Hey, good afternoon, everybody. We are back with the last presentation of the day. We're going to close out day two strong here with the continuation of the waste theme. We're happy to welcome Mary Anne Whitney, CFO of Waste Connections to the conference. Of course, Waste Connections, one of the largest solid waste providers in North America. Mary Anne, thanks so much for joining us today.
Well, thanks, Brian. We're glad to be here, and we appreciate Goldman Sachs including us in this virtual conference, and welcome everyone.
Thanks. Before I get into my own questions, just wanted to remind the audience, everyone on the webcast, that you do have the option to submit your own questions. Unfortunately, we're not in person this year, so no ability to do it audibly, but you are able to submit them electronically through the webcast. There should be a dialog box on there. Those questions will come into me. I'll be reading them aloud towards the end of the presentation. First, I did have a couple of my own to kind of run through. The most important ones will be around recent volume trends and sort of what you're seeing. It seems to be what people are most focused on and most interested in these days.
The earnings call was pretty recent, but interested to hear if some of the early signs of a recovery have continued since then. It's probably too early to call the slope and the shape of the recovery, but just interested to hear if we've seen some of that momentum continue and if there's any metrics you can provide on volume trends in the last couple of days.
Sure. Glad to. As you mentioned, Adam Bubes, on our call last week, we talked about some of the trends that we were seeing in the business really for the month of April, and our trackers that we've been using on a daily and weekly basis for the last several weeks, and how we were seeing the improvement in the business, which was encouraging. Specifically, some things that we look at and the trends we've seen would start with landfill volumes. What we said last week with the landfill volumes were down about 13% at the trough, and as of last week, they'd recovered about 5% of that, and at this point, that number has increased to nine. We had about a 3% sequential increase week-over-week to add to landfill volumes. Similarly, on roll-off pulls, another good real-time indicator of activity, of course, construction-driven.
We had pulls down about 17% at the trough. As of last week, we talked about getting back about 9%. That number is now 12%. Again, similar sequential improvement on the roll-off pulls as well. The third indicator we had talked about last week in terms of activity levels would be with respect to our commercial account activity. What we said there last week is that we track our competitive commercial account, and we had seen as of last week, resumptions or increases at 12% of accounts, which accounted for an increase of about 9% of the revenue that we had lost or had gone away through suspensions or reductions in service. Those same metrics as of this week would be about 17% of our accounts, representing about 12% of revenue.
Coming off the bottom, we've seen this week in, week out now where we've seen improvement. It became less negative for several weeks, and then we saw it turn positive, and now, as I mentioned, we continue to see the sequential improvement, and that's in those accounts where you saw reductions or suspensions of service. Generally, that was due to the shutdowns required in various municipalities where we've seen the business drop off most dramatically.
Am I thinking about it right? That it sound like in April, in general, you saw somewhere around low double-digit decline in volumes overall, and then now it sounds like you've gotten back maybe 15%, 20%, maybe a little bit more than that, and that's kind of how you're tracking of the decline?
Well, I'd say, the absolute numbers, if you think about the fact that we got back 12% off the bottom, you've got a mixture of what was going on in April. It was declining or stabilizing and then starting to come back. I think more in terms of the sequential improvement in May, if we had negative 12% volume in April, could it be a little better in May based on these numbers we're seeing? Yes. That's a reasonable way to think about it. Arguably, what this math says is we've gotten back about an eighth of what we lost. Right? We're still way off the prior peak, but we're beginning to climb out.
Got it. No, that helps clarify. That makes sense. Is there a chance that the volume drop is really just temporary in nature? Obviously, the lockdowns are driving a lot of it. We could get a sharp snapback as businesses reopen, and have you seen that in those cities that have started to reopen? We both live in Houston. It's kind of sort of trying to reopen a little bit by bit, are those the markets where you've seen that snapback in volume so that we can kind of extrapolate it and say, "Hey, this is really just going to play out regionally based on when lockdowns end"?
I think that's a fair way to think about it. What I can say is the following: we've seen sequential improvement in all of our regions, which is encouraging. To your point, how impacted each area was really has varied by the nature, the pace, the degree of the lockdowns. What we said on last week's call was, by way of example, there's a big contrast between our most impacted region, and in our model, that's our eastern region, which includes the Northeast and markets like New York and Upstate New York and Rhode Island, for instance, in our model. Then Canada, where you had province-wide lockdowns or shutdowns of both construction activity and a real cessation of commercial activity. Those were harder hit. For instance, we said in April, the volumes there were down about 20%.
That's a marked contrast to other parts of the country, like the Midwest for us, our central region, and also our southern region and western, where the decreases were 6%-8%. I mention that contrast because, as I said, in all of those regions, we're seeing improvement. As we said on the call last week, by way of example, at our landfills and hauling locations, roll-off pulls and landfill tons, more than 70% of them are showing that improvement off the bottom. That's very encouraging, and I'd say it's broad-based. I'd say the degree to which there's coming back varies, and as you might expect, it's more pronounced, the snapback is more pronounced in the regions, the areas that were harder hit that have now reopened.
Not to suggest that this is a V-shaped recovery or that they've come all the way back, but by way of example, in a market like Montreal, where they shut down construction and the commercial activity, when construction was turned back on, we saw the pulls, which were down 50%, come back halfway. It's still down 25%, but obviously a market improvement from the prior period when they were down 50%. We're encouraged by that, and yes, I would agree with your characterization that the pace of reopening should dictate what that snapback looks like.
I know on the earnings call, Worthing said he doesn't expect that it's going to be a V-shaped recovery. Nobody really can say definitively, but I think it's better to be conservative about these things. He talked about it kind of being a little bit of a longer recovery. How does that change the way that you plan the business, the way that you think about allocating capital spending, the way that you think about acquisitions, the way you think about how much cash you need on the balance sheet, if we are sort of planning for a longer recovery from here?
Sure. Well, in my mind, I sort of put it in two phases. One being this initial shock, if you will, to the system where everything's been shut down and therefore, of course, we really arguably hadn't been through a period like this, I guess no one has. Therefore, the response was a little different and that the shape of what went on was different from what we experienced in the Great Recession. As you may recall, in the Great Recession, our commercial business was only modestly impacted. The real impact was to the most cyclical portion of the business, the roll-off business.
We certainly know that when you're in a decline and you have a better sense of what the steady state, the new run rate is, you can make more wholesale changes in an individual market, like certainly rerouting and right-sizing your operations to the extent it is a lower run rate. I would say that you can take those same steps even in this environment if a market has been hit hard enough. Certainly, when you lose 50% of your volumes, you take a look and you reroute and you rethink the need for the number of trucks on any given day, and therefore the need for manpower. I would say you're making those steps more dynamically in this environment, but you have a greater opportunity across all of your markets to do that when you have a better sense of what the new run rate is.
I would say with respect to capital allocation and how we think about that in an environment like this, CapEx, for instance, we've already talked about the fact, as we described last week, that we've cut CapEx by about 20%. As you can appreciate, the two largest buckets of CapEx are where we had the greatest opportunity to do that, and that would be your landfill build-out and trucks, your fleet and equipment. Of course, as we see the year playing out and we provided a sense of how that could play out in our remarks last week. Under that scenario, we have high single-digit negative volumes, and therefore, in our model, you wouldn't need as many trucks this year, and you certainly don't need to build out your airspace as quickly if tonnage declines are a part of that year-over-year decline.
I think as we think about it, you can certainly adjust that to the extent the business comes back more quickly. We have the flexibility to do that. In terms of other aspects of capital allocation and M&A, the way we approach that is certainly we like to come into any year with the flexibility to conduct M&A, and certainly this year was no different in that respect. I'd take it one step further and say we like to be pre-positioned, particularly in a downturn, to take advantage of that opportunity because there could be opportunity that maybe someone else isn't pre-positioned for.
I would highlight the fact that as we said on our call last week, our net debt to EBITDA is about 2.3 times. We have tremendous room on any covenants or in terms of leverage, because we can take our leverage over 3.5 times. We can take it up to 3.75 to do deals. Tremendous flexibility there. In terms of liquidity, we've got about $2 billion in liquidity with no near-term maturities. Again, very well-positioned in terms of our balance sheet strength and the kind of flexibility we have coming into this year, and particularly in this environment.
On the earnings call, you guys did give, I guess I wouldn't call it guidance for the year, but you did sort of talk about what kind of revenues and margins could potentially look like. A lot of other companies aren't even providing any guideposts because it's really so hard to predict, just curious the decision, the thought process that went into providing those numbers and what do we need to see happen to hit those? I know we're starting to talk about not hitting a V-shaped recovery, but certainly you probably need a little bit of continued sequential improvement from here. Do you guys feel like those are estimates that are your best effort to get ahold of things, or there's a little bit of conservativism in there? I guess just the thought process around providing any kind of an outlook.
Sure. To your point, we did provide a sense of how the year could play out, and the thought process for providing that, Brian, was that we thought it's great when people provide statistics and some data around activity levels, and we can certainly, as we did, talk about landfill activity and roll-off pulls. At the end of the day, it's hard for people to then take that information and translate it into the $ behind it. We thought that given the fact that we were reporting when we were closing our books, it gave us the opportunity to share with folks how those statistics translate into what revenue we'd be reporting or will be included in Q2. Our April numbers, as we said, that with revenue down 6%, and really what that implies is that our solid waste volumes are down around 12%.
In terms of our ability to deliver those numbers, and the thought process behind how you communicate full year, a possible scenario, I'd say a few things. First of all, it is a possible scenario to give people a roadmap to one way that 2020 could play out and to help people understand that that was based on data we've been tracking for the past several weeks, where we've seen improvement, which gives us confidence that April may be as bad as it gets. We also acknowledge the limitations of only having several weeks worth of data and the uncertainty around, as you know, we're both sitting in Texas, and we know it's reopening, and we know there are concerns of sliding backwards as economies reopen. We tried to be mindful of the risks still around having one month's worth of data.
A way that I've encouraged people to think about it is that even though we continue to see data which suggests sequential improvement, which would suggest that May would be better than April, I would encourage people to think about that -12% type of volume we saw in April might be a good indicator for how Q2 plays out. Maybe there's a step up sequentially in Q3 and another step up in Q4. The round numbers I put around it was that -12% could step to -10%, and -10% goes to -8% as economies open up. Again, it's making allowance for some puts and takes in any individual market, but that the overall trends continue to follow the same trajectory over time.
What that all implies is that we don't recover all the way, and if that's because economies aren't fully open, if it's because there has been some slippage, if it's because there's a certain percent of our commercial customers who don't make it through, and that there are others who maybe come back at some percentage of the prior business that we were getting from them, that's a way to think about the allowance for why you would still be showing negative volumes in Q4. By the way, it doesn't limit the ability to show another step up next year in Q1, as we continue to come back and really anniversary the impact we started seeing last March or this past March.
No, that makes sense. It helps to just at least kind of understand what kind of assumptions are in the numbers, and that seems to make sense to me. Based on what you're saying for April and May improvement, that sounds like things may be even trending slightly ahead of that plan, which is great to hear. I just wanted to pivot a little bit towards pricing. I think you did talk about on the call also that you went into the year, I think, targeting, I think if I remember right, 5% type pricing, and now it looks like it probably trend more towards 4.5%. There's some mix probably component in there too, because we've seen maybe some of the volume declines are in some of the higher priced portions of the business.
As we look out to the back half of the year and next year. What kind of guidance would you give folks on pricing? We've been in this elevated environment for the last year or two. We've been kind of coming off of these 5% kind of numbers. Do you think we can see pricing get back to, I think, the industry's talked about more about a 2% to 3% kind of a range. Do you think we head back into that sort of a range next year, or is it going to depend more on CPI? Is it going to depend more on the shape and slope of the recovery? Based on what you're seeing today, do you think getting back to that 2% to 3% range is more reasonable?
Sure. Just to take a step back to remind folks how we think about pricing and how we think about what drives pricing, and the fact that in our mix of business, about 40% is CPI-linked. It's typically a local CPI, and most of those are on the West Coast. You've seen over the past several quarters, we've gotten 3% plus in those markets. We typically target CPI plus 100 to 200 basis points in our competitive markets. The end result is a blend of those two, and over the past dozen years or so, that's averaged CPI plus 150 basis points.
I really think in terms of the spread to CPI, because as long as I'm getting a spread and that CPI is representative of what my costs are doing, then I should be showing margin expansion if I'm getting that sort of pricing. I would say that we've demonstrated that we have done that historically and arguably in contractions and expansions. I think we've also demonstrated that if there are situations where we see cost pressures which are outsized, like we have over the past two years, arguably labor, which we felt wasn't being captured by CPI, and we did incremental price increases because of those pressures. Also, arguably, we put in incremental price increases when recycling was a headwind, and it was a way to help recover some of the impacts there.
We noted that that's what afforded us the opportunity to do greater pricing because there was a need for greater pricing. If we fast-forward to next year and CPI is down and we're in a recessionary environment, the growth has slowed dramatically. You're not seeing inflation in the business. I could absolutely envision a 3% type of price. Again, if in that scenario, my costs are closer to that 1.5%, I'm getting that spread. To the extent that cost pressures, whether it's wages or some other pressure, is outsized and it was a little higher than that, I would be targeting maybe 3.5%.
Even pre-COVID, we came into this year, just by way of reminder, even our 5% price that we guided to for 2020 initially, what we communicated was that it would start higher at 5.5% and then the year lower because our expectation was that those cost pressures had abated. They were starting to abate as we came into the year, and therefore we wouldn't need as much price. Just philosophically, that's how we think about the way we price in markets, and it's less about the absolute value. It's more about the spread to our costs.
Right. No, that makes sense. That's consistent with how you've talked about it, and I think makes sense. It seems like we probably are heading into a little bit more of a deflationary environment. Would seem to make sense that it ticks down some. I think to your point, you can still get margin expansion even in an environment with decelerating pricing as long as that spread is maintained there. Yep. On the topic of cost this year, you mentioned there may be some opportunities there. Obviously, over time, has come down some as the volumes have come down, even if it reflects some of the variable costs. The decremental margin question's come up quite a bit. We've gotten that from some investors. I think you talked about around a 40% decremental margin. Is that the right number to be thinking about?
Are there opportunities to kind of improve that later in the years as you have more time to take corrective actions? Or should we really just think about that 40% number throughout the balance of 2020?
Sure. Well, I think to your point, to the extent that first of all, the volumes improve a little, so there's not as much of a headwind, and also to your point that as things stabilize, perhaps, that we can take a more holistic look at our cost structure. I think that does argue for some improvement off of that. My feeling is, at this point in the process, however, it's the right way to think about it. Arguably, it tells you we've done a pretty good job already or the realities of the limitations on all of us to incur other costs have given us the opportunity to do a good job in the short term because with a 40% decremental, what we talked about in Q1, we also talked about the fact in April that really most of the margin drag was COVID-related costs.
It tells you that, yeah, there are decrementals there, but we're managing to pull other costs out of the business. I mention that because, in my mind, there are a few different buckets of the cost, and there certainly are the straight variable costs that we'd all think of. If there are fewer tons being picked up, that means there's lower third-party disposal and brokerage costs and franchise fees and fuel and other consumables, and your maintenance goes down. All of the things that you would expect to go down. I would say there's also the other buckets which are really put upon us because of a shutdown, and that's certainly travel and meetings and entertainment.
Even as you think about the fact that people aren't going to the doctor, you think about the fact that fewer trucks are being driven on the road, and therefore, it's great that we all in the industry have seen an improvement in our safety records. You'd expect us to, given the fact that there's less traffic on the road. There are a number of factors, I think, which have actually helped us in this environment, and we need to be mindful of the fact that as things open up, some of those benefits go away. I'd encourage people, just for now, to think about 40% as the right kind of decremental, in spite of the fact that maybe, as we both described, there's an opportunity down the road to do a little better.
Okay. That makes sense totally. Just to shift a little bit to M&A, we talked about it a little bit at the beginning around ways you react to the lower for longer scenario. You came into the year, M&A was certainly a tailwind. We had a pretty full pipeline. I'm sure there were some deals in 1Q that would've been closed if not for the virus and are maybe being pushed out a little bit. As you think about M&A for the year in general, maybe you won't hit the numbers you came into thinking because of the virus, but do you think it'll still be an elevated year, still a little bit higher than what you would do in a normal year?
Just thinking about the rebuilding the pipeline, do you think you'll be more cautious about the next wave of deals you look at and maybe want to wait and see how the virus plays out, see what the new level of EBITDA is in some of these markets?
Sure. For starters, just thinking about M&A at a high level, just to remind folks that for us, a quote "normal year" is about $125 million-$150 million in acquired revenue. We've been coming through the past few years where we did about twice that amount. I would say that I think that to get to quote a "normal year" is achievable this year. As you point out, there were things that we already had pretty far along, and that should have, frankly, closed in Q1 that slipped because of COVID. You should expect to see some deals get done, I would think in Q2 or in July, by the time we report, because we would expect that we will be able to get diligence finished and get those to the finish line.
We also have some other deals which, totally unrelated to COVID, are in various stages of dialogue. The question mark is how long do they take to come to fruition? Of course, there's uncertainty associated with whether or not they all get done. We certainly have things in the pipeline. I think the question is then anything that's COVID-driven, if you will, as people say, do things sort of shake loose because in this environment, someone decides they want to get out or depending on the state of their business. Our attitude is that good businesses in the right markets are always of interest to us. As I said, we like to come in pre-positioned to take advantage of that, so it's not as though we're not going to be actively pursuing things.
I think the reality is, and certainly the history coming through the Great Recession, is it takes a little while for people to come to terms with the decision to sell, perhaps when they realize a lower run rate implies a lower value. I look back to the recession, and there were things that definitely the conversation was happening in 2010, for instance, but the bigger year of actually closing deals was 2011. That took a little time. If that's any indication, maybe you could see it start at the end of this year, but maybe it takes into the middle or end of next year for those things to come to fruition.
I know you never put incremental M&A in your forward outlooks, but for those of us keeping score at home, it sounds like maybe we would dial back expectations for what it could look like next year, given your comments around how it trended coming out of the Great Recession.
Yeah. Again, every situation is different, but you're right. We never put M&A in until it's done. That's probably a fair way to think about it based on right now, Adam, based on what we're seeing.
I'm going to switch over to the audience Q&A. We just had one or two come in. One on E&P waste, which we didn't touch on yet. What you're seeing in that market, obviously, it's tied to the rig count. It held up extremely well last year. I think we saw 1Q started off well, but towards the end of the quarter, it started to finally drop off there with oil prices hitting a new leg lower. Maybe you could just talk about what you're seeing in the E&P business and where you think that's headed.
Sure. Just to remind folks, for us, the E&P waste business is a landfill niche business, so it's the disposal side of E&P waste. There, last year, we had done about $255 million in revenue and had expected it. As you note, Adam, we were surprised, frankly, for the last two or three quarters that the business held up as well as it did given the rig count decline, since it's highly levered to rig count or linear feet drilled. You've seen those numbers continue to decline. What we've said is that the run rate we saw in Q1, which was $19 million-$20 million of revenue per month, that has stepped down already about 35% because we were doing about $14 million in April.
We said it was going to step down again. Down about 45% from there, which implies around $10 million or $11 million in May. Given the fact that rig count continues to decline and what you hear from drillers is the dramatic reductions, we could see that continue to step down. The way I would think about sort of modeling it out for the rest of the year would be that maybe it finds a steady state in the high single digits, so maybe something like $8 million per month in revenue. That would be based on some amount of drilling continues, and there's production that would drive some of it as well, and then some remediation work. There's some modest level of activity that goes on. Just remind folks that the decrementals are very high.
They typically are running 70%, and that, given the cost structure could be even greater on those final reductions, and that down at that $8 million run rate, I would think of it as about a breakeven EBITDA.
Then theoretically, that's probably a pretty good floor if nobody's making any money in the business. Typically, these cyclical types of markets sort of bottom out around there. Is that around the revenue run rate you guys were at the last time we had that oil price decline in, I think it was 2015, 2016? Is that around where you bottomed out at?
It is. It's pretty close to it. We reported $120 million that year, but the final months were the lowest. Yeah, it's close.
Got it. We have one last one from the audience, so I'm going to end it there and let everyone go grab their TV dinner or wherever you're socially quarantining. On the question on the recycling business, you know there's a lot going on in the world if recycling is the last question you get in one of these conferences. OCC is back in the news for, I guess, for the right reasons this time, for you at least. Not so much for my paper companies, but for you guys. It didn't sound like you guys were too optimistic about where the total basket of recycling was headed. I think you noted some offsets there on the metal and plastic side.
Maybe just talk about the overall recycling basket, where it's moved and, in general, the movement in the business to try and move to more of a service model or upfront collection model instead of getting paid on the back end. How is that progressing? Has anything changed there based on the move in OCC or from the virus at all?
Sure. I'll start with that last one, since that was less a move that we were working on, but more, I'd say, the industry as a whole and our peers who control most of the recycling facilities. As you may recall, the majority of the recycling we bring to our own facilities comes off of our own trucks, there's not a big opportunity to impose fees at the recycling facility. That's where we took the approach of working on getting more price. I think we successfully did that for the past few years. Moving back to OCC and those pricing dynamics and the recycling basket as a whole, you're right, Adam Bubes, OCC was around $40 a ton as we exited last year. As I said on the call last week, we've seen pricing of $100 a ton.
There's some markets where you actually saw it spike to as high as $200 a ton, just episodically. I'd say that's an aberration, but we are seeing $100 a ton for sure in this past month, and we've seen that step up in May, and it could be as high as $125 a ton as we sit here today. Nice improvement in OCC. The point we had made on the call was not to take away from the nice improvement we're seeing there, which I would just mention is at least partially driven to lower supply. What you're seeing in this environment right now with such a slowdown, there's less being generated and more of it, a disproportionate amount, is being mixed in, coming out of residential streams, which are higher contamination rates.
You have more contamination in what's going to the single-stream recycling facilities, and therefore less clean OCC coming out the back end, and even mixed paper is poorer quality. If you've got a supply-demand imbalance, that's part of what's driving the higher pricing that you're seeing in OCC. I'd say another factor, though, is there is greater demand because, as we had discussed really over the past year or so, there would be more mills relying on recycled feedstock, and you're seeing that happen. You are seeing the demand there, which is a good thing. Taking a step back, though, and looking at the whole basket of recyclables, what we said on our call last week was, it's great that OCC is up.
Unfortunately, plastics and metals, which in the aggregate, those two buckets are almost 60% of the value of the basket of recycled commodities. Those commodities are down. As you can appreciate with crude being down, plastics, the reduction is about 50% year-over-year. Metals, they were also down 45%, 50% from last year. That has impacted the overall basket. What we said last week was therefore it would still be a drag. It would still be down year-over-year. With this recent continued increase in OCC pricing, there's a chance that as we move through this quarter, that rather than being down, we could end up with the basket being flat for Q2. That's encouraging, and certainly, we'll keep watching that.
That may be where we end up so that recycling in the aggregate, if nothing changed, then you had the headwind in Q1, which we had already talked about, then could it end up being flattish for the rest of the year at current rates? That's a possibility.
Great. Well, we'll end it there. I want to thank everyone on the webcast who joined in, especially those who submitted some questions. Thanks, Mary Anne, so much for making some time and joining us today. Hope everyone stays safe and enjoy the final day of the conference tomorrow.
Thanks again for including Waste Connections. Take care.
Thank you.
Bye-bye.