Q2 2020 Covanta Holding Corp Earnings Call
Good morning, everyone and welcome to Covanta, holding Corporation's second quarter 2020 financial results conference call and webcast.
An archived webcast will be available two hours. After the end of the conference call. It can be accessed through the Investor Relations section on the Covanta website at Www Dot Covanta dotcom. The transcript will also be archived on the company's website at this time for for opening remarks, an introduction I'd like to turn the call over to date.
And man S Covantas, Vice President and of Investor Relations. Please go ahead.
Thank you and good morning, welcome to Cabana second quarter 2020 conference call. Joining me on the call today will be Steve Jones, our president and CEO and Brad Helgeson, our CFO will provide an operational and business update review our financial results and then take your questions. During their prepared remarks, Stephen Brad will be referencing certain slides, we prepared to supplement the audio portion of this call.
Oh.
Those slides can be accessed now we're after the call on the Investor Relations section of our website Www Dot Covanta Dot com. These prepared remarks should be listen to in conjunction with you slots.
Now onto the Safe Harbor another preliminary notes.
The following discussion may contain forward looking statements and our actual results may differ materially from those expectations information regarding factors that could cause such differences can be found in the Companys reports and registration statements filed with the FCC.
The content. If this conference call contains time sensitive information that is only accurate as if the data. This why broadcast July 30, Onest of 2020, we do not assume any obligation to update our forward looking information unless required by law any redistribution retransmission or rebroadcast of this call in any form without the express written consent of Cabana is prohibited.
The information presented includes non-GAAP financial measures because these measures are not calculated in accordance with U.S. GAAP. They should not be considered in isolation from our financial statements, which have been prepared in accordance with gap.
For more information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparative purposes. Please see our press release, which was issued last night and it was furnished to the FCC on form 8-K.
With that I'd like to turn the call over to our President and CEO, Steve Jones, Steve.
Thanks, Dan and good morning, everyone for those using the web deck, let's begin on slide three.
As a company we worked very hard since the early days.
I've covered 19 to adjust our business. The reality is that a current environment. While it has not been without challenges I'm very proud of the team at all we've accomplished we followed up on a strong first quarter performance by generating $96 million of adjusted EBITDA and $62 million or free cash flow in the second quarter.
These are solid results considering the environment, we are in and it clear indication.
The underlying resiliency of our business model, we provide essential services with our critical infrastructure that are supported by long term contracts. This combination provides the foundation of our business.
And leads to our door ability and predictability.
As discussed in May on our first quarter earnings call. We responded rapidly to the cobot 19 crisis.
Instituting new policies and procedures to ensure the safety of our employees.
I also maintaining the continuity of our operations.
This was no easy task, but during the second quarter, we experienced limited operational disruptions and were able to maintain a steady flow waste to our facilities.
We also took immediate steps to reduce costs through several proactive measures, including eliminating all nonessential travel significantly reducing discretionary spend.
Enacting a corporate hiring freeze temper temporarily reducing administrative salaries and implementing a furlough program.
These efforts enabled us to manage costs, even as we saw an increase in cobot 19 related expenses.
As I sit here today, we're in an environment, where the waste volumes have improved meaningfully from the initial weeks of the pandemic. Our operations are steady and we see limited near term commodity volatility.
The most visible area of improvement resides in the recovery of the waste markets for the entirety of the quarter. We saw same store average tip fee prices down less than 1% year over year. However that one number doesn't tell the entire story.
As we anticipated the majority of our waste stream remained steady and our team responded to the reduction in commercial and industrial waste by effectively sourcing replacement volumes of spot municipal solid waste for our plant from our transfer station network and new customers.
Over the course of the quarter with modest improvements in way flows as commercial and industrial activity picked up we were we were able to reduce spot tons and improve our mix. The net result was that tip fee prices bottomed in April and improved slightly in may be for a more meaningful increase in June in fact June.
Tip fee prices were actually higher year over year.
Included in our tip fee volume is the profiled waste sourced through Covanta environmental solutions.
As noted in May some segments of our profiled waste stream or under significant pressure, most notably auto and international waste.
Profiled waste revenue bottomed in may with revenue, 19% lower year over year. However, similar to trends in municipal solid waste. We saw returned to positive year over year growth in June and profiled waste revenue ended the quarter down 5% versus prior year.
The combination of better mix and improved pricing helped to partially offset lower volumes.
One month Doesnt make a trend, but we remain enthusiastic about our unique ability to provide comprehensive non landfill solutions to commercial customers.
I'm not seeing a reduction in interest in this market.
As manufacturing ramps back up we have seen and expect to continue to experience a return of our typical volumes, which will help to further drive overall tip fee prices.
Outside of our waste to energy plant Covanta Environmental solutions continues to source ways for our fleet of material processing facilities.
With the quarter or for the quarter.
Environmental services revenue was down by 17% year over year, but again, we saw improvement as we move through the quarter similar to waste energy profiled waste.
This business provide solutions to commercial and industrial customers and as production rate slowed so did waste volume.
However, many of our end markets, including chemical consumer products and Pharmaceuticals remained steady one characteristic that makes this business a little different than the rest of Covanta is is the higher level of variable costs.
Lower revenue and inbound volumes, we were able to flex our costs, which significantly reduced the bottom line impact.
These financial results highlight our ability to manage through this environment and this is not by chance our operating teams reacted decisively to the changing environment to secure our facilities and adjust our protocols and procedures to ensure continued operation.
Our facilities operating normally with no material disruptions. However, this environment does not create challenges for us and has increased our cost of operations in certain areas one area, where we shifted our original plan for this year is maintenance.
Where we took tactical steps to manage risk in most years, we spend between 55 and 60% of our total maintenance dollars. During the first half of the year. This is by design as this spring shoulder period is an advantageous time to perform work given seasonally lower waste vault waste flows typically lower energy.
Prices than more temperate conditions.
With the onset of Cobot 19 in March we decided that order to reduce the risk to our employees and ensure the availability of qualified contractors and necessary parts.
We would selectively differ outages and reduce scope for the time being.
The second quarter progressed, and we became more comfortable that our procedures were effective in mitigating the risk of virus transmission, we started to reschedule our outages with more of a tilt to this summer and the second half of the year.
Lastly, as I mentioned earlier, we took action to partially offset these impacts by reducing costs. We recently ended the salad salary reduction in furlough programs in early July as business is beginning to normalize. However, we're keeping a tight rein on costs with limited discretionary and teen the spend through the balance.
The year and our corporate hiring freeze remains in effect with that I'll hand, the call over to Brad to discuss our financial results in greater detail before I close out with the discussion on our longer term strategic initiatives.
Thanks, Steve Good morning, everyone.
I'll begin with an update on the financial impact of the covert 19 pandemic on slide four.
During our first quarter earnings call in early May we discussed the areas, where the pandemic was impacting our business most significantly and provided a few specific financial data points at that time.
As the market an operating environment have continued to evolve it makes sense to update this commentary to the situation today.
As we've discussed the economic slowdown has impacted volumes of both commercial MSW and profiled waste, which has required us to source replacement waste streams at lower prices impacting our average tip fee.
Early in the second quarter, we estimated the run rate impacts to be four to $6 per tonne as an average across our 50 plants.
As waste volumes at our mix improved in May and June the negative pressure on tip fees abated, and we estimate that the average impact for the quarter overall was approximately $3 per ton.
At the positive trajectory exiting the quarter. The impact is currently running at an estimated one to $2 per ton.
Of course further improvement over the balance of the year in commercial and industrial waste volumes and therefore, our mix in average price will be dependent upon the pace of economic recovery.
Environmental service services revenue was initially lower by 15%, 20% on a monthly basis and ended the quarter down approximately 15% overall due to coated.
However, while we had originally estimated has declined to comment a decremental margin of approximately 50% the business was able to adjust variable costs, even more effectively than anticipated ultimately limiting the impact on EBITDA.
We estimate the cobot is currently impacting revenue by 10% to 15%, but looking forward. We're confident in our ability to continue to manage costs in response to further revenue pressure in this business.
In facility operations as discussed last quarter, we're incurring higher costs for plant safety, including for personal protective equipment and facility cleaning.
In the second quarter, we incurred $3 million of these direct cost of operating in the pandemic and we expect this to persist over the coming quarters and likely into 2021.
As Steve discussed, we adjusted our maintenance outage schedule in order to reduce risk in the initial weeks of the emerging pandemic and as a results now expect heavier outage activity than typical in the second half the year as we execute our full original scope of maintenance.
Note that this represents more than a timing shift as performing rescheduled work in this environment is now more expensive and you'll see that reflected in a higher revised estimated range for maintenance spend in 2020 in the appendix to the presentation.
Another consequence of maintenance deferrals as that we experienced an increase in unplanned downtime during the second quarter.
That impact is reflected in our in our outlook for tonnes processed for the year and is also a factor in the increased estimate for maintenance expense that I just mentioned.
Offsetting many of these impacts of the proactive cost reductions that we announced in April which we originally targeted at $15 million to $30 million.
We realized a little over $10 million would be savings already in the second quarter.
The initial range contemplated our ability to flex in response to the evolving situation and as business conditions have improved we're now unlikely to push towards the top of the range.
You'll see that we have not reintroduced guidance for adjusted EBITDA and free cash flow for 2020.
Well the operating environment remains challenging business conditions, particularly in the waste market clearly improved and we maintain a high degree of visibility on our business as expressed in the metrics were providing.
However, the course of the pandemic and resulting policy responses and economic consequences will ultimately determine our overall results for the year and we don't want to try to predict what is entirely out of our control.
I'll now turn to review in quarterly financial results beginning on slide five.
Total revenue in the quarter was $454 million down $13 million or 3% from the second quarter of 2019.
Not surprisingly the impact of Cobot 19 on waste and service revenue as we've discussed was the primary driver here.
Lower commodity market prices for recovered metals reduced revenue by $4 million on a year over year basis with the ferrous scrap HMS number one index and the old Cath high side scrap aluminum index, lower by 23% and 18% respectively.
Realized market energy prices were essentially flat compared to last year.
Asset divestitures reduced revenue by $4 million in the quarter, while long term contract transitions added 2 million.
Now moving on to slide six.
Adjusted EBITDA was $96 million in the quarter, a $2 million increase compared to Q2 2019.
Excluding commodities adjusted EBITDA improved by 5 million as our cost reduction program and the deferral of certain planned maintenance outages more than offset the lower revenue in the quarter.
Commodity prices were a net $3 million headwind on adjusted EBITDA again, driven by lower metals prices.
Now turning to slide seven.
Free cash flow was $62 million in the quarter compared to $21 million in Q2 2019.
Higher adjusted EBITDA contributed $2 million year over year, while the impact of lower maintenance capital expenditures, including the impact of capital type expenditures at our service facilities was $4 million in the quarter on a comparative basis.
Clearly the largest benefit to free cash flow in the quarter was working capital, which was driven both by reduced accounts receivable versus last year, an increased accounts payable related related to maintenance activity conducted late in the quarter.
We've now reported year to date free cash flow $81 million, which reflects a much heavier weighting to the first half than typical for covanta, largely resulting from the significant working capital inflows in both the first and second quarters much of which is timing related and will reverse in the second half.
Further our maintenance capital plan for the year calls for $155 million to $165 million of spend and to date, we've only spent $72 million or less than half of that which is also not historically typical.
In summary, while we're not guiding free cash flow for the year, you should not extrapolate a full year outlook based on the reported number for the first half.
Now please turn to slide eight where I'll review our growth investment activity.
As discussed on our last quarterly call. We plan to focus growth investment in 2020, primarily on our UK project and the startup of the taps facility.
We spent $8 million on taps in the first half and expect to spend about $15 million in total this year.
In the UK, we exercised an option to secure the land where the Protos project will be built.
Novanta made this investment of $8 million in the second quarter, but we'll be reimbursed for its project development costs, including land acquisition by the partnership when the project reaches financial close.
I'll wrap up my comments by touching on the balance sheet. Please see slide nine.
At June 30, net debt was approximately $2.5 billion down 8 million from March 30, Onest. Our consolidated leverage ratio was six times flat with Q1 and the senior credit facility Covenant ratio was 2.2 times, which is also flat and well below the covenant limit of four times.
Available liquidity under our revolver was over $450 million at June 30.
Our balance sheet remains stable and provides more than ample liquidity as we navigate this challenging period.
As a reminder, we have no material debt maturities for several years and no covenant constraints of any kind on our business plan, either now or anticipated in the future.
Before we move to Q in a I'd like to hand, it back to Steve for some concluding comments, Steve. Thanks, Brad I want to take a moment to circle back and remind you of our fundamental proposition and growth initiatives at our core where sustainable provider of waste services.
And all of our growth initiatives build off this foundation.
The secular drivers we've discussed in the past, including declining disposal availability in our core markets and growing demand for sustainable waste disposal remain in place. We don't see these trends changing in any way with the pandemic enable our primary domestic growth goal, which is to drive improvements in waste prices.
Offering sustainable solutions to our customers requires us to be fully committed to sustainability for all of our stakeholders, including our host communities. A key facet of this is our investment program that drives productivity improves our already low level of emissions.
I have made many of these investments in the past.
Most visibly. Our addition of a bag house to the Essex County, New Jersey facility going forward and as discussed in our sustainability report, we're committed to making further investments in our facilities, particularly those in environmentally burden communities.
Another set of long term opportunities that fits squarely within our sustainability goals as our metal recovery and asked for use initiatives.
Since 2012, we've increased non ferrous metal recovery by 220%.
Which reduces ash disposal and land usage recycles usable usable materials and reduces the need for metal mining looking forward, we expect to further increase our non ferrous metal recovery, both in our plants and VR total asked processing system or taps.
At our first taps plant in eastern PA.
We continue to work through the testing and commissioning phase our current goals are to increase production improved metal recovery and ensure reeves ability of the remaining aggregate we will use the balance of the year to fully prove out its capabilities prior to full scale operations.
We have long discussed our goal to grow our footprint in the UK market.
Where there are significant need for new waste to energy infrastructure, and where the logic of this technology over landfill from an environmental and sustainability standpoint, as well recognized.
During the last two years, we have seen tremendous tremendous success on the project development front and the benefits of these investments are in view.
We're now in full construction of three facilities with initial financial contributions from projects occurring in 2022.
Another project Protos is now in its final development phase with financial close expected late this year.
Lastly, before we move on to accumulate a one to express my gratitude to the entire Covanta team, our frontline operations personnel kept our facilities running as well as anyone could in an environment that no. One envisioned six months ago at the same time, our back office and administrative people transition to working from home without missing a beat instead.
During the payroll reduction and furlough programs was a painful decision and I'm very pleased to ended.
The shared sacrifice enabled the company and mitigate the financial impact of the pandemic and ensure the company emerged stronger. So thank you all for your ongoing efforts with that I'd not now like to open the line for questions. Operator can we move on to the Q in AG.
Thank you we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too please limit yourself to one question and one follow up if you have further questions you may reenter the question Q.
The first question comes from Noah Kaye from Oppenheimer. Please go ahead.
Thanks. Good morning, appreciate you're taking the questions and I'm sure a lot of folks you don't want to dive into.
The waste price and mix trends.
So let me actually that aside for a second ask you about some of these longer term strategic initiatives.
And start maybe with just a little bit more color on taps where are you at in terms of proving out process.
Demonstrating the reuse ability of of the aggregate with customers just help us understand kind of whats your which are working through over the course of the year.
Yes, Thanks, no it's Steve Jones here.
I was just out there last week.
And actually.
Dan and.
So some of the folks Brad we're out there we're in the process of processing Ash and we've made our first sale the metal.
That were reclaiming from the asked processing system.
We've gone through that process.
And we'll produce in aggregate and sand and what we're doing now in the aggregate in sand are going through the various test protocols.
That are required in order to use that type of product in the in the in the construction products market. So so all of its coming along nicely.
We are putting a little more water cut capacity waters important in this type of process and I'll say overall. This is this is somewhat of an R&D project in that.
We're tweaking the composition of equipment.
As we figure out how to get even more metal out of the out of the action and we've been successful from that standpoint. So so it's all working very well up from my perspective.
What we need we need to do now is to start to ramp up on rates and Thats, what I mentioned in my prepared remarks, as we go through the year through the rest of the year, we want to ramp rates on how much ash we're processing.
We'd like to get our first sale of aggregate and we're talking to both asphalt companies in in around a Pennsylvania, New Jersey and cement companies.
Global fill concrete is an application for the aggregate aggregate and sand that we produce so all that so all thats coming along nicely at this point, so I'm pretty pleased with where we stand.
And we'll kind of ramp up in volumes from here.
Okay, great thanks for that color.
Just don't produce on photos.
Maybe help us understand why did you buy the land.
Presumably that's a sign of conviction project will go forward and maybe what progress. They are you making in terms of.
Finding a new EGPC.
In driving that part of the process.
Yes, our land option was going to expire and so we felt and as we got closer to the expiration date, we looked at where the project returns where where we were on the APC. So good question are good facet of your question there.
We are comfortable enough to go forward the land purchase so that should give.
Investors are pretty good indication, how we feel about this project.
On the.
On the PC side, we're talking to two EGPC providers now both of them are are you know our reputable suppliers of engineering procurement construction services. So we feel good debt to one of those will be the winning party and we'll be able to move forward.
With that and the other thing that we just recently engaged to the is the lenders. So we've got the lending group kind of back together now and starting to talk and so we're moving ahead with documentation on them on the lending side and trying to get the financial close. So we expect that will be later this year, but protos and the land purchase.
This is an indication proteus is moving along nicely.
Okay terrific and last just wanted to touch on or unpack, a little bit the comments earlier around.
Increased investment in some of the environmentally burden communities.
Can you just tell us understand what is.
What is the decision calculus on undertaking those investments what's driving that.
Does that pretend any kind of increased maintenance.
Our capex beyond kind of normal levels.
And what is the benefit too.
It's interesting back in 2011, we developed and environmental Justice policy and community outreach policy I wanted a few companies that have that kind of policy. So we realized that where we operate we've got people who are around us and we've got to be.
Doing our best from an admission standpoint, and so in our sustainability report we'd indicated that we are going to do a number of projects in environmental Justice and overburden communities in so.
Thats become more.
Yes more in the news recently, we thought that as part of this earnings call. We make it clear that we're committed to that we've been committed to.
Being a good operator in and around the communities, where we operate and that.
We'd move we're going to move forward with.
With those commitments that we've made and again there and you take a look at our sustainability report and it's quite good I think.
This in our maintenance numbers all that's included there.
When you when you make these types of investments you do them for both.
Missions reasons, but they also have a productivity benefit and so.
They all they all make sense from a number of different vantage points.
And we'll continue to look at those investments and make those investments as we move through the next couple of years.
Okay perfect. Thanks, very much I'll jump back thanks.
The next question comes from Tyler Brown from Raymond James. Please go ahead.
Hey, good morning, guys.
$20 good morning, Tyler.
Hey, Brad So I know you guys elected to withhold guidance and I totally get it but it also feels like you've given us some bread crumbs here to kind of run with so and please stop me at any time, but I think the way that I'm thinking about it is there's kind of three big buckets of Delta relative to your original guidance first you've got.
Lower waste revenues from tip in service fees, Secondly, you've got higher PE costs may be lower metals and higher maintenance and then three you've got caught cost saves to the positive. So just to start are those kind of the big deltas relative to the original guide.
Yes, I think that gathers together the bread crumbs pretty well.
Okay. So if we were to look at each of those buckets and I know the tip fees are fluid, but based on what we know right now does it feel that that waste bucket is maybe a 25 million drag if I kind of sum it up to.
So again versus the original guidance thats between tip fee service fees and maybe volume.
I mean, it depends on how you do the math for the rest of the year, but of course the pieces to that are we've been specific about revising our guidance for service fee revenue, we lowered that by 5 million.
We've lowered our outlook for four plant production.
And to fee volumes by about 100000, so if you apply.
Our our average tip fee that puts you in the ballpark of probably another $5 million and then then the big variable I think for the balance of the year as is.
Is weighted average 50 prices of course, we were on plan in the first quarter. Everything was was it was normal we ended up about $3 a ton negative to original plan in Q2 were one to $2. Now so is that one to $2 is that what we see through the rest of year do we see further improvement orders or.
The pandemic take a take another turn for the worse, what we'll have to see in the coming months, but those are both are definitely the pieces.
Okay. Okay. That's helpful. And then I do want to come back. So you mentioned 3 million MPP. He costs first off is that in maintenance expense.
Other operating costs. Okay. Okay. So you've got 3 million of PE costs assume that stays with us. It. So it looks like you lowered nonferrous, a little bit and you've got obviously, that's higher 15 million maintenance, so that that bucket feels like thats, another say 30 million drag versus again kind of the era.
Annual guidance as well does that seem fair.
I think you're in the ballpark.
Okay, and then you've got this positive 20 million on the cost offset so maybe I'm crazy, but.
If you use the bread crumbs it feels like maybe EBITDA is tracking 30 to 35 million lower relative to the original guidance. If I was to again kind of follow those those bread crumbs.
Yes, I think the way you've added up the data points makes sense.
Okay.
I'm going to leave it at that but I really appreciate the time.
Okay. Thanks. Thanks.
The next question comes from Mario quota Lachey from Jefferies. Please go ahead.
Hi, guys. Thank you for the time.
Just kind of wanted to dive into that increased expense a little bit.
Going up by about 15 million and just wanted to see a slight us what's what's driving that is is there.
You've obviously put some expenses into the into the back half of the year, but I guess you the actual increases that due to the friction in actually doing the maintenance in their social distancing or timing of ships or.
Are there any other pieces inside of that that would be driving it outside of that are more corporate related rather than doing more work.
No it's really it's really.
Like you said Mario it's the friction associated with doing this maintenance think about this we doing this maintenance at at a later point in the year, particularly in the hot summer months. So we generally do this maintenance in the shoulder season.
Where's cooler.
So we're doing the maintenance and 60 degree weather now we're doing these 90 degree weather and when you get inside of boiler I think most investors would understand this but you get inside one of these boilers. It's already hot so so there's there's less there's more frequent change out of workers.
You need more rest effectively we are very concerned about heat stress, we've been doing a lot of safety contacts around heat stress as weve.
As weve encountered some issues around that so we've been really careful from that perspective.
Contractors are a little more expensive in this environment.
Our teams for example, it used to have maybe to contractors to it to a room.
When they were traveling the now because of Pan the pandemic. It's one contractor to have room, so to that kind of friction in a tougher climate more frequent breaks as you put it.
That are driving up the cost I think my view is if you look going forward. This so well get smarter at this like a lot of things. So as the pandemic has gone on I think were our productivity is increasing we are getting we're getting better at dealing with potential heat stress for example.
But there is a friction that that's that's that we're running into at this point.
Okay. So thats. The then obviously you're not guiding 21, but as we get into next year.
You should see either all of that are part of that come out of the expenses.
You had better timing or you guys in the dual during the summer months or.
That is at the right way to get out it yes, because you think about it next year, because we figured out and I said this in my prepared remarks, we kind of figure out how to do maintenance in a co bid environment, we'll be doing these doing the maintenance again back in the in the shoulder season, So we'll get back to do and maintenance in the normal period of when we when we did it so you'll see that.
Friction dissipate.
Okay, Great and then and then just just one on pricing and I guess, we'll being a little more specific with from a geographical standpoint.
Obviously, the mix is hurting pricing, but I guess could you could you break out the impact between maybe what that looks like in the north versus what that looks like in the south and then eating.
And then also what this pricing look like in those geographies on a like for like basis as well.
Yeah, Hey, Mario its Brad So I think the short answer. The question is the business, where this has impacted is our merchant business, which is almost entirely in the northeast along along the eastern seaboard.
So.
The to the tip fee businesses in northeastern business. So what we're saying about the that business as a whole is a kind of a regional comment I suppose.
The business that we have in Florida.
In contrast is predominantly a service fee business that I touched on on the impact we're seeing there as well, but when covanta talks about merchant waste prices, we're really talking about the northeast.
Got it okay understood.
And then have you guys provided what the end market exposure looks like for profiled waste I'm, just trying to get a sense for I guess, which parts of that business are coming back faster than others, obviously, you're seeing demand pick up and commercial and industrial businesses, improving as things rebounds from from the pandemic, but.
Have you guys provided the exposure profile we schedule.
So the areas that we got hit hardest on and I mentioned this in my prepared remarks, our international travel, which isn't coming back really.
At this point in auto and auto is starting to come back. So it's really really autos autos.
Probably the biggest driver we we've been pretty steady in pharmaceuticals chemicals, those those types of.
Those types of markets have been been pretty steady so it through the pandemic.
It's auto auto dropped off and now most of the auto manufacturers are back in production.
Great. Thank you so much.
The next question comes from Michael Hoffman from Stifel. Please go ahead.
Thanks, Steve Brad and Dan.
I was trying to be created figure out how they get one question and asked them with five different questions and one that sounds like I guess, just keep asking them.
[laughter], Brad could you update us on what the decremental now is for yes.
Yes, well in the second quarter was effectively zero I mean, we we yeah. We were down you feel about 15% we estimate due to covert in the quarter do were down a little more than that year over year, obviously, our plan had been to grow that business year over year.
And we saw very little EBITDA impact in the quarter front, yes, it's interesting Michael the we actually did we talked about furloughs, we did a furlough and the administrative.
Home office area.
But.
The folks and CES did even further furloughs.
So that we could we could flex our variable costs down.
And so again you saw that the impact we saw from the revenue line didn't really have much of an impact.
Didn't didn't flow through to the EBITDA line.
Could one get carried away Ingo you did such a good job that's volumes starting to recover costs come back on slower and there's margin.
Tailwind in the second to.
Yes, I think there is yes, I think the.
Dr., Paul Stouter, who runs that group I think he's feeling pretty good about the second half of the year as things start to load back you know the revenues look back on.
Okay, and then on the volume side can you frame for us.
Whereas the recovery of the percent that's under contract and the what's the recovery of the percent that's under spot that was spot how would you score that on a percent of recovery from the.
The debt.
Yes, Hey, Mike with Brent.
Yes.
Before we are probably not in a position to get too precise on on the percentages.
Between one of the other.
But the but sort of a little bit of a higher level spot volume was was for us materially down in June.
And Thats, what and Steve commented in his prepared remarks that bid on a year over year basis. Our average tip. Your June was actually up year over year.
In a lot of that was of course, the profiled waste coming back contracted volume coming back and spot and spot getting kicked out in fact from the plants I think there were some probably some onetime factors impacting June for example.
In the in the industrial area.
Volume deliveries that were probably held back in April and May.
Keep flooded in when the doors opened in June.
So that should normalize over time.
Also with the increased downtime we had for outages.
With that reduces the need for spot waste, which just naturally.
Reduces the pressure from that on the weighted average to fee.
So that'll sort of normalize again going forward at that we think the one to two dollar.
Net impact on on where we thought we'd be originally.
Okay, if I could tiers of a little bit.
Are we better than halfway recovered on the contract side are we still below.
Hi, Ken how about it and have at least where are we relative to.
Yes, I think we are simply just just based on the.
The difference between out of the gates, we felt like we were hit by four to $6 to add on and now it's now with one too.
So there was a dramatic improvement from.
When we spoke to you all in early May to now.
There's no we're seeing we're seeing we're seeing a pretty good improvement Michael from from that perspective.
Okay.
I'm just trying to get I can't we have to figure out the cadence, but I'm just trying to figure at a.
Does one to two turn into zero to one turns and so plus one.
Kind of 3412, and that's how to think.
Good morning came out at the right way, though Michael I missed that you've mentioned in his last time is it a Nike swash here is.
How is how that how that moving up from from where we are today right.
Working capital well, how how do we think about that cadence of the rolling back off is that a heavy warner period or the other or is there going to come off relatively smoothly, how do I think about that.
Well, a big benefit we saw in the second quizzes, Brad Big benefit we saw in the second quarter.
Was growing accounts payable related to the fact that we did a lot of maintenance work later in the quarter and just frankly didn't get a chance to pay the bills. So.
And then which has been which is normally it's just the way that fit the working capital moves around the the the scoping of the spend.
So so thats, specifically should reverse in the in third quarter. This month August.
So it really then the question becomes what's the working capital position at the end of the year and we're not really in a position I think anymore to to predict that with a lot of precision, but net net.
You absolutely, we'll see working capital I think on balance as a negative across the second half I.
I will say something along those lines on on because I saw some of the some of the other waste companies, we're talking about credit risk and things around that.
We saw good receivables.
Good receivables performance in the in the second quarter and our day sales outstanding is right pretty much right on top of where we were a year ago. So we're not we're not getting and again I.
Picked up on some people worried and for some other companies about the receivable side, we're not we're not worried at all we've we've had strong receivable performance. So good cash collections still on plan Hey, This is working capitals, mostly a payables issue and would you expect to be without it.
A number of positive or negative working capital for the year.
Thats to be determined yes, I think it'll certainly be negative for the second half where it ends up on balance positive negative for 2020.
TBD.
But but again, it and Steve Steve mentioned it when I mentioned in my prepared remarks.
And I think given the environment, it's definitely something we want to highlight.
Accounts receivable was a component of the strength in Q2 with the smaller of the two between APC they are but.
But it absolutely was.
The strength.
Which given the concerns that we have had and and our natural for for that side of the balance sheet. In this environment I think is really really good performance.
Thank you for taking all of the question that wants to appreciate it.
Sure.
Next question comes from Jeff Silber from BMO capital markets. Please go ahead.
Thank you so much.
I guess I wanted to continue the Breadcrumb trail that that Tyler started maybe that you guys elongated in the last answers to Michael up everything that you've said would it make sense that we would see negative free cash flow in the second half of this year.
It's possible yet possible.
Okay, Great and then just another out cash look question I'm, assuming you had some benefit from payroll tax deferral from the care is actually if you can just quantify that for us.
No we didn't we didnt avail ourselves of that.
Okay, all right that's good now.
And I guess, a bigger picture picture question one of your competitors announced earlier this month the acquisition of a hauler again part of a vertical integration strategy.
Is that something you guys might be considering over the next three years.
Yeah, we looked at this over time and I'm going to comment on their strategy, obviously, Jeff, but we've looked at this over time, we found that we can get plenty of waste because of where our facilities are situated to our geographically. So we havent, we haven't seen the need to get waste on wheels.
Again, we can.
Weve shown through a lot to different periods of time that if we need to pull in more ways. We can do that.
And when we showed during this pandemic quite frankly, so I.
I don't think you'll see us kind of moving in that direction and quite frankly, we've got a slate of we've got a slate a full slate of investments in the UK, you and I've talked about them.
You know with so a lot of our capital right now is really focused on UK investment taps, and then pain paying down debt and.
Thats not in that order, but.
They're all they're all kind of ended in their together.
So yes, I don't to answer your question I don't think you'll see us putting wheels on wheels on the road.
Okay, that's great and just like a sneak in one more I think last costs quarter, we talk a little bit about there were some press speculation about you guys getting or a bidding for a new facility and I think was Pascoe County, Florida can we get an update on it.
Yes, so we're in a sole sourcing.
Discussion right now with Pascoe County.
It'll it'll take some time so we're we're in the early stages of decide to talking to them about what their expansion might look like like a lot of 'em up places a lot of places it several places around the U.S., there's opportunities to expand these facilities as the.
In this powders look at their their 10 year waste solid waste planned and Pascoe County has been growing from a population standpoint, and so are starting to think about what they want to do as is the population has grown and so.
More to come on that but it's kind of early in this in the discussions, but you will see and there's a there's a handful of these opportunities.
In the US you will see us doing us projects here over the next several years.
As a as these municipalities come to grips with their sought their future solid waste programs and Jeff. It's Brad I'll, just add a comment just to properly calibrate expectations around these opportunities. So as Steve mentioned, the pascoe opportunity because that one happened to have been in the press and it is indicative of the types of offered.
Communities were seeing in our in our portfolio.
But but these processes move very very slowly by their nature and so.
As to the expectations.
People, probably shouldn't expect us to have kind of quarterly updates on on on any of those situations.
Okay fair enough. Thanks, so much for taking my questions sure.
The next question comes from Brian Lee from Goldman Sachs. Please go ahead.
Hey, guys. Good morning, Thanks for taking the questions.
[noise] had a couple of follow ups, maybe just first on the maintenance expense a lot box.
No the $15 million to $20 million increase here it sounds like it's mostly totaled related.
But on a net basis I supposed to be higher.
Just given the 15 to 25 million in the cost reduction program is being reflected.
As part of their maintenance expense and Opex increase so yes first question on that is is the 15 to 25 and cost reduction is that going to flow through all on the maintenance expense and OPEC side or does it show up elsewhere in the PML and then secondly, how much of the 15 to 25.
Sort of sticks.
When when things kind of normalize and.
You're not having to deal with some of these elevated expenses that you're doing what's right now.
Yes, Hey, Brian it's Brad.
So to be clear none of the now 15 to 25 range on the cost reductions.
None of that impact the maintenance line really you see that in the yesterday line and in other plants operating expenses.
As far as projecting forward to next year award or come to when there was a normalized operating environment.
The majority of that have that have that cost savings will unwind it at that time.
So it's really put in place as a shock absorber to the extent that business conditions worsen.
So.
Obviously, we we put that in place for this year I.
I think that being said, though naturally there they're like many companies there are probably some areas, where we're going to be.
Reassessing more more generally and fundamentally what our cost structure should be around things like.
Travel and entertainment I mean, that's sort of an easy one I can't imagine.
Sitting here today that we're going to be traveling next year as much as we have in the past and I think again thats probably.
It was for just about everybody.
And then other other discretionary expenditures that we really tightened rains on this year.
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Maybe that maybe that leads us to reassess some of those expenses going forward. So generally speaking I would say that the 15 to 25 is onetime offsetting the benefits that hopefully our onetime this year.
But but it but I think they may open up some opportunities for us to reduce the cost structure in a more permanent way going forward, you're going to see US me, particularly pushing on that because I think there are opportunities as we've kind of retreat re reenvisioned. How you do your job I think there's ways to get the cost stack down further.
Yeah.
On an ongoing basis so yes.
Okay, Great that's correct.
And then I might have missed its on the prepared remarks, but.
The increase in goes Capex tied to international development can you give us a bit of a breakdown as to where it all.
Spend is focused here and are you, indicating any type of acceleration in the timeline or would this always sort of kind of the implicit plan and it's just now becoming more efficient idea in the capex guidance. Thanks, guys.
Yes. So so this is Brad so the increase was was essentially entirely the purchase of the land for the Protos project.
That wasn't necessarily are our plan to to purchase it when we did.
It's just that we based on the timeline to that project the option to to acquire that land was expiring in may and so we had to make a decision.
So while it doesn't indicate necessarily a change in the timeline of the project. We're so focused on getting that project.
Financially closed and into construction later this year.
It is indicative and Steve made this comment earlier it is indicative I think of our confidence in in where that project since.
Primarily with pulling together the.
PC arrangements for construction.
Okay, that's great and is it typical that you by the landlord.
The least on kind of look what's typical in terms of.
And then we'll need new developments that you.
Approached in the past whether in the U.S. or where it will also.
You can go either way I mean, you might you might enter into long term lease 99 years, which is effectively buying atlanta or or or you by the land. So it it all depends on on the particular project.
And with this investment.
Ideally.
If given the flexibility we probably would have.
As purchase did financial close because covanta is going to be reimbursed for for that investment by the project now of course, we will be a part owner in the projects, but our partners will will will will reimburse us.
So you're going to get perfect World Thats the way, we would do it because the circumstances around this required us to make a decision earlier and therefore it shows up as as an investment on Covantas consolidated financials today.
Okay understood makes sense thanks, guys.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Yes, I looked at thank everybody for joining us on the call. This morning and for your continued interest in Covanta.
Stay safe, the well and have a good day and also have a good weekend. Thanks, thanks for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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