Greetings, and welcome to the Waste Connections 4th Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Thursday, February 18, 2021. I would now like to turn the conference over to Worthing Jackman, President and CEO.
Please go ahead.
Thank you, operator, and good morning, everyone. I'd like to welcome everyone to this conference call to discuss our 4th quarter results As noted in our earnings release, Q4 capped off a remarkable year for Waste Connections,
culminating in a solid beat in
the period and providing a higher entry point Into 2021, more than 250 basis points higher than expected improvement in solid waste volumes And increased values for recycled commodities and renewable fuels drove adjusted EBITDA margins 50 basis points above expectations for the quarter. Moreover, we converted over 50 percent of adjusted EBITDA to adjusted free cash flow in the year, while positioning ourselves for double digit percentage growth in With expected solid waste pricing, plus volume growth of 5% and increasing recycling and renewable fuels values, 2021 is already positioned for continued top line growth and 50 basis points margin expansion Although our outlook for the year does not include any benefit from further reopening activity, we are pleased to note that last week was the 1st weekly increase in revenue we've seen from COVID impacted customers in several weeks. Before we get into much more detail, let me turn the call over to Mary Anne for our forward looking disclaimer and other housekeeping items.
Thank you, Worthing, and good morning. The discussion during today's call includes forward looking statements made pursuant to the Safe Harbor provisions of the U. S. Private Actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement included in our February 17 earnings release and in greater detail in Waste Connections' filings with the U.
S. Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward looking statements As there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business, We make no commitment to revise or update any forward looking statements in order to reflect events or circumstances that may change after today's date. On the call, we will discuss non GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis Management uses certain non GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non GAAP measures differently.
I will now turn the call back over to Worthing.
Thank you, Mary Anne. We are extremely pleased with our strong operating and financial performance in Q4 and throughout 2020, In spite of the impacts from the COVID-nineteen pandemic, we often note our belief that culture, values and human capital are our greatest assets and instrumental in delivering differentiated results. This belief guided our response early on to the pandemic, Which focused on reducing employee concerns regarding income, health care and family obligations in order to provide continuity of service and a bit of normalcy for our customers, Reduce voluntary turnover and further improve safety performance. We spent over $35,000,000 in 20.20 for discretionary employee support, Primarily for supplemental wages to all of our frontline employees, whether union or non union, remote or in person and including temporary employees, as well as a thank you bonus late in the year. Voluntary turnover ultimately declined 18% in 2020.
Safety related incident rates decreased 12%, with over 60% of our operating locations either posting 0 safety related incidents or driving year over year improvements. And our total recordable injury rate ended at less than half the industry average. Looking at solid waste organic growth, price of 4.3% played out as expected in 2020, With combined price plus volume growth turning positive in Q4 for the 1st quarterly period since the onset of the pandemic on continued pricing strength Plus a higher than expected 260 basis points of sequential volume improvement. As a reminder, from the Q2 lows Of about negative 10%, solid waste volumes recovered to about negative 6% in Q3 and further improved to about negative 3% in Q4. This progression reflected the continuous recovery in activity we have seen since the depths of the pandemic and sets us up for Positive reported volumes in 2021 beginning in Q2, even without the benefit of any further economic recovery.
Any continued reopening activity or improvements to the economy related to COVID-nineteen or other factors will be expected to drive higher than expected overall volumes in 2021. Underlying solid waste margin performance in 2020 demonstrated the consistency of our focus On quality of revenue and managing costs, we exceeded each of our updated outlooks to deliver adjusted EBITDA margins of 30.5% in the year, Despite an 80 basis points drag from the high decrementals associated with lower E and P waste activity, plus an additional 70 basis points impact from the discretionary COVID-nineteen related employee support costs. Not that we would adjust for such COVID related costs, but it's worth noting that these discretionary costs alone accounted for more than More than the 60 basis points year over year margin decline in 2020, as underlying solid waste margin expansion more than overcame The drag from lower E and P waste activity. Moreover, we converted over 50% of adjusted EBITDA to adjusted free cash flow in 2020 and are positioned for an almost 53% conversion and double digit dollar growth in 2021. 2020 was also noteworthy for the pace of acquisition activity, which accelerated at year end to drive another outsized year.
We acquired approximately $115,000,000 in annualized revenue in Q4, including new market entries in Delaware and Minnesota And large tuck ins in Colorado and Nebraska. Along with other acquisitions completed earlier in the year, this brings our total acquired annualized revenue in 20 20 to approximately $180,000,000 and provides rollover acquisition contribution of about $120,000,000 or over 2% in 2021. In spite of the limitations of the COVID-nineteen pandemic, we closed 21 transactions in 2020 and continue to be selective about the types of markets we pursue, the risk profiles we accept and the valuations we determine to be appropriate. Acquisition dialogue remains elevated with seller interest driven by many of the same factors as in recent years, including uncertainty regarding the outlook for taxes. 2020 marked our 17th consecutive year of positive total shareholder returns, up 13.9% in the year.
We returned over $305,000,000 to shareholders through dividends and opportunistic share repurchases in 2020, With our dividend increase in October, marking a decade of continuous double digit annual percentage increases since initiating the dividend. Given the strength of our balance sheet and over $600,000,000 in cash at year end, we remain well positioned to fund additional acquisitions and increase our Dividend and share repurchases. As we have consistently communicated, we prefer to maintain flexibility to capitalize on stock market dislocations. This year, we've already repurchased over $65,000,000 of shares year to date and expect such activity to continue throughout the year. Now, I'd like to pass the call to Mary Anne to review more in-depth the financial highlights of the Q4 and provide a detailed outlook for Q1 And the full year 2021, I'll then wrap up before heading into Q and A.
Thank you, Worthing. In the 4th quarter, revenue was 1.398 $1,000,000,000 about $63,000,000 above our outlook due to higher than expected solid waste volumes and recycling and renewable fuel values, as well as about $12,000,000 from acquisitions closed during the quarter. Revenue on a reported basis was up $36,000,000 or 2.7 percent year over year, In spite of E and P waste activity down $37,000,000 year over year. Acquisitions completed since the year ago period Contributed about $56,500,000 of revenue in the quarter or about $52,700,000 net of divestitures. Core price in Q4 of 4.3%, less about 50 basis points in fuel and material surcharges was in line with our expectations.
Pricing range from about 2.7% in our mostly exclusive market Western region to between 3.9% and 4.3% in our competitive markets. As Worthing noted, solid waste volumes improved by 260 basis points sequentially in Q4 to negative 3.1%. Volumes improved in all of our regions, led by our mostly exclusive Western region, where volumes were positive 3.7% on strong underlying activity in many markets, improving landfill tons and roll off activity. Elsewhere in the U. S, volumes range from about negative 2% in our southern region to down about 8% in our most impacted Northeast U.
S. Markets, which were hardest hit by the pandemic and remained slowest As we have noted throughout the pandemic, our volumes largely reflect the pace and shape of shutdown and reopening activity across our markets. Relative weakness has generally persisted in those markets hardest hit by COVID-nineteen and related restrictions. That said, Canada's recovery has thus far outpaced It's reopening activity, with volume losses cut from about 9% in Q3 to about 4.5% in Q4 On strong disposal volumes. Looking at year over year results in the Q4 on a same store basis, we once again saw sequential improvements In all lines of business from the prior quarter, commercial collection revenue improved by 150 basis points to down 1% year over year.
Excluding the most impacted markets in the Northeast and Canada, commercial collection revenue was up 1.3%. In the aggregate, through Q4, about 65% of solid waste commercial customers and 56% of associated revenue in competitive markets we track had suspended or reduced service had reached out for a resumption of service or increase in frequency. These levels are largely in line with the rates we saw through Q3 In spite of renewed COVID driven restrictions in certain markets, roll off pulp per day increased sequentially by about 300 basis points to down 4% year over year with revenue per pulp up 1%. Canada's recovery continued in Q4 to down less than 1% year over year. U.
S. Markets still lag those levels, but drove the sequential improvement in the quarter to down less than 5%, led by West Coast markets. Landfill tons improved sequentially by 100 basis points to down about 5% year over year due to the strength of MSW tons, which were up 2% year over year with price per ton up 3%. Widespread year over year increases in many markets We're led by landfills in California and Oregon. Special waste and C and D tons were both down 14% to 15%.
Looking at Q4 revenues from recovered commodities, that is recycled commodities, landfill gas and renewable energy credits or RINs. Excluding acquisitions, in the aggregate, they were up about 50% year over year due to both higher RINs and higher recycled commodity revenues Due to strong fiber values, resulting in a margin tailwind in the period of about 70 basis points. Prices for OCC or old corrugated containers averaged about $85 per ton in Q4, ended the year at about 90 And have since been in the range of $100 to $105 after averaging about $1.80 in Q4 and ending the year at 2.10 RINs have been in the range of 225 to 250, bolstered by a supportive political and regulatory environment. Moving next to E and P waste activity, we reported $25,500,000 of E and P waste revenue in the 4th quarter, up sequentially from Q3 as activity firmed up on higher rig counts and increased remediation work. Adjusted EBITDA for Q4 as reconciled in our earnings release 426,600,000 about 27,050 basis points above our outlook at 30.5 percent of revenue.
A 100 basis point year over year improvement in solid waste, plus 70 basis points benefit from recycling and renewable fuels It was more than offset by drags of 100 basis points from lower E and P waste activity and 50 basis points From the prior year CNG credit, along with another 50 basis point impact primarily from discretionary COVID-nineteen related and incentive comp costs And the margin dilutive impact of acquisitions completed since the year ago period. Full year adjusted free cash flow Of $841,900,000 or 15.5 percent of revenue exceeded the high end of our guidance and reflects a conversion of 50 0.7% of adjusted EBITDA, in spite of capital expenditures about $25,000,000 above expectations, as we capitalized on opportunities for fleet and equipment at year end. Even more important is the free cash flow we didn't deliver in 2020, including from the deferral of payroll taxes as provided for the CARES Act and from the benefits of working capital, which provide a strong cushion Going into 2021, I will now review our outlook for the Q1 and full year 2021. Before I do, we'd like to remind everyone once again That actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and filings we've made with the SEC and the Securities Commissions or similar regulatory authorities in Canada.
We encourage investors to review these factors carefully. Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction related items during the period. Looking first at the full year 2021, Revenue in 2021 is estimated at $5,800,000,000 For solid waste, we expect price plus volume growth of 5%, With E and P waste revenue and the values for recycled commodities and renewable fuels assumed about in line with current levels. Adjusted EBITDA in 2021 as reconciled in our earnings release is expected to be approximately $1,800,000,000 or 31% of revenue, up 50 basis points year over year.
Underlying margin expansion in the year for solid waste collection, transfer disposal is estimated at approximately 60 basis points, with an additional 60 basis points benefit from higher values This combined 120 basis points improvement is projected to be partially offset by an approximate 30 basis points margin dilutive impact from lower E and P waste activity at current rates, a projected 10 basis point drag Acquisitions are in place for the year and an additional 30 basis point drag from certain discretionary COVID related costs, which we have assumed may continue in 2021. To the extent that COVID infection rates and other related employee impacts abate during the year, Such costs would be expected to abate as well. And as noted earlier, our initial 2021 outlook does not include Any benefit from reopening activity or an improving economy driving higher solid waste volumes beyond the levels recovered through Q4, Any pickup in E and P waste activity or additional acquisitions closed during the year that will provide upside to our initial 2021 outlook. Regarding tax rates, our effective tax rate for 2021 is expected to be approximately 20% with some quarter to quarter variability. Adjusted free cash flow in 2021, as reconciled in our earnings release, It's expected to be at least $950,000,000 or approximately 16.4 percent of revenue on $625,000,000 in capital expenditures.
Turning now to our outlook for Q1 2021. Revenue in Q1 is estimated to be approximately 1,370,000,000 We expect price growth for solid waste of approximately 4% in Q1 with volume of about negative 4%. Excluding the impact of the severe winter weather we are experiencing across many states and provinces, volume trends remain consistent just slightly improving since Q4. Year over year comparisons for Q1 also reflect the estimated 50 basis point benefit In the 2020 period, from the extra day due to leap year, as well as the strong start to last year that we observed prior to the onset of the COVID-nineteen pandemic. E and P waste revenue and recovered commodity values are expected to remain in line with current levels.
Adjusted EBITDA in Q1 is estimated to be approximately $415,000,000 or 30.3 percent of revenue, up 10 basis points year over year in spite of the continued margin headwinds expected from 1 final quarter of tough Comparisons for solid waste volumes and E and P waste activity. Similar to the full year outlook, underlying margin expansion in solid waste Calling, transfer and disposal is projected at 60 basis points in Q1. Depreciation and amortization expense for the Q1 estimated to be about 13.8 percent of revenue, including amortization of intangibles of about $32,600,000 or $0.09 per diluted share net of taxes. Interest expense net of interest income is estimated at approximately $42,000,000 And finally, our effective tax rate in Q1 is estimated to be about 19%, subject to some variability and below the expected full year rate due to tax benefits associated with vesting of equity based compensation. And now, let me turn the call back over to Worthing for some final remarks Before Q and A.
Thank you, Mary Anne. The strength of our results in 2020 and expectations for 2021 Reflect our purposeful culture and differentiated strategy. Moreover, they are a testament to the tireless efforts of our dedicated essential workers. We are extremely grateful for our employees' efforts to drive not only outsized financial performance during this challenging period, but operational excellence as well, as they honor commitments to our customers, communities and each other. Operational excellence is also evident in our progress towards Our ESG targets, including as noted earlier, further improvements in safety and employee retention.
We also see it in employee engagement I want to once again express my personal gratitude for the support of our customers, the partnerships we share with our communities And especially for the commitment and vigilance of our 19,000 employees who have made 2020 a success by any measure and positioned us for continued growth and success in 2021 beyond. We appreciate your time today. I'll now turn this call over to the operator to open up the lines for your questions. Operator?
Thank Our first question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.
Thanks very much. Good morning, everyone.
Hi, good morning, Walter.
So I want to start with the volume guide here. Obviously, you're Assuming the conditions stay in place, so that's I hope that's conservative for all of us. But when you look at your Q1 here, I look at what you guided to for your Q4 when you were trending kind of 5.8%, you indicate negative 5.8%, you were Just trying to get a sense of whether there is some inherent conservatism Built in as early as the Q1, I would have thought that your conservatism was mainly on the H2 expectations, but it does Look like there's a little bit of a expectation built into your guidance for perhaps a deterioration here in the Q1. Just wanted to square that
Thanks, Walter. I'll start and hand it over to Mary Anne. As we pointed out in the script, and it may have been lost, When you look at just the impact of leap year last year compared to this year, right, we said that was also about a 50 basis point impact to volumes. The weather impact alone, we've assumed is 50 to 70 basis points of impact to volumes in the period as well. And so if you just look at the weather impact and leap year, that's over 100 basis points impact to the 4%.
Another way of saying, we probably would have guided between 2.5% to 3% down had it not been for the weather this week as well as obviously normalizing for the leap year.
Okay. So it's really relating to those and nothing else. Okay. Moving on to the mix
In the script that the trends continue to improve since year end.
Right. In terms of Your guidance for full year revenue, I was wondering if you could give us a little bit of color on particularly around mix and how that's playing out for the year And disaggregating between volume and price within that your core price and volume, but particularly around what you expect The magnitude of the mix impact for the year built into your guidance?
Sure. So we said 5 Price plus volume, but you've seen us delivering around 4% price. So you could easily break that down to be about 4% and about 1 Could be a little more than that on price. Right out of the gate, what I can say is the stickiness has been good. We've been pleased with what we're seeing And Phil, as with other years, we're set up to do a little to deliver a little better than what we expected or talked about.
So I'd say that's a fair way to think about it, Walter, is 4 in 1.
So no impact from mix there that's embedded in your 4% guide?
Yes, that's correct.
Okay. And so that obviously a bit, Walter, the upside then if you're trying to look for it, while it might be modest above the 4% of price, It's probably more so on the volume side, right? If more COVID impacted revenue comes back, if GDP really hits 5%, if Washington passes a $1,900,000,000,000 stimulus package. I mean, there's so many variables that can drive the 1% notably higher, but Let's see how this thing plays out before we all commit to that.
Makes sense. Appreciate the time.
Our next question comes from the line of Tyler Brown with Raymond James. Please go ahead.
Hey, good morning, everyone. Hey, Worthing, so I want to come at the volume guide a little bit different. So I just want to make sure it's clear. You're taking basically a snapshot of today and simply rolling that forward, right?
That's correct.
Okay. So you talked about 40% of the commercial customers that have paused haven't returned. So if I just played around with the scenarios, so we don't have all the numbers, but at a high level, if say just half of those eventually came back, what would that maybe add to volume? Would that be something like 100 basis points Just a loan?
Yes, that's absolutely right. I mean, it's about $100,000,000 or so of revenue in the markets that we track that have not come back Due to the COVID impact. And so if half of that came back, that's $50,000,000 again, that's about 1% increase in volume activity. And the flow through from that is somewhere in that 40% to 50% range given the attractive incrementals as that comes back.
Right, right. And that doesn't even include if roll off pulls or even new resi subscriptions, anything else kind of comes back
Yes, more of the explosive expectations around GDP for the year or again whatever the stimulus might do, gas coming off the sideline, etcetera,
Okay, perfect. That's very helpful. So Mary Anne, so thank you so much for unpacking the 50 basis points of overall But I've got to say I'm a little unclear on COVID costs specifically. So I think you said the COVID costs Will be a 30 basis point headwind year over year in 2021. Is that did I hear that correctly?
So what I mean that the point we were trying to make, Tyler, was that there will be ongoing COVID costs, which amount to about 30 basis points of an impact. So expenses that continue while lower year over year as compared to what we put into the business in 'twenty. The point is, we're going to continue supporting our employees and we've assumed that there's a 30 basis point impact related to that. And again, to the extent that that's not necessary because these other things happen, the reopening, the reduction in cases, then those costs would abate.
Okay. Okay. Thank you for clearing that up for me. And then just my last one here. So to be you talked a little bit about The weather in Q1, so maybe you've already answered this question a little bit, but you're expecting some volume and you're kind of baking in the volume and the cost It could come from this kind of winter blast, if you will.
That is basically in the Q1. Okay.
Okay. Well, I
know it's going to I know it'll be a long call, so I'm going to go ahead and pass it on. Thank you.
Okay. Thank you.
Our next question comes from the line of Jeff Goldstein with Morgan Stanley. Please go ahead.
Hey, good morning. So it sounds like special waste and C and D is still providing a meaningful drag. I think you mentioned down mid teens on boats in So I'm just curious what you're hearing and seeing from customers in these markets and how you're thinking about growth there in 2021?
Well, right now, it's just a question of anniversarying the depth of the pandemic. This will be the last quarter where we would see these kind of Clients in those two streams. Look, some geographies, we still see quite a bit of strength in special waste, but in others, It can be episodic. And so I think in getting through the Q1 print and anniversarying the pandemic will change those percents.
Yes. To Worthing's point, I'd remind folks that if you look back to last year in Q1, in spite of the fact that the pandemic ultimately Impacted numbers in March, special waste was up 17% year over year. So you just the comp in and of itself was going to be difficult
Okay, fair enough. And then, excuse
me, I just want to
ask an ESG questions, specifically around the $500,000,000 of investment you called out in your sustainability report towards meeting your 15 year target. Just how will this $500,000,000 flow through the model over the long term? Does it cap margins in any way? And how much is incremental to what you were investing prior to this Announcement, just overall, how should we think about the financial impact of the investment?
Sure. If you take that $500,000,000 for instance and just divide it by that 15 year period or so, obviously, you get to a number of about $35,000,000 or so a year, which on a $625,000,000 spend right now, that's just part of our normal One course of making prudent investments, driving the return and everything we've always done has been consistent with these With our ESG priorities and targets, it's just that we haven't really packaged it from a communication standpoint, Which is what we're doing now. I mean, if you look at it from a margin standpoint, what we'll deploy over the next 3 to 5 years, We'll likely have a $25,000,000 or more benefit incremental benefit to EBITDA alone. And so again, these are the right investments. They're consistent with what we've done in the past.
And again, everything we also do has an element of returns based analysis with it.
Our next question comes from the line of Kyle White with
On service resumptions or increases in frequency on commercial collection that had previously suspended or reduced Can you give a bit more color as to why you think this didn't improve much from 3Q? And do you have a sense of how many commercial customers might be permanently closed?
Sure. So with respect to your observation that it didn't improve Q3 to Q4, What we would say is that we were kind of braced for the possibility that there would be deterioration because if you kind of wind back to October when we were looking at that, We are on the verge of some surges, reemerging and some renewed lockdown activity, which of course we all saw in Q4. And so our observation is in spite of those renewed restrictions, particularly interestingly on the West Coast and Canada, You've seen the business holds up, so the recovery stayed basically in line with where it was in Q3. And I would say the other thing to remember is, I think that tells part of the story. And in addition to that, you have the markets which aren't competitive markets, so the exclusive markets, as I mentioned, the West Coast, but also you have the other lines of business like roll off poles And landfill tons, and we made the observation that you saw municipal solid waste tons, which as you know account for 65%, 60% of the landfill tons, that improved sequentially by 500 basis points Q3 to Q4.
I think you have these other drivers which show why we are seeing potential volume improvement. And then to your question regarding Customers who are permanently out of the equation, as we've said in prior periods, what's interesting is if I look at cancellation rates, there's no discernible difference this year versus prior years, which leads us to believe that that's not the full story, Which is why we think it's appropriate to view things the way we have, which is to say, hey, we'll give you guidance that It gets no better from here and we'll communicate what those numbers are as Worthing described getting a point back from exiting the year down 3%. Some percentage will come back and we're not in a position to guess what doesn't come back.
When you're talking restaurants, office buildings, staffing up again, tourism increasing, schools reopening, Arena is refilling. I mean, there's a whole element of revenue that's missing right now that will be Dependent upon how the economy reopens and the timing of that.
Got it. That makes sense. And then on return to shareholders, you seem to suggest that repurchases will be kind of a bigger portion this year, which makes sense considering your leverage. Do you have a target for how much in buybacks you want to complete this year Or maybe perhaps a minimum leverage target that you don't want to go below that you view as kind of suboptimal from a capital structure standpoint?
So we're very comfortable where we sit. We like the flexibility that leverage in this 2.5 to 3 times gives us. And We'd be less about having it being driven by that, but we just want to continue to be opportunistic, which is what we demonstrated we've already done thus far this year. And Again, we look for those opportunities to present themselves throughout the year. So there's not a specific target, but as we said, the
Our next question comes from the line of Hamzah Mazari with Jefferies. Please go ahead.
Hey, good morning. Thank you. My question is on M and A, both sort of short term and long term. Maybe 2021, do you sort of expect this year to be like last year? Are there any LOIs signed sort of so far?
I know last year was sort of above average, but below average relative to what you were doing in the sector. And then just long term, Your overlap is pretty low with others. Do you foresee another mega merger in the space as it relates to You've obviously integrated assets that are large like Progressive Waste pretty well. So just any color around Short term and then much longer term M and A would be helpful.
Sure. The short term, Hamzah, as we said, the dialogue It continues to be elevated. If we think an average year is 125 to 150 in acquired revenue, we're positioned to meet or exceed that. The timing of that might be a little different given some of the stuff that we thought may have closed in Q1 of this year got done prior to the end of last year. And so you likely see more activity in the second half of this year versus the first half of this year with regards to that number.
But again, what's been driving sellers in the past to drive seller dialogue right now. I'd say the majority there are a couple of acquisitions That or above that $50,000,000 or $75,000,000 range that we're looking at. But the predominant of the deals we look at, as You know historically is in kind of that $10,000,000 to $30,000,000 range with a few higher than that on average. But so That pace of activity, that profile of what we find attractive and value creative hasn't changed. With regards to larger deals, never say never.
But clearly, when you look at the experience that Waste Management and Advance had with DOJ and going through that protracted period, when you look at other companies that have been hung up in second reviews For what you would think of the even smaller transactions, never say never about large combinations, but We all recognize that the you better be making prudent assumptions with regards to what you're going to get on the way out of those things, right? But again, there's nothing on the horizon right now as we look at it that's need of moving like that.
Got it. And just my follow-up question. Just on Canada, the strong disposal activity That you saw that you referenced sort of outpacing reopening activity there. What's the sustainability of that disposal activity as you look into 2021? Thank you.
We've seen that trend continue into 'twenty one, Hamzah. And in fact, as Mary Anne talked about reopening activity in some of the COVID impacted markets, Calgary and Montreal were 2 of those top 3 with New York City Being number 1 in that recovery. And so despite the veracity of the lockdowns in Canada, we still see the business holding up very well. And as the lockdowns unwind, we'll see that rebound even further.
Great. Thanks so much.
Our next question comes from the line of Kevin Chiang with CIBC. Please go ahead.
Thanks for taking my questions here. Hopefully everyone is staying warm given the storm. Our houses
Our flood is with bursted pipes and our sheet rocks on the floor. But other than that, go on.
You're experiencing a little bit of Canadian winter, I guess, Down in Houston. Maybe if I can ask about how you think about the longer term cost of risk For Waste Connections, you've always had a competitive advantage there. But when I look at your turnover this year, Voluntary turnover that is, you saw pretty significant decline. You've done some stuff On the hourly wage rate, you're introducing new technology into the fleet. Just and I guess you have a longer term target of a lower incident rate, I think of 25% is in your sustainability report.
Just wondering if I roll that all together, what does that mean for the cost of risk As you look out maybe 5 to 10 years from now.
Yes,
that's I'd just be crystal balling it and swagging it. And I say that What you find is when you get to as low a level as we are right now, meaning frequency of incidents and our TRIR, Look, some companies have long term targets to get to a TRIR that's 35% higher than where we're at right now. And so I say that because when you get to certain low levels of frequency, I mean that includes people hitting us too, right? It gets harder and harder on a frequency standpoint to continue to move the needle as notably as we've done over the past 15 plus years, right? And so, yes, we hold ourselves accountable to further improvement in that.
We are making the investments on the capital side. Obviously, we've always said it's more about human behavior than it is about technology, right? It's how humans use that technology and coach for improvement, for instance. So look, without a doubt, look, our jumping off point now It's probably around that 1.2% to 1.4% of costs right now. From a risk standpoint, We'll drive frequency down lower.
That'll help severity as well. But I think the cost push against that, To be honest with you, Kevin, as you may know, the insurance industry continues to drive our premiums for whatever risk you ask them to take above retention levels. And obviously, always the risk of 1 or 2 incidents over time that might be And expose yourself to litigation in the U. S. But Huawei is saying, look, we got to continue to drive improvement.
We're making the investments, holding ourselves accountable. Look, if we just look at it alone, I think 5% of our locations last year had over 25% of the incidents. And so making a focused effort on those 5% of the locations that are that much above average In risk, that's where we really see the greatest improvements on a year over year basis is Getting everyone to where we want them to be, especially getting the outliers to show that kind of dramatic improvement that we expect.
That's helpful. And maybe just a clarification question, maybe on the back of Hamzah's question on Canada. Maybe I was surprised to hear that the it sounds like the recovery in Canada is outpacing maybe what you're seeing in the U. S. Northeast.
When I think of both regions Is there something happening in Canada specifically or maybe something happening or not happening in the U. S. Northeast that's resulting in outperformance In Canada, I guess, looking over the past quarter or 2?
Yes. It's likely just the lower jumping off But we look at the dollar improvement just last week, for instance, On a dollar basis, on a weekly improvement, with I think the Calgary was probably 70% of what the dollar improvement was up in New York and Montreal was probably close to 50% of the dollar improvement up in New York. And so it's just a
The other observation I would make, Kevin, is that we saw the improvement in roll off, which started in Q3. So there could be that Pre pandemic, there was strength in certain markets like in Quebec, for instance, we had noted that. And we saw that kick right back in once restrictions were lifted. So I'd say the other aspect is maybe some of the restrictions are a little different market to market.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.
Hey, thanks. And first, Just want to echo what others have said. I hope everyone's families and customers are safe during the polar vortex And then you come out of this as painfully as possible. First question, just Around the free cash flow trajectory, so you outperformed the guide this year and you did so despite building what It appears to be a really outsized working capital cushion heading into 2021. You kind of left the 950 1,000,000 free cash flow bogey unchanged for 2021.
So can you call out any free cash flow Headwinds or one time items that we might want to think about in 2021, anything that might lap or reset in 2022? And
Feels like we left ourselves the opportunity to do better than 950,000,000 and of course the guide is at least 950,000,000 And to your point, as we've communicated throughout 2020 and again today, we did position ourselves that way And then payables, for instance, as we exited the year and the fact that we said CapEx was about $25,000,000 higher than we'd anticipated and we still delivered the cash flow better than the high end of our range. To your point regarding things that are unique to 'twenty one versus 'twenty, You're right, the observation that the CARES Act benefit, right, that we all enjoyed in 'twenty, you then have payroll taxes Back in, in 'twenty one and you repay 50% of what you were able to defer. So the math for us, that was a little over $40,000,000 is what the Deferral was and so that returns in 'twenty one plus half of the repayment, so about $20,000,000 And of course, that's already factored into the to be at least $950,000,000 that we've communicated.
Yes, I know you're looking at the decline in payables, but Look, we typically roll them every year with a cushion. So if you just take Mary Anne's $60,000,000 or 65,000,000 The reversal of CARES and of course the payroll taxes and paying it this year, and net debt against that $140,000,000 or so, That gives you what about net of $80,000,000 of cushion. It's not uncommon for us to have anywhere between $60,000,000 $100,000,000 of cushion going into any one year.
Our next question comes from the line of Michael Hoffman with Stifel. Please go ahead.
Hey, where are they? Mary Anne, thanks for the questions. I want to go back to service intervals for a second. So you clarified the progression 3Q into 4Q. How are you thinking about service intervals When I look at the guidance, is the assumption is it just no headwind, neither good or bad, it's a net neutral?
And therefore, that also offers an opportunity. So we're answering your question for you. Go
ahead. That's right.
Okay. So therefore, housing has always helped create new business formation When it's above a certain level, and we're running at 300,000 starts above a 5 year average. So that's a there's a potential for You build enough houses, you exhaust the infrastructure and you need another drugstore and things like that. It backfills the empty storefront. That's all upside potentially.
That's right. This is what we said is that, look, we're not going to predict the timing or the magnitude Of the improvement in the economy or the timing or the inflection point of the recovery from COVID, and so when we communicate 5 combined price plus volume, what we're saying is that that's the business we know we have today.
Okay. That's perfect. So we have a backdrop of maybe this housing cycle could be a benefit into the year as well. And then Incremental margins, so classically, in my tenure, we've always talked about sort of 40%, and it's been just Kind of a statement of 40%. Is it fair we're entering this year with a little bit of juice there because you were able to Use the pandemic as that laser focus to drive a little incremental productivity, the combination time wait and come out of it with just a slightly better incremental.
It feels like that in your solid waste margins when I look at what you did in 4Q that the incremental was Slightly better than a long term trend.
Yes. I mean, if it's primarily resulting from recovery in commercial And recovery and disposal tons, you're absolutely right. Those are the 2 highest incrementals with regards to solid waste. And so that's why you've seen above average incrementals On the returning revenue from COVID.
And some of it's structural too because you've lowered The absolute cost to win all of the models? Well,
that's just reduced bar bills, Michael, you know that. If you start spinning bar tabs again, what would that cost back in?
Yes, yes. Okay. I have to remember this is a drinking company that has a garbage problem. Inflation, can you remind us why garbage loves inflation?
Sorry, we had trouble hearing the end of your question.
So can you remind us why the garbage industry loves inflation?
Well, as you know
I get questions about this all the time and I just want them to hear it from you, why you love inflation.
Well, look, it's but we don't like runaway inflation, right? That's not good for anyone. But if you look over time, We'll typically average 150 basis points or more over CPI. And so as CPI comes back up, That will help pricing. Obviously, look at the cost structure, you got leverage going through the cost structure because not everything inflates at that rate Within the P and L, obviously some things like labor have been moving higher than that recently, meaning recently over the past few years.
And so that won't I don't see that stopping. But obviously, with labor being about 20% of cost as a percent of revenue, Obviously, getting that spread to CPI on the top line provides a lot more coverage to what moves through the middle And it creates higher opportunities for margin expansion through the P and L. Now what you also see obviously is the cost of CapEx goes up too, right? Let's not lose sight of that. Just this year alone, you're seeing again the cost of steel increases and the cost of kind of resin increases that are hitting toner prices.
And so, yes, you get benefits in the P and L, but also understand that there is some unit cost inflation within CapEx as well. And so it doesn't all flow through the cash flow, but a good chunk of that does.
And the one thing I would add to that, Michael, of course, is to the reminder that Inflation helps on pricing. What matters at the end of the day is if your pricing sticks, right? And so you want a market model that allows you to retain the price and deliver that 150 basis point spread to CPI that Worthing described, which we've demonstrated through the Great Recession, through expansions, we've demonstrated we've done that. Through expansions, we've demonstrated we've done that.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Stephanie Yih with JPMorgan. Please go ahead.
Hi. I just want to ask about kind of your longer term margins, whether you think there's room for it to Step up to maybe like the mid-30s, I'm talking about EBITDA margins, because we saw solid waste underlying margins Stand 90 basis points in 2020 and then you're assuming 60 basis points in 2021. I guess, how much At that, do you think is a lower cost structure that you're able to operate at because of some of the cost efficiencies that you gained during the pandemic? Or do you think we need some of those recycling prices or E and P to pick up to really move towards kind of higher 30s type of margins?
Sure. You've got a handful of things as you know that influence it. As Mary Anne pointed out already, there's just a 30.5 We reported in 2020 had a total of 150 basis points, right, just from the change in E and P waste activity and the discretionary cost we put in for COVID. Now assume the pandemic wanes, the quick march back up to recover that gets you back to the 32 as a jumping off point for last And then you put the 50 basis point expansion on this year. Obviously, the March is already there to the mid-32s as you do the walk.
Over time, we always talk about a 20 basis point to 40 basis point assumed expansion of margins given that spread to CPI. And so you can see a multi year walk assuming E and P comes back to the levels we had last year. You Got the year to year margin improvements. And obviously to the extent that recovery commodity values move higher within the inflation expectation, That also has very high incrementals in the flow through. And so to get anywhere near like the 34% plus or minus range, Everything's got to be working for you, both price, the tons in our landfills from E and P waste activity coming back as well as recover commodity values moving it forward.
What you don't see much anymore is that is the kind of margin dilutive impact from acquisitions Again, the denominator is so big for the base business that we have that even if we're doing $150,000,000 to $200,000,000 of acquired revenue per year, That is very negligible impact on reported margins. So that drag is less notable.
Okay, great. Thanks for painting that picture for us. And also this is kind of a bigger picture question as well. If we were to get an infrastructure bill passed, can you just talk about qualitatively how that might impact your business?
So to the extent there were to be an infrastructure bill that would be expected to impact volumes, of course, right? So You'd see it in development projects, things like special waste and C and D activity, and you'd see it in overall Economic growth that would be fueled by that infrastructure bill and so we would benefit also on the Holly side. So, certainly would be a boost for the industry and
Our next question comes from the line of Sean Eastman with KeyBanc. Please go ahead.
Hi, team. Compliments on closing out
the year strong. I just wanted To dig in on the COVID-nineteen related costs, I mean, the magnitudes, both in 2020 And what you've included in
the 2021
guidance really stands out. And I guess the question is, 1, Does the nature of those costs change going into 2021? And 2, I mean, there has to be a payback Around what you guys are spending there. So if you could just talk about how that percolates through and what that does for the business, that would be helpful.
Sure. I mean, look, we don't do this because of a payback. We do it because it's the right thing to do, right? Yes, Yes. If you look at what we did last year early on in recognizing our folks as essential work has had to show up every day versus You know, stay secluded, and that warrants supplemental wages, right?
That warranted Basically, unlimited wage support for folks that couldn't work because if they had a loved one that was impacted or if they contact traced If they tested positive, that wasn't their fault. And so last year, we had people that got several weeks of Based on just a sequencing of issues that defiled them, and that was 1,000,000 of dollars, right, and just What I call wage support on top of it just because the impact of the pandemic. Obviously, as the year wore on, we put a thank you bonus in the fall because once Again, as they power through it, we knew that the infection rates and the toughest time in the pandemic would be December, January, and so we got ahead of that mentally with folks and put a thank you bonus out there before Thanksgiving, heading into holidays to Really to steal them mentally, to be prepared for what was about to hit them. And we were right. I mean, as you guys everyone knows that 3rd wave that hit The holiday season was unprecedented in the span of the pandemic, with many times infection rates 5 6 times, And our folks power through it.
And so we look at, again, wage support that continues. Obviously, you look in January, We're probably spending $250,000 a week on wage support for folks that were isolated for one reason or another. That's important. Again, it's this most of these most of our people have spouses that may have lost a job or had hours cut back. And so that incremental support is invaluable.
So obviously, we do a number of things like that in those support programs, The weekly wages we give for folks that are out, that continues to the extent needed to Mary Anne's point. As infection rates come down, I think The need for that will abate, but nonetheless, the program, the policy is still there. Obviously, It's an easy reminder how hard our people work on a daily basis. And so we made sure that we put a $15 wage $50 per hour minimum wage target out there. We found we had about 4% of our employees below that amount.
And I think it's Look, our employees shouldn't have to go work 2 jobs to make ends meet, right? And so It was important to put that out there as well. Again, all these things are just the right thing to do. The payback is not What we consider, now we can look at the evidence and see what's happening out there. And I'm glad that we did it.
I mean, I think this whole industry can do better as you look around this industry with how it pays its people, especially
Our next question comes from the line of Mark Neville with Scotiabank. Please proceed.
Hey, good morning. Thanks for taking the questions and hope you're staying safe as well. Maybe just a couple of points of First, just on the recycled commodity values and the RINs and what's baked into the guide. So when you say it's you Assumed at current levels, is that Q4 or sort of where we're trending in Q1?
No, it's The current levels, basically where we've been trending in Q1, as we mentioned, we've seen them tick up. They ticked up over the course of the quarter and We're around $100, dollars 105 per ton on OCC, and you've seen rents in that $2.25 to $2.50 range.
Okay. And then I guess on the E and P, I guess the similar type question again. I assume it's sort of relative to Q4, maybe where we're at now. But is there again, with the I guess the increase in the commodity price, oil price, would you Your sort of thoughts around that business improved for the year or?
So our assumption at this point and what's included in our guidance is that We stay at essentially the current run rate. So that would imply it's around $25,000,000 per quarter, dollars 100,000,000 for the year with no assumed pickup. As some other people have speculated that there will be a pickup in the back half of the year, that has not been factored into anything we've communicated.
Okay. But I guess with WTI north of 60, have you seen sort of any noticeable improvements or is it just too soon?
No, we really haven't. We'd say it's too soon. I mean, you've seen rig count up, you've seen WTI increasing. And as we said, it firmed up in Q4, but nothing material since then, no.
Okay. And maybe just on the ESG front. Again, in Canada, we have a carbon tax policy. I guess when you think about these things, is this something that's Recoverable, is it sort of a headwind to you? Is there would it require sort of a bigger investment across your network in Biogas or does it create opportunities for M and A, just sort of how you think about sort of these things and just in general?
Thanks.
Well, there's a lot of thoughts on it, Mary, and there's a lot to unpack in that question because there are many differences here. So With regards to carbon taxes that we may incur, those are pass through. With regards to opportunities for us, obviously, with regards to, For instance, the biogas and renewable fuel side, clear opportunities. I mean, we're looking right now at building our 2nd large Gas plant in Canada, I would hope within we've worked on that for many years, I would hope within 2 to 3 years, That's easily online, and you'll see the economic benefit of that flowing through the P and Ls. But so it's a lot of different things that we're doing, both in the tax That it's being imposed upon us, that's being passed through.
Obviously, the investment opportunities that we laid out are part of our ESG and $500,000,000 commitment Over the span of those targets.
And the one thing I would add to that, Mark, is that when we look at what's required in Canada, we No change to our operations or anything we need to do. It could impact others and so could level the playing field in a way that helps us.
Right. Okay. Thanks again for taking the questions.
I'm showing no further questions at this time. I'll turn the call back for the presenters.
If there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and I are available today to answer any direct questions that we did not cover, that we're allowed to answer under Regulation FD, Reg G and applicable securities laws in Canada. Thank you again. We look forward to speaking with you at upcoming virtual investor conferences or on our next earnings call. Thank you.
Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.