Q1 2020 Earnings Call
Good afternoon, and welcome to the Republic since.
First quarter Twentytwenty <unk> conference call.
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Think Rachel.
Welcome everyone is Republic services first quarter 2020 conference call. Donna later, our CEO John there are parts.
Serianni, our CFO, who are joining me, yes, we discuss our performance.
I'd like to take them only to remind everyone that some of the information we discussed on todays call contains forward looking.
Which involve risks uncertainties and may be materially different from actual results.
Our E file reach discussed stars that could cause actual results could differ materially.
Sure.
The material that we discussed today is pretty close to them in the future you listen to a rebroadcast or recording of this conference call, we should be crazy did.
Do you ever joke, all what gives me cheaper 20.
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When events are scantily <unk> eight times in presentation are posted on our website with there I would like to turn the call over time.
Thanks, Nicole good afternoon, everyone and thank you for joining US hope you are doing well in staying safe and healthy.
This is of course and unprecedented time for all of US So before we get into a discussion of our results I want to first for you. The steps we're taking in light of the ongoing Cobiz 19 pandemic.
As you know public services provide some essential service our team is working tirelessly to serve our customers and communities.
What I sincerely thank them for all their efforts as always the safety and well being of our people is our top priority and we are supporting them by continuing to provide all field employees, which rolls specific P. P E and masks.
Implementing enhanced Queen protocols.
Adjusting processes procedures and physical spaces to enable proper social distancing.
Rebalancing the workload to keep all people.
Working by reducing overtime.
Providing supplemental paid time off and enhancing medical benefits to cover all coal would relate it out of pocket costs.
And finally, finding new and creative ways to keep our 36000 employees engaged motivated and connected.
Last month, we launched our 20 million dollar committed to serve initiative to recognize our front line employees, while also helping to support our small business customers and the communities we serve.
We are providing weekly onsite meals to employees and I've sent home weekly dinners for their families. These meals are being purchased from our local small business customers.
We're also providing $400 worth of gift cards to each frontline employees to help them and their families were encouraging them to use these cards with our small business customers.
In doing so we're not only supporting our people, but also our customers for by providing them with what they need most additional revenue.
Lastly, we are donating $3 million to the Republic services charitable Foundation.
Through its national neighborhood promise program.
Oh nation is focused on rebuilding revitalizing and restoring local communities the $3 million will be used to fund the foundations long term nonprofit partners, who support local neighborhoods and small businesses as part of their mission.
I'm not surprised by our team's ability to quickly mobilized in a time of crisis over the past decade, we've been investing in our business to advance our strategy and enhance long term shareholder value.
Some of these investments include developing standardize processes implementing innovative technology consolidating our customer service operations and building a world class procurement organization and business continuity function.
Through these investments.
We built a solid foundation and even more and even in a more resilient business.
These investments was a driving force behind our superior results in 2019, and our strong start to 2020.
Importantly, these foundational improvements have enabled us to be more agile.
As we navigate the current environment for example through our investment in innovative routing and workforce planning tools.
We've been able to quickly adjust our routes for changes in demand.
And our investment in technology and collaboration tools allowed us to successfully transition approximately 6000 of our people to work from home in a matter of days.
We did so without disruption to our customers or productivity.
As you can see our company was well prepared.
Furthermore, our management and business continuity teams our experience in navigating difficult times for example, during the great recession, we successfully adjusted our business to changes in demand and continue to generate strong cash flow.
And following some of the most tragic weather events, such as Hurricanes Harvey and Maria we were the first waste company back up and running in our markets.
That's for two today the investments that are people processes and technology had better prepared us to manage through this unprecedented time.
Next I'd like to give you some perspective and what we're currently seeing in the business.
We started the year strong in January and February.
In mid March some customers and our large container in small container businesses began adjusting their service by decreasing the frequency of pick up were temporarily pausing service.
Service decreases continued in late March through mid April and have moderated since then.
The last couple of weeks, we've begun to see customers reengage with us as they plan to reopen their businesses.
Assuming these trends continue we believe the worst is behind us and volumes will sequentially improve from here.
This perspective is consistent with current GDP consensus estimates, which call for a decline in the second quarter and sequential improvement in the third and fourth quarters.
With this outlook, we still expect to generate over a billion dollars a free cash flow in 2020.
Lastly, before turning the call over to John I'd like to briefly discuss capital allocation.
Despite the current pandemic, our balanced approach to capital allocation remains unchanged.
We continue to believe that disciplined investment in acquisitions, but attractive returns is the best use of free cash flow to increase long term shareholder value.
After investing in growth, we will continue to return I remaining cash flow to shareholders through dividends and share repurchases during.
During the first quarter, we invested over $60 million in acquisitions, our deal pipeline remains strong.
Conversations with potential sellers continue to be active with that I'll turn it over to John Thanks, Tom because we're in a central service provider, we have contingency plans in place to ensure continuity of service.
As a result, we were well prepared to face the challenge of this endemic our priorities are simple remain unchanged put our people first keep our facilities running smoothly and take care of our customers.
Doing so we will continue to generate strong free cash flow and create long term value first stakeholders, including our people customers communities and shareholders.
As Doug discussed we acted quickly to ensure our employees wellbeing.
I'm immensely proud of how well all of our employees that adjusted to these changes.
For example, our drivers ever made engaged and focus during this potentially distracting time.
Attendance is at an all time high and April was our best safety month ever.
Activity and service reliability have also proof.
In just three days, we transition 98% of our customer service representatives to work from home with no disruption to our service to customers.
In fact since moving to an at home working environment, we've seen a meaningful increase in their productivity.
Our first quarter results were strong despite the headwind in March from that pandemic.
We increased revenue, 3.4% and expanded underlying EBITDA margin by 30 basis points.
In the first quarter average yield was 2.9%.
Volumes during the quarter increased 40 basis points.
Excluding the benefit from an additional workday in the quarter versus the prior year volumes decreased by 10 basis points.
This included a 70 basis point increase in January and February which was more than offset by 1.8% decrease in March.
In April volumes decreased versus the prior year, but the magnitude and rate of change varied by line of business.
Looking first at our small container business.
In March as shelter in place orders were implemented across the country.
Service decreases began to outpace service increases.
Additionally, container weight started to decline.
In April totally are collected decreased by approximately 11% and container weights decreased by approximately 20%.
It's important to note that in the last two weeks trends have become more favorable.
Container weights have started to increase and customers are beginning to resume service as they plan for reopening.
In fact last week service increases fully offset service decreases.
In response to these changes in demand our local teams are leveraging existing tools and technology to adjust route and rebalance the workload daily.
Impressively productivity in our small container business improved and overtime was down approximately 45% a true Testament to the amazing work that our team is doing.
Turning to our large container collection business.
In April recurring large container halt decreased 19% versus the prior year.
And temporary large container halls decreased 14% versus the prior year.
Given the decrease in demand our teams effectively rebalance the route and reduced overtime by approximately 50%.
Now turning to a residential collection business.
In this line of business, we bill customers based on the container size and frequency of pick up rather than on the weighted the container.
As a result, given we're continue to operate as it as normal the pandemic has had minimal impact on our revenue.
However, as residents consume more at home and create more recycling and solid waste.
Processing and disposal cost will increase.
For the month of April average container weights increased approximately 15% versus the prior year.
Regarding our disposal business.
In April 3rd Party times decreased by approximately 20% and included a decrease in special waste of 34%.
A decrease in C and D of 11%.
And a decrease in MSW of only 7%.
Importantly, the rate of decline has begun to moderate and last week total landfill tons were only down 15% versus the prior year.
Turning to recycling.
During this crisis, we remain steadfast in our commitment to the environment.
Thanks to the hard work and resourcefulness of our procurement and operations teens I'm proud to report that we've been able to continue to operate our recycling processing centers across the country without any disruption.
In a time like this when E commerce activity is increasing and the demand for fiber is increasing it is more important than ever to keep our operations up and running safely.
We've implemented social distancing and are providing necessary pp to keep our people safe and our facilities operational.
In those areas, where employees are station less than six feet. Apart, we've installed plastic protected barriers to help keep them safe.
Regarding our environmental services business.
In April U.S. rig counts and associated drilling activity continued to decrease sequentially from the first quarter.
As a result, we expect revenues in the upstream MP portion of our environmental services business to decrease sequentially.
In the downstream portion of this business, we're also seeing headwinds, though not as severe.
Downstream operators, including refinery and petrochemical companies, usually benefit from lower crude prices, providing a natural hedge to the volatility in the upstream portion of our business.
However, given the unprecedented low demand for fuel, we expect utilization rates to come down and activity in the downstream portion of our business to decrease sequentially.
Finally, turning to expense in Capex.
As we continue to operate during this uncertain time, we're adjusting our cost structure to align with real time changes in volume.
Importantly, we estimate approximately 60% of our total cost structure going to cost of operation SGN and depreciation and amortization is variable.
We are closely managing these variable costs for example, we've put labor management strategies in place to root redistribute the workload.
As a result, we've reduced total overtime hours by approximately 37%.
We're also reducing discretionary spending such as travel and are scaling back on capital expenditures.
For example, approximately 10% of our capital budget or a little over $100 million, Mr drove cap capital, which we will no longer need to spend this year.
Additionally, as volumes decreased the replacement cycle of our assets naturally extends.
Therefore, we are intelligently scaling back on replacement capital to align with changes in demand, including the construction of landfill aerospace and the purchase of replacement trucks containers and equipment.
Overall, we have been quickly adapting our operations based on changes in customer demand.
As always we will continue to manage the business for the long term we've been very nimble. During this rapidly evolving period and will be equally ready as the economy begins to begin to grow again with that I'll now turn the call over to Chuck to discuss our first quarter results.
Thanks, John in the first quarter, Tony revenue increased by 3.4%. This included average yield a 2.9% and volume growth of 40 basis points.
Core price net of rollbacks was 5.2%.
Adjusted EBITDA increased $24 million or 3.4% versus the prior year.
Normalizing for an additional workday in the quarter.
EBITDA increased 4.8%.
Underlying EBITDA margins increased by 30 basis points.
Adjusted free cash flow for the first quarter was $267 million and decreased by $82 million versus the prior year.
This decrease in free cash flow was due to the timing of capital expenditures in cash taxes.
Cap expenditures in the first quarter increased $74 million and cash taxes increased $25 million.
As the prior year.
Normalizing for these two items free cash flow would've increased 4.9% versus the prior year.
During this unprecedented time, our balance sheet remains strong and we will continue to have ample liquidity of $1.9 billion.
Looking forward the impact of a pandemic on the U.S economy remains uncertain in particular, the pace and timing of the recovery.
As a result, we have decided to suspend our detailed financial guidance for 2020.
But as Don and John discussed.
Recent trends are encouraging.
The rate of volume declines is slowing and we're beginning to see customers plan for reopening.
Our employees have rapidly adjust its new ways of working to stay safe.
And our is engaged as ever.
Our operations teams are adjusting routes daily to maintain productivity and minimize costs.
We are increasing customer loyalty by continuing to provide great service to our customers and investing in our communities.
And finally, we are prudently managing spending while continuing to invest for the long term.
Assuming these recent trends continue we would still expect to generate over $1 billion of adjusted free cash flow in 2020.
In closing we mentioned numerous times the unprecedented nature of this global pandemic.
Well, we are all facing a tremendous amount of uncertainty one thing you can be certain up.
The stability and resiliency Republic services.
In my 20, plus year history with Republic.
I've seen many ups and downs from the great recession to the longest economic expansion in history.
What I have learned is that the essential nature of our business doesn't change.
What is our ability to generate strong predictable free cash flow.
Remember the economic environment. We're currently in is temporary.
And when the economy returns to some level of normalcy.
We will emerge stronger than ever.
With that operator like to open the call for questions.
Thank you.
We will now begin the question and answer session.
You asked a question you my first off Min 100 touched on side.
And then just does time, we also you limit yourself to one question and one follow up question today.
It's a question has been and you would like to withdraw your request you might they say a Christian Scotch Jade.
If you use this speakerphone, please pick up enhance it before pressing the case.
Your first question comes from Walter Spracklin with RBC capital markets. Please.
Please go ahead.
Thanks, very much a good afternoon everyone.
Hi, Thanks for taking my question. My first question here is on a pricing behavior. I know you give some indication on April tendencies on volume, but can you elaborate a little bit on how pricing behavior. Among some of your competitors have changed as me as we've gone into the second quarter here in April period.
Oh, thanks for the questions for pricing our pricing.
Prospective remains consistent but we're continuing to.
Invest our employees and we're continuing price for the quality and not committed work that we do with our customers are we have not seen any meaningful change in the market now theres always pockets of behavior here in there, but that's true regardless of what we're out in the economic cycle and get our policies and approaches that remain very consistent.
Okay and follow up question here is on a on residential volume and noted that we've seen a pickup in the in the amount of volume that's a volume increases compared to last year.
Is there any sense that or is there any opportunity here going forward that you can reconstitute your contracts going forward to include a degree of volume pickup how difficult is out to do.
Could that be one of the changes if you look out your industry.
Post covert if you're looking at any me any substantial shift in in the overall industry could that be one area, where where your company could focusing your and.
The industry overall could focus in terms of pricing residential contracts.
Sure well it will definitely be something we're talking about.
And right now.
As we've kind of come through into May April has been all about kind of stabilizing the business, making sure that the service level quality stays high working with municipalities on any sort of schedule changes that we need to accomplish.
As we assess the additional tons that weve absorb will be going to talk to this validates about what that means and look for some help it's too early to tell yet we'll give you more color on that once we get into supporting the second quarter.
I think I'd add on that as we have a small number of programs.
It is based on white their bag programs.
And the industry and we've also migrated away from those programs over the years, because they're not easy for the consumer, but having one been that they pull up to the curb and having that automated has been safer for us has been better for the consumer and you've seen the industry move in that direction and so whatever we do going forward, we want to make sure that it's still effortless the customer.
Okay. Appreciate the time, thank you very much.
Thank you Sir your next question comes from Tyler Brown from Raymond James. Please go ahead.
Hey, good afternoon guys.
Hey, so John appreciate all the color on April very helpful. But if we were to aggregated altogether is there anyway, you could just be a little more specific just basically what did total revenue due in April just for simplicity purposes.
Yeah, well Unfortunately that will probably cover that in July when we talk about Q2, so we can't get into overall April trends, but I would reinforce that.
In most of the places we think we've seen the bottom and we're starting to see recovery. So in a really good sign and also I'd say that bottom as might a much higher floor. Then I think we initially expected on that front. So we're feeling pretty positive about the outlook.
Yes, I agree there so Chuck I know, there's a ton of moving pieces, but is the best way to think about it that in aggregate the decremental margins.
Lets say ex the commitment to serve should be around 40% I know, it's going to vary by line, specifically collection versus landfill, but is that probably the best way to kind of think about it yeah, you're right Tyler that's 40%.
Is accurate.
Okay and are you guys see in.
Any changes in cash collection are you seeing an uptick in in bad debt I think you're already thinking working capital would be a drag this year I'm just thoughts of of maybe what that working capital draw might look like yes. So we're not seeing anything as of yet you as a matter of fact idea. So went down by half a day year over year.
So nothing here in the first quarter, we are thinking that ER DSL will trickle up.
During the year and Thats already contemplated in our cash flow guidance for the year.
Okay, and then my last one.
From a quick modeling perspective are you guys still expecting about a 1% contribution from M&A and would that be inclusive of possibly closing Santander.
Well I think we said, we still expect to do.
But 600 650 of M&A this year right I mean somewhere that somewhere in that area right. So you do the math on that it could be more I mean, we'll see how well see all companies come through this this pandemic, but.
Wonderful our people are involved.
You know centex on track so we'll be good okay. Okay, alright, thanks, guys.
And just on that points I think obviously that deal was not closed yet it's going through regulatory review, we typically wouldn't comment but other people have put that out there and we've got but we're confident we're in a close that deal in the second half of the year.
Thank you. Your next question comes from him.
Sorry with Jefferies. Please go ahead.
Good afternoon, hope everybody safe and healthy.
My My first question is around volume.
You know you've talked up our volume stabilizing.
Service increased outside decreases last week.
When we do sort of.
Come back in terms of commercial volume coming back.
Do you see any structural changes positive or negative.
In terms of the shape of the recovery for the waste space, given social distance, saying or any other things that you think sort of we we see sort of a U shaped recovery on the volume side any thoughts just structurally post Goldberg.
What to expect in terms of changes around your business.
Yes, I have I think you'll see the pace of the recovery be differentiated based on geography and based on US I see code. So you could imagine things like hospitality are going to be under pressure and that recovery is going to be a bit slower than manufacturing, which we're already seeing facts and start to come back on line.
Reopening production ramp up so again, we're going to see.
Differences in that that capacity.
As we go for.
Got it.
And just just a follow up question.
Back in 2012, you know municipal residential was it was a week spark and it was driven by budgetary constraints that all of these municipalities hard.
You know a bit.
They're probably having budgetary constraints again.
Do you think that are you seeing that at all or I guess, the federal government can better <unk> or is there any sense that you're seeing.
Conversations with municipalities that Muni resin pricing, maybe an issue or.
You're not seeing Dr. day.
No I'm, so we're not seeing that today and obviously something we're looking into actively but don't anticipate any creditor collections issues.
On that side of the business you know these are long cycle contracts. So if there's any pressure it would show up kind of years from now in a bid cycle and as you know we've been holding line in that part of the business, making sure that we get a fair return for all the work that we do.
Let me add to that there was a much different situation too right. So that was caused by housing what caused by property values crashing caused by property taxes dropping.
Tax base of all these municipalities was under under pressure you know to your point onto depending on how this thing bounces back, but if it is some type of a decent U shape recovery, we're not going to see that that kind of an issue we don't believe.
Gotcha very helpful. Thank you.
Thank you Sir your next question comes from car White with Deutsche Bank. Please go ahead.
Hey, good afternoon, everyone is doing well.
With it but I appreciate all the details on small container I was just wondering if you could provide similar level of details regarding to your large container business Howard trends throughout April was the exit rate any better any signs of improvement both on a permanent and temporary.
Yes, Thanks a question.
On that we think absolutely found the bottom in that stabilize and starting to see kind of trends of recovery. Here. You can imagine attempt for example, construction shutdown Seattle will shut down reopen about 10 days ago. The Bay area was shutdown in construction and that begins to ramp up and we're seeing a number of places that are just on gang busters into dons.
Point.
Well construction was a huge weak spot in the last recession and downturn I think this is going to turn out to be one of the brighter spots given that housing starts already what a modest space in commercial construction still is pretty strong. So we feel pretty optimistic about that part of the business.
Got it just next question is on a capital return I know you're committed to the balance approach, but just curious are you are you still targeting around the 400 million share buyback. This year is there any change there kind of a dividend policy I know typically you look to increase it in July and just any thoughts there.
Yes, no change to the dividend policy, we've been paying a dividend now for 18 years and that's not that's not going to change.
We always say that we would like to deploy our capital by a purchasing EBITDA and Don mentioned that our pipeline is very robust right now our acquisition pipeline. So looking for our capital to work by buying businesses are you taking advantage of what might be a pretty good opportunity right now.
And then finally, returning to rest of the cash that we generate to the shareholders at several of our share repurchase so our capital allocation strategy really hasn't changed.
Alright, Thanks, I'll turn it over to lock in there.
Thank you. Your next question comes from Jets cyber from BMO capital markets. Please go ahead.
Thanks, So much that's close enough I wanted to circle back to your commercial business I don't know if you can parse it out for you, but even for us, but even at a high level. This would be helpful.
What percentage of your clients do you think are just putting their service either on hold or reducing frequency as opposed to those clients that might not come back.
I think we've seen there's three things going on there's customers who will have permanently closing, we're seeing very little of that although in fairness still some sifting in sorting out.
As the economy starts to get some steam back in it we're seeing customers who have temporarily suspended their service as we've had shelter in place orders and they've had to temporarily closed their business and then we've seen people have decreased their service a restaurant will be Great example, who doesn't have in the interim dining, but do does that take out so they may have.
Scaled back their service yeah, we're seeing those customers who were temporary pause or service come back online and we're seeing now those service increases outpaced service decreases in small container, which is a very positive five floors.
Okay. Great. That's helpful. And then you mentioned some of the productivity improvements decided that the reduction in over time are you seeing anything else in terms of just greater route efficiency fuel cost savings any color on those areas would be helpful. Thanks.
Yes, certainly a fuel cost savings is there as oil is that I I'm very low historic level.
I would say one of the reasons, we've been successful in this environment and the productivity improved as all the hard work and the foundation that we built so we've worked really really hard to keep our people working in employed and that Matt everybody had to give up some overtime. So everybody could get work and that means people picking up different routes and.
Our different stops and you got a customer service is improving the productivity has improved so real testament to.
Our CEO, Tim Stewarding, the operating team for how they've done that would operations and I'd also say this we benefited a bit from traffic right as people sheltered in place traffic is down so, especially in urban areas, our ability to get around and get to win back from the recycling center in Atlanta pellets, certainly improved but as John said his comments right. Ted This is all time.
Hi.
Safety, you've got a best safety month ever and engagement strong right and so all those things all those things will be will be benefits for us.
All right that's great to hear stay safe.
Thank you.
Your next question comes from Noah Kaye from Oppenheimer. Please go ahead.
Hi, good afternoon, thanks for taking the questions.
I could just go back to the earlier question on on price and just be more specific can you talk about the take rate that you saw on price increases.
And any pushback that you might have gotten on price increases as we went through the last couple of months.
Did you lose any meaningful customers studio pricing discipline is curious it puts in more detail around that.
Oh, so thanks, a question on a very strong first quarter and pricing again very consistent with our historic approach of making sure we get paid for the work we do.
I have no maintain that approach here in the last six seven weeks and I've not seen meaningful.
Levels of pull back on pricing now.
Look anticipate some of that as people sift through their business as well so I'm sure, we'll see little bit out, but I don't anticipate large movement on that front.
Okay. That's helpful. And then you know you you kind of kept your expectations on M&A intact for the year you talked about the strong activity I'm curious if.
This is up they have a different.
Environment, we're all in now.
A couple of months ago, maybe you could speak too if you've seen any change in behavior from potential sellers or whether thats indicative of lesser or greater opportunity for an hour or the more medium term and any maybe short term air pocket to.
To expect just from a diligence perspective and give some color.
Yeah, I don't think it's a material change you know diligence you know for deals we had near closing diligence is there more difficult because we're not traveling.
So we've had to maybe slow some of those things down to do some things remote lease. That's just you know required a little bit of innovation, but as far as new opportunity goes I think frankly, as we've said there's a lot of really good companies out there that we'd like to look look at and talk to some that we already had in the pipeline there maybe some more that come to market I think for the most part.
Our companies have just been busy getting their businesses stabilize try to figure this thing out and as as the market starts to come back you know people will start to decide you know.
Whether they're still lives for the long term or not we know that we are we know we've got the balance sheet and the know how to get it done. So we'll be here to have conversations if there are people who want to analysts.
So we think a thing you'll see it will still be a good year for us in the M&A Department.
Okay, great and if I could ask one more.
There are 20 million dollar initiative.
First I just want to menu for for this initiative and putting their employees first you called out I think about 3 million business production costs from corporate Nike nothing adjustment or safety equipment, we need to that that kind of costs fall under this.
Program should we think about the sort of 3 million among being kind of the right level spend on those things for.
The near term just kind of expectations for an elevated cost of doing business there.
Yes, so the 3 million, though is that we incurred during the first quarter were associated with just keeping our employees.
The committed to serve actually is a little bit different than that that's that's helping the employees, but it's also helping the communities. So you know how much we incur in these these costs that were that we carved out in Q1 going forward really depends on the duration of the a.
The pandemic how quickly the economy rebounds, a little bit too early to be able to forecast at this point, but most of those costs were onetime in nature. So hundreds of thousands of mass me purchase we talked about putting some structural changes into our hauling companies to promote social distancing screens.
That's right.
So feel really good about that we've already always use mask our recycling centers.
So yes, we have a little more hand, sanitizer spend going forward I'm certainly will for a long period of time, but that's not meaningful in the overall economic.
Okay I really appreciate that color. Thank you.
Thank you. So next question comes from Michael Hoffman from Stifel. Please go ahead.
Oh, Thank you for taking my calls and I'm glad a everybody is safe and healthy family and friends and employees.
Could I get Chuck.
What percent of your labor costs, you all are doing very good job getting line item costs, an opex and in 2019 what percent of that labor number was overtime.
It's about 15% Michael.
And when we think about how you've rolled that back about half of its come out that is that what I sort of discern through all of Jay's comments, yes, a little less than that probably closer to 40% and keep in mind, Michael not much came out in revvy revenue were working harder than ever so almost half and large container swap it there.
Okay, Okay that helps and then.
It's terrific to hear this has had a higher LOE than you thought it was kind of a.
You mentioned John the is we're seeing less not lost business I'm trying to say this smoothly and I'm not sure I'm doing very good job.
How many customers don't you think don't return in the commercial business percentage wise.
A small I couldn't give you a absolute number as a percentage number I think it will be small Michael.
Small less than 10%.
It's hard to forecast exactly what the shape of the recovery is right. You know if we're in an l. shaped recovery, which I don't think any of us are seeing and our side of the business, yes, it could be that number but in a kind of a steady rebound here.
I would expect less but it's hard to say yet.
Okay.
Alright.
Ask one more if I can you said 100 million a growth capital spending some upside, but what is the growth capital spending as some or the total capital spending assumption.
If you exceed $1 billion a free cash.
Yes, So you know well give you more information on that Michael as we are work our way through the year here, where they really depends upon the duration of the downturn how quickly we come back right are we talking about the growth capital the remaining capitals really replacement and it just depends upon the utilization.
Our assets, which includes a landfills right building additional landfill aerospace and that's all predicated upon turns after receiving landfill so well much more information to come here in Q2, Yeah look Michael as you know there's a lot of moving parts right. So as I said already in April was all about sort of stabilizing the business.
Right working with our people getting keeping everybody safe you know may will be about keeping everybody sort of enthusiastic and ready to return we're already seeing all these positive signs that John laid out I mean, there's positivity across all lines of business all market verticals or just a lot a really great stories, we had four hour.
Earnings call, we can Sherri, we got really great stuff, it's too soon to trended right. So thats the difficulty of there just so many moving pieces Andy though the fact is though we know that we can make changes in decisions in and around capex in other areas of spending which we've done and are doing well continue to win.
Just but you know, there's there's still a chance right depending on how this return occurs and we can still catch the bottom edge of our original cash flow guidance, which is over billion.
Right so.
We're going be making adjustments every day every we premiered ended the year. The leadership team gifts together every day at 11 am and reviews every piece of data, we have and it's making decisions daily.
And that will continue.
Under John's leadership, so it's been really a great process, so far and the team just responding great. So in July we have a lot more data and we'll have some trend information that will be more meaningful, but I would say who focus on the cash flow and that just it just really underscores journaling helps stability of the business.
Okay. Thank you very much stay healthy.
Thanks, Michael.
Your next question comes from Sean Iceland from Keybanc. Please go ahead.
Thanks for taking my questions team.
First one for me just on on Labor helpful color on the OTI reductions just wondering if it had been any offsets there with any potential temporary increases for any employees and maybe just rounding it out with trends and retention turned over things like that would be helpful discussion.
Sure maybe I'll start the second part of the question. So retention is that an all time high and we have some natural attrition in a business that retirements and other things, but we don't have a lot of people, leaving us for a bigger better opportunities in part because we don't extraordinary job of taking care of our people, which ties into the first part of your question Yeah, they're committed to serve probe.
Graham we've done for a few reasons one it was to honor and celebrate our frontline people right. They are.
Performing essential service and it's a normal purpose.
Unfortunately society doesn't do a great job of recognizing them all the time and this is their moment and this is our opportunity to elevate them and appropriately celebrate them and then connecting them with customers right customers, obviously, they're looking for some cost relief, but they are what they really needs revenue and we're allowing our people and empowering our people to go support lower.
So small businesses that our customers I mean would do that we support the community. So we think all those things are connected and tie together.
Okay excellent its good stuff and I'm, just curious with both you see really spiking here.
Hello.
Typical sensitivity to EBITDA their whole door.
Nuances on the volume or operating costs, the what should we should be considering as we kind of flow through.
They're cycled commodity price movement, we've been saying.
Yes, there will be I would say is that keep in mind that we talk about our commodities the basket.
And Oh, yes. He is a portion of that basket is about 45% also included in there as aluminum and plastics and the pricing on that has actually gone down or having said all that sensitivity I really hasn't changed our basket of goods 10 dollar change for the year is about three cents at bps.
Okay helpful and just last quick one for me I'm just curious on the residential dynamic you guys highlighted some specific numbers around container rate increases I'm, just curious if you're able to help us understand what that means for the margin profile.
You guys are getting on that business relative to your normalized this time last year site.
Yes, so because of the disposal, it's going to be compressed a little bit, but we think it's a temporary issue and.
Yes, we'll work our way out of it.
Okay got it thanks guys.
Thank you. Your next question comes from Michael Feniger from Bank of America. Please go ahead.
Hi, Thanks, guys for up ticking, taking my questions are this is kind of asked earlier.
And I might have not heard properly when a customer opens up which sounds like you started to see at the end the month are they decreasing service levels.
Hiccups first where they were pre coat coated and are they asking for a relief on that price point.
And on this topic it maybe too early but you know Chuck can we see small mom and pops start to get aggressive on that line isn't that's when the economy opens back up.
Yes, so we're seeing people call back in we're not seeing meaningful changes when they come back with the coming back at the same service level, obviously, it's a mix.
We go for we've not seen any kind of movement in terms of expecting a different price points.
We have customers were under contract and we have allowed them to temporarily pause that contract given the kind of once in a 100 here nature. This phenomenon and they've been appreciative that we've allowed them to do that and then mindful of their timing is their opening backup they're eager to get back to business.
Right and their first point of interest is not the price point of their waste recycling centers, it's getting their employees back safely and working and getting customers in their door on that process and then could we see people be aggressive.
Yes, we could we see that all the time in select markets are always be a player who does a hard to do a volume graph here are there specific time I think it's too early to tell whether that's going to be a broad trend, but we've not seen any meaningful uptick in activity in the last six seven weeks.
Okay, good to hear and I might have missed heard this comment Deco metals EBITDA margins did you say, 40% is that the total company that collection and disposal Oh that April comment.
I was hoping you just flesh that out for that's for the entire comedy. So if you think about you know we're losing our volumes on the residential side of the business right. It's on the small container and our landfill sites and those have the highest margins in the company. So the decremental margins are approximately 40%.
Michael keep in mind, you I mean, we have right well we closed the books for April so.
We're talking theoretically what that income our minimum margin.
And we'll give more guidance kind of in the second quarter around all the numbers that we've been talking about here.
And that's that's helpful and just lastly, you mentioned the pipeline outlets with M&A art.
Are you an active discussions are you seeing a recalibration of the multiples in that in that pipeline. So clearly you know the trailing EBITDA gets a haircut post coven or you know I in this new environment I understand that portion, but I'm just curious if youve.
If you think theres been a recalibration of just the multiples on on on that EBITDA or that or that potential future khosro. Thanks you.
Well I'll start with Johnson is I would say first it depends on the deal it depends on the makeup of the revenue.
Right. So yeah, we're smart enough to look at that but it depends really on what what is the makeup of the business.
Yeah, so our activity remains higher than ever before continuing dialogue and discussions we are we're not snapping a chalk line on pricing those deals that we're giving you know sellers an expectation of ranges, but we're waiting to sift through both things where the economy thats what the future demand profile is gonna be for those assets.
And then overtime do multiple expectations come down because there's more willing sellers because their life is changing that might be a little tougher run the business in this environment, we'll see.
Thank you. So next question comes from Brian Maguire from Goldman Sachs. Please go ahead.
Hi, good afternoon, everyone up everyone's a safe and doing well.
And I appreciate all the detail on on trends in April with all the fluid situation here.
And I know guidance is it's been Paul that's a very tough environment to be able to provide any so I appreciate given a billion dollar free cash flow marker there.
I'm trying to just reconcile some.
Some sort of conflicting talen versus number it seems like people not as bad as we could have feared but still.
Obviously not immune to the environment.
I really haven't gotten a lot optimism out to you guys about the pace of the recovery the ability to maybe even clip the low end of the original free cash.
And.
It's great that sequentially, maybe on a week over week basis things are starting to improve a little bit but.
I guess sitting here how can you have any any confidence that we're gonna get back to anything close to normal in the back half a year I guess kind of embedded in the question is that there's no way. He gets a deal again kind of at the current run rate right. I mean, you need a healthy kind of recovery in Threeq and Fourq you to get there so.
I just you there's something you guys are seeing that we're missing that just would explain the the heightened competence to kind of get to whatever level you need to that you get to even talking about clip in the low end of the prior range.
Yeah, what I'd say, the it's obviously economic outlook broadly, there's still some uncertainty to it right and so if we get into a double dip right. Because we have a reemergence alright, I broad scale and have widespread sheltering in place in the fall.
That will be different scenario, but based on what we're seeing now basically work kind of consensus is going on a macro environment that we're going to.
Q2, and start to see growth in Q3 in Q4, coupled with what we're saying which is again at relatively high floor to what some of the early or predictions were and already seen that flatten out and starting to see that move upward I think those are all positive signs and that's what's embedded in our perspective. So Furthermore.
For years decades, as we've talked to you the market about what's great about the waste business. You know we talk about the same things we talk about our market position being number one number to 90 plus percent of the revenue. We talk about the fact that were essential service, we talk about the fact that 80% of our customers.
There are some type of contract we talk to you about the fact that in our small container business, even in our residential business, but the cost per household in the residential businesses generally sub 35 Bucks a month the cost in a small container is sub 400 and these are not jives spends these are not the numbers that Keith.
Them awake at night. These are not the major parts of their budgets right. That's what makes the business. Great fact, everyone needs US Okay and then when pays is mostly in advance right for the service that we provide.
And that's one reason that we get really get strong pricing four or 5% you know core pricing or a 3% yield is really small dollar amount for or any business right. All those things are true we talk about Peabody, how we can flex our cash flow or our spending in times like this.
To still produce strong free cash and maintain a strong balance sheet and have a balanced approach the cash allocation all those things that we've been telling you that frankly, we proved into 2001 economic decline in the great recession and will prove again now all those things started the that's the truth that we've been telling you and free.
Actually I think is maybe going overlooked.
By some people during the last call. It 70 weeks of this madness, but we're going to continue to do that and that's on anything that's inconsistent with what we've done or what we've said in the past.
I appreciate that color in perspective, I would tend to agree with you on all those points is just none of us have lived through this and.
Underlying assumption is that those businesses are are coming back and well continue to operate and that's it's a kind of Michael's question earlier, just seemed like the big wildcard at it.
What I'll say.
Just on another cc absent the price has run up and I just wonder why would you can say about volumes and how much of the new hire has been supply shock true then with the news you know in collections from brick and mortar retail and.
Hi.
Stylish men's whereas usually about very hard to cover rate to more consumers in E Commerce channel and maybe maybe lower recovery rates. There is this yeah. It kind of really had supply shock driving at higher from what you can tell.
Yes, so I think yeah, I mean keep in mind that we're still down slightly Fred because well resi is way up.
Commercial or small container is down right I mean, there's just less economic activity going on right now overall from a supply standpoint, and that's obviously from the demand side or demand signal out of a back door for a second process, there's big pull for fiber both the support E Commerce, but also.
So to support in all of the clean acts and paper towel and toilet paper and whites and everything else and you could argue some of those are just a poll for a surge in demand some of those I would argue or more permanent wipes for example pay for tower. It paper towel I think we're gonna have an elevated level demand for months or probable years ago.
Okay last one from me I think I can remember remember if somebody already asked if I just on the capital reallocation thoughts on the share repo I think you sound like you're still committed to M&A or that maybe the stuff the due diligence and can travel but.
On the share repo, it's still expected to kind of continue at a similar pace or does the uncertainty out there and again, maybe pull back a little bit on that.
Yes, So I would tell you a first of all you know our stock is a bargain today right and we should be buying more of it but you know with the uncertainty in the world right. Now you know the the prudent thing for us to do is conserve cash right. So Chuck talk about.
Having plenty of cash on hand, having plenty of capacity in the revolver. That's the prudent thing for us to do at this moment.
Of course, we'd much rather buy more businesses do more M&A. The buyer shares that's still the best use of cash so we're going to take a little wait and see approach and as Chuck said you know we've we've been paid a dividend every quarter for 18 years. So while we don't have a an exact dividend policy. We do have a practice that weve honored.
So we think we're in good position from a cash allocation perspective, you know we looked at the intrinsic value of the company today and if it weren't for some of the uncertainty around corporate 19, we'd we'd we'd buying a little more about ourselves, but we're just going up or kind of think we'd see approach.
Yes, fair enough Alright, Ah stay safe guys best of luck.
Great too.
Thank you Sir your next question comes from Kevin Chiang come see RBC. Please go ahead.
Thanks, Thanks for taking my questions just one for me.
Just wondering I just hope as you hopefully youre commercial customers we start here.
I suspect a lot of them more or some of them or probably facing more financial duress.
How do you manage the counterparty risk there in the event that.
The cotton make it all the way through or are you changing payment terms at all or what are you doing to make sure that don't become a little bit of bad debt expense sometime down the road.
Yes. Good question. So I'll provide perspective does anticipate some elevated bad debt expense or will inevitably be some customers or don't make it through that I think that's obvious to everybody on the call.
But first you know we have a differentiated approach in a very thoughtful warm so customers are good credit ratings and get a little bit of help through this we will extend in terms of those customers you know the longer they've been with us, obviously, well, albeit play that loyalty to them and help them get through this time on that front feels pretty good about our approach would trade off.
Our people are both in credit collections, and our customer service Representatives and all those policies and also the approach people are going through a very dramatic experience and we start with a human centered approach of understanding what they're going through working with them and getting to a good outcome and we have long and loyal customers over seven years or costs.
Listeners are with us and so I'm pretty confident we're going to work through this together.
That's it for me thank you very much.
At this time they appear to be no set of questions, let's just like Oh, 10, Nicole <unk> closing remarks.
Thank you Rachel in closing given the foundational investments we've made in the business we've been operating from a position of strength and we will continue to do so through the recovery and beyond our diversified footprint across the broad mix of markets nationwide position us well to benefit at each stage of the recovery.
Look forward to working together with our customers and their communities because they resume operations once again I'd like to thank all of the Republic employees for their ongoing hard work commitment and dedication to our customers are communities each of our employees trulia bodies. The committed to serve spirit had a good evening everyone Stacy.
Yes.
Ladies and gentlemen, this concludes the conference call. Thank you for Tinting you may now disconnect.
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