Earnings Call: Q1 2020

May 12, 2020

Future events and developments or otherwise. This call will include a discussion of certain non IFRS measures. A reconciliation of these non IFRS measures can be found in our filings Canadian and U. S. Securities regulators. I will now turn the call back over to Patrick, who will start off on Page 3 of the presentation. Thank you, Luke. I would like to start by thanking all of you, both equity and debt investors for sticking with us through one of the biggest stock market declines since the Great Depression. Given management's equity ownership, we are in this together for the long haul to continue creating shareholder value over the years to come. When we took GFL public at the beginning of March, none of us thought we were at the start of an unprecedented global health crisis that has brought personal and economic disruptions that we have seen from the shutdowns and other measures taken by governments across North America to stop the spread of COVID-nineteen. Despite the significant impact on general economic activity resulting from these measures, we delivered an exceptionally strong quarter, growing adjusted EBITDA by nearly 25 percent to $223,000,000 and completing over $1,000,000,000 in M and A in the quarter. When we were on the road for the IPO in late February, our recurring message was about GFL's resilient growth profile. Our first quarter results are a testament to our ability to deliver on that profile. Let me first and foremost, importantly, that none of the success in managing through the pandemic will be possible without our employees. Our top priority since the start of this crisis was and as we begin to navigate through the loosening of government restrictions continues to be ensuring the health and safety of our more than 13,000 employees. To protect our employees, we took immediate steps including setting up risk management teams of our senior leadership and operational leads to identify, assess and respond to the changing internal and external dynamics on a daily basis and to provide real time direction to the field to address issues as they arose. We implemented and have continued to follow physical distancing protocols as recommended by public health authorities across all of our operations, including work from home arrangements where appropriate and we eliminated all non essential travel. We have invested in enhanced PP and E and sanitation practices and increased the frequency and depth of cleaning of our facilities and our highest touch services at all of our facilities. As an essential service, many of our frontline employees have continued to come to work every day and the measures that we've implemented have proven successful in keeping them safe. The loyalty and dedication of our employees have continued to deliver our essential service during these unprecedented times is truly inspiring and something for which I am extremely grateful for. We have also been touched by the outpouring of support from our employees shown by our customers and communities. We have in turn given back to our communities by continuing our financial support of local charities, including through our first our Full Circle project and the donation to local hospitals of medical grade masks that we had in stock to support local healthcare workers. In terms of COVID on our financial results for the quarter, the impacts we saw vary greatly by market and were largely dependent on the characteristics of the rules of the shutdown that were imposed in each market. The COVID related impact on our solid waste revenue in Q1 was mostly attributable to the reduced volume in our commercial and industrial collection business during the last 2 weeks of March. Restricted economic activity from regional shutdowns reduced demand for our IC and I collection services. With the timing and scope of the shutdowns driving the magnitude of their impact on revenue in each of the affected markets. Our residential collection business held up very well and actually outperformed in those Canadian markets where we are paid by the ton under municipal contracts. Also, a relatively lower proportion of our revenues coming from volume based post collection activities, mitigating the overall revenue impact from the reduction in C and D and special waste volumes into our landfills in the quarter. We saw the greatest volume impacts in the primary markets in which we operate, most notably Toronto and Montreal, where stay at home orders were put in place earlier than other markets and covered a broader scope of service offerings. Volumes in our secondary markets where we generated almost 2 thirds of our solid waste revenues were far less impacted. Our pricing during the Q1 was very strong contributing 4.9% to revenue growth. We continue to see pricing discipline in the industry and as of now we have not experienced any significant pricing related impacts from COVID. As we said on our investor call in April, because of the high proportion of our revenues coming from our service based collection, we have a highly variable cost structure. As volume slowed, we reduced our operating costs by consolidating collection routes, parking trucks and reducing overtime hours, while our disposal costs, R and M and fuel costs naturally flexed down with reduced volumes. At the same time, we reorganized our workforce across our service offerings and business lines to minimize the disruption to our employees. Because of our focus on the safety of our employees, we did incur incremental costs in the quarter for the enhanced safety and hygiene protocols that we implemented that I described earlier. We also looked at our SG and A costs and have significantly reduced discretionary spending there as well. We have eliminated substantially all travel and entertainment costs as we postponed annual merit increase for salaried employees, but not for our hourly employees until we have greater clarity on the impact of the virus on our operations. We have taken these measures to avoid incremental headcount reductions recognizing that our employees are our number one asset and we want to continue having our engaged workforce ready to carry on once we get on the other side of this pandemic. On capital expenditures, we have evaluated what can be eliminated or deferred for the remainder of the year. During the IPO roadshow, the view for 2020 was a total spend of approximately $440,000,000 on capital expenditures, which included a significant component of discretionary replacement and growth capital. As we have said before, because of our relatively lower landfill concentration, our replacement CapEx needs run at approximately 8% of revenue. And looking at our 2020 spend, we've identified $100,000,000 of spend that we could eliminate for this year if we need to. Our actual spend will depend on how things evolve over the rest of the year. We plan to continue to capitalize on attractive opportunities that may arise and like we have seen in the past, we expect that this crisis will generate opportunity. But we have this lever available to us ultimately to mitigate the impacts on the free cash flow line for the year if we need to use it. In terms of M and A, we completed 8 acquisitions during the quarter. 5 of these contemplated at the time of the IPO, including County and American Waste. And we closed 3 additional tuck in acquisitions around the beginning of March. We deployed $1,100,000,000 of capital on County and American and approximately $70,000,000 of capital on the 6 tuck in acquisitions. Although there have been some delays because of COVID related travel restrictions, the integration of both County and American are progressing very well. With the highly successful financing that we completed last month, we have over $1,300,000,000 in liquidity and are ready to capitalize on opportunities as they arise. We have temporarily delayed the closing of a few smaller tuck in acquisitions since the onset of the pandemic, but we continue to progress on several opportunities and our pipeline continues to be robust. Our focus on creating long term shareholder value has not changed. As we saw managing through the downturns in 2,008 and 2,009 and again in 2015 2016 in Canada, times of uncertainty and increased volatility can create great opportunities. We expect that having a strong balance sheet, a flexible capital structure and a very supportive group of both equity and debt investors will position us well to capitalize on these opportunities as they continue to arise. I will now pass it over to Luke, who will discuss the financial results for the quarter. Thanks, Patrick. Turning to Slide 4 of the presentation. Revenue for the quarter was $931,300,000 a 29% increase compared to the prior year. Revenue from new acquisitions accounted for approximately $180,000,000 of the increase, with the balance of the growth coming from organic price and volume. I will walk through the details of the price and volume growth by segment on the following page. Cost Cost of sales as a percentage of revenue was 91.5%. Under IFRS, depreciation and amortization expense related to operations is recognized within cost of sales. Cost of sales, excluding D and A and acquisition related costs, was 67.5 percent of revenue as compared to 66.5% in the prior period. The year over year change is primarily attributable to the impact of acquisitions, both in terms of business mix and margin profile. The one extra day in 2020 attributable to the LEAP year also increased total cost of sales in amount and in percentage. Fuel costs as a percentage of revenue were 4.5% compared to 5% in the prior period, a decrease attributable to both revenue mix and diesel prices. Diesel costs vary by region, but were down approximately $0.04 as compared to the prior year. Commodity prices were down approximately 32% period over period, which resulted in higher amounts paid to 3rd party processors over our recyclable volumes. COVID related impacts, including decremental margins on volume losses, incremental equipment rentals expense in our infrastructure business attributable to delays in receiving equipment and additional spending on enhanced safety and hygiene activities also increased cost of sales. SG and A expense, excluding IPO and acquisition transaction costs and depreciation expense, again IFRS requires us to recognize depreciation expense within SG and A, was $96,700,000 for the quarter or 10.4% as a percentage of revenue. Total B and A expense was $221,800,000 a period over period increase of $47,000,000 which was driven by the incremental D and A expense associated with tangible and intangible assets acquired organically and through M and A since the prior period. Interest and other finance costs were $269,400,000 an increase of $145,500,000 as compared to the prior year. The increase is primarily attributable to refinancing costs incurred in relation to the IPO, all of which were contemplated in the IPO offering documents. The change in other income and expenses is primarily attributable to the noncash foreign exchange fluctuations on our U. S. Dollar denominated term loan and the mark to market revaluation of the purchase contract component of our tangible equity units. With respect to income taxes, the change in the deferred tax recovery is largely attributable to the costs incurred in respect of the IPO. For current income taxes, we continue to have minimal cash tax obligations. GAAP net loss was $0.77 as compared to a net loss per share of $0.64 in the prior period. On an adjusted basis, net loss per share was $0.03 Turning to Page 5. You'll note a summary of results by operating segment. In solid waste, price and surcharges drove 4.9% growth as compared to 4% in the prior year period. As we've told you before, our focus on pricing is going to lead to incremental growth from this lever as compared to prior periods, and this quarter's results are a testament to that. As we've also told you, our pricing activities are front end loaded, so this level of PI will taper down throughout the year. Volume for the quarter was negative 0.1%, but the volume story needs to be split into a couple of parts to be fully understood. First, volume for the 1st 10 weeks of the year was running positive 100 basis points. So we view this entirely as a COVID related impact. 2nd, the volume decline is largely attributable to our commercial industrial collection businesses as residential collection and the majority of our post collection businesses were positive or flat in March. And third, the declines varied significantly by market, with the Montreal and Toronto market seeing double digit decreases starting in mid March as compared to the prior year. Current trends, however, appear promising with sequential volume increases week after week, and Patrick will speak more to that in a moment, but these were the impacts we realized in the last few weeks of the quarter. Solid waste adjusted EBITDA margin was 28.5% for the quarter compared to 28.9% in the prior year. Included in the current quarter margin is a 50 basis point decline from the Extra Leap Day, a 40 basis point leap day, a 40 basis point drive from commodity pricing and about 120 basis points drive from acquisitions, a decrease primarily attributable to Canada Fibers acquisition that is yet to achieve the anticipated margin profile. Excluding these items, the base solid waste business drove nearly 150 basis points of organic margin expansion over the prior year, consistent with our previously communicated expectations regarding the anticipated impact of our pricing and procurement initiatives, both of which we have discussed with you in the past. The disruptions from COVID, both in terms of lost margin on volume declines and incremental health and safety related costs, also served as a headwind to margins. Looking at Soil and Infrastructure. The success of our previously discussed strategy continues to be demonstrated as we realize 6 percent organic revenue growth during the quarter, despite certain projects being disrupted and or put on hold in response to government imposed COVID mitigation measures. In terms of margins, the prior quarter benefited from several high margin specialty projects that did not repeat in the current quarter. Also, delays in the acquisition of planned equipment purchases to support the growth of the infrastructure and soil remediation business resulted in increased equipment rental costs as compared to the prior quarter. We believe these impacts to be the timing related and the margin profile of the business will return to the historical trajectory in subsequent quarters. Our liquid waste business was our most impacted segment during the Q1. Revenue was impacted by not only COVID related volume disruptions, but also depressed WTI prices and the impact on the used motor oil market as well as some difficult comps in the prior quarter, where we benefited from an increased level of high margin emergency response activities and a bulk sale of inventory of used motor oil that we had acquired in an acquisition in late 2018. Used motor oil selling prices were down 19% in Canada and 12% in the U. S. In the quarter. While we've modified our change for oil rates to mitigate the ultimate spread compression, there is a time lag, which ultimately impacts current period results. There's a time lag, which ultimately impacts current period results. While volumes sold in Canada were relatively comparable to the prior period, U. S. Volumes were down 45% when considering the bulk sale in the prior period. Collected volumes in the quarter were down approximately 25% compared to the prior year, a decrease we believe is attributable to the COVID-nineteen disruptions. Turning to Page 6. Reported cash flows from operating activities were a use of 91 point $3,000,000 in the current quarter as compared to $19,400,000 in the comparable period of the prior year. The change was primarily attributable to cost incurred in connection with the IPO of $145,000,000 Excluding these IPO costs and the changes in noncash working capital, cash flows from operating activities were positive $108,000,000 an increase of 34% compared to the prior period that's attributable to the increase in adjusted EBITDA. On the point of working capital, we have yet to see any material impacts on cash collection activities. We are actively monitoring our credit exposures, but to date have not seen any material changes. We did hold on to cash during the end of March, pushing up AP balances at month end. In terms of investing activities, as Patrick mentioned, we spent $1,100,000,000 on M and A during the quarter, the substantial majority of which was contemplated in the IPO offering documents. We also spent $100,000,000 on capital expenditures in the period, which was below plan due to delays in receiving certain equipment from overseas. Cash flow from operating activities less capital expenditures was a use of $46,000,000 when excluding the IPO costs, an improvement of 61% over the prior period. As we said before, the seasonality of our business coupled with the front end loading of our CapEx results in a free cash flow being generated in the back half of the year. With the IPO transaction costs behind us and our significantly reduced interest costs going forward, we see a clear path to material free cash flow generation by the end of the year. Cash flow from financing activities were the outcome of the IPO and the pre closing capital transactions, all of which were detailed in our prospectus. Additionally, subsequent to quarter end, we issued a new $500,000,000 4.25 percent 5 year notes. This was an opportunistic financing that lowered our overall interest costs and bolstered our liquidity, which positions us favorably to capitalize on any opportunities that may arise. Turning to Page 7. We have presented a summary of our net leverage at the end of the quarter. As forecast in the IPO offering documents, net debt net leverage materially decreased as a result of the application of the IPO proceeds to debt repayment. Substantially, all of our long term debt is denominated in U. S. Dollars and is hedged to Canadian at fixed rates. However, for financial reporting purposes, our U. S. Dollar denominated debt is revalued Canadian dollars at the FX rate at the end of the period. During periods of foreign exchange volatility, such as that we experienced during the end of the Q1, we may realize significant noncash foreign exchange adjustments on our balance sheet that are in excess of the foreign exchange fluctuations realized on our P and L. The foreign exchange rate was 1.42% at quarter end as compared to 1.3% at year end, a change that resulted in an incremental $395,000,000 of long term debt recognized on our balance sheet. To facilitate a comparison of net leverage to the amounts that were presented as part of the IPO roadshow, we have presented our quarter end long term debt balances translated to U. S. Dollars using the year end foreign exchange rate, which you can see in the middle column yields the net leverage amount approximately 4x at the end of the quarter. Not reflected on this balance sheet is the April bond offering, which was a leverage neutral transaction. Considering that transaction, we have over $1,300,000,000 of liquidity on hand with no material debt maturities in the near term. I will now pass it back to Patrick, who will discuss the trends that we are seeing in the business. Thank you, Luke. Despite the great Q1, I know everyone is more interested in what we think the Q2 and the balance of the year are going to look like. Unfortunately, with the degree of uncertainty that still exists around the reopening of markets, it's difficult to forecast with a great deal of precision as to what the future holds. However, the current trends appear promising, so we want to shed some light on what we are currently seeing. If you look at Page 8, as noted in our press release, April revenue was up 16% when compared to April of 2019. If you back out the M and A and FX adjustments, we saw a 9.9% revenue decline on a like for like basis. Looking at solid waste, as I said earlier, there is a greater disparity in the COVID related impacts by market. With our Canadian IC and I business seeing the declines nearly 4 times greater than in our more secondary market focused commercial industrial business in the U. S. And Canada. The impact on Canadian revenue is primarily the result of business shutdowns in Ontario, Quebec and British Columbia. I think it's important to emphasize that the revenue impacts we saw in April are heavily weighted towards our commercial and industrial collection volumes. Our municipal revenue in both Canada and the U. S. Has not been significantly impacted and our relatively low landfill revenue translates to a lesser impact from the lost volume in that line of business. So if you look at the activities in the IC and I collection business starting in the 3rd week of March, we saw roll off haul start to decline week over week until approximately the beginning of the 3rd week of April, at which point, hauls were down approximately 18% compared to the pre COVID week. Since the 3rd week of April, however, we have seen weekly haul counts increase sequentially and although we are still not at the levels we saw in early March, we are moving in the right direction day by day. And it is a similar story if you look at our commercial collection activity. Starting in the 2nd week of March, we were seeing service level decreases and temporary suspensions. And the decrease has increased sequentially through to mid April. Since then, we are now having customers reengage as they're preparing to reopen, which is another sign we perceive as an indicating the worst is behind us. Looking at our daily trackers, we expect this week's IC and I collection revenues to show an increase over last week and next week to be even better assuming that the governments continue to loosen restrictions on the timetables that have been announced. Again, ultimately only time will tell the full extent of the impact, but from where we sit today, we're feeling cautiously optimistic. Thinking about how these revenues impacts translates to margin, I think there's a few points that need to be teased out. 1st is the revenue profile of our business with a larger proportion coming from the service based collection activities. Our lower landfill concentration results in a lower blended decremental margin impact than if we had a meaningful portion of our revenue declines tied to our very high margin landfill volumes. As I said earlier, tied into that point is the highly variable cost structure that comes with our revenue profile. Since this began, we have reduced overtime hours by approximately 30%. We have consolidated collection routes and parked vehicles to improve asset utilization and in many markets have experienced improved productivity, thanks to reduced traffic patterns. Our safety staff have also improved with April being the best month of the year and our absenteeism is at all time lows. All of these factors together with natural flex of our disposal costs, R and M and fuel costs that I described earlier will contribute to mitigate the impact on margin on the revenue decline resulting from COVAD related volume reductions. Finally, we have some macro tailwinds, which we believe will further mitigate the margin impacts. As you've heard from others, commodities have had significant run over the past 6 weeks, with OCC commanding over $200 a tonne in certain markets. Fuel costs continue to be at historical lows, which provides a margin benefit in both our residential and post collection service lines and FX continues to be higher than last year, which improves our blended margin profile by translating the relatively higher margin U. S. Business into Canadian dollars at a higher rate. Looking at infrastructure and solar remediation, as we have previously said, the majority of projects we are involved in have been deemed essential services and continue to progress. Based on what we're seeing today, it's looking like May will be better than April and hopefully that trend continues. And finally, on liquid waste that we previously told you, we expect this segment will be the most impacted by the current market conditions. On the used more oil collection side of the business, suppression of the oil related indices on which Yumel selling prices are based, combined with the reduced volumes being generated as a result of COVID related shutdowns will continue to negatively impact revenues from the service line in the near term. Regarding the core industrial service component of the business, COVID related shutdown have had a negative impact on the portion of our customer base, which should have been deemed non essential and therefore temporarily shut down in many markets. The ultimate impact will depend on the nature and shape of the recovery in each of the markets we service, but again, the trend line we are seeing today continues to be very positive and encouraging. Before we open it up for questions, I want to end by saying thank you to all of the GFL employees who deserve all the credit for our great results in the quarter. And to all the investors who support us on the IPO and since then, We thank you for your time and look forward to speaking with you as the quarters continue to come. I will now turn the call over to the operator to open it up for any questions. We'll take our first question from Tyler Brown with Raymond James. Hey, good morning, guys. Good morning, Tyler. Good morning. Hey, appreciate the April details. But I do want to come back to the comments on pricing. I think the 4.9% pricing was quite strong. You kind of touched on it. So big picture, it feels that over the past couple of years, pricing has accelerated. So I was hoping that you could talk a little bit about your go to market strategy and maybe philosophy around pricing as that changed with time and maybe should we be expecting this general level of pricing into the future? Yes. So I mean, as we've discussed in the past, I mean, previous to 2018, we didn't spend 5 minutes focusing on price as we were building the business. There was a we were much there was much more of a cadence towards growing volume and growing market share versus growing price. And then post the acquisition of Waste Industries and watching how they increased and started rationalizing our entire book of business in the and started rationalizing our entire book of business in the 9 provinces in Canada and 23 states in the U. S. So pricing continues to be strong. I think as we rationalize the existing book and level set that existing book, we're going to continue to be focused on prices as we've discussed in the past. Yes. Okay. That's great to hear. And then, Luke, so I appreciate the comments that you have a highly variable cost model, but there's a lot of moving pieces here. So maybe to boil it down for simple people like me, could you run through at a high level maybe an incremental decremental type of margin that we should think about by line? Yes. I mean, there's a lot of moving pieces, Tyler, as you said. But I mean, if you take the residential line out of the equation, I mean, there's probably puts or takes, as we said on our April update call, that in Canada, maybe we're getting a little bit of benefit. But in the U. S. Maybe a load is a little bit heavier. And so maybe you think about the residential from a margin profile as a bit of a wash. So then left with commercial and industrial, obviously, the industrial or the roll off line of business easier to flex by nature of the route days and what those look like. So if you look at the amount of trucks and how quickly we can park the vehicles and therefore defray all of that engine hour related costs, much more variable cost structure on that line and therefore a better ability to mitigate the sort of margin. Versus commercial, while we have been parking some trucks in the markets that have been most significantly impacted, as you know, not as nimble to flex the operating structure of those routes. And so you eat that a little bit more. So and that's collection and you think about our relatively lower landfill concentration. I mean, you listen to all the others, everyone is saying somewhere in the sort of 30% to 40% decrementals on a blended is what this margin is looking like. I think given our cost structure, we're on the lower end of that range. But again, it's market specific and there's other factors that are offsetting some of this pain. As Patrick had said, the lower traffic patterns as well as diesel, I mean, we're getting some benefits from that. So I think it's difficult to model it perfectly, Tyler, but hopefully that's helpful directionally wise. Yes. Sorry, I was not as much in within wise. Yes. Sorry, I was not as much within solid waste, but about the liquids and soil piece. Would those be 20% decrementals, good way to think about it, 25% something like that? I mean, I'm not giving too much forward looking. I mean, if you look at infrastructure, I don't really see margin accretion coming from that sort of line of business. I mean, that cost structure flexes very well. On the liquid side, I think when you think sort of what we're seeing, I think, yes, I think a reasonable number on the liquid waste side is probably sort of 25% today, when I sort of look at April. And if that's the worth it's going to get, hopefully it gets better from there, but that's what we're seeing today. Okay. That's helpful. All right, guys. I'll turn it over. Thank you. Thank you. We'll take our next question from Brian Maguire of Goldman Sachs. Hi, good morning Patrick. Good morning Luke. Glad to hear that we seem to have reached a bottom in April. I was just wondering if you could maybe provide a little bit of color on it's very early days, but the size and shape of the recovery so far, are we seeing decent size rebound in some markets? I'm sure it's going to be very, but in some of the harder hit markets like Toronto and Montreal, are we seeing a little bit of a snapback so far? Or are you kind of seeing more of a gradual little bit of improvement, but it's going to take some time to be able to call it a snapback? Yes. So just I mean real data is sort of if you think about the I mean, the biggest impact we've seen in those markets is definitely on the roll off line. When you think about that, I mean, if you think about the Toronto market, for example, that's a market where we would do somewhere between 4.50-475 lifts a day. That drop in the peak of the low to somewhere around 250, so 250 lifts a day. And if I look at where we sort of sit over the last week, that has trended back up to 300 to 3 25 lifts a day. So I think it's moving in the right direction. And I would say the governments here have been far stricter than they've been in the U. S. Regarding the shutdowns. This wasn't an optional stay at home. You actually mandatorily have to stay at home. So as they roll out the phases here over the next 6 weeks, I anticipate those numbers will continue to grow. But it's been decent. So I think over the next 2 months, we'll see a good chunk of that come back in Toronto and Montreal. Okay. That's very helpful. And then just on the topic of the dropping crude oil prices, I mean, you guys have touched oil in a lot of different ways, the UMO price, your own fuel cost, some of the Canadian provinces have exposure to E and T and oil extraction. Just as you think about it, overall, that's not something that was really contemplated at the time of the IPO either. Just how would you kind of frame the overall impact of the drop in oil prices to the bottom line or however you want to think about it? There's a lot of moving parts there. Yes. So I mean, when you look at so first off, we have no exposure directly to E and P waste. So we have the macro exposure to what happens in Alberta, but as it relates to direct E and P exposure, we have none. So I'll start with that. Obviously, we have a natural hedge with our own diesel costs and dropping oil prices. But I would say, the biggest exposure and I would say Alberta, which is what people worry about. Alberta has been depressed since 2015 2016, right? All the small junior producers have been out. It's really been a business that's been run by the majors and those guys are still producing today. Is there new development? No, there's not new development, but that wouldn't really affect our P and L anyways because we have virtually no exposure to that. And on the macro side, since really the crash in 2015, 2016, Alberta really hasn't recovered. The biggest exposure on oil will be the UMO collection business. And again, we can manage the spread as you've seen from Clean Harbors and others, putting charge for oil in etcetera is accepting of the market and everybody's doing it. So for maintaining a spread, that's not an issue today. Really what the issue comes down to is if car dealerships aren't servicing because they're been ordered to close and not deemed an essential service. As we've seen volume declines on our collected volume of sort of 30% to 35%, that's where the sort of the gap is going to come. That will recover, that will come back. It's just a question of when because the end of the day, people are going to need to get their car serviced as they start driving again. But when you think about that in context of the grand scheme of the business, I mean, we collect 75,000,000 gallons, right? In historical period selling that at $0.60 a gallon, dollars 0.60 to $0.70 a gallon, it's not a material number in the overall grand scheme of $4,000,000,000 of revenue. You're talking about $35,000,000 to $40,000,000 of revenue coming out of that service line. It will shift a little bit because we're going to be getting more of our revenue from the charge for oil versus the actual selling of the oil. But that's where we sort of sit today. Going back to Q1 wasn't a really good comparative period because when we did that acquisition in the U. S, there was almost 4,000,000 gallons we inherited that were on the owners watch that we had to sell for them in Q1. So the numbers are a little off, but if you strip that 4,000,000 gallons out, the business performed relatively the same quarter over quarter. But that's I don't see a big impact from oil dropping. I mean, I think at the end of the day, it will be a net benefit. When you think about our overall fuel expense, we spend about $170,000,000 on diesel in any one year. If you look at diesel pricing today, to the tune of almost 40%. That far offsets any degradation we would see on used more oil collection business. Just to be clear on the diesel, because a lot of the U. S. Based guys pass that through surcharges pretty quickly. Do you think how much of the lower diesel do you get keep versus how much you have to pass through? Yes. So all the commercial that flows with surcharges, if it goes up, we pass it on. If it goes down, we give it back. I think where the benefit is, is on some of these municipal contracts where you have legs on the surcharges up or down when they're annual adjustments versus monthly adjustments, you'll win on those. And obviously with post collection operations, you're going to the fuel surcharge, it doesn't work exactly the same as it would on the commercial business. Yes. Thank you. We'll take our next question from Walter Spracklin of RBC Capital Markets. Yes. Thanks very much. Good morning, everyone. Hi, Walter. Walter. So I think I'd like to come back to the contracts that you have and the volume based ones that you're enjoying you're benefiting from here in Canada. Just curious and I know one of your competitors has signaled their intention to go back to municipalities with an effort to move to adjust their contracts before expiry to more volume based. And I was wondering if you have that opportunity among the U. S. Contracts where you're not volume based. Are you looking into or making efforts for getting some adjustments to the contract to give us offset the higher costs? Yes. I mean, mean, it's a similar dynamic to what we experienced in 2018, really around the depressed commodity pricing. Some municipalities, you can rely on force majeure and other things that are in the contract to try and renegotiate, which is always an opportunity. And you'll get some municipalities that are open to realizing the issue and not wanting to get in an argument about it. And then there's others that just say, hey, the contract is the contract and they're going to argue about it. I mean, when I look at our business, if I think about Canada on the residential collection side, it's either neutral to a benefit with increased volumes just because of the contracted nature and the structure of the municipal contracts in Canada. So there's really not a negative impact on the Canadian residential book from increased volumes at the curb. On balance, it'd be potentially a bit of a positive. If you think about the U. S, 40% of our U. S. Residential business is subscription. So listen, we have the ability to move pricing on a monthly or quarterly basis if we see increased volume. So that is a bit and then you have that sort of balance of the 60% of the U. S. Residential municipal contracts that are tied to house counts versus volume, where that could be a negative, a bit of a negative. But if you think about what we've seen, I think, again regional specific, but if you look at the specific markets, I look at Toronto, for example, which is a big market, You saw increased volumes of like sort of 12% to 15% in the last 2 weeks of March, right? And then you've slowly seen that taper down as people move to a more normal state of not bulking up and staffing up at their house where I think where we look this what we said this week volumes have sort of sat around 6% to 7% versus the sort of 12% to 15% we saw right when the shutdown happened. And in the U. S, it's been a wide range where there's been virtually no impact and then there's been other markets that we've seen increased volume of sort of 15% like we've seen in Michigan that had similar orders that they have in Canada. So we will work with the municipalities to try and get more money out of them. But if it's something I'm banking on, given what we experienced in 2018 with the recycling, I'm going to say, it would be all additive and bonus if we were able to get something. Got it. Appreciate that color. And just my second question here is on M and A trends. Patrick, can you give us a little bit of update on over the last since we last spoke, how the tenor of the conversations have been, how the logistics of enacting on a deal has improved or hasn't improved and what your thoughts are on the advanced disposal trends? Has there been any update with regards to how enticing that might be to you and your ability to capitalize or take advantage of any of the divestitures out of the Advanced Disposal transaction? Thank you. Sure. I mean, I won't comment on specific M and A, but going into the IPO, our pipeline was very full. It has been a thesis of ours since we've found it, I mean, completing over 135 acquisitions since our founding. I think it's something we do well. When you looked at the pipeline before, we closed on 8 plus opportunities in Q1. As we said, as part of the COVID update calls, we were going to pause and have paused for the short of the last 6 to 7 weeks. Just trying to understand what the impact would be on April. And I think sitting here talking, I think we're one of the fortunate industries and businesses. And this is probably the reason why a lot of investors want to own this space is because we're talking about revenues being off 9% on an organic level when the bulk of other industries are off sort of 50% to 90%. From a free cash flow perspective, we believe that we can manage our free cash flow to the expectations that we saw as part of the IPO. So when you think about it from that perspective, I think we're starting to feel more and more comfortable about where the base business is going and where the free cash flow generation of the business is going for the balance of the year, which allow us to sort of maintain leverage. So I think we're going to start reengaging on M and A here sort of over the next 2 to 3 weeks and sort of get back on. I think when you think about acquisitions, listen, there's the way I think about it, there's gold, silver and bronze. People have asked about valuations. I think valuations for the gold, I think is as in gold is always gold. And I think valuations will not change much on some of those opportunities. I think when you think about the silver and bronze and where the opportunities are, when you're thinking from a multiple perspective, maybe there's an extra return to turn and a half and maybe you get some more willing sellers that don't want to live through another downturn like we saw in 2,008, 2009 and 2015 2016. So it brings guys to the table, gets them a little bit more realistic. And I think we're seeing that on some of our pipeline today where we had a little bit of a price gap. I think the sellers are becoming a little bit more realistic. And I think that'll lend itself to a good bunch of execution opportunities over the next sort of 6 months here. Okay. Appreciate the time. Hope everyone is staying healthy and safe. Thanks. Thanks, Walter. Thank you. We'll take our next question from Rupert Merer of National Bank. Good morning, guys. Congratulations on the results in your Q1 as a public company. Thanks. Now it may be too early to see, but do you have any sense of any permanent impairments of volumes that could come from the pandemic? Have you seen any abnormalities in terms of service cancellations? So we've had very minimal service cancellations. Like we said, with our service based revenue, we have contracts whether there's a pound in the bin or whether there's £100 in the bin or whether there's £1,000 in the bin, we're generally have to collect it. We're collecting that and charging for that. I think obviously we want the bulk of our customers to be a going concern. So as customers have called in and asked to temporarily suspend their service because they're closed, We've worked with those customers on a case by case and a customer basis. So I would say there's been very little sort of out and out terminations. I think if you look at the customer base today, about 6% to 7% of the commercial customer base is called in and asked to either temporarily suspend or change their frequency. So I don't think there's a permanent impairment, But again, it's still early days, right? Like people don't understand. I mean, I think our governments are struggling on actually how to reopen. It was easy to shut it down, but I think they're trying to understand how they actually reopen. But we are seeing sort of material upticks in people now wanting to get their service back online. So it's going to take some time to get back to the service level that we're at. But I think all in all, from what we're seeing has been very little termination of the services. Great. Thanks. Secondly, on cost, can you give us a little more color on the puts and takes of what you're seeing on costs? You talked about some cost savings and discretionary costs, but you've got increased cost of safety and hygiene. Can you give us a little more color on those costs? And then secondly, are there any sort of long term benefits that could emerge from efficiencies you've realized over the last month? Yes. So Rupert, in terms of some of the puts and takes on the cost side, the comment about incremental sort of enhanced PP and E and clinic, yes, so there's incremental costs coming out of that. You'll see we didn't add any of that back because I think there's also some offsetting sort of benefits from this unique environment when you think about sort of traffic and some of the productivity, safety related and traffic level productivity. So I mean, if you think of how to quantify those exactly, I mean, the incremental PP and E cost, we can put $1 on that in Q2, but the incremental productivity is offsetting that. So don't have a COVID related add back. Whether or we will in the future sort of remains to be seen. But I think one of the most natural levers we've seen is on the overtime side. And really, if you think about our normal overtime hour being sort of 15% to 20% of total hours, I mean, we reduced overtime by about sort of 30%, where we should say 27% for the quarter or 27% post COVID impacts. So I think that's the most natural sort of cost flex that we've had in sort of response to this in addition to the reduced direct variable costs when you think about disposal fuel and R and M associated with the lower volume. So we'll continue to monitor and use that lever to mitigate the impacts. But the other puts and takes, I don't want to say perfectly offset, but I think there's things that sort of go both ways there. And then obviously, as we alluded to, some of the discretionary SG and A, those are very quantifiable dollars. There's no travel. There's been no merit increases, etcetera. Those are other levers that have been pulled to offset the free cash flow impacts of this. Yes. And one thing we didn't touch on earlier, but cash collections in April was a worry pre March, but cash collections were on target for us. We're worried about what the working capital impact on the business would be. But as we got through April, we were on plan and on target without a significant amount of any material defaults. So, again felt very good about the cash collection of the business over April. Great. Thanks. I'll leave it at you. Thank you. We will take our next question from Michael Hoffman of Stifel. Hey, Patrick, Luke. If we could circle back to the free cash flow and set some guardrails. So let's remind everybody what you thought it would look like for 2020 before the pandemic? And then how do you think about how that trends? I'm assuming that the decremental on the cash isn't any different than the decremental on the EBITDA. Yes. So Michael, I mean pre COVID pandemic, the IPO roadshow, there was a view just for round numbers that the sort of realized EBITDA in the year was $11.15 to $11.50 There was an interest expense on that of sort of $260,000,000 to $275,000,000 There was a CapEx expense on that of $420,000,000 to $440,000,000 And there was an other for ARO cash taxes, whatever, of another sort of $50,000,000 So that's where we were before, and that brings you down to the sort of pre TEU, pre dividend free cash flow number. Where we sit today, I'm going to go backwards. I'm going to say, we have an interest cost, never mind Q1, which had all this sort of noise, but really today, ex the new bond, we have an interest cost today of $236,000,000 That's where we sit today. So I have that. I have CapEx number of $340,000,000 to $350,000,000 is what we're looking at today when you look at what we've sort of paused or deferred for the time being. And then I have $50,000,000 ish of the sort of odds and sods on ARO cash taxes, etcetera. So now that's before considering working capital. Working so that brings me to a sort of $630,000,000 cost against the free cash flow line, where I sit today. And then working capital now in the quarter, we had a great Q1, materially better than the prior period from a working capital perspective. As many of you know, we had or we're beginning to undertake a whole order to cash optimization process. We believe working capital is a place we can drive incremental benefit. With all that's happened, that's been sort of temporarily paused. But we still think there's an opportunity to drive working capital improvements. But even if we say it doesn't get any better for the balance of the year, so working capital isn't the source, I stick with my minus $50,000,000 I have a $630,000,000 against whatever the EBITDA number is going to be. Now we haven't come out and exactly said what the new EBITDA number is. I think the consensus estimate of the group today is somewhere around $10.40 $10.50 So if you apply those costs, I said, against that $10.50 of EBITDA, I think that's a decent proxy for where your free cash flow is going to be on a normal 12 month run sitting where we sit today before considering the TEU and the dividend. Terrific. And just to be clear, the actual reported loss that reflects 100 and $50,000,000 of IPO cash outflows and all that that were in the Q1. But an adjusted number would be the 10.45 less 6.30. Yes, correct. Again, Q1 if you really want to adjust Q1, I mean, there's $233,000,000 of EBITDA. I mean, really, the normal interest cost should have been burned against that, but just under $60,000,000 if you think of our new sort of run rate. And then the $100,000,000 of CapEx, and there was a $50,000,000 of ARO and working cap, etcetera. That would be the real normalized number. But I think as you framed it for the year, that's correct before considering the IPO friction. Okay. And then could you help us just appreciate the 30% reduction in the OT? But what was OT pre COVID as a percentage of direct labor? Just so we understand the scope of what's coming down. From an hours perspective, about 15% of total hours and the labor line, low 20s in 2019. Okay. And then do you think it's likely that you'll add incremental sales at a better incremental margin because you won't have to add costs as quickly? Is that getting lean like this has that kind of a benefit is let's add incremental costs lower than we add the sale? Yes. I think it will be a benefit moving forward on a multitude of fronts, right. Like these times that we're living in, when guys actually have to hunker down and look at every single expense, you really realize what will you actually need to run the business, right? So I think as the existing business that was temporarily suspended or temporarily lost comes back online and then you bolt on new business, yes, I think you could see some outside sort of margin expansion that comes from it. So I want to quantify it today? No. But intuitively, that would make sense. Yes. No, I'm just curious if you thought you'd be able to hold on to that in the manner we've just discussed. All right. Thanks for taking the questions. Thanks, Michael. Thank you. We'll take our next question from Mark Neville of Scotiabank. Hey, good morning guys. Good morning. Good morning. Maybe just want to start following up on the commercial. At peak, it sounds like roll off was off about 18%. It's come back a bit. I'm just curious if you had sort of similar round ballpark numbers for the commercial line? Yes. So when I look at the commercial line, I think it was far less, but thinking about 7% was where we saw the commercial sort of revenue stream come off and that today is sitting at about 4%, 4.5%. Okay. That's helpful. I think Patrick last time we spoke, I think you talked about, you said roughly 80% of your sites you were on with an infrastructure or soil were up and running. I'm just curious if there's an updated number. I assume it's gone a bit higher, but just curious where that is now? It's today yes, today is about 85%. There's still some but we're expecting those other sites to come back online in the next 2 weeks. There's been a bit of a delay, truthfully with some permits on some of the sites just because of the municipalities not fully functioning. So permit issuance on some of them has been slower than we would like. But again, as municipalities come back online here over the next week or 2, hopefully that bottleneck removes itself. Okay. Maybe just on the decrementals, I want to make sure I understood. Luke, I think you said within solid waste sort of in the range of 30% to 40%, but sort of towards lower end and then liquid waste around 25%, I understand all that correctly? Yes. So on the solid waste, what I'm saying the decrementals of pure, the sort of COVID impact, so that you take that lost revenue and you apply that. Now there's a bunch of tailwinds offsetting that. If you look at the peel it all back, look at the organic margin expansion we're having in the base business throughout the 1st sort of quarter, I think, is going to more than offset on a year over year basis. But yes, if you think about the volume loss on solid, that's the right way of thinking about it. And then similarly on, as Patrick said, on liquid. The liquid, you flex the rebate on the used motor oil side, which ultimately mitigates a lot of that. There is a bit of a timing difference. At the end of the day, I think that's the right way of thinking about liquid margins. Okay. And if I can maybe ask one last question. Just again, last thing you spoke, you talked about a COVID cleaning business. Appreciate small, but I'm just sort of curious how that's trended over the last 6, 7 weeks. And if it's something that maybe I think sticks around sort of for the next bit of time? Yes. I mean it's become a new line of business. I think as long as COVID is around, where we've seen the biggest uptick in that, I mean, is really around large sort of industrial projects in industrial businesses, such as manufacturing plants where they've had a few cases of COVID and potentially are concerned about COVID outbreaks and they shut down those facilities and go in an extensive amount of cleaning. I think if you look at what we've done in the last 6 weeks, it's sort of been in the range of about $1,500,000 to $2,000,000 so double what it was before. And I think as that continues to evolve and as businesses come back online, I think that's going to continue to be an opportunity because as people actually start going back in offices and they want to do the deep clean, it's going to continue to be an opportunity. Okay. Thanks guys for all the comments. I'll leave it there and get back to the interest of time. Thanks. Thank you. Thank you. We'll take our next question from Kevin Chiang of CIBC. Hi, Eric. Good morning. Thanks for taking my question, Patrick and Luke. Maybe just going back on the pricing question. If I'd ask it a different way, like what percentage of your solid waste revenue do you think is underpriced? Or if I were to put it in buckets, like what is the ultimate low hanging fruit that you think as you get to the crisis, you should be able to go out and get significantly above average pricing? Yes. So Kevin, what we had said at the start of this was halfway through the progress process of optimizing that existing book, and we said there was another $25,000,000 to go out and get. We probably got about $5,000,000 of that since we last sort of spoke about that. And so where we look is there's probably another $20,000,000 to come out of that. So that's what we continue to view that opportunity to be. And as we realize that, I think that's going to help sort of produce some of this outsized pricing, at least for us. That's helpful. And then just last one for me. When I look at the liquids waste business, it looks like about 10% of your revenue. It looks to be the most well, it's proven to be the most volatile, I guess, when you look at what's happened to the crisis here. When you look out over the long term, just how important is this business as a growth vehicle for you? Or does this naturally become smaller as maybe focus on your more stable segments of infrastructure and solid waste here? Yes. I mean, it's obviously going to continue becoming a smaller and smaller piece. But I would say, they were unfairly sort of penalized with what's happened just because it was things out of their control. If there was an issue with the business, particularly on the used motor oil side, on managing the spread, then that's from my perspective as managing the business, that's an issue. But if dealerships and everything were closed, which is normally open, I think it's similar to what you experienced on the solid waste revenue when you saw 25% declines in the commercial business. If you saw 25% to 30% less volume collected because dealerships were closed, I don't think it's a fair structural issue with the business. I just think it's a question of COVID related issue with bad luck when it comes to the volumes that people couldn't collect and sell because the spread hasn't changed in the business. We pushed on the charge for oil. So we're still going to maintain that spread faster than we did historically. As soon as WTI dropped as quickly as it did, we put in those implemented those stock charges and charge oil like immediately. So it's really just we need the businesses to reopen so we can start collecting the volume again. And Kevin, if you look at that business, if you chart it out like back to beginning in 2011 and look at that, I mean there's really been 2 material volatile spikes in. It was 2015, oil frached and now so you do but if you look at those, they're really just a short term intra quarter or intra month period. I mean, if you look at the chart in totality, that business continues to grow at very attractive organic growth rates, is a great free cash flow generator. And if you take out the noise of oil that seems to happen every sort of 5 years with these 1 quarter spikes, you have a very nice predictable sort of growth line coming out of that business with attractive free cash flows and great returns on capital. And that complement with how it fits in with our broader sort of solid waste service offering, I think is what we view as well. Yes. And when you just to put it in perspective, when you if that is you sort of look at the analyst model and that is budgeted sort of just over $7,000,000 of EBITDA for April. I mean even in the shutdown that business did mid fives of EBITDA. So it was off budget sort of like $1,500,000 on the EBITDA line because the cost structure is so flexible. So again, it's not something that went to 0. It was off a little bit, but from a materiality perspective, it was very minimal. That's very helpful color. Thank you very much. It will continue getting to be a smaller piece of the overall stream. Makes a ton of sense. Thank you. Thank you. We'll take our next question from Jeff Silber of BMO Capital Markets. Thank you so much. I know it's late. I just had a quick question on the used motor oil business. Forgive me, I think you had mentioned in your prepared remarks, Luke, that the volumes in Canada were relatively stable, but they were down dramatically in the U. S. Just if you can confirm that, that'll be great. And I'm just wondering if that's true, why the discrepancy? Thanks. Yes. So Jeff, you're accurate with what I said in the comments about the volumes, but the U. S. Is really disproportionately impacted by what I'll call sort of one time event in Q1 of last year. And really, if you think about the U. S. Business that we bought in November of 2018, came with that a huge amount of oil inventory that the former vendor was just stockpiling, didn't want to sell it during the transaction. So when we got into Q1, we had this excess inventory that we all we sold in this onetime shot. So unseasonal large volume. So it just makes for a very tough comp. I think if you back that out, the U. S. Volumes were slightly down period over period, which is really the impact of late March as things started tightening up in and around the Midwest. Okay. Appreciate you clarifying that. I thought for some reason there was some strange driving going on in the U. S. Versus Canada. I appreciate it. Thanks. Thank you. We'll take our next question from Michael Feniger of Bank of America. Thanks guys for taking my question. Can you just help me understand how you can select your CapEx? I know you guys are a fast growing business. You acquired a lot of different businesses that might not have had fleet or equipment as young as yours, but you guys also have a lower land exposure like you mentioned before. So can you help me understand how you can flex your CapEx if we see a lower from longer type of demand environment? Yes. So Mike, if you think about and you go back to our April sort of update deck where we sort of showed sort of wheel, if you will, of where we normally spend our CapEx, with the lower landfill concentration, just a lower need in that department and an overall lower base maintenance CapEx rate. So I mean, what we've said consistently is our maintenance CapEx spend is sort of 7.5% to 8%, that's what we need. Now, we've been growing, as you said, through M and A and organically, and we've been deploying a lot of strategic incremental growth capital above and beyond that. That's why our historical CapEx spend has been at levels above that. But if I have to keep the lights on, I can do so very easily with a sort of 7.5% to 8% spend, which is again largely predicated on the lower dollars going into landfill cell construction. So when we looked at what we had in the plan for this year, we had some growth oriented items, which are sort of more nice to have. We don't need to be doing anything. And then I think we've always asserted we have a very sort of not aggressive, but our replacement schedule is where we're maintaining what we believe to be a great fleet and then great set of facilities. And so in an uncertain period such as this, we can defray some of that replacement CapEx, just a slightly different replacement schedule. And I think it's those two things together that gives us a lot of latitude within that original $40,000,000 number. That's very helpful. And you mentioned that we're seeing customers starting to reengage as hopefully the economy is reopened. As these customers reengage, are they asking for any type of price concessions or much lower search levels compared to pre COVID? Are you seeing anything specific with customer bases in the hotel, leisure space or education or airline that would be of note? Thanks. Yes. So no one price, no one's asked for reduced pricing. Well, I shouldn't say no one. I'm sure everyone will ask if the opportunity presents itself, but we haven't seen a material issue with in terms of people asking for price reductions. Again, they're contracted revenue streams for 3 to 5 years. Again, we are working with individuals that were maybe getting service 3 times a week and now they want to reduce to 1 or 2 times a week as things slowly come back online. We are seeing we don't have any real exposure to any of the airlines. We do have a couple of airport contracts like in Denver, a part of the Vancouver airports and a little bit at Pearson in Toronto. So obviously that has slowed. But again, it's insignificant in terms of dollars. We are seeing hotels come back online in again, our hardest affected markets were sort of Toronto, Montreal, in Vancouver. So even sort of in the pandemic, they went down, the height of the pandemic, we're going down to sort of service about once a week. And we've seen in some of those, they're now moving to sort of twice a week, where historically they would have been 3 to 4 times a week. So again, it's all going to be dependent on how fast they open and how fast it's going to recover. But we are seeing the uptick today and where they're moving. Thank you. Thank you. We'll take our last question from David Kenny of iris and rb Group. Hi, guys. I wonder if you can comment on any discussions you may have had with your municipal city clients with regard to smart city initiatives, something of which they're quite focused on these days, whether using technologies for data collection or garbage set out or other non waste data collection. Have you had any questions in that regard? And to what extent is that something that may not be on the it's very early days on that. I mean, Google owned entity, sort of has been the pioneer in terms of trying to actually design sort of smart cities. So there was some there were some trials being done with Google and we had done a JV partnership with them and they had utilized our single stream MRF to identify different sort of cradle to grave recycling streams, particularly around the circular economy and extender producer responsibility legislation that is coming out in Canada. I would say in the U. S, it's been very sort of minimal to date. But recently, that smart city project that Google was going to do, they've recently called out of that when COVID hit. So they're actually not going forward with that project. So I'm assuming that will subside over the next little while, but we have explored that with some of those providers. Thanks. And just one follow-up. You guys track or have an accurate with regard to the number of laundry based vehicles covered and whether you track from a period? Sorry, can you repeat the question? It was muffled. I apologize. No problem. I'll repeat. Just I wonder if you have the metric on number of kilometers that your waste vehicles cover and whether you track that period over period, number of road closures? We definitely track it. It's part of our compliance. But I don't have that number at my fingertips. Okay. Well, thank you very much. If there's no more questions, operator, we'll conclude this call. And as always, Luke and I are available to answer questions over the course of the day. Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.