Q2 2020 Waste Connections Inc Earnings Call
Please stand by the conference if we get momentarily we thank you for your patience.
[music].
Greetings and welcome to the waste connections second quarter 2020 earnings conference call. During the presentation, all participants will be in listen only mode.
George We will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Friday August 7th 2020.
I would now like turn the conference over to Worthing, Jackman President and CEO. Please go ahead.
Thank you operator, and good morning welcome.
Welcome everyone to this conference call to discuss our second quarter results. The current operating environment and our outlook for Q3 in the full year.
Joined this morning by Marianne Whitney our CFO.
As noted in our earnings release strong operational execution that continued recovery in solid waste volumes drove better than expected results in the second quarter.
Adjusted EBITDA margin for solid waste collection.
Transfer and disposal expanded year over year in spite of significant coupled with 19 related cost incurred in the quarter.
In fact, the reported year over year margin decline in the period was entirely attributable to reduced DMP waste activity its underlying solid waste margin expansion more than offset over $20 million, an incremental kobin related costs, primarily related to frontline supplemental wages and the margin dilutive impact of acquisitions in the quarter.
At the onset.
We believe that are preparedness and execution during this pandemic well leave us better position, what we emerge from.
The only in the early stages of recovery. We already are pleased to provide our outlook for the full year above the preliminary expectations, we had communicated in bag.
Before we get into much more detail, let me turn the call over to Marianne far forward looking disclaimer and other housekeeping items.
If you were running and good morning. The discussion during today's call includes forward looking statements made pursuant to the safe Harbor provisions of the U.S. Private Securities Litigation Reform Act that 1995, including forward looking information within the meaning of applicable Canadian Securities law.
Actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties.
Factors that could cause actual results to differ or discussed both in the cautionary statement, including in our August six earnings release and agreed it detailing waste connections filings with the U.S. Securities and Exchange Commission and the Securities commissions are similar regulatory authority from Canada, you should not place undue reliance on forward looking statements as or maybe additional.
With that which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our kids.
We make no commitment to revise or update any forward looking statements in order to reflect events or circumstances that may change after today.
On the call, we will discuss non-GAAP measures such as adjusted EBITDA adjusted net income attributable to waste connections, but that dollar basis and per diluted share and adjusted free cash flow.
Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operation.
Other companies May calculate these non-GAAP measures differently.
I will now turn the call back over to work great. Thank you Marianne.
We're extremely pleased with our results in the second quarter, which exceeded the preliminary expectations. We provided in may and provide the basis for our increased revenue and margin outlook for the full year.
These results reflect the resilience of our underlying solid waste business as well as the dedication commitment over 18000 employees.
Maintained to focus on the health safety and welfare their colleagues service continuity expense management and community support all weren't doing well in during the many challenges hardships resulting from the pandemic.
Looking at results revenue went packs and <unk> 19 continues to be driven mostly by changes in demand for collection and disposal services, resulting from closure requirements or other operating limitations the markets, we service and the resulting levels of activity as those economies reopened.
As such the magnitude of reductions and the shake the pace of recovery of loss revenue varies by geography market size and customer mix.
By the end of Q2 about 53% of solid waste commercial customers and 42% of associated revenue.
Competitive markets, we track that had suspended or reduced service had reached out for resumption in service or increasing frequency up from 12% and 9% respectively. In early may.
Volumes and all of our solid waste regions showed monthly improvement during Q2 exceeding our preliminary expectations, resulting in solid waste revenue down 5.3% year over year on a same store basis.
Excluding the most impacted markets in the northeast in Canada solid waste revenues in the quarter, we're down about 1.3% on a year over year basis.
Our results in the period also reflect the company wide focused on cost control as volumes declined.
On quality revenue as volumes from term.
As noted earlier underlying margin expansion and solid waste enabled us to overcome.
$80 million incremental covert related costs.
In Q2, primarily related to frontline supplemental wages and the margin dilutive impact of acquisitions completed since a year ago period.
Cash collections also improved as we have driven a 10% reduction in dsos year to date, along with better than expected bad debt exposure and expense.
Looking beyond the financials, our top priority remains to health and welfare of our employees.
Specialty those experiencing unexpected hardships and we continue to invest in our communities in our business.
Frontline attendance remains near record levels.
Turnover and safety performance continued to improve.
Philanthropic efforts have been expanded in our communities to further support organizations the focus on women and children at risk and racial and equities at a local or national level.
Our normal waste connections scholarships more water to support employed children and their pursuit of vocational technical and University education goals.
Portion of Koby related Capex cuts early this year had been restored.
We're making additional technology investments to improve customer connectivity.
Produce machine vision and AI, it's onboard fleet camera systems in beta test our first electric garbage trucks later this year.
We're also on pace for another solid year of acquisition activity in spite of koby related logistical and diligence constraints.
Year to date, we have closed acquisitions totaling approximately $60 million, an annualized revenue, including an exclusive GE certificate collection in France, we're competing in Washington, and an integrated collection and disposal company with operations in Iowa and Nebraska.
In addition, we've completed tuck ins in Idaho, Missouri, New York, Oklahoma, South Dakota in Texas and have signed an agreement to acquire a collection of recycling company with about 40 million in annualized revenue, which we expect to close getting mid Q4.
Looking at recent trends solid waste volumes improved sequentially by about 300 basis points in July as compared to Q2.
The 53% of solid waste commercial customers and 42% of associated revenue and competitive markets. We track that if suspended or reduced service and subsequently reached out for resumption in service or increasing frequency by the end of Q2.
Since increased to about 60% and 50% respectively.
Looking at year over year results in July revenue on reported basis was down about 1.9% and adjusted EBITDA margin was down and estimated 70 basis points.
Reduction in DMP waste activity accounted for the entire year over year decline in revenue and exceeded the estimated margin decline for the month.
Price plus volume for solid waste collection transfer and disposal revenue declined 2.4% in July.
And was up 50 basis points, excluding Canada in the northeast our most impacted markets.
We acknowledge that the impacts from cope with 19 persist.
Recognize that Reopenings, maybe complicated by continued outbreaks and the in position of additional closer requirements.
As such the trajectory of any recoveries inherently unpredictable.
The ultimate impact to our business will not be known until we emerge from this period.
That said, we are encouraged by the demonstrator project ability of our business.
Insights from daily tracking Q2 trends and our July results.
On that basis, and assuming no significant change in the underlying economic trends.
We have provided our 2020 outlook as follows.
Revenue of 5.3 to 5 billion down about 1% year over year.
Adjusted EBITDA of 1.61 billion or about 30.2% of revenue and down 90 basis points from 2019.
Adjusted free cash flow between 805 million and 835 million or about 50% to 52% of adjusted EBITDA.
The expected decline in the MP waste activity for the year exceeds that year over year to change in consolidated revenue and accounts for all of the year over year change in adjusted EBITDA margin in our outlook.
Moreover, in addition to the over $20 million, an incremental quoted related costs year to date.
We have included about 50 basis points of potential additional could related expenses in the second half of the year.
Thus our 2020 outlook includes underline solid waste margin expansion sufficient to more than offset these incremental cobot 19 related costs.
Collecting the strength and resilience of our growth strategy in our differentiated approach to market selection.
We've also laid back in a portion of Capex cuts as our business has recovered increasing our expected capex to 550 million for the full year.
With year to date adjusted free cash flow of 495 million, we're well on our way to achieving our full year outlook and we remain opportunistic it presented at attractive offers to purchase additional fleet equipment or landfill acreage for future development.
Finally, we've already returned over 200 million to shareholders through share repurchases and dividends year to date.
Today, we announced the annual renewal of our normal course issuer bid authorizing the repurchase of up to 5% of our outstanding shares, which we will continue to approach opportunistically.
We also anticipate announcing another double digit percentage increase in our cash dividend.
Silver.
Looking back to the beginnings of the pandemic and concerns about the potential for double digit volume losses.
We couldn't have anticipated that would be in a position to provide our 2020 outlook with solid waste price plus volume growth of only a negative 200 basis points for better.
The strength of our pricing and the resilience of solid waste volumes, particularly in the majority of our markets has driven outperformance in the first half of the year.
Funded significant discretionary koby related costs.
And provided a hard jumping off point for the second half of 2020.
With that I'll pass the call the Marianne to review the financial highlights of the second quarter. Anna provided detailed outlook for Q3 elegant wrap up for heading into Q.
Thank you worthy.
The second quarter revenue was 1.306 billion for about $18 million about the preliminary expectations. We provided in may.
Better than expected recoveries solid waste volumes during the period.
Revenue on a reported basis was down 64 million were 4.7% year over year with almost half the decline due to lower GMP waste activity.
Acquisitions completed since the year ago period contributed about 45 million of revenue in the quarter for about 40.7 million net of divestitures.
So at least price plus volume growth on a same store basis in Q2 was negative 5.3% ranging from about flat, we're mostly exclusive west coast markets and negative 1% to 2% in our central and southern regions to negative 11% to 13% in our most impacted eastern and Canada.
Okay.
Pricing growth overall in Q2 was 4.3%, including core price of 4.5% inline with our expectation offset somewhat by 20 basis point reduction surcharges.
Pricing range from 3.1% in our more exclusive markets in the Western region to an average of over 4.5% in our more competitive regions.
Solid waste volume growth in Q2 was down 9.6% with the most impacted regions in the northeast you asked in Canada down 16% to 17% while volumes in our southern and central and Western regions declined between about 4% and 7%.
As we've noted our volumes largely reflected the pace and shape of shutdown reopening activity across our markets, which berries and depends on geography side and customer mix in each market.
The client activity by line of business in Q2 reflect decreases in all regions related to shutdown orders, including some markets that limited were prohibited construction activity.
Looking year over year results in the period on a same store.
Commercial collection revenue decreased approximately 7.6% with the most impacted markets in the northeast in Canada accounted for about half of that year over year decline.
Robot revenue decreased approximately 13% on pulls down about 12% year over year and revenue per pull down about 1% on lower weight.
So solid waste landfill average price per tonne increased 5% year over year, although revenue was down about 5% on the same store basis as total tons declined about 10% year over year.
MSW tons were down about 8% special waste down, 12% and CND down 18%.
Looking at Yankee waste activity, we reported $35.5 million MP waste revenue in the second quarter down about 45% year over year.
This decline in activity was associated with the drop in rig count on reduced expectations for future demand, which also resulted in our recognition of a $417 million noncash impairment charge for long lives DMP waste assets as we had portion.
Looking at Q2 revenues to recycle commodities landfill gas renewable energy credits or Rins.
Excluding acquisitions in the aggregate they were down about 9% year over year due to lower landfill gas sales and recycled commodity revenue.
Resulting in a nominal margin headwind of about 10 basis points well below the punitive impact a prior quarters.
At current rates for recycled commodity cinram their combined impact could be a small tailwind for the second half 2020, with lower recycled commodity values more than offset by higher year over year.
Adjusted EBITDA for Q2 is reconciled in our earnings release was 394.39.
21 million above our preliminary expectations due to higher revenue and stronger flow through from returning disposal and commercial collection Bob.
Adjusted EBITDA as a percentage of revenue was 30.2% in Q2 down 90 basis points year over year, but about 110 basis points better than our preliminary expectations.
With the entire year over year margin decline due to lower MP weighted activity. In addition, there was a 20 basis point drag from the margin dilutive impact of acquisitions completed since a year ago period, and another 10 basis point drag from recycling and brands as noted earlier.
Solid waste collection transferring disposal margins were up 30 basis points year over year in the quarter.
As notable reductions in third party brokerage and disposal cost medical expense fuel and discretionary items more than offset increased incentive deferred compensation and risking pool and over $20 million included related expenses, which included about five and a half million in higher bad.
Debt expense.
Fuel expense in Q2 was about 3.4% of revenue down about 50 basis points year over year on fewer gallon lower rates and CNG credit about $900000.
We averaged approximately $2.30 per gallon for diesel in the quarter down about 14% or 37 cents from a year ago period.
Our effective tax rate to the second quarter included as expected a 27.4 million dollar tax impact from 2019 do the due to the proposed IRS regulations from late 2018, which were finalized in April 2020 and impacted 2019.
As such our effective rate in the second quarter was 41.1% adjusting for this discrete item the underlying tax rate in Q2 was approximately 21.5%.
In line with our expectations for the quarter and the full year.
GAAP net loss per diluted share was 86 cents and adjusted net income per diluted share on adjusted basis was 60 cents in the second quarter. Adjusted net income in Q2, primarily excludes the impact of the non cash impairment charge to the MP segments and the discrete tax item as well as intangibles amortization.
And other acquisition related items.
Adjusted free cash flow in the first half of the year was 494.6 million or 18.6% of revenue and 61.6% of adjusted EBITDA.
Capital expenditures in 268.7 million during the six month period were up 14.9 million year over year.
Debt outstanding at quarter end was about 4.7 billion down from approximately 5.2 billion in Q1 due to the pay down of 500 million on our credit facility.
We ended Q2 with cash balances of 790 million in over $2 billion available liquidity.
Our leverage ratio is defined in our credit agreement with about 2.7 times debt to EBITDA and on a net debt basis, our our leverage remains at around 2.3 times debt to EBITDA at the end of Q2.
Our current weighted average cost of debt is approximately 3.4%, but essentially all of our debt that's fixed rate.
I will now review our outlook for the third quarter 2020, before I do we'd like to remind everyone. Once again that actual results may vary significantly based on risks and uncertainties outlined in our safe Harbor statement and filings we made the FCC and the securities commissions are similar regulatory authorities in Canada, we incur.
Page investors to review these factors carefully.
Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensive transaction related items during the period.
Revenue in Q3 is estimated to be approximately 1.37 billion.
We expect price plus volume growth for solid waste to range between negative, 2.5% and negative 3.5% with price in the range of 4% to 4.5% and volumes in the range of negative 7% to negative 7.5%.
In addition, we expect revenue for PMP waste activity to account for less than 2% of reported record.
Adjusted EBITDA in Q3 is estimated to be approximately 420 million or about 30.7% of revenue.
Depreciation and amortization expense for the third quarter is estimated to be about 13.8% of revenue.
That amount amortization of intangibles in the quarter is estimated to be about 32.6 million or nine cents per diluted share net of taxes.
Interest expense net of interest income in Q3 is estimated to be approximately 40 million.
And our effective tax rate in Q3 is estimated to be about 21.5% and now let me turn the call back over to the work toward them for some final remarks before Q any.
Thank you Marianne.
Again, our pandemic preparedness and playbook, the commitment and dedication of our employees strong operational execution and recovering solid waste volumes drove better than expected results in the second quarter and positions us to increase our outlook for the full year over the preliminary expectations, we communicated in may.
Our 18000 employees have stepped up throughout this pandemic to providing essential service as evidenced by the many customer expressions of appreciation extend it to our front line.
Providing a bit of normalcy during this chaotic and uncertain time.
We are closer new and better position company as we emerge from this pandemic.
I appreciate your time today.
I will turn call over to the operator to open up the lines for your questions operator.
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Our first question is coming from the line of Kevin Chiang with CBC. Please go ahead. Your line is open.
Hi, Thanks for taking my question this morning, and congrats on a.
Good good Q2 here.
Maybe if I could just turn to turn to pricing.
If I look at the the splits between Canada and the U.S. this looks to be below with spread.
In the second quarter is about 60 basis points no positive for Canada [noise].
Just one as we look out here should we think of these two numbers converging.
Overtime or do you still feel Lincoln.
Opportunities here to kind of.
Capture more pricing accounted or possibly use in the United States.
Kevin as you know weve.
Okay.
Where we completed the progressive transaction, we've talked about the needs to go in and reprice. The book, obviously were four years in two or more into the closing of the progressive transaction. So consists of what we communicated throughout last year and earlier. This year, we do see those converging over time, because we've worked through the book.
Hi, good what I would just add to that Kevin. This is consistent with the expectations that we had coming into the year.
Really our plate pricing is playing out as expected as you may recall, we had talked about the stepped down from Q1 Q4 and as we've been noted at the time. It was most pronounced in Canada, because you had that carryover of those outsize T.I.s, we did in prior periods.
That's not that's helpful and maybe this month my second question here. If my math is correct I think you're going to elaborate just sub 10 million revenue run rate per month.
He.
Just wondering like this one.
What you can do here to maybe take up more cost.
To to maybe reduce the decremental margins, if you think recount stay low for longer.
And then secondly, do you still see this as a standalone reporting segment or or doesn't make sense to eventually goal to send to what are your your regional segments.
Good question so.
First off I'm proud of the fact that we remain profitable.
Through the through the rapid decline as we've talked all last year, our business held up a lot better than any other company in that space as did our margins despite tremendous declines at a rig count.
So you saw the acceleration from Q1, the Q2 and that decline.
Our margins were still looking more like a collection company now than that of disposal company right landfill company.
But thats a testament to again to the asset positioning we still have.
And the tight execution that our folks have.
And so from that from an EBITDA standpoint, EBITDA minus Capex standpoint, it's still running positive.
From a segment standpoint, we have chosen to consolidate that segment into our southern region those to reagent sit together.
In the same office and so it made sense from a from a kind of a overhead basis.
And the command control basis to consolidate those too as you you may know.
The first note this overseas and southern region used to also oversea.
Our 360 and regional Vice Presidents oversaw threesixty is a for solid waste and so that person is now system RVP within that region and so we've kept the command and control, but consolidated where it made sense.
Thank you very much of a great.
Yes.
Our next question is coming from the line of Hamzah Mazari with Jefferies. Please go ahead.
Hey, good morning, Thank you.
My My my first question is.
Just just on free cash flow.
Yeah. It looks like you did almost 500 million first half.
Second half.
It seems more conservative.
But you are seeing sequential momentum in the business. So maybe if you could just talk about the puts and takes.
Some of the cost coming back maybe some conservatism, you've baked and do that guides, especially because some of your peers are reiterating free cash flow guide.
Which they had pre call Greg I think your guide is a little lighter than what you were thinking creek over to you know just walk us through high level thoughts on how you're thinking about that.
Sure well happy to start with the puts and takes the as you said, Tom and you're right coming in with 500 million and over 60% conversion in the first half of the year, we are assuming a lower conversion rate in the second half year I'd say there a couple of things that we know about to start with better higher.
Peaks in the back half of year. So for instance, cash taxes are heavily weighted to the back half of the year are there still about $90 million and cash taxes to calm and our interest expense, which stepped up as we extended the tenor of our dad and fixed.
We have the full impact that in the back half of the year and only a partial impact in the first half of the year. So there are some discrete items, which should should cause that conversion to change, but then I would say that that arguably it depends on how you think about what flows this year and what you think longer term about what I'm alluding to there would be for instance.
The deferral of payroll taxes, which as everyone is benefiting from men as in our numbers is about a $14 million benefit in the first half the year and the total for the years about $40 million and clearly we could show all of that benefit this year and the number would be higher from our guidance.
Similarly Worthington described in his remarks, the yes, so improvement, which also if you look at about three days works out to about $40 million as well and again, we could fully take all of that benefit this year, where we could think longer term, which as you know is more style to think about.
Setting ourselves up for smoothing that are out over multiple years.
I'd rather go into next year with an 80 to 100 million dollar cushion.
Then let it will flow through this year and start defending why free cash flow was flat to down next year.
Got it.
That makes a lot a sense and and then just.
His historically the waste business has lagged.
Going into or downturn coming out, but I would have a downturn.
This is very different clearly with a pandemic gets adjusted a lot quicker both on the upside and downside I guess my question is where do you think the rails. The strong sequential momentum in July is it just there you see a wave of bankruptcies and customer churn goes up or.
Sure.
Is it sort of something else.
D. rails the momentum.
Is it just the consumer of just.
Tons are just help us think through.
You know you've hired a strong almost V shaped recovery.
You know where do we go from here.
Sure.
First I'd say that as we think about our outlook for the year, our assumption really is that the recovery goes plateaued.
I think we'll be proven wrong on that but we're not going to bake into our outlook for the balance of the year the continued recovery.
Clearly there are some more impacted markets.
In Canada in the northeast that have all recovered about 40% of revenue not 50%.
As those economies continue to reopen as school resumes governments kind of start restaffing buildings I suspect that those markets will get closer to the 60% of recovered revenue that we've seen elsewhere throughout the system. So there is likely some recovery that but that we still expect.
That could provide further upside to our to our Q3 guidance and balance of your guidance I mean, obviously.
Volume.
Declines in July year over year, we're ahead of six handle on them and as Marianne said, we're guiding 7% to 7.5% Delta before quarter. So you've got to see where some of the question is as things do recover but without a doubt there are some of that business that has not recovered yet.
Where the lights aren't on where no one's answering the phone.
Likely won't come back.
And so we have to expect that.
Add scale takes some time, but clearly the good news for the industry goes a lot of it has come back like the industry as punching through some pretty good numbers relative to what's happening in the macro but without a doubt some business sets that as a comeback likely won't come back.
And then just lastly, I'll turn it over just you know on on your M&A pipeline or you are you just being more disciplined or or are you just seeing increased competition from from others that are.
Just doing more aggressive M&A.
Just a broader in terms of larger transactions and then even some of the majors.
Increasing their acquisition appetite and spend.
Just just is there any change in terms of.
Bidding activity that maybe more competitive.
Or is it just you know.
This year, just being disciplined and there's more M&A to come next year. As you had said. Thank you, yes look like as you know.
Beauty is always in the I'd be holder right I mean, what's attractive to one company.
I may not fit for another one company is willing to pay may not fit with another companies willing to pay me. So I can't speak for the transactions. Other folks are doing I know our transactions, we remain focused on market selection and asset positioning most importantly, free cash flow and as always we remain highly skeptical of any.
Any financials generated by banker, so thats skepticism hasn't hasn't changed so look that we said that this would be a high period. These past four years and M&A activity, you're seeing it happen.
You know there could be additional rush to activity by the end of this year folks still want to get into this year certainty of tax law.
So remains to be seeing how much more might get done during this calendar year or how much if there's momentum in place might naturally just flock into next year.
Because clearly there's there's concern out there.
Potential changes in tax law next year that could impact a lot of sellers.
Great. Thanks, so much.
Our next question is coming from the line of Tyler Brown with Raymond James. Please go ahead.
Hey, good morning, guys.
Good morning.
Hey, worthy and so I know servant leadership is a big part of your culture. It seems like times like these maybe when that model really shines if it even comes at a cost I know you called out the 20 million of covert but can you talk a little bit about what servant leadership means in times like these ended other kind of employee cost creep band that we may not have seen.
No it wasn't directly in that 20 million.
Well, it's a good question then we've always said that culture matters.
Finally, we think that's been a key to our success.
Look how we how we think about culture.
Combined with our decentralized operating model, what's really empowers local folks and you think about a time like this.
When lot of folks a remote and.
Really counting on the decision, making at a local level.
Our ability, but that leaders locally half of their front line.
You know its.
It's driven our success in this pandemic, that's how we're quickly able to pivot and not lose momentum.
Look I think every company is doing what they can.
For frontline employees, we've chosen to do it a little different right I mean weve.
I think we're the only company that's on supplemental wages.
We've chosen to pay our people not to work we've chosen to pay our people at their child care daycare issues.
We're supporting them through reported a relief we're supporting them in there in their personal tragedies I mean, what you think about our workforce and with 30 to 40 million people on some sort of government employment assistance right now a lot of those espouses of our employees.
And so it's incumbent upon us to to get more money in the front line, we did it through supplemental wages in the first wave we have other things in mining as Mary and so we're anticipating.
But likely that during the second or third wave, we'll do some other things the frontline look our incentive comp accruals were higher this year, we've not cut back on that.
We think that its people, we've always said that worked harder in a tough year to deliver results than than when they blow away budget.
We're not going to penalize, our folks just because of budget cut and targets got set right before pandemic relative to accompany that would have had a fiscal year starting in April that set different targets on the path with pandemic started I mean, so you've got to take carry people.
That's that's rooted in our culture.
And we're seeing the benefit in the end again, what we're doing for our customers.
We're seeing the benefit and reduce turnover, we've seen the benefit and improve safety.
It's just as a separate forward so certain get company throughout the organization.
Again, I think the foundational aspects that wrong and others put in place here for our culture and certain leadership.
We're paying huge dividends in this period of time and again, we're just scratching the surface of.
Of the payback that we'll see as we come out this pandemic.
Right, Yes, that's extremely helpful real quick Marianne so if we strip BMP away and we look at solid waste margins, but basically what is the embedded I may have missed it but what is the embedded Q3 Q4 solid waste margin guide and then can you kind of go through the puts and takes on year over year basis, It feels like maybe risk.
Cycling and rents can be a tailwind covert M&A a headwind and in some core expansion.
Sure so to the biggest difference between the back half of the year in Q2 is that the drag from me in key in Q2 was about 90 basis points and we're thinking in terms of more like a 130 basis point drag in Q3, and similar would be expected in Q4, so with that.
In slide is that underlying solid waste margin expansion of around 70 basis points in Q3 in spite of the fact that it.
As Worthing said, you got to about 50 basis point Cove. It cost built in there acquisitions about a 20 basis point drag and recycling and Rins are essentially flat as I said in my remark that could be a little tailwind so maybe a nominal tailwind distinct.
Okay perfect just real quickly one last one just for simplicity purposes, just based on the deals that you've done today, how much revenue should we see from M&A in 2020, and then how much rolls into 21, just from a modeling perspective.
Sure. So in Q3 in Q4, you're right about 40 to 43 million.
And that brings you to a total of about 185 million in 2020 from all of the deal. So the 170 from last year net of some some divestitures plus about 30 from the deals we've gotten done this year and then that says that 70 would roll for next year and anything that's yet to close will be additive to that correct.
Correct, Okay, all right. Thanks for time.
Thank you.
Our next question is coming from the line of Brian Maguire with Goldman Sachs. Please go ahead.
Hey, Good morning Hope you all they're doing well understand say it's out there.
Thanks, Brian.
Question on the.
On the third quarter sales outlook it looks like.
May just be conservativism looks like you're guiding for sales to be down 3% in July comp.
July was down 2% just wondered if there was anything unique in the July comp there would have made that a little bit better than what you'd expect for the full quarter and just thinking about some of the different end markets, you've got things like schools looks like we see around Houston, rather going to be shut to.
To start the school year so.
In a much like July you wouldn't have that necessarily in the comp I wouldn't think that as you get it back into some seasonality later in the year do you think that the year over year.
Range could could have some unique headwinds from things like that.
Yes, as you know.
We tried to give outlook that we can meet or exceed.
Mike back to what I've said earlier.
That I think your question as once again, exposing the cushion we think about when it comes to revenue.
We are guiding 775% negative for volumes for Q3, but July had a six handle on it. So you think about the.
If we're if were too conservative buyer percent that means there's 10 to 15 million of potential revenue upside as we look at the quarter playing out, but obviously, there's still to through the quarter to play out here relative to just closed in July.
One thing I would say, though is.
Look at a pandemic.
You know in the and the project ability to business as we talked about before we do constant rolling forecast here.
Our <unk>, we are July revenue exceeded our expectations by about one half of 1%.
So when you think about how we've dialed into business to think we know what's going on.
We're kind of narrowing.
On the scope of expectations and so could we be.
July trends continue absolutely degrees of magnitude again.
Our numbers like 10, or 15 million people shouldn't go too much higher than that but it's always better give something in our pocket just like keeps on going our Bakken our margins and something at our pocket on free cash flow.
That makes sense.
And then just a little bit more of a.
The bigger picture question just around pricing over the last couple of years.
It's been a positive backdrop, I think you guys and others in the industry and cited the need to recover.
A lot of cost inflation also the need to offset the lower recycling prices.
The question is just really sort of around what what will support pricing going forward because it looks like everybody in the industry is getting a ton of cost benefits way more than anybody thought kind of in this environment recycling as you know maybe temporarily but kind of poked at said back above water for a lot of folks.
Yeah, I know the industry discipline will probably hold so there there will be pricing, but would you expect naturally just in this more deflationary environment, we would see industry pricing starts.
Normalized towards the lower end of the range, where you guys have historically talked about it being.
Sure I would say, Brian as we continue to think about it communicated the way, we historically have which is at the spread the CP and.
And so to your point to the extent that costs are under control and as a slow down that as we're seeing we think that that would suggest that pricing on a reported basis.
Stepped down to meaning less positive as as we move ahead really consistent with the way we came into 2020, where we said it would step down over the course of the year and that's playing out as expected and you again would would look ahead to 2021, and therefore is it possible. It's in the three and a half.
I want to 4% range Yup, that's consistent with what we said in the past, but again the spread to see a.
It's still running we'll be running 200, plus basis points abella, adesto, but that kind of number.
Yeah, Yeah, I think I wanted just trying to make is in a quarter like twoq everybody seems to be getting the benefit from the the lag in the pricing benefits, but you're getting the cost kind of deflation.
Front.
Which is a good thing, but again I think you guys will be able to BP in that spread to cpis that makes sense I.
Just lastly from me when if you could just talk about.
How much over time might have been down year over year and if there was any benefit in the quarter from lower diesel prices are just a lag on some of the past or is there anyway to quantify that.
Yes, I mean, we quantify at least from a fuel standpoint that fuel as a percentage of revenue was down about 50 basis points.
A little bit of that was CNG credit, but most of it was the.
The decline in diesel prices.
Year over year.
And with with respect to overtime as we said last quarter, we really saw the depth of that really coming coming into our call in may where we said overtime had been down about 25% at the bottom and if those costs were coming back yet because the business with returning so less about.
Just on that.
Okay is it 25% at the bottom and then as the volumes came back some of that came back as well probably.
Yes, we're back to having overtime be about 18% of total hours, which is kind of where we were going into the pandemic.
Got it makes sense, okay. Thanks, very much good luck in the quarter.
Our next question is coming from the line of call late with Deutsche Bank. Please go ahead.
Hey, good morning, Thanks for taking my question.
Just wanted to see how the recovery has progressed in states that we're kind of early to open in the scene rising cases.
Out July, let's say, such as Texas, and Florida anything notable there in terms of kind of the revenue impacts as those cases started to spike up.
Sure. So happy happy to give you. Some some anecdotal information we haven't seen really any step down in any of those markets, where which I think it's what you're referring to where you've seen us a second wave or a surge in places like Florida, or Texas as Worthington when we look.
In the aggregate the recoveries around 50% and in the lead less impacted markets, meaning not the northeast or Canada. It averages, 60% and for instance, I look at a market like Houston and its above that 65, 70% recovery and really no material change over the last three months.
Again by way of example, I've been with contrast that with something like New York City, which really didn't open up and still down at more like 30% recoveries are well below the average, but really we haven't seen any step backwards yet in our numbers if something were mindful of NFC. It's one of the reasons to be conservative as.
We think about how the quarter plays out.
That's helpful. And then just kind of a bigger question is there anything about this kind of pandemic that is making making a change the way you operate your business or your strategy for the long term you know whether it's on what markets you want to be active in participate if you want to have exposure to GMP or just anything on the cost side any cost take out. So we think that may.
The permanent.
You know its.
Turning to of course is the last couple of years people been asking us. So you don't have as much urban exposure. So do you think you're missing out the migration of people into the urban environments, and we said no. We've got a nice balance we've talked about secondary suburban markets and resilience and.
And the price retention ability there and why we still think those are the best markets long term, but no. It's good to have a balance mix, obviously, we have a balance and some.
Some large urban markets.
We're obviously new York is slower the recovery to see that the numbers, but no look we see no change in our strategy, we like our current footprint, we like all the businesses that we're in.
They all work well together.
It's obviously, we had a big impact this year with what's happened in the crude market but.
What makes us look stupid one year, we might look like geniuses in two years right.
And so we'll continue to play the hand, though that we hold right now.
Got it they're good luck in Q3.
Okay.
Our next question is coming from the line of Michael Hoffman from Stifel. Please go ahead.
Thank you Hi, Worthing Marianne Joe there in the background.
I think the questions.
On your side.
For all of this pandemic happen, we often talked about Incrementals on collection kind of 35, 40% Incrementals.
Then disposal 60 to 80.
Clearly you do better because you manage the cost what how do we think about the sustained incremental.
So low end come up because you're going to retain some of this.
Savings.
And so now we get to talk about a better overall incremental going forward.
Yes. Thank you you got to separate.
Things like costs, it don't come back in the business versus the incremental or decremental conversation.
And in my mind at least.
When you look at.
Decrementals and Incrementals.
The pandemic played out completely different based on you know the impact to the pandemic was having the revenue.
In markets, where you might have had a 4% to 6% or 6% or less pipe impact to volumes.
The loss of revenue was was a cute on the flow through.
It was a very high fixed cost embedded cost structure because of those examples we weren't really relatively rerouting, if you're thinking the business is going to recover.
You know in six weeks or eight weeks, we weren't cutting heads in that period as well. So you held on the cost as revenue float off.
But as you've seen as revenues returned in those markets. The Incrementals were also extremely high also.
Contrasts out in markets, where you had severe contractions like in the northeast in Canada, where there you were more aggressively and proactively parking trucks as needed.
Managing your head count et cetera, and so you know the the Decrementals and Incrementals are not as high as compared to those other markets. So the already of course as the markets that performed better on the topline, we're having different type of experiences on incrementals and decrementals them than the others.
But clearly on the cost side discretionary items that we control.
Look different as we come back.
As economy recovers because how how we operate as a company, we'll we'll tweak modestly.
We will get back to face to face, we will get back to two in person training.
On the times right.
We won't get back to town Hall meetings with our front line at all times of the day at any time of the day. So those kind of cost will come back in.
And I can't wait for them to come back again, we'll start paying bar bills again, we'll start throwing parties again.
And that's not insignificant when it comes the got no but so.
So look it's different the incrementals decrementals, Michael but by type of market, given how the pandemics, it and that and the shape of the costs that came out of the business as Marianne described which ones did and which ones come back in.
We will be a little bit different coming out of this.
Okay.
Price.
You did very clearly telegraph back in February no. You thought you do five to five and a half a year and then it would trend down sequentially sort of.
Slide five and a half the first half four and a half the four in the second half.
The 100 basis points difference between your original view or to Q and what you report into Q is all related to pandemic and then the mess it sort of a question that statement for foreigner half for Threeq you.
I think is what you originally were going at it.
Does that is that accurate yes.
Sure and maybe just to clarify it's really a little different from what you said because it's really has been playing out just as we expected the to the extent said, we deferred any PPI. That's a nominal amount it's about $10 million in Q2, which we've layered in the back half of the year So to your point.
We said that pricing would step down over the course of your I don't think we put too fine a point on saying that the first half five and a half I think instead, we said Q1 is outside.
Because of the timing and price increases that carried forward rolls into Q1. So we really see this that there's no change in the way we think about pricing obviously, we're mindful of the timing given the pandemic and so we're sensitive to that but we thought we'd exit the year at around 4% and I think that was your green.
Thats whats implied by the numbers that we presented and I think we guided for to have to five for the full year not not five five would happen obviously as the year plays out we still expect the full year looked like 4.5%.
In pricing so at the low end of our original expectation again had we not defer some of the pricing the Mary and talked about we would have been closer to the upper end of that range.
Great and then the other point, but while you talk you always have talked about for the 20 plus years I know a spread to an index, but the.
More important spread is your internal cost inflation and that's probably the bigger message is that you're very disciplined about managing that spread consistently so it creates the appropriate leverage.
So it's kind of update guidance question implied.
Notes.
I got to look look up which mean by that but yes, we agree with.
Your implied question that statement [laughter].
Okay, and then on the M&A, just still unclear Marietta suddenly layer rollover is deals done today, including but not the 40 million that might close in Fourq you.
Yes, that's correct.
Pardon me partner Pardon me, Michael that would be the entire hundred million, so meaning its 30 million from the 60, that's already gotten down 30, plus 30, and then sporty essentially the whole amount role. So next year is what like communicated so meaning no credit has been taken for that.
In 2020.
Right and.
Okay, and but you were assuming it's happened and therefore, there's the rollover. Okay got it. That's those are all of you have already so we've already signed a definitive agreement on that Michael We're just waiting for the closing date and what I wanted to make clear is that there was nothing from that deal in our 2020.
Right got it got it and then typically you're talking about MP being a little 50 ish percent margin business when things are normal where is that right now.
Well right now again I called it more like a collection company in some cases right now we're running closer closer to 20%.
Okay.
Right that had again if you look at the last time, the MP dip I think the bottom was about.
10 to 12 million or so or revenue per month and at that level, we held onto about a 25% margin.
And that business at the edits that its depth right now the depth is running a little bit below 10 million or so a month and that's why you see the decrementals coming off the.
Come down as well as revenue comes down below that prior to.
Right that was April 16, and we got back to 50 $60 oil by this fall and newer back right micro margins right.
Yes, I don't suspect that.
Look I don't want to say I'm, calling bottom in Q3, but.
I think a lot of companies love drilling companies have kind of said hey, this year is over.
When I look at having rigs return.
For whatever reason as the magical one one or the new year starts right.
Right so lot of folks have their capital programs.
Kind of kicking in in January of 21, and and so this year I think we can pretty much anticipate what's going to happen for the balance of the year and then the question will be as was the pace of any recovery issue as you know flip the calendar into 21.
Got it and then lastly on free cash.
And nobody actually has revised returned to guidance that's equal to last year, if you're not if you're excluding the cares act so everybody's below plan.
Proportionally, though what we're looking at your differential.
As a percentage of the previous you're at a better percentage of the previous ex any cares acts and what are your sort of your comments about why that's the case for waste connections. So I think that should should be drawn out.
Well I think it's just our style is not to.
No not let everything flow.
And so what we're going to make sure. We're running this for the long term, we're going to make sure. We remain optimistic as we move through this year case or some.
Answers to make additional unexpected investments that that are very attractive.
And and still deliver.
At are higher than what we're committing to.
I still look back and say look converting over 50% of EBITDA free cash flow is still a metric that others can hit.
And so that should be enough at this time right now given the shape of the economy and let's.
Let's hold onto a lot of cushion as move into 21.
Got it right.
There's so much.
Our next question is coming from the line of Sean Eastman with Keybanc capital markets. Please go ahead.
Hi, guys. Thanks for taking my questions Sean.
Nice work this quarter.
We see some big Big parties next year.
Yeah.
I wanted to go back.
I just wanted to go back to M&A.
Just trying to understand what you are planning around you know you mentioned there could be this sort of Russian activity in the second half.
But is that what you're anticipating and planning around from a capital deployment perspective.
This year or should we be kind of thinking about more of a normalize 125 to 150, an annualized revenue as kind of a base case.
And also on that topic, you know seeing a deal get done in Washington, and the second quarters interesting you know any kind of anything to read into there in terms of activity and the franchise markets from an acquisition perspective.
Yeah look I think to your first point of Hey, an average year 125 to 150.
We easily have that in our sites for the full year typically what's what's driven numbers well above that has been maybe one or or even maybe to uniquely size transactions of 100 million or 50, or 75 million or seven revenue.
Look right now right, we always think hey, if we if we just bought the averages do 125 to 150, keeping to our strategy keeping to our metrics.
And that's a great year.
And if we can do better than that Thats really up to the sellers and and them driving the timing what I would say is any seller that wants to get a deal done this calendar year needs to be in the shoot.
No no later than the into September and.
And so time is running.
For those sellers.
And we should know more on our next call with regards to.
What might get done this particular calendar year.
Got it but I guess overall message maybe even into next year.
Likely to be active and 21 as far as you see it today as well.
Well again as you look at.
Lineage transition and tax issues, you know drive a lot of things move our sellers to come to the table.
And so I think the the question will be around taxes is this the last year of certainty because if everything flips in DC.
Would would tax laws change next year or would it take them into 22 to get their act together and change tax laws I think there's.
There is a kind of assumption out there that taxes are going up.
And the certainty of what you got this year could drive people to it's able to share or if they think they want to make the bed that it takes more than a year to get.
Change done in DC that they might have optionality for that into 21 Lady transitions will always always exist right.
But what we know that folks that may want to sell their business and the next two or three years, you know are likely to come to the table this year because again.
Just as our businesses performed well just as you've seen other people in the sector perform well you know, it's we can all look at the pandemic and and and understand how to value added value. These businesses.
Yep understood and I'm, just going back to sort of the pace of recovery question.
In terms of that group of businesses, where you mentioned the lights are still off they're not picking up the phone I mean.
You know how good of a handle do you have on you know those potential.
You know that bucket that potentially doesn't come back and gets cancelled and.
You know how do you manage through that I'm, just curious to get your thoughts there.
Yes, Thats a good I mean, that's a really good question because it brings up a couple of things may number one.
So very early in the pandemic really preparing for the pandemic. We've spent a lot of time with our folks.
Try to try to make sure we all have our arms around not booking revenue.
For a customer that may not pay us issued playing forward.
Because that runs the risk of of.
Future Unwinds that can be that can be punitive and so we spent a lot of time and educating folks around that and also we said, we're not going to change our bad debt policies, just because we think they're close for month or 45 days Gee, let's extend the timing for payment.
Which is why I think you've seen us.
At 5 million or so of incremental bad debt bookings those businesses reopened you might see some of that unwind in the future and so you got to our view is you've got to be cautious in revenue recognition.
And if you're over conservative that's fine.
And you've got to.
Keep your standards on.
On on bad debt accruals and reserves and if it gets bet. If you have over estimated it that means you've got come back in future periods.
We spent a lot of time trying to get our arms around that.
To make sure the the controls are in place.
Got it literally.
Track as we've talked about the daily tracking we have by market by commercial account.
The commission tracking as revenue recovers weeping or salespeople on recovered cobot business et cetera, I mean, there's there's a lot of data a lot of inside to support everything we're doing what I would add to that Worthing said is we also track cancellations and given the fact that it's as low as that number is meaning that it's in line.
And with historical averages that about half a point that tells us that the cancellations arent in there. So we're glad that we've been conservative to all those points that were the main about how we think about the business is coming back.
Got it that's very helpful. Thanks, very much guys.
Sure.
As a reminder to register for a question. Please press the one followed by the four.
Our next question is coming from the line of Noah Kaye with Oppenheimer. Please go ahead.
Hi, good morning, and thanks for taking the questions I think your last comment [laughter], where they I think your last comment actually really play into my question, which is we've heard some interesting commentary.
From waste peers this quarter around the role of technology, and improving operational efficiency and some of those benefits kind of coming to the four during the pandemic on we know you run a more decentralized operational model, but you've also been rolling out and crews connectivity as part of your 2020 vision in cap tools things like that so it's what would you call out in terms of.
The impact those investments had from an operational perspective.
Keep running a good business and keeping people save.
I mean look I mean weed out as you know, we're not folks that talk about use of technology and how it's going to take head count out to do this or do that and the other sub modeling these sort of savings et cetera look running a good business.
And driving additional improvements while the beat operations.
The health and safety and welfare people in their communities. That's just doing the right thing.
Our savings to savings come along with that absolutely.
Do we get hit in other areas of the PML all the time to absolutely and so look this is like a portfolio approach to to help you in those move and we talk about the strength of pricing and how overall you know the March to operating leverage and what that means to the PML, but to delays or.
One or two things and to try to tell you what our expectations are.
Would be focusing on the good and and kind of turning of line died.
Oh, Thanks second nature Alright.
So that the predictive maintenance tools I mean, that's that's very powerful for four for what that can do with.
Alone engines, and reliability uptime and reduction or road calls. This this machine vision and AI that at the end camera systems are moved too I mean, that's not there to say I gotcha, that's there to make sure that.
We can improve on a real time basis machine communication to our employees around a rolling stopper around staying at Alain around wearing a seat belt around using a cell phone or whatever it is and the cab maybe we're not trying to say I got you were trying to say lets just.
Instead of waiting for an event recorder to record something bad that's happened already recorded a huge inertial shift in the in the into vehicle, let's try to avoid those those from happening.
And so technology I think is.
Whether it be into fleet that'll benefit all companies.
Whether it be through engagement tools, whether it be through.
Online for learning management systems, and the LMS and now we've got a said okay. We understand the pandemic, we've got business that you want to align servant leadership online.
Looming video training lead driver training et cetera, there's so many things we're doing.
That you know if this pandemic happened before the onset allow this technology in the existence of the Internet and bandwidth both would've been a hell lot different than.
What we've all in this industry and other industries have been able to do commissioning period of time.
Well I appreciate that and you know I think add to your point, you don't necessarily to call out quantify.
From a financial perspective the impacts.
And yet you just went through a very detailed list of tools that you have now that maybe didnt exist in the past and no question I think we all.
Have found benefit in some of those technology tools. This time around so maybe just one more.
Around the opportunistic capex spend clearly you've got trucking.
Scenery demand generally depress used truck pricing down. So is this just primarily buying more new trucks that better pricing to lower the age of the fleet or is there something else you would call out and if I can just add to that I mean, you mentioned your trailing trucks with electric power trains. This year I'm sure that's very small part of the spend.
Just are you seeing eases potentially economical are getting more economical from the total cost of ownership perspective or is this more just about trialing technology and positioning for differentiation on municipal bids.
Thanks, Good wells, we'll see on the Navy side I mean, we've been evaluating.
Different units for the past three to four years and have waited until.
The payloads and the battery life were consistent with a the payloads of diesel truck right and that the and that the batteries were consistent with the kind of route hours that we have right.
And so we finally have the first product that we decided to beta three different units.
Three to units at three different markets to which will be all levy.
In one of which will be easy chassis and.
And.
To get diesel chassis in the NPV body.
And so we're going to see how they performed obviously, we did our expectation is that while a fully the might cost to WEX.
Our hybrid TV diesel might cost 50% more.
Look the payback.
In reduced maintenance fuel usage et cetera.
It could be in that five to six and a half your year span.
And so it can make sense in certain markets to deploy obviously west coast markets in some areas like California, there already looking out ahead, and and looking to mandate aviation move into the future.
And so while CNG was a nice way stop.
In this industry to reduce the use of diesel in the cleanup emissions. Obviously that is just a stop on the way to easy.
And so we've got a we've got to be at the forefront of that and others are doing the same thing something similar to what it comes to too optimistic use of additional cash flow for Capex. I mean, just this past month in July I mean, we've we've invested a significant amount of money in the Quebec Province.
Both on a on a very large tract of land.
To to for future development for our include existing landfill.
For resource recovery Park as well as we further our resource recovery initiatives in that marketplace. We've also acquired to Opportunistically.
Recycling facility out of bankruptcy in that marketplace.
So there are things we're doing in various markets.
Yes.
As we say opportunistically to take advantage of some unique things and.
That were presented.
Thanks, very much for the color appreciate it.
Our next question is coming from the line of Stephanie with JP Morgan. Please go ahead.
Hi, good morning, Thanks for squeezing yen.
I guess, just a clarification on the tight it implies that the fourth quarter revenue will be lower than the third quarter and I would think that volumes would improve in for Q versus three Q. So is that implied that.
Our price in the fourth quarter or is that just reflective of lower energy revenue.
Sure. So just to clarify your right what's implied would be a step down Q4 versus Q3, which is actually consistent with the seasonal decline that you typically see across the industry. In Q4, you to think about the way that the quarters low it's three to four war. So you stepped down.
Yeah.
Of course between three to three in Q4 and is worthy instead, we haven't assumes that there is continued expansion coming into the back half of the year and in fact, you noted described as the plot. So that's how we think about the way we guided Q3 and again stepping down in Q4, So we think thats the right.
Ways to be thinking about that at this point in time and arguably there's been less of the seasonal pickup that you've seen so we could be in fact conservative even in Q3 does play out with that.
If you look at this point about seasonality.
You look back overtime, there is what between a four and 6%.
Nicole sequential decline in Q3 to Q4.
Obviously to be conservative we've assumed the upper end to that.
And again to our point about wanting to meet or exceed expectations.
As that comes in and performed a little bit better because to your point about things opening up during Q3 them that again provides room for upside.
Okay, Okay that makes sense.
And I know, it's still early but I guess what are your expectations for it the energy business into next year and I guess longer term do you still think Gibson attractive business GBM.
Yeah. If you look at we've been in that business now have this kind of span of assets.
For almost eight years.
I think over that period of time, we've gotten about 800 million of EBITDA off of it at about 600 million of EBITDA minus Capex and so what I would tell you is it's been a great business.
And it will be a great business.
Obviously, there peaks and valleys.
You know when it's when there's a valley like this you are seeing corresponding reductions and fuel costs right and so for PNM standpoint, I think about.
What I call it a hedge but as that business comes back I guess, what else is happening the cost of fuels going up.
So, we'll we'll offset that cost of fuel increase with the with the recovery in that business. So.
No its a.
Again, rather we're at a low it's a unique low.
And obviously as rigs start coming back we'll see some some pickup off the bottom in that business as well our folks have done a tremendous job and again managing the cost to to maintain profitability in that business.
Very attractive profitability, especially compared to some of their peers.
It's just that youre seeing a more pronounced impact to our PML. This year, because we did so well so long last year in its early this year me a lot of other companies in that space got washed out last year and so they're biennale impact was last year and so you don't see as much piano impact.
France's out of our peers that are also in that business. This year.
We just did that much better than them.
For longer.
Okay got it thank you.
As a reminder to register for a question. Please press the one followed by the for.
Our next question is coming from the line of Walter Spracklin with RBC capital markets. Please go ahead.
Hi, good morning, or the good morning Marianne.
I'd like to start.
With the lasting impacts structurally from cobot in a couple areas and I want to start here with acquisitions.
You know do you find that given what has occurred and the tenor of the change.
In the acquisition activity in the nature of your discussions.
In the last month to month three months do you get a sense any I know you mentioned the election coming up but there is more urgency for those that were contemplating selling down the road to really get this done now and has that in particular changed youre negotiating leverage where.
You might be able to get a lower multiple for those transactions where.
Cobot versus pre cobot or are you seeing valuations around the same level as as before.
Yes look gold plated companies are just that.
And they know what they're worth we know what they're worth.
Pandemic I know pandemic, a gold plated they've done fine to the pandemic.
Some of its tax for ever from a timing standpoint. Some of it is just outright being tired I mean, it's you know the been added so long.
You know they went through the period of time were stopped upon employees and some of their markets. The now you fast forward into a pandemic here's an additional struggle you've got the government in some cases paying more money for folks to stay home versus show up in some of their markets and so it's just a it's a.
It can wear yet and so yes, I think some of that is driving.
Timing as well.
Well look without a doubt.
I don't I don't think what some people are playing with the effectively free money.
Then it's a it's tough to tell you that.
Valuations right now are coming down obviously, we've talked about over the past couple of years, how they've gone up one to two turns in EBITDA, primarily coming out of tax reform with the fact that more cash flow was was a crew to the buyer because more cash we're staying in the business.
Obviously taxes go up.
There's a risk that obviously evaluations will come down.
Taxes go up and the but in the stock market corrects any valuations are coming back down again as well so.
There is a unique time period, which we said a couple of times in the past that valuations kept getting a better than this but when money is free they definitely can't get any better than this and so I think theres been a.
For some folks a rush to the exit.
Others have no interest and so I mean, it's just the.
Such a great business or mentally not prepared to do it no people these onto it and those will be deals in the future. Some stuff we got done.
Like the transaction, we got done in Iowa, Nebraska, I mean that first offer was done in I think you know the late nineties.
And 21 years later, we finally got to close.
So sometimes these things take some time.
It's quite a closing time.
Can we move now to the impact that it's having the Kogut post cobot on on pricing.
Obviously, you've been you could.
Theres been some municipal contracts for example that have been.
Based on a per household bases, which arguably you'd want to move too.
On a on a volume basis, how will that figure in two year over year pricing will you get.
Will you will your pricing go up to reflect some of the potential downside risk that you've seen developed with cobot 19 or will that just adjust to some volume level that if volumes are up than your than your price goes up a quarter. How do you change your pricing strategy now that you've had the the experience.
From Covet 19.
Yeah look we have been a company that's complained about our quality of price and quality revenue on the residential side.
And so we're not going to start complaining right now look pricing for us as simple I mean, you've got a subscription side of the residential business.
Where you have more flexibility on the on the pricing structure, obviously of municipal contracts generally are peg to either rate of return or some form of CP.
The depending upon weather, where those contracts throughout the us and in some cases, we just have bad contracts that were still working through.
The other came along with a progressive transaction that.
We are mostly through I mean this past.
Month, we got a very large price increase and one of our contracts.
That corrected that one.
I think two years ago, we got a very large price increase in another one that corrective that we've got another one that will be correcting likely in Q3.
And if that one gets done that just really leaves one more left our two more left in that system of inherited contracts that just for market reasons contractual structured reasons pandemic reasons et cetera, a host of things that are.
That are happening that we'll likely see those reprice as well.
Or will exit.
Again, we don't do this for practice, we've been doing for practice for years in some cases based on that along with on those assets.
In the right thing to do for the market for our people et cetera, and our capital.
It was to corrected or move on so the pricing dynamic as we've seen it.
Hasn't changed.
Relative attractiveness to residential hasn't changed.
And again, it's a market selection does matter.
And how you operate in those markets and move pricing.
You know matters as well and the one thing I would add to that is certainly on the west coast and some of those franchise or exclusive market entry. It can create an opportunity next year to get outside pricing to the extent there are costs, including the types of costs, you're describing that other people have highlighted like higher weight, but more importantly negative.
Volume and the opportunities and therefore getting better pricing them than we would have otherwise been entitled to so I think epic to where these point everyone mix of business, including the exposure to franchise markets, where there is that recovery mechanism that factor in.
It makes a lot I appreciate the time as always.
Sure.
And there are no further questions at this time.
Terrific little or no further questions on behalf of our entire management team. We appreciate your listening to and interest in the call today, Marianne and I are available today to answer any direct questions that we did not cover that were allowed to answer on the regulation FD Reg G applicable securities laws in Canada.
Thank you again as always we missed being able to to meet with you in person and look forward to speaking with you at upcoming virtual investor conferences or on our next earnings call. Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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