August 6th earnings release and in greater detail in Waste Connections' filings with the U.S. Securities and Exchange Commission and the Securities Commission's 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.

2:46 We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's dates. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both the dollar basis and per diluted share, and adjusted pretash flow. Please refer to our earnings releases for 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 Ward.

3:26 Great. Thank you, Mary Anne. We're extremely pleased with our results in the second quarter, which exceeded the preliminary expectations we provided in May and provide the basis for our increased revenue and margin outlook for the full year. These results reflect the resilience of our underlying solid waste business as well as the dedication and commitment of our 18,000 employees who have maintained a focus on the health, safety, and welfare of their colleagues, service continuity, expense management, and community support, all while enduring the many challenges and hardships resulting from the pandemic. Looking at results, the revenue impact from COVID-19 continues to be driven mostly by changes in demand for collection and disposal services resulting from closure requirements or other operating limitations. and the markets we service and the resulting levels of activity as those economies reopen.

4:19 As such, the magnitude of reductions and the shape and pace of recovery of lost revenue varies by geography, market size and customer mix. By the end of Q2, about 53% of solid waste commercial customers and 42% of associated revenue in competitive markets we track that had suspended or reduced service had reached out for a resumption in service or increase in frequency up from 12% and 9% respectively in early May. Volumes in all of our solid waste regions showed monthly improvement during Q2, exceeding our preliminary expectations and resulting in solid waste revenue down 5.3% year-over-year on a same-store basis. Excluding the most impacted markets in the Northeast and Canada, solid waste revenues in the quarter were down about 1.3% on a year-over-year basis.

5:12 Our results in the period also reflect the company-wide focus on cost control as volumes declined and on quality of revenue as volumes returned. As noted earlier, underlying margin expansion and solid waste enabled us to overcome $20 million in incremental COVID-related costs in Q2, primarily related to frontline supplemental wages and the margin dilutive impact of acquisitions completed since the year-ago period. Cash collections also improved. as we have driven a 10% reduction in DSOs year to date, along with better than expected bad debt, exposure, and expense. Looking beyond the financials, our top priority remains the health and welfare of our employees, especially those experiencing unexpected hardships, and we continue to invest in our communities and our business.

6:01 Frontline attendance remains near record levels. Turnover and safety performance continue to improve. Philanthropic efforts have been expanded in our communities to further support organizations with a focus on women and children at risk and racial inequities at a local or national level. Our inaugural Waste Connections scholarships were awarded to support employee children in their pursuit of vocational, technical, and university education goals. A portion of COVID-related CapEx cuts earlier this year have been restored. And we're making additional technology investments to improve customer connectivity introduced machine vision and AI into onboard fleet camera systems, and beta test our first electric garbage trucks later this year.

6:47 We're also on pace for another solid year of acquisition activity, in spite of COVID-related logistical and diligence constraints. Year-to-date, we have closed acquisitions totaling approximately $60 million in annualized revenue, including an exclusive G-certificate collection and transfer company in Washington, and an integrated collection and disposal company with operations in Iowa and Nebraska. In addition, we have completed tuck-ins in Idaho, Missouri, New York, Oklahoma, South Dakota and Texas and have signed an agreement to acquire a collection and recycling company with about $40 million in annualized revenue, which we expect to close in mid-Q4. Looking at recent trends, solid waste volumes improved sequentially by about 300 basis points in July as compared to Q2.

7:36 The 53% of solid waste commercial customers and 42% of associated revenue in competitive markets we tracked that had suspended or reduced service and subsequently reached out for resumption in service or increase in frequency by the end of Q2 have since increased to about 60% and 50% respectively. Looking at year-over-year results in July, Revenue on reported basis was down about 1.9% and adjusted EBITDA margin was down an estimated 70 basis points. Reduction in E&P waste activity accounted for the entire year-over-year decline in revenue and exceeded the estimated margin decline for the month. Price plus volume for solid waste collection, transfer and disposal revenue declined 2.4% in July and was up 50 basis points, excluding Canada and the Northeast are our most impacted markets.

8:32 We acknowledge that the impacts from COVID-19 persist and recognize that reopenings may be complicated by continued outbreaks and the imposition of additional closure requirements. As such, the trajectory of any recovery is inherently unpredictable and the ultimate impact to our business will not be known until we emerge from this period. That said, we are encouraged by the demonstrated projectability of our business with insights from daily tracking, Q2 trends, and our July results. On that basis, and assuming no significant change in the underlying economic trends, we have provided our 2020 outlook as follows. Revenue of 5.325 billion, down about 1% year-over-year. Adjusted EBITDA of 1.61 billion, or about 30.2% of revenue, and down 90 basis points from 2019.

9:27 adjusted free cash flow between $805 million and $835 million, or about 50% to 52% of adjusted EBITDA. The expected decline in EMP waste activity for the year exceeds the year-over-year change in consolidated revenue and accounts for all of the year-over-year change in adjusted EBITDA margin in our outlook. Moreover, in addition to the over $20 million in incremental COVID-related costs year-to-date, We have included about 50 basis points of potential additional COVID-related expenses in the second half of the year. Thus, our 2020 outlook includes underlying solid waste margin expansion, sufficient to more than offset these incremental COVID-19-related costs, reflecting the strength and resilience of our growth strategy and our differentiated approach to market selection.

10:18 We've also layered back in a portion of CapEx cuts as our business has recovered. increasing our expected cap bets to $550 million for the full year. With year-to-date adjusted free cash flow of $495 million, we are well on our way to achieving our full-year outlook, and we remain opportunistic if presented attractive offers to purchase additional fleet, equipment, or landfill acreage for future development. Finally, we've already returned over $200 million to shareholders through share repurchases and dividends year-to-date, Yesterday, we announced the annual renewal of our normal course issuer bid, authorizing the repurchase of up to 5% of our outstanding shares, which we will continue to approach opportunistically. We also anticipate announcing another double-digit percentage increase in our cash dividend in October.

11:10 Looking back to the beginnings of the pandemic and concerns about the potential for double-digit volume losses, we couldn't have anticipated that with being in a position to provide our 2020 outlook with solid waste price plus volume growth of only a negative 200 basis points or better. The strength of our pricing and the resilience of solid waste volumes, particularly in the majority of our markets, has driven outperformance in the first half of the year, funded significant discretionary COVID-related costs, and provided a higher jumping off point for the second half of 2020. With that, I'll pass the call to Mary Anne to review the financial highlights of the second quarter and provide a detailed outlook for Q3. I'll then wrap up before heading into Q&A.

11:55 Thank you, Worthing. In the second quarter, revenue was $1.306 billion, or about $18 million above the preliminary expectations we provided in May, on better-than-expected recovery of solid waste volumes during the period. Revenue on a reported basis was down $64 million, or 4.7% year-over-year, with almost half the decline due to lower E&P waste activity. Acquisitions completed since the year-ago period contributed about $45 million of revenue in the quarter, or about $40.7 million net of debentures. Solid waste price plus volume growth on a same-store basis in Q2 was negative 5.3%, ranging from about flat in our mostly exclusive West Coast markets and negative 1 to 2% in our central and southern regions, to negative 11 to 13% in our most impacted Eastern and Canada regions.

12:52 Pricing growth overall in Q2 was 4.3%, including core price of 4.5% in line with our expectations, offset somewhat by a 20 basis point reduction in surcharges. Pricing ranged from 3.1% in our more exclusive markets in the Western region to an average of over 4.5% in our more competitive regions. Solid waste volume growth in Q2 was down 9.6%, with the most impacted regions in the Northeast U.S. and Canada down 16% to 17%, while volumes in our southern, central, and western regions declined between about 4% and 7%. As we have noted, our volumes largely reflected the pace and shape of shutdown and reopening activity across our markets, which varies and depends on geography, size, and customer mix in each market. Declines in activity by line of business in Q2 reflect decreases in all regions related to shutdown orders, including some markets that limited or prohibited construction activity.

13:56 Looking at year-over-year results in the period on a same-store basis, commercial collection revenue decreased approximately 7.6%, with the most impacted markets in the Northeast and Canada accounting for about half of that year-over-year decline. Roll-off revenue decreased approximately 13% on polls down about 12% year-over-year, and revenue per poll down about 1% on lower weights. Solid waste landfill average price per ton increased 5% year-over-year, although revenue was down about 5% on the same store basis, as total tons declined about 10% year-over-year. MSW tons were down about 8%, special waste down 12%, and C&D down 18%.

14:46 Looking at E&P waste activity, we reported 35.5 million of E&P waste revenue in the second quarter, down about 45% year-over-year. This decline in activity was associated with a drop in rate count on reduced expectations for future demand, which also resulted in our recognition of a $417 million non-cash impairment charge for Long Life E&P waste assets, as we had foreshadowed. Looking at Q2 revenues from recycled commodities, landfill gas, and renewable energy credits, or RINs, excluding acquisitions, in the aggregate they were down about 9% year-over-year due to lower landfill gas sales and recycled commodity revenues, resulting in a nominal margin headwind of about 10 basis points, well below the punitive impact of prior quarters.

15:36 At current rates for recycled commodities and RINs, Their combined impact could be a small tailwind for the second half of 2020, with lower recycled commodity values more than offset by higher year-over-year rents. Adjusted EBITDA for Q2 as reconciled in our earnings release was $394.3 million, about $21 million above our preliminary expectations due to higher revenue and stronger flow-through from returning disposal and commercial collection volumes. Adjusted EBITDAs, the percentage of revenue was 30.2% in Q2, down 90 basis points year-over-year, but about 110 basis points better than our preliminary expectations, with the entire year-over-year margin decline due to lower E&P waste activity.

16:24 In addition, there was a 20 basis point drag from the margin diluted impact of acquisitions completed since the year-ago period, and another 10 basis point drag from recycling and RINs, as noted earlier. Solid waste collection transfer and disposal margins were up 30 basis points year-over-year in the quarter, as notable reductions in third-party brokerage and disposal costs, medical expense, fuel and discretionary items, more than offset increased incentive deferred compensation and risk accruals, and over $20 million in COVID-related expenses, which included about $5.5 million in higher bad debt expense. Fuel expense in Q2 was about 3.4% of revenue, down about 50 basis points year over year on fewer gallons, lower rates, and a C&G credit of about $900,000.

17:18 We averaged approximately $2.30 per gallon for diesel in the quarter, down about 14% or 37 cents from the year-ago period. Our effective tax rate for the second quarter included, as expected, a $27.4 million tax impact from 2019 due to the proposed IRS regulations from late 2018, which were finalized in April 2020 and impacted 2019. As such, our effective rate in the second quarter was 41.1%. Adjusting for this discrete item, the underlying tax rate in Q2 was approximately 21.5%, in line with our expectations for the quarter and the full year.

18:04 Gap net loss per diluted share was 86 cents and adjusted net income per diluted share on an adjusted basis was 60 cents in the second quarter. Adjusted net income in Q2 primarily excludes the impact of a non-cash impairment charge to the E&P segment and the discrete tax item, as well as intangibles amortization and other acquisition related items. Adjusted free cash flow in the first half of the year was 494.6 million. were 18.6% of revenue and 61.6% of adjusted EBITDA. Capital expenditures of $268.7 million during the six-month period were up $14.9 million year over year. Debt outstanding at quarter end was about $4.7 billion, down from approximately $5.2 billion in Q1 due to the pay down of $500 million on our credit facilities.

19:00 We ended Q2 with cash balances of $790 million and over $2 billion of available liquidity. Our leverage ratio is defined in our credit agreement with about 2.7 times debt to EBITDA, and on a net debt basis, our leverage remained at around 2.3 times debt to EBITDA at the end of Q2. Our current weighted average cost of debt is approximately 3.4%, with essentially all of our debt at fixed rates. I will now review our outlook for the third quarter 2020. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the Securities Commissions or similar regulatory authorities in Canada.

19:50 We encourage investors to review these factors carefully.

19:53 Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period. Revenue in Q3 is estimated to be approximately $1.37 billion. We expect price plus volume growth for solid waste to range between negative 2.5% and negative 3.5%, with price in the range of 4% to 4.5%, and volumes in the range of negative 7% to negative 7.5%. In addition, we expect revenue from E&P waste activity to account for less than 2% of reported revenue.

20:41 Adjusted EBITDA in Q3 is estimated to be approximately $420 million, or about 30.7% of revenue. Depreciation and amortization expense for the third quarter is estimated to be about 13.8% of revenue. Of that amount, amortization of intangibles in the quarter is estimated to be about $32.6 million, or $0.09 per diluted share net of taxes. Interest expense, net of interest income in Q3 is estimated to be approximately $40 million, and our effective tax rate in Q3 is estimated to be about 21.5%. And now let me turn the call back over to Worthing for some final remarks before Q&A.

21:25 Thank you, Mary Anne. Again, our pandemic preparedness and playbook, the commitment and dedication of our employees, strong operational execution, and recovering solid waste volumes drove better than expected results in the second quarter and positioned us to increase our outlook for the full year over the preliminary expectations we had communicated in May. Our 18,000 employees have stepped up throughout this pandemic to provide an essential service as evidenced by the many customer expressions of appreciation extended to our frontline for providing a bit of normalcy during this chaotic and uncertain time. We are a closer knit and better positioned company as we emerge from this pandemic. We appreciate your time today. I'll now turn this call over to the operator to open up the lines for your questions. Operator.

22:13 Thank you. If you would like to register a question, please press the one followed by the four 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. Once again, as a reminder, to register for a question, please press the 1 followed by the 4. Our first question is coming from the line of Kevin Chang with CIBC. Please go ahead. Your line is open. Hi.

22:42 Thanks for taking my question this morning and congrats on a good Q2 here. Maybe if I could just turn to pricing. If I look at the splits between Canada and the U.S., this looks to be the lowest spread in the second quarter here, about 60 basis points positive for Canada. Just wondering as we look out here, should we think of these two numbers converging over time, or do you still see latent opportunities here to kind of capture more pricing in Canada versus what you see in the United States?

23:17 Kevin, as you know, when we completed the progressive transaction, we talked about the need to go in and reprice the book. Obviously, we're four years into or more into the closing of the progressive transaction. So consistent with what we communicated throughout last year and earlier this year, we do see those converging over time because we've worked through the book.

23:40 And I guess what I would just add to that is, Kevin, this is consistent with the expectations that we had coming into the year. Really, our pricing is playing out as expected. As you may recall, we had talked about the step down from Q1 to Q4, and we even noted at the time it was most pronounced in Canada because you had that carryover of those outside PIs we did in prior periods.

24:03 That's helpful. And maybe just my second question here. If my math is correct, I think you're going to average a sub 10 million revenue button rate per month in E&P. Just wondering, I guess, one, what you can do here to maybe take out more costs, to maybe reduce the decremental margins if you think rate counts stay low for longer. And then secondly, do you still see this as a standalone reporting segment or does it make sense to eventually roll this into one of your regional segments?

24:37 Good question. So, first off, I'm proud of the fact that we've remained profitable, you know, through the rapid decline. You know, as we talked all last year, our business held up a lot better than any other company in that space, as did our margins, despite tremendous declines in the rate count. Obviously, you saw the acceleration from Q1 to Q2 in that decline. Our margins are still – they're looking more like a collection company now than a disposal company, right, a landfill company. But that's a testament to, again, to the asset position that we still have and the tight execution that our folks have. And so from an EBITDA standpoint, EBITDA minus CAPEX standpoint, it's still running positive.

25:24 You know, from a segment standpoint, we have chosen to consolidate that segment into our southern region. Those two regions sit together in the same office, and so it made sense from a kind of an overhead basis and a command and control basis to consolidate those two. As you may know, the person that oversees the southern region used to also oversee R360 and the region vice president of RSAW 360 is a former solid waste. And so that person is now assistant RVP within that region. And so we've kept the command and control but consolidated where it made sense. That's it for me. Thank you very much.

26:08 Have a great weekend. Our next question is coming from the line of Hamza Mazari with Jefferies. Please go ahead.

26:18 Hey, good morning. Thank you. My first question is just on free cash flow. It looks like you did almost $500 million first half. Second half seems more conservative, but you are seeing sequential momentum in the business. So maybe if you could just talk about the puts and takes, maybe some of the costs coming back, maybe some conservatism you've baked in. Thank you for joining us today.

27:07 Sure. Well, happy to start with the puts and takes, as you said, Hamza. And you're right, coming in with $500 million and over 60% conversion in the first half of the year, we are assuming a lower conversion rate in the second half of the year. I'd say there are a couple of things that we know about to start with that are higher takes in the back half of the year. So, for instance, cash taxes are heavily weighted to the back half of the year. There's still about $90 million in cash taxes to come. and our interest expense which stepped up as we extended the tenor of our debt and fixed. We have the full impact of that in the back half of the year and only a partial impact in the first half of the year. So there are some discrete items which should cause that conversion to change. But then I would say that arguably it depends on how you think about what flows this year and what you think longer term about.

27:57 And what I'm alluding to there would be, for instance, the deferral of payroll taxes. which I'd say everyone is benefiting from and as you know in our numbers is about a 14 million dollar benefit in the first half of the year and the total for the year is about 40 million and you know clearly we could show all of that benefit this year and the number would be higher for from our guidance. Similarly Worthing described in his remarks the DSO improvement which also, if you look at about three days, works out to about $40 million as well. And again, we could fully take all of that benefit this year, or we could think longer term, which as you know, is more our style to think about setting ourselves up for smoothing that out over multiple years.

28:46 Yeah, I'd rather go into next year with an $80 to $100 million cushion. and then let it all flow through this year and start defending why free cash flow is flat to down next year. Right. Got it.

28:58 Yeah, that makes a lot of sense. And then just, you know, historically the waste business has lagged, you know, going into a downturn, coming out of a downturn. This is very different clearly with the pandemic. It's adjusted a lot quicker both on the upside and downside. I guess my question is, What do you think derails the strong sequential momentum in July? Is it just that you see a wave of bankruptcies and customer churn goes up? Or is it sort of something else that derails the momentum? Is it just the consumer just flattens out?

29:44 Just help us think through. You know, you've had a strong, almost V-shaped recovery. You know, where do we go from here?

29:54 Sure. You know, first I'd say that as we think about our outlook for the year, our assumption really is that the recovery has plateaued. I think we'll be proven wrong on that, but we're not going to bake into our outlook for the balance of the year, the continued recovery. Now, clearly there are some more impacted markets in Canada, in the Northeast. that have only recovered about 40% of the revenue, not 50%. As those economies continue to reopen, as school resumes and governments start restaffing buildings, I suspect that those markets will get closer to the 60% of recovered revenue that we've seen elsewhere throughout the system. So there's likely some recovery that we still expect that could provide further upside to our to our Q3 guidance and balance of year guidance.

30:45 I mean, obviously, you know, our volume declines in July year over year. We're ahead of six handle on them. And as Mary Anne said, we're guiding, you know, seven to seven and a half percent down for the full quarter. So you kind of see where some of the cushion is as things do recover. But without a doubt, there's some of that business that has not recovered yet where the lights aren't on, where no one's answering the phone. That likely won't come back. And so we have to expect that. It'll take some time. But clearly, the good news for the industry is a lot of it has come back. The industry is punching through some pretty good numbers relative to what's happening in the macro. But without a doubt, some business that hasn't come back likely won't come back.

31:31 And then just lastly, I'll turn it over just You know, on your M&A pipeline, are you just being more disciplined or are you just seeing increased competition from others that are, you know, just doing more aggressive M&A, just both in terms of larger transactions and then even some of the majors, you know, increasing their acquisition appetite and spend. Just is there any change in terms of, You know, bidding activity that's maybe more competitive, or is it just, you know, you're just being disciplined and, you know, there's more M&A to come, you know, next year, as you had said. Thank you.

32:16 Yeah, look, as you know, you know, beauty is always in the eye of the beholder, right? I mean, what's attractive to one company may not fit for another. What one company is willing to pay may not fit what another company is willing to pay. I mean, so I can't speak for the transactions other folks are doing. I know our transactions, we remain focused on market selection and asset positioning, and most importantly, free cash flow. And as always, you know, we remain highly skeptical of any financials generated by a banker. So that skepticism hasn't changed. So, look, we said that this would be a high period these past four years in M&A activity. You're seeing it happen. You know, there could be additional rush to activity by the end of this year. Folks still want to get into this year, certainly of tax law.

33:03 So it remains to be seen how much more might get done during this calendar year or how much, if there's momentum in place, might naturally just, you know, flop into next year. Because clearly there's concern out there of, you know, potential changes in tax law next year that could impact a lot of sellers.

33:23 Great. Thanks so much. Our next question is coming from the line of Tyler Brown with Raymond James. Please go ahead.

33:33 Hey, good morning, guys.

33:35 Good morning.

33:36 Hey, Worthing, so I know servant leadership is a big part of your culture. It seems like times like these may be when that model really shines, if it even comes at a cost. I know you called out the 20 million of COVID, but can you talk a little bit about what servant leadership means in times like these, and did other and all of those kind of employee costs creep in that we may not have seen or wasn't directly in that 20 million?

34:01 Well, it's a good question. And, you know, we've always said that culture matters. And obviously we think that's been a key to our success. And look, how we think about culture are these combined to their decentralized operating model, which really empowers local folks. And you think about a time like this when a lot of folks are remote You're really counting on the decision-making at a local level, the accountability that leaders locally have to their frontline. You know, it's driven our success in this pandemic. That's how we're quickly able to pivot and not lose momentum. Look, I think every company's doing what they can for frontline employees. We've chosen to do it a little different, right?

34:47 I mean, I think we're the only company that's done supplemental wages We've chosen to pay our people not to work. We've chosen to pay our people if they have childcare or daycare issues. We're supporting them through employee relief. We're supporting them in their personal tragedies. I mean, look, you think about our workforce and with 30 to 40 million people on some sort of government employment assistance right now, a lot of those are spouses of our employees. And so it's incumbent upon us to to get more money on the front line. We did it through supplemental wages in the first wave. We have other things in mind. As Mary Anne said, we're anticipating the likelihood that during a second or a third wave, we'll do some other things to the front line. Look, our incentive topic rules are higher this year.

35:37 We have not cut back on that. We think that it's people, we've always said they work harder in a tough year to deliver results than when they blow away budget. We're not going to penalize our folks just because a budget got and targets got set right before a pandemic relative to a company that would have had a fiscal year starting in April that, you know, set different targets after the pandemic started. I mean, so you got to take care of your people, you know, that's rooted in our culture. And we're seeing the benefit in, again, what we're doing for our customers. We're seeing the benefit in reduced turnover. We've seen the benefit in improved safety. It's just, as I said before, we're a closer knit company throughout the organization.

36:23 And again, I think the foundational aspects that Ron and others put in place here for our culture and servant leadership are paying huge dividends in this period of time. And again, we're just scratching the surface of the payback that we'll see as we come out of this pandemic.

36:40 Right, yeah, that's extremely helpful. Real quick, Mary Anne, so If we strip EMP away and we look at solid waste margins, but basically what is the embedded, I may have missed it, but what is the embedded Q3, Q4 solid waste margin guide? And then can you kind of go through the puts and takes on a year-over-year basis? It feels like maybe recycling and RINs could be a tailwind, COVID, M&A a headwind, and then some core expansion.

37:08 Sure. So the biggest difference between the back half of the year and Q2 is that the drag from E&P in Q2 is about 90 basis points. And we're thinking in terms of more like 130 basis points drag in Q3 and similar would be expected in Q4. So what that implies is that underlying solid waste margin expansion of around 70 basis points in Q3 in spite of the fact that, as Worthing said, you've got about 50 basis points of COVID costs built in there. Acquisitions are about a 20 basis point drag. And recycling and RINs are essentially flat. As I said in my remark, they could be a little tailwind, so maybe a nominal tailwind boosting that.

37:53 Okay, perfect. And just real quickly, one last one, just for simplicity purposes, just based on the deals that you've done to date, How much revenue should we see from M&A in 2020, and then how much rolls into 21, just from a modeling perspective?

38:09 Sure. So in Q3 and Q4, you're right, about $42-43 million, and that brings you to a total of about $185 million in 2020 from all of the deals, so the $170 from last year, net of sums. some divestitures plus about 30 from the deals we've gotten done this year. And then that says that 70 would roll to next year.

38:32 And anything that's yet to close will be added to that?

38:34 Correct.

38:35 Correct. Okay. All right. Thanks for your time.

38:39 Thank you. Our next question is coming from the line of Brian McGuire with Goldman Sachs. Please go ahead.

38:47 Hey, good morning. Hope you all are doing well and staying safe out there.

38:51 Thanks, Brian. Just a question on the – on the third quarter sales outlook. It looks like, and this may just be conservatism, but it looks like you're guiding for sales to be down 3% in the July comp, or July was down 2%. Just wondered if there was anything unique in the July comp that would have made that a little bit better than what you'd expect for the full quarter. And just thinking about some of the different end markets you've got, things like schools, looks like, at least here around Houston, they're going to be shut to start the school year. So In a month like July, you wouldn't have that necessarily in the comp, I wouldn't think. But as you get back into some seasonality later in the year, do you think that the year-over-year rates could have some unique headwinds from things like that?

39:36 Yeah, as you know, we try to give outlook that we can meet or exceed. I link back to what I've said earlier. that, you know, I think your question is once again exposing the cushion we think about when it comes to revenue. You know, we're guiding 7%, 7.5% negative for volumes for Q3, but July had a sixth handle on it. And so you think about the, you know, if we're too conservative by a percent, that means there's 10 to 15 million of potential revenue upside as we look at the quarter playing out. But obviously there's still two-thirds of the quarter to play out here relative to just closing July. One thing I would say, though, is, you know, I even look at the pandemic, you know, and the projectability of the business, as we talked about before.

40:24 You know, we do constant rolling forecast here. You know, our July revenue exceeded our expectations by about one-half of 1%. So when you think about how we've dialed in the business to think we know what's going on, you know, we're kind of narrowing, you know, the scope of expectations. And so could we be? If July trends continue, absolutely. Degrees of magnitude, again, are numbers like 10 or 15 million. People shouldn't go too much higher than that. But it's always better to keep something in our pocket, just like we keep something in our pocket on margins and something in our pocket on free cash flow.

41:03 Yeah, makes sense. And then just a little bit more of a bigger picture question just around pricing. I know over the last couple of years, It's been a positive backdrop. I think you guys and others in the industry have cited the need to recover a lot of cost inflation, also the need to offset the lower recycling prices. And the question is just really sort of around, you know, what will support pricing going forward? Because it looks like everybody in the industry is getting a ton of cost benefits, way more than anybody thought, kind of in this environment. Recycling has, you know, maybe temporarily, but kind of poked its head back above water for a lot of folks. Yeah, and I know that the industry discipline will probably hold, so there will be pricing, but would you expect naturally just in this more deflationary environment, we would see industry pricing start to maybe normalize towards the lower end of the range where you guys have historically talked about it being?

41:57 Sure. I would say, Brian, that we continue to think about it, communicate it the way we historically have, which is as a spread to CPI. And so to your point, to the extent that costs are under control. It has slowed down as we're seeing. We think that that would suggest that pricing on a reported basis, it steps down to meaning less positive as we move ahead. Really consistent with the way we came into 2020, where we said it would step down over the course of the year, and that's playing out as expected. And again, we'd look ahead to 2021 and therefore, is it possible that it's in the 3.5% to 4% range? Yeah, that's consistent with what we've said in the past.

42:41 But again, the spread to CPI is still running, would be running 200 plus basis points at that kind of number.

42:50 Yeah, yeah, I think what I was just trying to make is, you know, in a quarter like 2Q, everybody seems to be getting the benefit from the lag in the pricing benefits, but you're getting the cost kind of deflation up front, you know. which is a good thing. But again, I think you guys will be able to maintain that spread to CPI. Does that make sense? And just lastly for me, I wonder if you could just talk about how much overtime might have been down year over year and if there was any benefit in the quarter from lower diesel prices or just the lag on some of the pass-throughs there. Anybody quantify that?

43:22 Yeah, I mean, we had quantified, at least from a fuel standpoint, that fuel as a percentage of revenue was down about 50 basis points. You know, a little bit of that was CNG credit, but most of it was the decline in diesel prices year over year. What were the others?

43:39 And with respect to overtime, as we had said last quarter, you know, we really saw the depths of that really coming into our call, you know, in May, where we said overtime had been down about 25% at the bottom, and that those costs were coming back in because the business was returning. So less of a focus

44:02 on that. Okay, so 25% at the bottom, and then as the volumes came back, some of that came back as well, probably.

44:08 Yeah, we're back to having overtime be about 18% of total hours, which is kind of where we were going into the pandemic.

44:17 Got it. Makes sense. Okay, thanks very much. Good luck in the quarter. Our next question is coming from the line of Kyle White with Deutsche Bank. Please go ahead.

44:28 Hey, good morning. Thanks for taking the question. I just wanted to see how the recovery has progressed in states that were kind of early to open and we're seeing rising cases throughout July, you know, states such as Texas and Florida. Anything notable there in terms of kind of the revenue impacts as those cases started to spike up?

44:48 Sure, so happy to give you some anecdotal information. We haven't seen Really any step down in any of those markets, which I think is what you're referring to, where you've seen a second wave or a surge in places like Florida or Texas. As Worthing said, when we look at, in the aggregate, the recovery is around 50%. And in the less impacted markets, meaning not the Northeast or Canada, it averages 60%. and for instance, I look at a market like Houston and it's above that at 65 to 70% recovery and really no material change over the last three months, again, by way of example. I then would contrast that with something like New York City, which really didn't open up and is still down at more like a 30% recovery, so well below the average.

45:38 But really, we haven't seen any step backwards yet in our numbers. It's something we're mindful of, and it's one of the reasons to be conservative as we think about how the quarter plays out.

45:51 That's helpful. And then just kind of a bigger question, is there anything about this kind of pandemic that is making you change the way you operate your business or your strategy for the long term, whether it's on what markets you want to be active in and participate, if you want to have exposure to E&P, or just anything on the cost side, any cost takeouts you think that may be permanent?

46:12 Yeah, you know, the irony, of course, is the last couple of years, people have been asking us, so you don't have as much urban exposure, so do you think you're missing out the migration of people into the urban environment? And we said, no, we've got a nice balance. We've talked about secondary suburban markets and resilience and the price retention ability there and why we still think those are the best markets long term. But, no, it's good to have a balanced mix. Obviously, we have a balance in some areas. and some large urban markets. Obviously, New York is slower, the recovery, you see that in the numbers. But no, look, we see no change in our strategy. We like our current footprint. We like all the businesses that we're in. They all work well together. Obviously, we had a big impact this year with what's happened in the crude market.

47:00 But what makes us look stupid one year, we might look like geniuses in two years, right? will continue to play the hand that we hold right now. Got it. I'll leave it there.

47:14 Good luck in Q3. Our next question is coming from the line of Michael Hoffman from Stiefel. Please go ahead.

47:23 Thank you. Hi, Worthing, Mary Anne, Joe there in the background. Thanks for taking the questions. On the cost side, before all of this We often talked about incrementals and collection, kind of 35% to 40% incrementals and disposal, 60% to 80%. Clearly, you do better because you've managed the cost. How do we think about the sustained incremental? Does the low end come up because you're going to retain some of this savings? And so now we get to talk about a better overall incremental going forward?

48:07 Yeah, I think you've got to separate things like costs that don't come back in the business versus the incremental and decremental conversation. I mean, in my mind, at least, when you look at decrementals and incrementals, the pandemic played out completely different based on the impact the pandemic was having on the revenue. In markets where you might have had a 4% to 6% or 6% or less type impact to volumes, You know, the loss of revenue was acute on the flow through. It was a very high fixed cost embedded cost structure because in those examples, we weren't really restably rerouting if you're thinking the business is going to recover, you know, in six weeks or eight weeks. We weren't cutting heads in that period as well.

48:55 So you held on to the cost as revenue flowed off. But as you've seen as revenues returned in those markets, the incrementals were also extremely high also. Contrast that in markets where you had severe contractions, like in the Northeast and Canada, where there you were more aggressively and proactively parking trucks as needed, managing your headcount, et cetera. And so, you know, the decrementals and incrementals are not as high as compared to those other markets. So the irony, of course, is the markets that perform better on the top line were having different type of experiences on incrementals and decrementals than the others. Look, clearly on the cost side, discretionary items that we control, it'll look different as we come back as the economy recovers because how we operate as a company will tweak modestly.

49:47 We will get back to face-to-face. We will get back to in-person training, you know, when the time's right. We will get back to town hall meetings with our front line at all times of the day at any time of the day. So those kind of costs will come back in. And I can't wait for them to come back in. We'll start paying bar bills again. We'll start throwing parties again. And that's not insignificant when it comes to cost. So look, it's different. The income is detrimental, Michael, by type of market, given how the pandemic's hit and the shape of the cost that came out of the business, as Mary Anne described, which ones did and which ones come back in will be a little bit different coming out of this.

50:32 OK. Price, when you you did very clearly telegraph back in February, you know, you thought you'd do five to five and a half a year and then it would trend down sequentially sort of five, five and a half the first half, four and a half to four in the second half. The hundred basis points difference between your original view of 2Q and what you report in 2Q is all related to the pandemic. And then it's sort of a question and a statement. The four, four and a half for 3Q I think is what you originally were going to do. Is that accurate?

51:08 Yeah. Sure. And maybe just to clarify, it's really a little different from what you said because it really has been playing out just as we expected. To the extent that we deferred any PI that's a nominal amount, it's about $10 million in Q2, which we've layered in the back half of the year. So to your point, we said that pricing would step down over the course of the year. I don't think we put too fine a point on saying that the first half is five and a half. I think instead we said Q1 is outsized because of the timing of price increases that carry forward, you know, rolls into Q1. So we really see this, that there's no change in the way we think about pricing. Obviously, we're mindful of the timing given the pandemic.

51:53 and so we're sensitive to that. But we thought we'd exit the year at around 4% and I think that's, you're agreeing that that's what's implied by the numbers that we've presented.

52:03 And I think we got it 4.5 to 5 for the full year, not 5 to 5.5 and obviously as the year plays out, we still expect the full year to look like 4.5% in pricing. So we're at the low end of our original expectation. Again, had we not deferred some of the pricing that Mary Anne talked about, we would have been closer to the upper end of that range.

52:24 Great. And then the other point that while you always have talked about for the 20 plus years I've known you, a spread to an index, but the more important spread is your internal cost of inflation. And that's probably the bigger message is that you're very disciplined about managing that spread consistently so it creates the appropriate leverage. It's kind of a statement, but it's question implied.

52:50 No, I've got to look Look up what you mean by that. But yes, we agree with your implied question at the statement.

53:00 Okay. And then on the M&A, just so I'm clear, Mary Anne, the $70 million rollover is deals done to date including, but not the $40 million that might close in 4Q?

53:12 Yes, that's correct.

53:14 Oh, no, excuse me. That is, pardon me, pardon me, Michael. That would be the entire $100 million. So meaning it's 30 million from the 60 that's already gotten done, 30 plus 30, and then 40, essentially the whole amount rolls till next year is what I've communicated. So meaning no credit has been taken for that in 2020. Right.

53:39 Okay, but you were assuming it happened and therefore there's the rollover. Okay, got it. That's what I wanted to say.

53:44 Yeah, we've already signed a definitive agreement on that, Michael. We're just waiting for the closing date.

53:48 Right, and what I wanted to make clear is that there was nothing from that deal in our 2020 outlook.

53:54 Right, got it, got it. And then typically you've talked about E&P being a 50-ish percent margin business when things were normal. Where is it right now?

54:07 Yeah, well, right now, again, I called it more like a collection company in some cases. Right now, we're running closer to 20%. Okay. And again, if you look at the last time the E&P dipped, I think the bottom was about, you know, 10 to 12 million or so of revenue per month. And at that level, we held on to about a 25% margin in that business at its depth. Right now the depth is running a little bit below $10 million or so a month, and that's why you see the deck amount coming down as revenue comes down below that prior dip.

54:48 Right. That was April of 2016, and we got back to $50, $60 oil by this fall, and you were back where old margins were.

54:56 Yeah. I don't suspect that – look, I don't want to say I'm calling bottom in Q3, but – I think a lot of companies, a lot of the drilling companies have kind of said, hey, this year is over. And when they look at having rigs return, for whatever reason, it's the magical 1-1, the new year starts, right? So a lot of folks have their capital programs kind of kicking in in January of 21. And so this year, I think we can pretty much anticipate what's going to happen for the balance of the year. And then the question will be is what's the pace of any recovery as you've Flip the calendar into 21. Got it.

55:36 And then lastly on free cash, I mean, nobody actually has returned a guidance that's equal to last year if you're excluding the CARES Act. So everybody's below plan. Proportionally, though, we're looking at your differential. As a percentage of the previous, you're at a better percentage of the previous X in the CARES Act. and what are your comments about why that's the case for Waste Connections? I think that should be drawn out.

56:11 Well, I think it's just our style is not to, I don't know, not to let everything flow. And so, look, we're going to make sure we're running this for the long term. We're going to make sure we remain optimistic as we move through this year in case there's some Chances to make additional unexpected investments that are very attractive and still deliver at or higher than what we're committing to. I still look back and say, look, converting over 50% of EBITDA to free cash flow is still a metric that others can't hit. And so that should be enough at this time right now, given the shape of the economy. And let's hold on to a lot of cushion as we move into 21. Got it.

56:56 All right. Thank you so much. Our next question is coming from the line of Sean Eastman with KeyBank Capital Markets. Please go ahead.

57:07 Hi, guys. Thanks for taking my question. Hey, Sean. Nice work this quarter. Hope we see some big parties next year. I just wanted to go back to M&A. Just trying to understand what you're planning around. You mentioned there could be this sort of rush in activity in the second half. But is that what you're anticipating and planning around from a capital deployment perspective this year? Or should we be kind of thinking about more of a normalized 125 to 150 in annualized revenue as kind of a base case? and, you know, also on that topic, you know, seeing a deal get done in Washington in the second quarter is interesting. You know, any kind of anything to read into there in terms of activity in the franchise markets from an acquisition perspective?

58:05 You know, look, I think your first point of, hey, an average year, 125 to 150, you know, we easily have that in our sights for the full year. Typically what's what's driven, you numbers well above that has been maybe one or even maybe two uniquely sized transactions of 100 million or 50 or 75 million or so in revenue. Look, right now we always think, hey, if we just bat the averages and do 125 to 150, keep into our strategy, keep into our metrics, then that's a great year. And if we can do better than that, that's really up to the sellers and and them driving the timing. What I would say is any seller that wants to get a deal done this calendar year needs to be in the shoot, you know, no later than the end of September.

58:57 And so time is running for those sellers. And, you know, we should know more on our next call with regards to what might get done this particular calendar year.

59:10 Got it. But I guess overall message maybe even into next year, you know, likely to be active in 21 as far as you see it today as well?

59:19 Well, again, as you look at, you know, lineage transition and tax issues, you know, drive a lot of things that move our sellers to come to the table. And so, you know, I think the question will be around taxes. Is this the last year of certainty? Because if everything flips in D.C., you know, would tax laws change next year? or would it take them into 22 to get their act together and change tax laws? I think there's a kind of assumption out there that taxes are going up and the certainty of what you got this year could drive people to the table this year or if they think they want to make the bet that it takes more than a year to get change done in D.C., that they might have optionality for that into 21.

1:00:05 Lineage transitions will always exist, right? but what we know is that folks that may want to sell their business in the next two or three years are likely to come to the table this year because, again, just as our business has performed well, just as you've seen other people in the sector perform well, we can all look at the pandemic and understand how to value these businesses.

1:00:32 Yep, understood. Just going back to sort of the pace of recovery question, You know, in terms of that group of businesses where, you know, you mentioned the lights are still off, they're not picking up the phone. I mean, you know, how good of a handle do you have on, you know, those potential, you know, that bucket that potentially doesn't come back and gets canceled? And, you know, how do you manage through that? I'm just curious to get your thoughts there.

1:01:02 Yeah, that's a good, I mean, that's a really good question because it brings up a Very early in the pandemic, really preparing for the pandemic, we spent a lot of time with our folks trying to make sure we all have our arms around not booking revenue for a customer that may not pay us as you play it forward. Because that runs the risk of future unwinds that can be punitive. And so we spent a lot of time in educating our folks around that. And also, we said we're not going to change our bad debt policies just because we think they're closed for a month or 45 days. Gee, let's extend the timing for payment, which is why I think you've seen us at $5.5 million or so of incremental bad debt bookings.

1:01:54 As businesses reopen, you might see some of that unwind in the future. And so our view is you've got to be cautious in revenue recognition. And if you're over-conservative, that's fine. and you've got to, you know, keep your standards on bad debt accruals and reserves. And if it gets bad, if you've overestimated it, then that means you've got, you know, comebacks in future periods. We've spent a lot of time trying to get our arms around that to make sure the controls are in place. Got it. Thank you very much. As we talk about the daily tracking we have by market, by commercial account, the commission tracking, as revenue recovers, how are we paying our salespeople on recovered COVID business, et cetera.

1:02:42 I mean, there's a lot of data, a lot of insight to support everything we're doing.

1:02:47 What I would add to that, to what Worthing said, is we also track cancellations. And given the fact that it's as low as that number is, meaning that it's in line with historical averages at about half a point, that tells us that the cancellations aren't in there. So we're glad that we've been conservative to all those points that Worthing made about how we think about The business is coming back.

1:03:10 Got it. That's very helpful. Thanks very much, guys.

1:03:13 Sure. As a reminder, to register for a question, please press the 1 followed by the 4. Our next question is coming from the line of Noah Kay with Oppenheimer. Please go ahead.

1:03:26 Hi, good morning, and thanks for taking the questions. And I think your last comment, I think your last comments actually really play into my question, which is, you know, we've heard some interesting commentary from Waste Peers this quarter around the role of technology and improving operational efficiency and some of those benefits kind of coming to the fore during the pandemic. And we know you run a more decentralized operational model, but You've also been rolling out increased connectivity as part of your 2020 vision, in-cap tools, things like that. So what would you call out in terms of the impact those investments had from an operational perspective?

1:04:04 Keep running a good business and keep your people safe. I mean, look, I mean, we don't, as you know, we're not folks that talk about use of technology and how it's going to, you know, take headcount out or do this or do that and you ought to start modeling these sort of savings, etc., Look, running a good business and driving additional improvements, whether it be at operations, the health and safety and welfare of our people and their communities, that's just doing the right thing. You know, our savings, do savings come along with that? Absolutely. Do we get hit in other areas of the P&L all the time, too? Absolutely. And so, look, this is like a portfolio approach to how P&Ls move and We talk about the strength of pricing and how overall the march to operating leverage and what that means to the P&L, but to laser out one or two things and to try to tell you what our expectations are would be focusing on the good and kind of turning a blind eye to the other things that can hit you. The predictive maintenance tools, I mean, that's very powerful for for what that can do with blown engines and reliability and uptime and reduction of road calls.

1:05:23 This machine vision and AI that the in-camera systems are moved to, I mean, that's not there to say, I got you. That's there to make sure that, you know, if we can improve on a real-time basis machine communication to our employees around a rolling stop or around, you know, staying in a lane, around wearing a seatbelt, around using a cell phone or, whatever it is in the cab. I mean, we're not trying to say, I got you. We're trying to say, let's just, you know, instead of waiting for an event recorded to record something bad that's happened or to record a huge inertial shift in the vehicle, let's try to avoid those from happening. And so technology, I think, is whether it be in the fleet, that'll benefit all companies, whether it be through engagement tools, whether it be through online for learning management systems in the LMS and how we've kind of said, okay, we understand the pandemic. We've got business acumen online, servant leadership online. We're Zooming video training, lead driver training, et cetera.

1:06:27 There's so many things we're doing that, you know, if this pandemic happened before the onset of a lot of this technology and the existence of the Internet and bandwidth, boy, this would have been a hell of a lot different than what What we've all in this industry and other industries have been able to do in this unique period of time.

1:06:48 Well, I appreciate that. And, you know, I think to your point, you don't necessarily need to call out quantify, you know, from a financial perspective, the impacts. And yet, you know, you just went through a very detailed list of tools that, you know, you have now that maybe didn't exist in the past. And no question, I think we all have found benefit in some of those technology tools this time around. So maybe just one more around the opportunistic CapEx spend. Clearly, you've got truck and machinery demand generally depressed. Used truck pricing is down. So is this just primarily buying more new trucks at better pricing to lower the age of the fleet, or is there something else you would call out? And if I can just add to that, I mean, you mentioned you're trialing trucks with electric powertrains this year. I'm sure that's a very small part of the spend.

1:07:39 But just are you seeing EVs as potentially economical or getting more economical from a total cost of ownership perspective? Or is this more just about trialing technology and positioning for differentiation on municipal bids? Thanks.

1:07:55 Yeah, we'll see on the EV side. I mean, we've been evaluating – different units for the past three to four years and have waited until the payloads and the battery life were consistent with, A, the payloads of a diesel truck, right, and that the batteries were consistent with the kind of route hours that we have, right? And so we finally have the first product that we decided to beta three different units. are units in three different markets, two of which will be all EV and one of which will be an EV chassis and then a diesel chassis and EV body.

1:08:41 And so we're going to see how they perform. Obviously, the expectation is that while a full EV might cost 2x or a hybrid EV diesel might cost 50% more, Look, the payback in reduced maintenance, fuel usage, et cetera, could be in that five to six and a half year span. And so it can make sense in certain markets to deploy. Obviously, West Coast markets in some areas like California, they're already looking out ahead and looking to mandate EV as you move into the future. And so while CNG was a nice way stop, in this industry to reduce the use of diesel and to clean up emissions, obviously that is just a stop on the way to EV. And so we've got to be at the forefront of that. And others are doing the same thing, something similar to. When it comes to optimistic use of additional cash flow for CapEx, I mean, just this past month in July, I mean, we invested a significant amount of money in the Quebec province both on a very large tract of land for future development for an existing landfill, for resource recovery park as well as we further our resource recovery initiatives in that marketplace. We've also acquired, optimistically,

1:10:12 a recycling facility out of bankruptcy in that marketplace. And so there are things we're doing in various markets as we say optimistically to take advantage of some unique things that were presented.

1:10:28 Thanks very much for the call. I appreciate it. Our next question is coming from the line of Stephanie with JP Morgan. Please go ahead. Hi. Good morning. Thanks for squeezing me in. I guess just a clarification on the guide. It implies that the fourth quarter revenue will be lower than the third quarter, and I would think that volumes would improve in 4Q versus 3Q. So is that implying that there would be lower price in the fourth quarter, or is that just reflective of lower energy revenue?

1:11:06 Sure. So, Stephan, just to clarify, you're right. What's implied would be a step down Q4 versus Q3, which is actually consistent with the seasonal decline that you typically see across the industry in Q4. You know, if you think about the way that the quarters flow, it's 3-2-4-1. So, you step down, of course, between Q3 and Q4. And as Worthing said, we haven't assumed that there is continued expansion coming into the back half of the year. And, in fact, you know, he described it as a plateau. That's how we think about the way we guided Q3 and, again, stepping down in Q4. So, we think that's the right way to be thinking about it at this point in time. And, you know, arguably, there's been less of a seasonal pickup that you've seen. So, it could be, in fact, conservative even if Q3 does play out as expected.

1:12:00 Yeah, if you look to Mary Anne's point about seasonality, you look back over time, there's what, between a 4% and 6% typical sequential decline, Q3 to Q4. Obviously, to be conservative, we've assumed the upper end of that. And again, to our point about wanting to meet or exceed expectations, as that comes in and performs a little bit better, because to your point about things opening up during Q3, then that again provides room for upsides. Okay, that makes sense. And I know it's still early, but I guess what are your expectations for the energy business into next year? And I guess longer term, do you still think it's an attractive business to be in?

1:12:45 Yeah, look, we've been in that business now of this kind of span of assets for almost eight years. I think over that period of time, we've gotten about $800 million of EBITDA off of it. and about $600 million of EBITDA minus capex. And so what I would tell you is it's been a great business and it will be a great business. Obviously, there are peaks and valleys. You know, when there's a valley like this, you're seeing corresponding reductions in fuel costs, right? And so for a P&L standpoint, think about a, you know, I don't want to call it a hedge, but as that business comes back, guess what else is happening? The cost of fuel is going up. And so we'll will offset that cost of fuel increase with the recovery in that business.

1:13:33 Again, we're at a low. It's a unique low. Obviously, as rigs start coming back, we'll see some pickup off the bottom in that business as well. Our folks have done a tremendous job in, again, managing the cost to maintain profitability in that business, very attractive profitability, especially when you compare it to some of their peers. It's just that you're seeing a more pronounced impact to our P&L this year because we did so well so long last year and it's early this year. I mean, a lot of other companies in that space got washed out last year, and so their P&L impact was last year, and so you don't see as much P&L impact, for instance, out of our peers that are also in that business this year. We just did that much better than them, you know, for longer.

1:14:22 Okay. Got it. Thank you. As a reminder, to register for a question, please press the one followed by the four. Our next question is coming from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.

1:14:38 Good morning, Worthen. Good morning, Mary Anne. I'd like to start with the lasting impacts structurally from COVID in a couple areas. And I want to start here with acquisitions. You know, do you find that given What has occurred and the tenor of the change in the acquisition activity and the nature of your discussions in the last month, two months, three months? Do you get the sense, and I know you mentioned the election coming up, but there's more urgency for those that were contemplating selling down the road to really get this done now? And has that in particular changed your negotiating leverage where You might be able to get a lower multiple for those transactions post-COVID versus pre-COVID, or are you seeing valuations around the same level as before?

1:15:38 Yeah, look, gold-plated companies are just that, and they know what they're worth. We know what they're worth. Pandemic or no pandemic, the gold-plated, they've done fine through the pandemic. You know, some of it's tax-driven from a timing standpoint. Some of it is just downright being tired. I mean, it's, you know, they've been at it so long. You know, they went through the period of time where it was tough to find employees in some of their markets. And now you fast-forward into a pandemic. Here's an additional struggle. You've got the government, in some cases, paying more money for folks to stay home versus show up in some of their markets. And so it's just a, you know, it can worry you out. And so... I think some of that is driving the timing as well. But look, without a doubt, I don't think, when some people are playing with effectively free money, then it's tough to tell you that valuations right now are coming down. Obviously, we've talked about over the past couple of years how they've gone up one to two turns in EBITDA, primarily coming out of tax reform with the fact that more cash flow was was, you know, accrued to the buyer because more cash was staying in the business.

1:16:52 Obviously, if taxes go up, there's a risk that obviously the valuations will come down. If taxes go up and the stock market corrects any, valuations are coming back down again as well. So there is a unique time period. We've said a couple times in the past that valuations can't get any better than this, but when money's free, they definitely can't get any better than this. And so I think there's been a for some folks, a rush to the exits. Others have no interest in selling, right? I mean, it's just such a great business. They're mentally not prepared to do it, and they'll keep holding on to it, and those will be deals in the future. Some of the stuff we got done, like the transaction we got done in Iowa, Nebraska, I mean, that first offer was done in, I think, the late 90s.

1:17:40 And 21 years later, we finally got it closed. So sometimes these things take some time.

1:17:48 Can we move now to the impact that it's having post-COVID on pricing? Obviously, there's been some municipal contracts, for example, that have been based on a per household basis, which arguably you would want to move to on a volume basis. How will that figure into year-over-year pricing? Will you get will your pricing go up to reflect some of the potential downside risk that you've seen develop with COVID-19? Or will that just adjust to some volume level that if volumes are up, then your price goes up a quarter? How do you change your pricing strategy now that you've had the experience from COVID-19?

1:18:38 Yeah, look, we have been a company that's complained about our quality of price and quality of revenue on the residential side. and so we're not going to start complaining right now. Look, pricing for us is simple. I mean, you've got a subscription side of the residential business where you have more flexibility on the pricing structure. Obviously, municipal contracts generally are pegged to either rate of return or some form of CPI depending upon where those contracts sit throughout the U.S. And in some cases, we just have bad contracts that we're still working through that came along with a progressive transaction that we are mostly through. I mean, this past month we got a very large price increase in one of our contracts that corrected that one. I think two years ago we got a very large price increase in another one that corrected that. We've got another one that will be correcting likely in Q3.

1:19:40 And if that one gets done, that just really leaves one more left or two more left in the system of inherited contracts that just for market reasons, contractual structured reasons, pandemic reasons, et cetera, a host of things that are happening that we'll likely see those reprice as well or will exit. Again, we don't do this for practice. We've been doing it for practice for years in some cases based on how long we've owned those assets. And the right thing to do for the market, for our people, et cetera, and our capital, is to correct it or move on. So the pricing dynamic as we've seen it hasn't changed. The relative attractiveness to residential hasn't changed.

1:20:27 And, again, market selection does matter, and how you operate in those markets and move pricing matters as well.

1:20:37 And the one thing I would add to that is certainly on the West Coast and some of those franchised or exclusive markets, it can create an opportunity next year to get outsized pricing to the extent there are costs, including the types of costs you're describing that other people have highlighted, like higher weights, but more importantly, negative volumes and the opportunity to therefore get better pricing than we would have otherwise been entitled to. So I think ever to Worthing's point, everyone's mix of business, including the exposure to franchise markets where there is that recovery mechanism factor in.

1:21:12 Makes a lot of sense. Appreciate the time as always. Sure. Thanks. And there are no further questions at this time.

1:21:21 Terrific. Well, 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 do not cover. that were allowed to answer under Regulation FD, Reg G, and applicable securities laws in Canada. Thank you again. As always, we miss being able to meet with you in person, and we look forward to speaking with you at an 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.