Q2 2020 Republic Services Inc Earnings Call
Public services second quarter 2020 is just circle, let's call public service, that's the straight up all the New York stock exchange under the symbol Rs Jay.
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No. It's about it's being recorded I'd now like turn the call a richer Nicole she has to NATO senior Vice President of business transformation Communications nickel.
Hi, I would like to welcome everyone to Republic services second quarter 2020 Conference call, John Bray hurt our CEO, John the into our <unk>, President and Brian's Okazaki out our CFO joining me if we just got for performance.
I'd like to take a moment to remind everyone somebody information we discussed on today's call contains forward looking statement, which involve risks and uncertainty and may be materially different from actually result.
If these deep highly viscous factors that could cause actual results could differ materially.
Sure.
I material that we discussed today, it's time [laughter] future you listen to a beep broadcast a recording of this conference call you should be close to that took a date of the original cost which is August 2820 <unk>.
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Any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of Republic services is strictly prohibited I want to point out our SBC Finally, our earnings press release, which include the GAAP reconciliation table and [laughter] this activity.
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I want to remind you that republics management team routine we participate in investor conferences.
When events our schedule deep pines <unk> presentation are posted on our website with that I'd like to turn the call over to Tom.
Thanks, Nicole good afternoon, everyone and thank you for joining us.
We're extremely pleased with our second quarter results, which clearly demonstrate the resiliency of our business.
The power of our operating model and the strength of our cash flow.
We delivered strong results in the second quarter by leveraging the solid foundation, we built over the last decade during the quarter. We increased adjusted earnings per share delivered double digit growth in adjusted free cash flow and expanded adjusted EBITDA margin 170 basis points to 29.
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I'm proud of the results the team delivered a truly inspired by their dedication to the Republic way.
Our leaders are working tirelessly to keep our people safe adjust our operations to changing demand and ensure consistent reliable service to our customers. Our frontline employees continue to show up every day for our customers and each other.
And our support personnel quickly adjusted to new wave working.
It wasn't a collective effort of all 36000 employees that delivered these results.
Our economic outlook is positive since April total volume has increased month over month through July.
And our small container business, we're seeing a similar volume tread. Additionally, container wage increase sequentially through July, indicating steady improvement in consumption and economic activity.
As always we are running our business for the long term and continue to make investments to enhance the customer experience improve the efficiency of our operations and strengthen our market position.
These investments will position us well for future growth.
In the second quarter, we continue to effectively allocate capital by investing in value, creating acquisitions and returning excess cash to shareholders.
Year to date, we've invested $124 million in acquisitions to further enhance our market position and grow free cash flow. Our deal pipeline continues to be strong and we remain on track to invest $600 million to $650 million in acquisitions. This year.
In July our board approved a 5% increase in the quarterly dividend.
The consistent growth in the dividends demonstrates the stability and predictability of our cash flows as well as our confidence in delivering future cash flow growth.
And year to date, we've returned $99 million to our shareholders through share repurchases and had approximately $600 million remaining and our share repurchase authorization.
We now have greater clarity and how the pandemic impacts our business and how we can continue to adjust operations and effectively manage spending.
As a result, we are reinstating our full year adjusted free cash flow guidance, we expect to generate adjusted free cash flow of 1.1 billion to $1.175 billion.
Our ability to achieve the low end of our original free cash flow guidance demonstrates the tenacity of our team the flexibility of our operating model and the strength and stability of our free cash flow.
As an essential service provider, we play a critical role in our communities. This starts by providing uninterrupted service, regardless of the circumstances and being you're responsible and ethical partner in the community.
This quarter, we were recognized for our efforts and were named two three Bell Media's 100, best corporate citizens list for the first time.
For this list 1000 of the largest U.S. public companies were evaluated and ranked based on transparency and performance across 141, environmental social and governance factors.
Lastly, we recently published our 2019 sustainability report, which highlights the progress we're making on our most significant opportunities to positively impact our customers employees communities shareholders and the environment I would encourage you to give it a look it's a great Reid.
Now I'll turn the call over to John.
Thanks, Don in the second quarter, we remain focused on our priorities, putting our people first keeping our facilities running smoothly and taking care of our customers.
By stay focused on these priorities, we successfully executed our plan and delivered strong financial and operational results.
These results clearly demonstrate we are well positioned to come out of this pandemic stronger and better than before.
As expected revenue decreased in the quarter due to customers temporarily suspending or reducing service levels.
Volume decreased 7.4% versus the prior year.
The volume decline with steepest in April and sequentially improve throughout the quarter.
In April total volume decreased 10.2%.
In June volume improved to a full 5.4% decline versus the prior year.
The depth of the decline in volume and pace of recovery vary by line of business and by market.
Landfill special waste volume was impacted the most decreasing 17% versus the prior year.
Special waste volumes were down 22% in April and June were down 13%.
The decrease in special waste volume was primarily due to jobs being deferred not cancelled and the pipeline remains strong.
In the second quarter landfill MSW volume decreased 3.5% and landfill CSD volume was essentially flat.
Second quarter small container volume decreased by 8.8%.
In April small container volume was down 10.5%.
By June five sequentially improved 300 basis points and was down 7.5% versus the prior year.
Second quarter large container volume decreased 12.4%.
In April large container volume was down 17.3%.
By June volume was down 7.2% versus the prior year.
We expect volume to continue to recover over the remainder of the year.
During the quarter, we waived contractual terms to support our customers and their time of need.
We made pausing and resuming service simple and easy.
We waived late fees.
And offer flexible payment plans to our most loyal customers needing assistance.
Our results demonstrate that customers appreciated our effort and value our service.
Our net promoter score increase nine points from the prior year, and we maintained our customer churn of 7%.
Additionally, we successfully executed our pricing program to cover our cost of inflation.
This enabled us to continue to deliver the essential services, we provide while being mindful of the challenges our customers based.
Total core price was 4.7%.
This included open market pricing of 5.5% unrestricted pricing of 3.4%.
Core price represents price increases to our same store customers netted rollbacks.
Average yield was 2.5%.
Average yields measures the changes the change in average price per unit and takes into account the impact of customer churn.
Thanks to the team's relentless efforts, we effectively manage our cost and expanded adjusted EBITDA margin of 170 basis points versus the prior year.
Due to our investment innovative routing and workforce planning tools, we were able to quickly adjust our route for changes in demand.
This enabled us to reduce overtime by 25% versus the prior year.
And increased productivity across our entire collection business.
For example, and a large container line of business productivity improved approximately 230 basis points.
Throughout the quarter, our drivers remain engaged and focus.
Attendance remained at all time highs and turnover was that multiyear lows.
We also decreased safety related expenses by 19% or 13 basis point of revenue 30 basis points of revenue compared to the prior year.
We achieved the best safety performance in the company's history, reducing safety instances incidences by approximately 20% versus the prior year.
During the quarter, we continue to partner with our municipal customers and discuss the impact of coal that on our business.
In the second quarter residential weights were up 10.1% versus the prior year.
Wait taper down during the quarter and by June residential weights were up 7.6% versus the prior year.
We also continued to renegotiate contracts with favorable pricing terms.
We now have off $850 million of annual revenue or 34% of our Cpis based book of business tied to a waste related index or a fixed rate increase of 3% or greater.
Next turning to environmental services.
During the quarter environmental services revenue decreased 26% from the prior year.
This is primarily due to a decrease in drilling activity and the delay of implant project work.
The decrease in environmental services revenue resulted in a 90 basis point headwind to total revenue growth.
We expect this headwind to continue in the second half of the year.
Turning to recycling.
During the second quarter recycled commodity prices increased 29%.
To a $101 per tonne compared to $78 per ton in the prior year.
The benefit from higher recycled commodity prices was partially offset by 11% decrease in inbound recycling volume.
Finally.
Preliminary results for July indicate total revenue increased approximately 1.5% from June.
We typically see July revenue increase from June due to seasonality.
Total revenue in July was down approximately 3% from the prior year for reference purposes total revenue in June was down 3.5% from the prior year with that I will now turn the call over to Brian. Thanks, John year to date adjusted free cash flow was $743 million an increase of.
Approximately 20% over the prior year.
Free cash flow growth was driven by an improvement in working capital, which was partially offset by a 51 million dollar increase and capital expenditures when compared to the prior year.
The increase in capital expenditures demonstrates our commitment to invest throughout the pandemic, which will protect and improve the long term health of our business.
The contribution from working capital includes a one day improvement in DSL, a two day improvement in DPL and a 35 million dollar payroll tax deferral under the cares Act.
We expect a total payroll tax deferral of approximately $100 million in 2020, which will flip over the next two years.
To date cash collections have remained strong.
We believe our DSL performance reflects our customers' willingness to pay for the high quality service, we provide and the essential nature of our business.
We expect the working capital benefit from the DSO and DPL to anniversary in the second half of the year since we saw improvement in these metrics in the latter part of 2019.
With respect to EBITDA margin, the 170 basis points of expansion over the prior year included 110 basis points of improvement from favorable net fuel and higher recycled commodity prices and 60 basis points of improvement and the underlying business.
Business absorb $31 million of Kobin related costs during the quarter. These costs related to the investment made in our committed to serve initiative to recognize our frontline employees and support our small business customers.
Additional PPD and enhance facility cleaning to help keep our people say.
And supplemental paid time off and enhance medical benefits for our employees and their families.
EBITDA margin expansion resulted from reducing operating and SGN costs by a combined $151 million or 8%.
This completely offset the 151 million dollar or 5.8% decline in revenue.
Most of the cost reductions resulted from effective cost management.
That positively impacted nearly all PNM line items, our focus on cost control will enable us to gain leverage on volume growth as demand returns.
Some of the cost improvement resulted from macro economic factors that positively impacted results for example transfer and disposal costs were down 80 basis points compared to the prior year, primarily due to lower container weights and our small container business.
Container weights were at their lowest level in April and progressively got heavier throughout the quarter.
While we're not providing specific EBITDA margin guidance, we expect second half margin to be at or slightly above the second half of last year.
This would result in full year margin expansion.
During the quarter total deep total debt decreased to $8.7 billion and total liquidity increased to $2.3 billion.
Interest expense in the second quarter was $92 million and included $16 million noncash amortization, our leverage ratio was approximately three times.
Our adjusted effective tax rate in the second quarter was 24.1% and inline with our expectations.
Finally, as Don mentioned, we're reinstating full year adjusted free cash flow guidance of 1.1 billion to $1.175 billion.
This guidance assumes continued gradual improvement and economic activity through the remainder of the year.
With that operator, I'd like to open the call to questions.
We will now begin the question answer session.
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Our first question will come from Walter Spracklin with RBC capital markets. Please go ahead.
Hi, Thanks, very much good afternoon, everyone.
Afternoon Walter.
I guess I'd like to fair those great.
Color you gave into July.
On down, 3% and then down three and a half the month before if you're seeing that trend.
And take into consideration seasonality is there anything to suggest that you wouldn't be into positive growth territory.
Year over year by the end of the year.
Well look as we've said right I mean, we we have a positive outlook on the trend right.
And we feel good about a couple of things one residential wage increases have stabilized.
Right and now small container weights are resuming right. So again strength of American business consumption rates the consumer.
We think is getting stronger people are adjusting to a new way of doing things.
You see it all round you're right. So we have a very very positive outlook exactly when it will go positive we can't put our finger on that and also the guidance. We've given is around cash flow, which we think is strong. We told you in April we thought we saw scenario, we could catch the bottom end of the range.
And now we're telling you we're even more confident than that and all the trends are positive. John gave you a lot of great trends cost management a capex.
On people paying their bills the whole.
Nine yard so to speak so look when it goes positive, we'll we'll have more for yet in the next quarter and.
Hopefully that will be another good news story, we can share with everybody, yes, no absolutely trends there are certainly in the right direction here, but I guess that now looking out a little further and not asking for guidance here, but just conceptually you did a great job of managing costs on the way down so that margin expansion in fact occurred.
Is there anything to suggest that volume comes back to the rest of the year.
You look out to 2021, and assuming we have a more hopefully knock on wood here we have.
A macro situation with a lot more normalcy too it is it not out of the question that margin enhancement here as volumes come back.
Could be quite substantial given how well you were able to in fact improve margins on the way down.
Yes, let me give you a couple of thoughts there. So there were certainly some some macro economic benefits that we realized in the second quarter, we kind of talked about that so for example, some of the things we saw around container weights.
We would expect those to those benefits I would say two to moderate as we look forward, but I would say that being said, we do expect to be more profitable as we look for we've learned things about ourselves on how we can operate differently one within cost of operations as well as within SSG anyway, and we would expect those.
Benefits to accrue to the PNM in future periods.
So as John mentioned safety is a bright spot employee engagement is an all time high we expect that to continue we're still doing a great work take care of are friendly people talk about the acquisition pipeline being full we're talking about tuck ins. Obviously, we're talking in into current markets. That's a margin enhancement in all of its own we.
Talk about.
Running the business for the long term.
In in sort of the depth of coal bed, we were busy sort of.
Adapting to new way you in business, but we're back to add long term planning in the business John and his team, they're still rolling out the rise platform across the organization.
While the digital tools, we are well underway. There. So we're we're back at it and all those things are going to be margin Enhancers as we go forward. So there's still a lot of good news, we'll be talking about here as we go to these next couple of quarters off.
That makes a lot of Santana congrats on a great quarter. Thanks very much. Thanks.
Our next question will come from Tyler Brown with Raymond James. Please go ahead.
Hey, good afternoon guys.
Hey, John So I know theres been a lot of chatter out there about rural versus large urban markets. I think you guys are about a third a third a third world franchise in urban you gave some great color in aggregate on volume trends, but is there anyway, you could kind of bifurcate urban versus maybe those small markets if even.
Anecdotally just basically is there a big difference going on.
In those different types of markets.
No. This is Barry geographic to your point Tyler.
We've looked at a lot of productivity data.
Circumstances to understand what less traffic, obviously were more efficient and getting the recycling in the garbage off the ground.
And surprisingly, we're seeing pretty steady trend the paw across both rural and urban markets and you think you get a much bigger advantage in urban markets and we're seeing kind of the same advantage across all of those markets, which to Brian's earlier point gives us some.
Confident that some of the costs that we've captured on the way down we're going to carry or predict keep that in a way back and those productivity improvements.
And I wouldn't get we haven't we're not releasing that data, but I haven't seen dramatic differences between urban suburban and rural right in terms of can be activity levels and volume.
Okay. No that's extremely helpful. Hey, Brian just a quick clarification on Capex. So I think coming into this year you guys were looking for some heightened spend I think on break rooms, and such I think that stemmed all the way back from the tax Bill first off is that the case in did you make that spend and number two I know 2021 is a long way away but.
Should we be thinking about that that incremental spend peeling off and 21.
Yes, so Tyler.
Of the original hundred that we were talking about spending it's probably going to be closer to about 60, so $40 million of that will roll into 2021.
Okay. That's very helpful. And then just my last one here if I can the Don you reiterated that you plan to spend 600 650, I think you've done I think you said 125 year to date or so.
Is the preponderance of that half a billion sitting in one property or are there more kind of multiple sizable deals out there, yes, there's one big deal out there right that we've talked about.
But there are some others again I continue to say look there.
A number of really nice companies out there well run and good markets good people getting to a place in their lifecycle.
Were talking to us make sense, we're engaged in some really good conversation. So we get a lot of concepts in the pipeline, but it is one big deal out there that'll that'll give us the bulk of I think one of the bright spots of this is what we slowed down pricing deals right in the decline year to understand what demand is going to happen, we never stop conversation and.
And pipeline remains very robust very active and we now are starting to bright deals with sellers as we got lot more confidence in our outlook and there's I feel really confident going forward for the rest of this year and next year in terms of acquisition pipeline absolutely.
Okay sounds great well great quarter guys. Thanks.
Thanks.
Our next question will come from plasma Lazard with Jefferies. Please go ahead.
Hey, good afternoon.
First of all the congratulations Brian on the CFO role.
Yes.
Out My my first question is.
You talked about second half margins being slightly above last year, and and I realize you know you're going to have some costs come back into the system.
Content aware, Scott heavier et cetera, but maybe could you talk about what you see.
As sort of permanent cost saves during covert 19 anything sort of structurally or that you think you can take out of your business, whether it be realistic footprint or.
Maybe there's other stuff.
Maybe you can talk about that maybe more permanent in nature.
Yes ill give you a three arms that real estate is certainly one of them and we are reevaluating what rolls.
Should always be in the office, what rolls can be permanently at home and what role as we'll have some flexibility to them and therefore, we capture a real estate savings on the ones that home are the ones that are flexible I travel is another one the tools that weve used to work remotely we have been far more connected inefficient.
Than we expected there will be rolled there is a role for travel going forward. So operating completely virtual is not a norm that we'll have but we'll certainly be spending last on t. any as we go forward as we kind of think about best to both worlds.
And then just in terms of labor productivity, I think our ability to flex labor and move people cross trained people move people across different lines of business has allowed us to serve customers really really well as well as manage costs. The same time. It will certainly carry some of those forward as we recover from a pandemic.
Gotcha, and then just on pricing I know a lot of the pricing is already locked in Q1, a and I'm not asking you to comment on your competitor, but but they had much lower average yield.
And maybe we're giving more price relief could you just maybe talk about you know how you were able to keep pricing.
Pretty steady as well as.
In the face of you know really down volume, maybe just talk about you know your pricing tools and and I know, how you see pricing bill build up for the balance of the year or you expect it to be pretty consistent.
Yes, so we looked at a range of options. Obviously, there are given it was an unprecedented event and definitely want to be empathetic to customers who were their businesses were changing dramatically. So as I talked about we let people break contracts to suspend service.
And we're in constant communication with them about when.
They could come back at a time that was right for them. We were flux long payment terms with some of our customers and certainly offered that some anymore, but didnt take us up on it and then spent a lot of time and energy committed to serve so we put money in the hands of our frontline people to serve our customers. So our philosophy was that customers while.
There may be needs, a little cost relief, what they really need as customers and revenue when we got our local teams engaged and energized to power our small business customers through a very difficult time and got a lot of positive feedback from our customers on that front and listen we are out there every day and.
Mmm picking up the recycling and the garbage and doing a hard job and our customers are noticing it in their paying us a fair price for the hard work. We're doing so I think thats. The primary reason, we've been able to sustain it and going forward I think we see more of the same obviously, there's some puts and takes in terms of year over year and some fees that might change.
Change year over year, but the philosophy is not changing and we expect a strong pricing performance in the second half and what they're paying its a fair price and they're paying us on time and I think to John's point, I think they value the service and rewarding us for the hard work and the for frontline people are putting out so.
Gotcha and I just have a last clarification question that's very helpful.
600 650 million in in M&A.
Is that a new normal going forward for you guys are used to be a lot smaller, but but you know you're seeing your peers do a lot more transactions.
And so has the philosophy changed at all or you know this is just sort of.
Our time, where you're just seeing much more in the pipeline and then it goes back to sort of a normalize that ticket was maybe was 300 million of annual deals are used to do.
Well I think even John just said with the pipeline not only strong for the remainder of year that the six to 650 range. We've given what we think it strong into next year. So do I have I don't have an outlook you know for the next 10 years idle, but I would tell you just based on where we are in this point history again, there's a lot of great companies out there, we know where the our who they are we have ongoing.
Good conversations.
We think that.
You know sort of a robust pipeline of deals and continued appetite for for good deals. Good companies is going to be somewhat of a regular diet for us at least into the future here that we can see and and certainly we have the upside we have the ability and the team continues to demonstrate their ability to very efficiently integrate these things.
And after we get everything up to sort of company standards really turned into cash flow on that we think that generate as we look back at the deals we've done.
We've got a high degree of confidence in what they've delivered so we know that.
We're paying the right price for deals and making the right assumptions on the way and so it gives us all more confidence to keep on going.
Great. Thank you so much.
Our next question will come from Brian Maguire with Goldman Sachs. Please go ahead.
Hi, good afternoon, and well if everybody's congratulations on the next quarter solid job managing the cost there.
[music].
Just on the.
Back on the margin outlook.
Just one thing I'm trying to reconcile is yet to Q is the worst for volumes down 7% or so and the best for year over year margins and volumes are getting better on a your comp basis for the rest of the year it sounds like but the.
The margin gains aren't getting there quite as good as it is that really as simple as as a recycling fuel.
Kind of contribution sort of going away and maybe a little bit from a higher container weights or are there. Some other puts and takes some factors in there.
Yes, David said, there I'd say, it's what you just mentioned quite honestly, so from where fuel prices are right. Now we think sequentially that steps down about 40 basis points. So starting with our 29.6 in the second quarter that'd be a sequential decline of 40 basis points and then commodity prices would be another 20.
I'd say already down 60 basis points, just with those too and I talked about the container weights right and we saw those lighter by 20, 20% in April and actually by July that's down about 6%.
So that benefit that we enjoyed in the second quarter, we don't expect that to repeat at the same level going forward, but quite honestly, a while to near term cost headwind, it's actually good sign.
Right, it's a really good sign for the health of our small business customer.
Embrace the other thing to keep in mind, if you recall, we see tax credit.
We recognize two years were suspended.
Fourth quarter 2008, full and so that is giving us a headwind for example in the fourth quarter of 60 basis point headwind. So about call. It 30 for the second yes, so thats something we have to overcome.
Yes, I mean, you're talking about a second half Martinez cumulative number so threeq you could be quite a bit better, but fourq you love that unique headwind like you said, which is just a timing thing.
Makes sense.
And then.
Just a question on capital reallocation with the outlook, a little bit better and be able to get back to providing guidance do you think we get back to buying shares back more periodically like the course, you around beforehand or is it a little too early to be thinking about reopening that window.
Look as I said, we've got 600 million remaining on the authorization. We continue to look at the intrinsic value. The business again, we look at that based on our three year outlook. Our three year plan right. So we're looking at a real actionable plan against.
What how we think the stock will perform.
You'd look at our track record, we've always taken a balanced approach would that intrinsic mindset at the same time, we've said look will will flex buyback based on opportunity in the market as it relates to M&A and maintain the optimal leverage ratio of call. It right around three times and so.
All those things are in place we've got a lot of flexibility, we got a lot of dry powder, we've got a lot of capability. So we're in a good place.
And if if the market allows it and we see an opportunity well by Opportunistically just as we haven't frankly, I think we beat the market.
Here in a year out so the balance approach won't change, but we'll continue to look to put our money to work.
And return to shareholders. The best way that we cannot do we think we do it as efficiently as anybody.
And just last one from me just back on the pricing outlook. It sounds like what we saw a little bit of a stepped out in the year over year growth rate, which was expected to think just as the year progress is the comps going a little bit tougher.
Year over year basis.
Can you just expect a little bit of more gradual.
In addition in Montana that line item.
Yes, the gradual again, there's some timing things year over year. So some of our fees are impacted by fuel declines there is a year over year decline on that but our core pricing philosophy is not changing we want to send a fair price for the hardware, but we do and customers reward and value that and path.
Yes, thanks sense, alright, congrats again have a great color.
Thanks Brent.
Our next question will come from Carl White with Deutsche Bank. Please go ahead.
Hey, good afternoon, extending the question.
And John Thank you for the details regarding how boys progressed through the corridor and the details on total revenue in July but curious if you think trying to give similar level of details on how volumes were in July by line of business, how small container and roll off and such.
No we're not given that level of detail on July, but given steady recovery across that and I would say because we have a little bit of a geographic headwind that we had overcome has recovered cases initially started out in the northeast and were heavily impacted where we have a lighter footprint they have.
Your case load in the last couple of months has been in the South and southwest, So, Florida, Georgia, Texas.
Oh, Arizona, California, we have significant market positions in all of those markets and yet we're still seeing volumes recover so that gives us a lot of optimism, but the outlook is a positive theres still uncertainty of course, there was going to be puts and takes across different geographies and.
Week to week, we're running the business for the long term, but we feel like.
We certainly far more than exceeded the floor and we're on our weighted I say recovery I think John.
Repaired remarks, you mentioned seasonality right. So we we actually are seeing some seasonality in the business and so with all its John just mentioned in overcoming.
What's happening out there again that leads us to our positive out.
Got to that's helpful and apologies if I missed this and appreciate the free cash flow guidance provided but did you provide any of that kind of moving parts. There you know what do you expect for Capex for the full year old about working capital.
Yeah, we actually in our guidance, we provided the various components.
Including what we expect from a cash from operations as well as our Capex. So you can actually see the various components in our 8-K filing if you kind of take the midpoint of the range sale, what we're kind of thinking it's approximately 1.1 billion of Capex.
I know a card I don't know that our Capex plan is naturally pulls back when we don't have the volume 10% of our annual Capex typically used for volume growth and we're not seeing that drove our national not going to spend that capex avoids the decline in some of our replacement.
Schedules for trucks naturally push out we're still investing in the business. We're still working on projects still investing in our digital operations platform, which is rise and run the business for the long term. So the teams done a great job in the face of a pandemic not just work in the quarter, but working for our multiyear plan and it just read.
At rates the flexibility we have in the business model. When these things happen, we've got the ability to flex very quickly and still produce the cash flow.
And meter obligations. So again I think each degree outcome of lot of great working the team, but again it just really shines a bright light sovereigns late at the business models and Kyle as I mentioned that the midpoint of right around 1.1 billion. The range is 1.075 billion to 1.15 billion.
Perfect. Thanks, I'll turn it over.
Our next question will come from Sean useless with Keybanc capital markets. Please go ahead.
Sean Your line may be muted on Europe.
Hey, sorry about that guys about my Mom's house, So just trying to keep it requires.
So guys really impressive job congratulations.
[music].
I just wanted to ask sort of a higher level question I mean.
You know post Cove. It does seem like we could see pockets of population growth.
And you know pretty different parts of the country relative to what we've seen over the last many years. So I'm, just wondering whether that or anything else sort of in the post Cobrand world is.
Changing how you guys are prioritizing or.
Focusing your capital investment dollars or M&A dollars and any thoughts there would be great.
So look our strategy around.
Market position hasn't changed right, we strive to be number one and number two in the markets we serve.
We strive you vertically integrated and again.
The results you see there are are result of decades of building around that that pillar of our strategy.
We want to get in front of the growth right, we want to be where people are and so when you think about the sunbelt that we talk about from go in Seattle, Washington down the coast across Texas up into the Carolinas and all the a little pockets of people are moving into hot spots like Nashville right were there.
We've got a great business mix, a great business portfolio of of urban centers.
You know, which sort of picks up some of the growth around sort of the urbanization trend, we've got a great business position in secondary markets.
Right and.
So.
Look you won't see especially wander into markets were not in into startups, just because they are hot spots for people.
If we can take a number one number two position in that in an adjacent markets that were not in currently what's next door or a brand new market, we'll do that and we've done that we've done the over the last couple of years, you've seen us go into some some new secondary markets because we were able to take a nice position. So again, we've got a great pipeline, we've got a great.
M&A team a great leader in that group and again, we've got the balance sheet to continue to grow that way great thing about our business again as population grows as business formation grows around that we're very well situated with our portfolio and the fact that were east and west and north and south can instead.
Lets us when they're sort of micro pockets of bad news right. So while there may be a couple of cities right. Now. We're you know the epidemic still on the upswing, where plenty of cities, where the numbers are going the other way and so we're we're getting that balanced benefit so again thats the strength of the portfolio power the portfolio and so.
One thing that will change in our outlook is just as John said I mean, we've learned a lot on how we can work a little differently.
And we're we're taking all those lessons to heart.
That will make us better it will make us even more attractive company to work for idle make our employees, even more engaged it will make us leaner.
But it won't change our outlook on how we grow and again I think we're very well situated for all of that.
Okay, Yeah that makes sense good answer and next I just wanted to give a brian the floor I mean, congrats on the CFO role just curious over the next 12 months, where do you think you're going to be spending the biggest chunky your time from an operational perspective, what's what's the big parity as you come into the big seat here.
Well look I mean, I think the traditional role of the CFO. When you just think about making sure that we have good quality financials. I mean can be spending obviously my time on that but even more so when you think about me keeping right. The the ITC Department and when we think about our investments in technology how there.
Enabling things like our rise platform, how they're doing things quite honestly, even on the SGN a side.
When we think about modernizing our core systems.
That's why I'm going to be spending a majority my time just to make sure that we set ourselves up well for future growth and enhance profitability.
Got it I appreciate the time and nice work again.
Great. Thanks to you.
Our next question will come from David Manthey with Baird. Please go ahead.
Thank you good afternoon, everyone.
On the call you mentioned that you are questioning your own real estate footprint I'm wondering given opinion on the near term outlook for commercial construction in general and how that might in influence you business into 2021.
Oh.
Not a strong on given the uncertainty only that construction has held up pretty well right opinion about CMV tons into our landfill or it was pretty strong quarter, there and I think in many markets construction spend the bright spot in ball everything else was shut down and people were sheltering in place in most markets construction had an exemption.
And really strong obvious in the residential side right construction, probably a lot of current project getting finished but we're still seeing new activity in market. So probably too early to tell in terms of the longer term outlook. One thing I would add to that as you know here in a lot of people talk about how the U.S based differently not necessarily having less space, but having more open space having me.
Our space between pupils and I know for us for a long time, we needed more office space. So we went from the.
10 by eight cubicle to the eight by eight cubicle to the six place excuse.
Yes, I was just sort of squeeze people. It. So have you know I've heard that from a number of companies that they're going to use this opportunity maybe maintained to some of the space. They haven't and just make it more more wide open more more sunlight for their people more meeting space, that's required that kind of thing and just to appeal.
Two.
The next generational of workforce. So I think I think thats going be true for lot of people.
Okay. Thank you and then.
DNA and tax rate expectations for the full year 2020, if you Didnt give those and then somewhat related the July revenue month to month increase of 1.5 be just tell us what the normal seasonality ranges from June to July.
That's a pretty typical of what we say.
Okay.
And then mark.
Thats, where our assumption haven't changed from the original guidance that we provided so we're looking for four years adjusted effective tax rate of 21% and then just keep in mind. We also have a tax related non cash solar chart.
That shows that below below operating income, we expect that charge to be about $110 million and weighed into the fourth quarter.
Hi, Thank you.
Our next question will come from Michael Hoffman with Stifel.
Please go ahead.
Thanks, Hi, John John Hele, welcome back and Michael denial.
I'd like to tease out the free cash flow outlook.
Yes, I lay the pieces out and I think about.
Your typical ratios like you've been tracking at 40.
So 42% conversion ratio or your cash flow from ops or 20% to 23% of revenues.
I'm, just sort of teasing all those pieces together to try and figure out.
What what's going on it.
It feels like this should be better than one one to 1.75 so whats.
What's our headwinds in the second half gave a couple of them earlier, but take if that only give me a you know about.
It's about 4 million of incremental free cash to be at the midpoint.
Yes, Michael Let me give me a you know a couple in numbers here right. So I talked about in my prepared remarks.
That we expect a working capital benefit to flip and the in the second half of the year and quite honestly. That's just because we saw really strong DBSO in depot performance in the second half in 2019.
So it's not that we expect those two step down in the current year, it's just they're going to anniversary. Okay. So we no longer enjoy that working capital benefit in the second half that's real big piece is really cash taxes.
So when you take a look at what we expect to spend in cash taxes in the second half it's over $100 million more than what we spent in the first half.
I think I'll just point out is just because we had some refunds in the prior year, we would expect cash taxes to be at least $100 million more on a full year basis than in 2019.
And just to put a finer point cash tax as a percent of provision was about 12% last year. This year, we're expecting it to be about 70.
One seven or 707 Zero center.
Hey, Michael did we do we mentioned that we reinstated our original free cash flow guidance [laughter] I know your original guidance is actually a $100 million on the upper end on the higher end. So it feels like maybe that's not actually out of reach.
Well look nothing's ever out of reach.
How's that.
Good.
Our the ratios I talked about still consistent kind of 40% to 42% of EBITDA or 20% to 23% cash flow from ops as percentage of revenues because of the way I think about things Yeah, that's fair and.
Again, I think the big impact Theres, just can be cash taxes with what you're seeing it that 50 plus conversion that we're seeing in the first half versus what a more normalized rate would be.
Got it and just to close on the acquisition side.
Techs 450 million. So that leaves you 200 million to do tuck ins sets and that's kind of what you've spent.
Insistently for decades 200 million type.
Yes, I don't know, there's a questionnaire unless you are just emphatically agreeing with me but.
No I am I, just seems like there's confusion and unlike theres not any compute all penthol Warner settlement.
Okay.
Look look back roll the years, you've known US we have a really.
Good track record of telling what we're going to do and then doing what we say in and we wouldn't we wouldn't tell you what we're telling if we didnt have a pretty good handle on it right. So.
We're very committed to growing through acquisitions as I can't say enough about about the team that we have in place.
The personal leaves that team.
The amount of time that we spent talking about it.
And the amount of great companies that we see out there so.
We're in that game and we're going to continue to make intelligent investments in growing our business expanding your business that way and that's going to be.
We'll be right in the Hans Ole along with anyone else and hopefully.
Because it really ships because of our style because of you know our ability to get things done, we'll we'll give more than our fair share.
Okay cool thanks.
Our next question will come from Michael Sen with Bank of America. Please go ahead.
Hey, everyone. Thanks for for squeezing the yen Don can we just take a step back for for very long time. There was the goal for public to get back to its prior peak margins not 30, 31% range. It's been out there for a while and some investors were.
We're frustrated didn't know if the maintenance at one fleet in these initiatives are actually going to benefit and then you guys put up this quarter and I know that some of that I'd like Brian said is macroeconomic driven by focusing on the container weights, but Don maybe you can kind of talk about how you think about those those those margin targets we have.
Heard about down the while the maintenance.
Extends it seems like it's really under control this quarter landfill costs I'm just curious how you view this quarter in the context of getting and what you guys talked about the margins on a full year basis. This year.
In the context of those prior peak margins.
Sure well, let me start by stating that the 30% margin goal still very much in our minds and very very real.
There are two main things that have that have sort of been or nemesis. There one was the CPI.
Escalator built into all of our contracts for decades that we've been overcoming and John mentioned in his remarks, the great progress to the team has made in moving away from that archaic.
Element of our contract into something that is more relevant in the teams are the great job there and so that just another way of showing that what's what are mine for something we move the needle we moved the market. We did that with a full recovery fee. We doing it now with alternative index and then the other thing that's been an emphasis is recycling right and again.
We have really put a stake in the ground here, we talk about recycling Reimagine recycling 2.0, the team has made incredible.
Improvement in progress in moving off of the old way of of pricing and sharing in the risk and getting that risk appropriately.
Balanced and.
Thats more to come so not only are we getting it done with our customers because our customers.
Well you are what we do and are willing to pay and understand the fairness of it but the market is moving right, we're seeing that become more and more Renault because it's just it's just common sense to do it that way and so again as that was those two things continue to shift as we close the gaps on that and that alternative index and on and on.
Though the recycling sharing arrangement.
Thats. The most of these by themselves will go a long way toward getting us to 30% now just those two things and again if you look at the progress this trend them out and the team is fight hard and and John is committed designed to get that done in believes that you will.
Now you add on top of that you know again some of things we've talked about some of the learnings through cobot 19 some of the.
The way, we think about how will move forward and in some of the putting those learnings to to work the way, we'll work differently remote working even the.
I think we can we can maintain some of our safety performance and some of our productivity firms as John said the team is committed to do that now you layer in coal.
Right.
The team has been hard at work getting that put into the business and we've got a great agreed a percentage of implement.
That's just the first phase and then this is going to be the gift that keeps on giving right. Once we get sort of digitized there and we get the initial benefits Ben as can be one chapter after another of new opportunity, but that will present to us right and so.
There are lot of great stuff on the Horizon, you can't take all that obviously into the remainder of 2020, but as we get further along as we always do come due in October with a preliminary outlook.
And then will share some of those.
Details with you and its a real starts to settle down to right and then we'll start sharing some of that with you in February next year, but we think Alex very bright and 30% margins is very much in our minds and very very very reasonable goal in our in our perception.
Great. Thanks for that color, Don and just lastly.
Over the years your volumes were little lighter than than your peers and you guys were shedding business you were talking about nonrefundable losses.
Is your book of business now higher quality than it was a few years ago to help get through a time like this you guys kind of talked about those non regrettable losses in a while I'm. Just curious if you can help us with the context and you guys going through that process and way that leaves you now in.
In this tough tough backdrop. Thanks.
Yeah, we spent a lot of time understanding the customer not all customers are equal and they all going to have the same needs. So we specifically put a lot of time energy targeting customers that are willing to pay unwilling to stay right. It's a loyalty is a big part of our strategy and where we invest our time energy answer.
Your point, we had some yeah.
Optimization to across the portfolio one is a little bit of that will happen. All the time as we acquire smaller tuck ins that will find bits and pieces of that business, we feel very very good about our portfolio.
In terms of customers.
We are willing to pay at all levels from.
Residential subscription all the work National accounts and everybody has got to pay their fair share we feel really good about the progress.
Our next question will come from Henry Chen with BMO. Please go ahead.
Hey, good afternoon. Thanks, Thanks for squeezing me and I I, just wanted to dig in a little bit it and asks about the.
The pricing dynamics I mean, it's been very strong and.
Yes.
You could talk a little bit more about.
What's driving that I'd, how much of that it is just.
It's structural.
Supply shortages, you will and disposal capacity and or and how much of it. It is like what you're saying before and just providing more value to your customers and what that is that just keeping that price at a pretty.
Solid rate.
Well sure, let's let's start with this this notion of being an essential service right.
We really are an essential service and with all the work we've done as John just mentioned to understand customers what they want what the value what do they want to pay for that reliability is top of mind right and just like when you go to turn on the Fossett you expect the water come to come out when you go to flip the likes with respect to likes to come on when you roll the guard the carts.
The Street you expected to be gone that same day within the same window of time. The work we've been doing operationally with one fleet our fleet how fleet reliability.
Is paying dividends today the work we've done around.
You know.
Our workforce planning in our employee engagement and route readiness all those things right are coming to bear today.
You know employee engagement.
No not only makes a safer but it makes our.
Our entire organization think about how we better served the customer right and so we talk about NPS going up was nine points you know.
We're very much wired around that so when we when we think we have a service that is valued by our customers. When we show up the way, we do with their relentless attitude to get the job done and then we do that even in a difficult time.
We feel like we can continue to price through that.
To that event and we did that and our customers rewarded us for our hard work. If you back all the way up to the macro right you have a irrational.
Environment out there we think about.
The cost of disposal.
The.
The limited amount of landfill space, even though there we have a lot of years ahead of us I mean, it more and more difficult to to get that space permitted and so on.
Oh.
All those things continue to play into just a strong a strong environment, then and I know I'm I'm really encouraged when we think about and we were talking about this for the call.
You know the strength of American business, and the business mentality of people, calling the way back the strength of the free market, you know not to get to patriotic, but the American spirit right I mean.
Well, we've seen an honorable people shown up everyday I mean, that's happening in other companies as well that's happening in other businesses, that's happening with our customers and.
People have a much more positive outlook I think in the world than what you read in the headlines right and we're seeing it right here in our numbers were seeing it right here in the consumption in the waste generation rates.
Our story tells a different store than what you might read if you just read.
No.
The newspaper.
So look bad that strength on the business model and our pricing tools and in the way our field leaders work with our pricing leaders here.
And that belief that will be do is really important and as value and we're not done yet right. The digital tools will further enhance that relationship we're going to connect cams. The customers, we're going to further improve the quality of the product and that's going to give US continued pricing power is we move ahead.
Yeah got it okay that's great.
Thanks, so much.
And then if you'd like to ask your question that a star then one star then one tops your question.
Our next question will come from Noah Kaye with Oppenheimer. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking the questions.
Don you've never mentioned a couple of times that digital investment in rise will start to roll that out last year.
And at least it seemed like initial clubs is really about improving dispatch of efficacy in a real time routing information enhanced data visualization mentioned that you had implemented a fair amount of that endemic then depend demick had you know it throws I would imagine some new variable.
The next for operations and kind of test that platform. So you know how did they perform.
What impacted it may benefit did you see on you know how does it how does that experience in the form and your car error Youre digitalization plans going forward.
Yeah, I mean, it performed well just purely from a plumbing standpoint, right. The ITC team did an incredible job that.
Everything ran right, we move people around and including the right platform right operated without a hitch. So the technical side of it operated very well now the performance side.
Operated well to capacity one of those that had an implemented already used it to really reconfigure the operations right as weight got heavy on residential and there was more demand there and then things got constrained or.
Constricted in small container large container, we were able to optimize routes.
Great way.
And then the deployment itself that dairy costs of what goes away were our deployment was it typically hand to hand combat model, where we would go out and spend a couple of weeks working shoulder to shoulder coven didnt allow us to do that so we've deployed those things entirely remotely we didnt stop the pace, we kept going and the performance in a room.
Most deployment has been on par the deployment in the in person deployment. So as we think about continue to put tablets in the cabin all the further wave the digital operations, our ability to do that both from a cost and the speed standpoint improves and that's a great learning.
Look when you think about that from a change management perspective, you know we've gone from sort of pushed the whole right.
The things that we're producing here our value added in the mines of our front like leaders and they're anxious to get those tools, there and so they're very willing.
And able to implement that but they're pulling that that that capability and so you know.
I'm hopeful that are our speed of change.
More and more reduces our speed of change could actually increase as well.
Yeah, that's great color and maybe just one more and you mentioned that a couple of times here.
The progress on moving the Sicad book of business to an alternative pricing mechanism.
Go back three years.
You basically you almost doubled your your revenue exposure to an alternative index.
But just given that you're highlighting that is one of the keys to continue moved the margin profile up.
Can you share with us any targets.
Benchmark that you really hoping to get to say over the next couple of years, how do you want investors to judge that progress and and frankly, how does what's happening now the current environment impact that.
No. We haven't we haven't actually cert absolute goal and look I would just ask you to look at the at the.
Progress, we've made as a testament to the ability to do it.
There are there a lot of factors you know it the the when contracts come due.
The size of contracts.
And.
Just to the the pace of change the dynamic of the market I mean, all those things are variable to Jeff to work through.
But I will tell you that again, we're committed we see the market moving and.
We are going to stand here every quarter and tell you about the progress, we're making and you can hold us to that yes, I think the progress we've made during this pandemic to the good indication of our revolver commitment because our municipal sales team is pretty busy city hall, because we still have some customers from recycling standpoint that we need to get into a different risk sharing relationship with us still some work.
Doing alternative index, obviously and as more people work from home and we are going to envision probably being a little heavier than those initial contract contemplated we're having dialogue about getting paid for the work, we do right and that's going to be a very important piece again fairness is on our side or try to do get paid for the work we do when we've got a pretty good track record.
When that argument of our customers working with us that's great and again that's upside.
Yeah I appreciate it thanks again.
At this time there appear to be no further questions Mr. Slager I'll turn the call back over to you for closing remarks.
Thank you grant in closing, we're very pleased with our second quarter performance and we're well positioned as volume continues to recover.
Despite going declines we grew earnings delivered double digit free cash flow expanded adjusted EBITDA margins.
We also reinstated full year adjusted free cash flow guidance, which includes the low end of our original 2020 guidance range and then we mentioned that we raised our dividend for 16 years straight.
That's a lovely stat once again I'd like to thank all Republic employees for their ongoing hard work commitment and dedication to our customers. It communities each of our employees truly embodies the committed to serve spirit have a good evening and stay safe.
Ladies and gentlemen, this concludes the conference call. Thank you for attending you may now disconnect.