Republic Services, Inc.

Good afternoon and welcome to the Republic Services first quarter 2020 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in a listen only mode. Should you need any assistance please signal the conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Nicole Giamdinotto, Senior Vice President of Communications and Investor Relations.

Thanks, Rachel. I would like to welcome everyone to Republic Services' first quarter 2020 conference call. Don Slater, our CEO, John VanderArk, our president, and Chuck Sirianni, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive. If, in the future, you listen to a rebroadcast or recording of this conference call, we should be sensitive to the date of the original call, which is May 5, 2020. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables, and a discussion of business activities, along with a recording of this call, are all available on Republic's website at republicservices.com. Finally, I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to Don.

Thanks, Nicole. Good afternoon, everyone, and thank you for joining us. I hope you are doing well and staying safe and healthy. This is, of course, an unprecedented time for all of us. So before we get into a discussion of our results, I want to first review the steps we are taking in light of the ongoing COVID-19 pandemic. As you know, Republic Services provides an essential service. Our team is working tirelessly to serve our customers and communities, and I want to sincerely thank them for all their efforts. As always, the safety and well-being of our people is our top priority, and we are supporting them by continuing to provide all field employees with role-specific PPE and masks, implementing enhanced cleaning protocols, adjusting processes, procedures, and physical spaces to enable proper social distancing, rebalancing the workload to keep all people working by reducing overtime, providing supplemental paid time off and enhancing medical benefits to cover all COVID-related out-of-pocket costs. And finally, finding new and creative ways to keep our 36,000 employees engaged, motivated, and connected. Last month, we launched our $20 million Committed to Serve initiative to recognize our frontline employees, while also helping to support our small business customers and the communities we serve. We are providing weekly on-site meals to employees and have sent home weekly dinners for their families. These meals are being purchased from our local small business customers. We are also providing $400 worth of gift cards to each Frontline employee to help them and their families. We're encouraging them to use these cards with our small business customers. In doing so, we are not only supporting our people, but also our customers by providing them with what they need most, additional revenue. Lastly, we are donating $3 million to the Republic Services Charitable Foundation. Through its National Neighborhood Promise Program, the foundation is focused on rebuilding, revitalizing, and restoring local communities. The $3 million will be used to fund the foundation's long-term nonprofit partners, who support local neighborhoods and small businesses as part of their mission. I'm not surprised by our team's ability to quickly mobilize in a time of crisis. Over the past decade, we've been investing in our business to advance our strategy and enhance long-term shareholder value. Some of these investments include developing standardized processes, implementing innovative technology, consolidating our customer service operations and building a world-class procurement organization and business continuity function. Through these investments, we've built a solid foundation and even a more resilient business. These investments were the driving force behind our superior results in 2019 and our strong start to 2020. Importantly, these foundational improvements have enabled us to be more agile, as we navigate the current environment. For example, through our investment in innovative routing and workforce planning tools, we've been able to quickly adjust our routes for changes in demand. And our investment in technology and collaboration tools allowed us to successfully transition approximately 6,000 of our people to work from home in a matter of days. And we did so without disruption to our customers or productivity. As you can see, our company was well prepared. Furthermore, our management and business continuity teams are experienced in navigating difficult times. For example, during the Great Recession, we successfully adjusted our business to changes in demand and continued to generate strong cash flow. And following some of the most tragic weather events, such as hurricanes Harvey and Maria, we were the first waste company back up and running in our markets. Fast forward to today, the investments in our people, processes, and technology have better prepared us to manage through this unprecedented time. Next, I'd like to give you some perspective on what we are currently seeing in the business. We started the year strong in January and February. In mid-March, some customers in our large container and small container businesses began adjusting their service by decreasing the frequency of pickup or temporarily pausing service. Service decreases continued in late March through mid-April and have moderated since then. In the last couple of weeks, we've begun to see customers re-engage with us as they plan to reopen their businesses. Assuming these trends continue, we believe the worst is behind us and volumes will sequentially improve from here. This perspective is consistent with current GDP consensus estimates, which call for a decline in the second quarter and sequential improvement in the third and fourth quarters. With this outlook, we still expect to generate over a billion dollars of free cash flow in 2020. Lastly, before turning the call over to John, I'd like to briefly discuss capital allocation. Despite the current pandemic, our balanced approach to capital allocation remains unchanged. We continue to believe that disciplined investment in acquisitions with attractive returns is the best use of free cash flow to increase long-term shareholder value. After investing in growth, we will continue to return our remaining cash flow to shareholders through dividends and share repurchases. During the first quarter, we invested over $60 million in acquisitions. Our deal pipeline remains strong. and conversations with potential sellers continue to be active.

With that, I'll turn it over to John. Thanks, Don. Because we are an essential service provider, we have contingency plans in place to ensure continuity of service. As a result, we were well prepared to face the challenge of this pandemic. Our priorities are simple and remain unchanged. Put our people first, keep our facilities running smoothly, and take care of our customers. By doing so, we will continue to generate strong free cash flow and create long-term value for our stakeholders, including our people, customers, communities, and shareholders. As Don discussed, we acted quickly to ensure our employees' well-being. I'm immensely proud of how well all of our employees have adjusted to these changes. For example, our drivers have remained engaged and focused during this potentially distracting time. Attendance is at an all-time high, and April was our best safety month ever. Productivity and service reliability have also improved. In just three days, we transitioned 98% of our customer service representatives to work from home with no disruption to our service to customers. In fact, since moving to an at-home working environment, we've seen a meaningful increase in their productivity. Our first quarter results were strong, despite the headwind in March from the pandemic. We increased revenue 3.4% and expanded underlying EBITDA margin by 30 basis points. In the first quarter, average yield was 2.9%, and volumes during the quarter increased 40 basis points. Excluding the benefit from an additional workday in the quarter versus the prior year, volumes decreased by 10 basis points. This included a 70 basis point increase in January and February, which was more than offset by a 1.8% decrease in March. In April, volumes decreased versus the prior year, but the magnitude and rate of change varied by line of business. Looking first at our small container business. In March, as shelter-in-place orders were implemented across the country, service decreases began to outpace service increases. Additionally, container weights started to decline. In April, total yards collected decreased by approximately 11%, and container weights decreased by approximately 20%. It's important to note that in the last two weeks, trends have become more favorable. Container weights have started to increase, and customers are beginning to resume service as they plan for reopenings. In fact, last week's service increases fully offset service decreases. In response to these changes in demand, our local teams are leveraging existing tools and technology to adjust routes and rebalance the workload daily. Impressively, productivity in our small container business improved and over time was down approximately 45%, a true testament to the amazing work that our team is doing. Turning to our large container collection business. In April, recurring large container hauls decreased 19% versus the prior year. And temporary large container hauls decreased 14% versus the prior year. Given the decrease in demand, our teams effectively rebalanced the routes and reduced overtime by approximately 50%. Next, turning to our residential collection business. In this line of business, we build customers based on the container size and frequency of pickup rather than on the weight of the container. As a result, given we are continuing to operate as normal, the pandemic has had minimal impact on our revenue. However, as residents consume more at home and create more recycling and solid waste, our processing and disposal costs will increase. For the month of April, average container weight increased approximately 15% versus the prior year. Regarding our disposal business, in April, third-party tons decreased by approximately 20% and included a decrease in special waste of 34%, a decrease in C&D of 11%, and a decrease in MSW of only 7%. Importantly, the rate of decline has begun to moderate, and last week, total landfill tons were only down 15% versus the prior year. Turning to recycling. During this crisis, we remain steadfast in our commitment to the environment. Thanks to the hard work and resourcefulness of our procurement and operations teams, I'm proud to report that we've been able to continue to operate our recycling processing centers across the country without any disruption. In a time like this, when e-commerce activity is increasing and the demand for fiber is increasing, it is more important than ever to keep our operations up and running safely. We've implemented social distancing and have provided necessary PPE to keep our people safe and our facilities operational. In those areas where employees are stationed less than six feet apart, we've installed plastic protective barriers to help keep them safe. regarding our environmental services business. In April, US rig counts and associated drilling activity continue to decrease sequentially from the first quarter. As a result, we expect revenues in the upstream E&P portion of our environmental services business to decrease sequentially. In the downstream portion of this business, we are also seeing headwinds, though not as severe. Downstream operators, including refineries and petrochemical companies, usually benefit from lower crude prices, providing a natural hedge to the volatility in the upstream portion of our business. However, given the unprecedented low demand for fuel, we expect utilization rates to come down and activity in the downstream portion of our business to decrease sequentially. Finally, turning to expense and capex. As we continue to operate during this uncertain time, we are adjusting our cost structure to align with real-time changes in volume. Importantly, we estimate approximately 60% of our total cost structure, including cost of operations, SG&A and depreciation, and amortization, is variable. We are closely managing these variable costs. For example, we've put labor management strategies in place to redistribute the workload. As a result, we've reduced total overtime hours by approximately 37%. We are also reducing discretionary spending such as travel and are scaling back on capital expenditures. For example, approximately 10% of our capital budget or a little over $100 million is for growth capital, which we will no longer need to spend this year. Additionally, as volumes decrease, the replacement cycle of our assets naturally extends. Therefore, we are intelligently scaling back on replacement capital to align with changes in demand, including the construction of landfill airspace and the purchase of replacement trucks, containers, and equipment. Overall, we have been quickly adapting our operations based on changes in customer demand. As always, we will continue to manage the business for the long term. We have been very nimble during this rapidly evolving period, and will be equally ready as the economy begins to grow again. With that, I will now turn the call over to Chuck to discuss our first quarter results.

Thanks, John. In the first quarter, total revenue increased by 3.4%. This included average yield of 2.9% and volume growth of 40 basis points. Core price net of rollbacks was 5.2%. Adjusted EBITDA increased $24 million or 3.4% versus the prior year. Normalizing for an additional workday in the quarter, EBITDA increased 4.8%. Underlying EBITDA margins increased by 30 basis points. Adjusted free cash flow for the first quarter was $267 million and decreased by $82 million versus the prior year. This decrease in free cash flow was due to the timing of capital expenditures and cash taxes. Capital expenditures in the first quarter increased $74 million, and cash taxes increased $25 million versus the prior year. Normalizing for these two items, free cash flow would have increased 4.9% versus the prior year. During this unprecedented time, our balance sheet remains strong, and we will continue to have ample liquidity of $1.9 billion. Looking forward, the impact of the pandemic on the U.S. economy remains uncertain, in particular, the pace and timing of the recovery. As a result, we have decided to suspend our detailed financial guidance for 2020. But as Don and John discussed, Recent trends are encouraging. The rate of volume declines is slowing, and we're beginning to see customers plan for reopening. Our employees have rapidly adjusted to new ways of working to stay safe and are as engaged as ever. Our operations teams are adjusting routes daily to maintain productivity and minimize costs. We are increasing customer loyalty by continuing to provide great service to our customers. and investing in our communities. And finally, we are prudently managing spending while continuing to invest for the long term. Assuming these recent trends continue, we would still expect to generate over a billion dollars of adjusted free cash flow in 2020. In closing, we mentioned numerous times the unprecedented nature of this global pandemic. While we are all facing a tremendous amount of uncertainty, One thing you can be certain of is the stability and resiliency of Republic services. In my 20-plus year history with Republic, I've seen many ups and downs, from the Great Recession to the longest economic expansion in history. What I have learned is that the essential nature of our business doesn't change, nor does our ability to generate strong, predictable free cash flow. Remember, the economic environment we're currently in is temporary, and when the economy returns to some level of normalcy, we will emerge stronger than ever. With that, operator, I'd like to open the call to questions.

Thank you. We will now begin the question and answer sessions. To ask a question, you may press star, then 1 on your touch-tone phone. In the interest of time, We ask that you limit yourself to one question and one follow-up question today. If a question has been answered and you would like to withdraw your request, you may do so by pressing star 2. If you're using a speakerphone, please pick up your handset before pressing the keys. Your first question comes from Walter Sprackland with RBC Capital Markets. Please go ahead.

Thanks very much. Good afternoon, everyone. And thanks for taking my question. My first question here is on pricing behavior. I know you gave some indication on April tendencies on volume, but can you elaborate a little bit on how pricing behavior among some of your competitors have changed as we've gone into the second quarter here in the April period?

Thanks for the question. So pricing, our pricing, you know, perspective remains consistent. We're continuing to Invest in our employees, and we're continuing to price for the quality and committed work that we do with our customers. We have not seen any meaningful change in the market. Now, there's always pockets of behavior here and there, but that's true regardless of where we're at in the economic cycle. And, again, our policies and approaches remain very consistent.

Okay. The follow-up question here is on – On residential volume, you noted that we've seen a pickup in the amount of volume that's – volume increases compared to last year. Is there any sense that – or is there any opportunity here going forward that you can reconstitute your contracts going forward to include a degree of volume pickup? How difficult is that to do? Could that be one of the changes if you look out to your industry – you know, post-COVID, if you're looking at any substantial shift in the overall industry, could that be one area where your company could focus and the industry overall could focus in terms of pricing residential contracts?

Sure. Well, it'll definitely be something we're talking about. And, you know, right now, you know, as we've kind of come through into May, you know, April's been all about kind of stabilizing the business, making sure that the service level, you know, the quality stays high, working with municipalities on any, you know, sort of schedule changes that we need to accomplish. As we assess the additional tons that we've absorbed, we'll begin to talk to municipalities about what that means and look for some help. It's too early to tell yet. We'll give you more color on that once we get into reporting the second quarter.

And the only other thing I'd add on that is we have a small number of programs that is based on weight. They're bag programs. And the industry and we have also migrated away from those programs over the years because they're not easy for the consumer. having one bin that they pull out to the curb and having it automated has been safer for us, has been better for the consumer, and you've seen the industry move in that direction. And so whatever we do going forward, we want to make sure that it's still effortless for the customer. Okay.

Appreciate the time. Thank you very much.

Thank you. Your next question comes from Tyler Brown from Raymond James. Please go ahead.

Hey, good afternoon, guys. Good afternoon, Tyler. Hey, so John, appreciate all the color on April, very helpful. But if we were to aggregate it all together, is there any way you could just be a little more specific, just basically what did total revenue do in April, just for simplicity purposes?

Yeah, well, unfortunately, we'll probably cover that in July when we talk about Q2, so we can't get into overall April trends. But I would reinforce that In most of the places, we think we've seen the bottom, and we're starting to see recovery. So it's been a really good sign. And also, I'd say that bottom has been a much higher floor than I think we initially expected on that front. So we're feeling pretty positive about the outlook.

Yeah, yeah, agree there. So, Chuck, I know there's a ton of moving pieces, but is the best way to think about it that in aggregate the decremental margins – let's say X the commitment to serve should be around 40%. I know it's going to vary by line, specifically collection versus landfill, but is that probably the best way to kind of think about it?

Yeah, you're right, Tyler. That's 40% is accurate.

Okay. And are you guys seeing any changes in cash collection? Are you seeing an uptick in bad debts? I think you were already thinking working capital would be a drag this year. I'm just thoughts of maybe what that working capital draw might look like.

Yeah, so we're not seeing anything as of yet. As a matter of fact, DSO went down by half a day year over year, so nothing here in the first quarter. You know, we are thinking that DSO will trickle up during the year, and that's already contemplated in our cash flow guidance for the year.

Okay, and then my last one. From a quick modeling perspective, are you guys still expecting about a 1% contribution from M&A? And would that be inclusive of possibly closing Santec?

Well, I think we said we still expect to do about 600, 650 of M&A this year, right? I mean, somewhere in that area, right? So, you know, you can do the math on that. It could be more. I mean, we'll see how companies come through this. this pandemic. But, you know, the pipeline's full. Our people are involved. You know, Santec's on track. So we'll be good.

Okay. Okay. All right. Thanks, guys.

Just on that point, Santec, obviously that deal is not closed yet. It's going through regulatory review. We typically wouldn't comment, but other people have put that out there, but we're confident we're going to close that deal in the second half of the year.

Thank you. Your next question comes from Hamza Mazari with Jefferies. Please go ahead.

Good afternoon. Hope everybody's safe and healthy. My first question is around volume. You know, you talked about volume stabilizing, service increase, offset decreases last week. When we do sort of come back in terms of commercial volume coming back, Do you see any structural changes, positive or negative, in terms of the shape of the recovery for the waste space, given social distancing or any other things that you think sort of we see sort of a U-shaped recovery on the volume side? Any thoughts just structurally post-COVID what to expect in terms of changes around your business? Sure.

Yeah, thanks. I think you'll see the pace of the recovery be differentiated based on geography and based on SIC code. So you could imagine things like hospitality are going to be under pressure, and that recovery is going to be a bit slower than manufacturing, which, you know, we're already seeing factories start to come back online and reopen and production ramp up. So, again, we're going to see differences in that capacity as we go forward.

Got it. And just a follow-up question, you know, back in 2012, you know, municipal residential was a weak spot, and it was driven by budgetary constraints that all these municipalities had. You know, they're probably having budgetary constraints again. Do you think that – are you seeing that at all? Or I guess the federal government can bail them out. But is there any sense that you're seeing – in your conversations with municipalities that muni resi pricing may be an issue, or you're not seeing that today?

No, we're not seeing that today. And obviously, something we're looking into actively, but don't anticipate any credit or collections issues on that side of the business. You know, you know, these are long cycle contracts. So if there's any pressure, it would show up, you know, kind of years from now in a bid cycle. And as you know, we've been holding the line in that part of the business, making sure that we get a fair return for all the work that we do.

And let me add to that, that was a much different situation too, right? So that was, you know, caused by housing glut, caused by property values crashing, caused by property taxes dropping. You know, the tax base of these municipalities was under pressure, you know, to your point, Hamza, depending on how this thing bounces back. But if it is some type of a decent U-shaped recovery, you know, we're not going to see that kind of an issue, we don't believe.

Gotcha. Very helpful. Thank you.

Thank you. The next question comes from Kyle White with Doche Bank. Please go ahead.

Hey, good afternoon. Hope everyone is doing well. I may have missed it, but I appreciate all of the details on small container. I was just wondering if you could provide similar level of details in regarding to your large container business. How are trends throughout April? Was the exit rate any better, any signs of improvement both on permanent and temporary?

Yeah, thanks for the question. On that, we think we've absolutely found the bottom, and that's stabilized and starting to see kind of trends of recovery here. You can imagine a temp, for example, you know, construction shut down. Seattle was shut down and reopened about 10 days ago. The Bay Area was shut down in construction, and that begins to ramp up, and we're seeing a number of places that are just doing gangbusters, and to Don's point, You know, while construction was a huge weak spot in the last recession and downturn, I think this is going to turn out to be one of the brighter spots, given that housing starts already with a modest base and commercial construction still is pretty strong. So, we feel pretty optimistic about that part of the business.

Next question is on capital return. I know you're committed to the balanced approach, but just curious, are you still targeting around the 400 million in share buybacks this year? Is there any change to kind of the dividend policy? I know typically you look to increase it in July. Just any thoughts there?

Yeah, no change to the dividend policy. You know, we've been paying the dividend now for 18 years, and that's not going to change. You know, we always say that we would like to deploy our capital by purchasing EBITDA. And, you know, Don mentioned that our pipeline is very robust right now, our acquisition pipeline. So looking for our capital to work by buying businesses. taking advantage of what might be a pretty good opportunity right now. And then finally, returning the rest of the cash that we generate to the shareholders in the form of a share repurchase. So our capital allocation strategy really hasn't changed.

All right, thanks. I'll turn it over. Good luck in the air.

Thank you. Your next question comes from Jess Cyber from BMO Capital Markets. Please go ahead.

Thanks so much. That's close enough. I wanted to circle back to your commercial business. I don't know if you can parse this out for us, but even at a high level, this would be helpful. What percentage of your clients do you think are just putting their service either on hold or reducing frequency as opposed to those clients that might not come back?

I think we've seen there's three things going on. There's customers who will have permanently closed, and we're seeing very little of that, although, in fairness, still some sifting and sorting out as the economy starts to get some steam back in it. We're seeing customers who have temporarily suspended their service as they've had shelter-in-place orders and have had to temporarily close their business. And then we've seen people who have decreased their service. A restaurant would be a great example who doesn't have – in-room dining but does have takeout, so they may have scaled back their service. And we're seeing those customers who were temporary positive service come back online, and we're seeing now those service increases outpace service decreases in small container, which is a very positive sign for us.

Okay, great. That's helpful. And then you mentioned some of the productivity improvements. You cited the reduction in overtime. Are you seeing anything else in terms of just greater route efficiency, fuel cost savings, any color on those areas would be helpful? Thanks.

Yeah, certainly fuel cost savings is there as oil is at a very low historic level. And then I would say, you know, one of the reasons we've been successful in this environment and the productivity has improved is all the hard work and the foundation that we've built. So we've worked really, really hard to keep our people working and employed, and that meant Everybody had to give up some overtime so everybody could get work. And that means people picking up different routes and are different stops. And, again, our customer service has improved. The productivity has improved. So a real testament to our CEO, Tim Stewart, and the operating team for how they've done that with their operations. And I'd also say this. We've benefited a bit from traffic, right? As people have sheltered in place, traffic is down, especially in urban areas. Our ability to get around and get to and back from the recycling center and landfill is certainly improved.

But as Jonathan has commented, right, 10th is an all-time high. Safety, we've had our best safety month ever. And engagement is strong, right? And all those things will be benefits for us.

All right. That's great to hear. Stay safe. Thank you.

The next question comes from Noah Kaye. Please go ahead.

Hi, good afternoon. Thanks for taking the question. If I could just go back to the earlier question on price and just be more specific. Can you talk about the take rate that you saw on price increases and any pushback that you might have gotten on price increases as we went through the last couple of months? Did you lose any meaningful customers due to your pricing disciplines? Just curious if you can put some more detail around that.

So thanks for the question. A very strong first quarter in pricing, again, very consistent with our historic approach of making sure we get paid for the work we do. And have, you know, maintained that approach here in the last six, seven weeks and have not seen meaningful changes. levels of, you know, pullback on pricing. Now, you know, I'll look and anticipate some of that as people sit through their business as well, so I'm sure we'll see a little bit of that, but I don't anticipate large movements on that front.

Okay, that's helpful. And then, you know, you kind of kept your expectations on M&A intact for the year. You talked about the strong activity. I'm curious if, you know, this is obviously a very different environment we're all in now, versus a couple of months ago, maybe could speak to if you've seen any change in behavior from potential sellers, whether that's indicative of lesser or greater opportunity for now, or the more medium term, and any maybe short term air pocket to expect, just from a diligence perspective, can give some color that would be helpful.

Yeah, I don't think it's a material change. You know, diligence, you know, for deals that we had near closing, diligence has been more difficult because we're not traveling, right? So we've had to maybe slow some of those things down and do some things remotely. That's just, you know, required a little bit of innovation. But as far as new opportunity goes, I think, frankly – As we've said, there are a lot of really good companies out there that we'd like to look at and talk to, some that we already had in the pipeline. There may be some more that come to market. I think, for the most part, companies have just been busy getting their businesses stabilized, trying to figure this thing out. And as the market starts to come back, you know, people will start to decide, you know, whether they're still in this for the long term or not. You know, we know that we are, and we know we've got the balance sheet and the know-how to get it done. So... We'll be here to have conversations if there are people who want to have those. So we think it'll still be a good year for us in the M&A department.

Okay, great. And if I could ask one more, the committee to serve $20 million initiative, I guess first I just want to commend you for this initiative and for putting your employees first. You called out, I think, about $3 million in business reduction costs from COVID-19 as an adjustment. Does that kind of cost fall under this program? You know, should we think about the sort of $3 million a month being kind of the right level of spend on those things for the near term? Just expectations for an elevated cost of doing business there.

Yeah, so the $3 million that we incurred during the first quarter were associated with just keeping our employees safe. The commitment to serve actually is a little bit different than that. That's helping the employees, but it's also helping the communities. So how much we incur in these costs that we carved out in Q1 going forward really depends on the duration of the pandemic, how quickly the economy rebounds. It's a little bit too early to be able to forecast that at this point.

But most of those costs were one time in nature. So hundreds of thousands of masks we purchased. We talked about putting some structural changes into our hauling companies to promote social distancing, screens, et cetera. So feel really good about that. We've already always used masks in our recycling centers. So, yeah, will we have a little more hand sanitizer spend going forward? I certainly will for a long period of time. But that's not meaningful in the overall economics.

Okay. I really appreciate that call. Thank you.

Thank you. Your next question comes from Michael Hoffman from Stifel. Please go ahead.

Thank you for taking the calls, and I'm glad everybody is safe and healthy, family and friends and employees. Could I get Chuck... what the percent of your labor costs, you all are doing a very good job of giving line item costs and optics. And in 2019, what percent of that labor number was overtime?

About 15%, Michael.

And when we think about how you rolled that back, about half of it's come out? Is that what I sort of discerned through all of JVA's comments?

Yeah, a little less than that, probably closer to 40%. And keep in mind, Michael, not much came out in resi. Resi were working harder than ever. So almost half in large containers, small containers. Okay.

Okay, that helps. And then it's terrific to hear this is a higher low than you thought it was going to be. You mentioned, John, you were seeing less not lost business. I'm trying to say this smoothly, and I'm not sure I'm doing a very good job. How many customers do you think don't return in the commercial business percentage-wise?

I couldn't give you an absolute number as a percentage number. I think it will be small, Michael.

Small, less than 10%?

It's hard to forecast exactly what the shape of the recovery is, right? You know, if we're in an L-shaped recovery, which I don't think any of us are seeing in our side of the business – Yes, it could be that number, but in a, you know, kind of a steady rebound here. I would expect less, but it's hard to say yet.

Okay. All right. May I ask one more, if I can? You said $100 million of growth capital spending is not spent, but what is the growth capital spending or the total capital spending assumption if you exceed $1 billion of free cash?

Yeah, so, you know, we'll give you more information on that, Michael, as we work our way through the year here. But it really depends upon the duration of the downturn, how quickly we come back, right? We talked about the growth capital. The remaining capital is really replacement, and it just depends upon the utilization of our assets, which includes landfills, right, building additional landfill airspace. And that's all predicated upon funds that we're receiving into the landfill. So, Well, much more information to come here in Q2.

Yeah, look, Michael, as you know, there's a lot of moving parts, right? So as I said already, April was all about sort of stabilizing the business, right, working with our people, keeping everybody safe. You know, May will be, you know, about keeping everybody sort of enthusiastic and ready to return. We're already seeing all these positive signs that John laid out. I mean, there's positivity across all lines of business, all market verticals. There's just a lot of really great stories. If you had a four-hour earnings call, we can share with you a lot of really great stuff. It's too soon to trend it, right? So that's the difficulty. There's just so many moving pieces. And, you know, the fact is that we know that we can make changes and decisions in and around CapEx and other areas of spending, which we've done and are doing, and we'll continue to adjust. But, you know, there's – There's still a chance, right, depending on how this return occurs, that we could still catch the bottom edge of our original cash flow guidance, which is over a billion dollars, right? So we're going to be making adjustments every day, every week from here to the end of the year. You know, the leadership team gets together every day at 11 a.m. and reviews every piece of data we have and is making decisions daily. and that will continue under John's leadership. So it's been really a great process so far, and the team is responding great. So in July, we have a lot more data, and we'll have some trend information that will be more meaningful. But I would say to focus on the cash flow, and that just really underscores the underlying health stability of the business.

Okay. Thank you very much. Stay healthy. Thanks, Michael.

Your next question comes from Sean Eastman from KeyBank. Please go ahead.

Thanks for taking my questions, team. First one for me is just on labor. You know, helpful color on the OT reductions. Just wondering if there's been any offsets there with any potential temporary increases for any employees and maybe just rounding it out with trends and retention, turnover, things like that would be a helpful discussion.

Sure, maybe I'll start with the second part of your question. So retention is at an all-time high. We have some natural attrition in the business of retirements and other things, but we don't have a lot of people leading us for bigger, better opportunities, in part because we've done an extraordinary job of taking care of our people, which ties into the first part of your question. The Committed to Serve program was done for a few reasons. One, it was to honor and celebrate our frontline people. They perform an essential service, and it's a noble purpose. And unfortunately, society doesn't do a great job of recognizing them all the time, and this is their moment. This is our opportunity to elevate them and appropriately celebrate them. And then connecting that in with customers, right? Customers obviously are looking for some cost relief, but what they really need is revenue. And we're allowing our people and empowering our people to go support local small businesses that are our customers. And when we do that, we support the community. So we think all those things are connected and tied together.

Okay, excellent. That's good stuff. And I'm just curious with OTC really spiking here, does the typical sensitivity to EBITDA there hold or, you know, is there nuances on the volume or operating costs that we should be considering as we kind of flow through the recycled commodity price movement we've been seeing?

Yeah, the only thing I would say is that keep in mind that when we talk about our commodities to baskets, And OTC is the course of that basket, about 25%. Also included in there is aluminum and plastics, and the pricing on that has actually gone down. Having said all that, you know, the sensitivity really hasn't changed. Our basket of goods, a $10 change for the year is about 3 cents a DPS.

Okay, helpful.

And just last quick one for me. I'm just curious on the residential dynamic. You guys highlighted some specific numbers around container rate increases. I'm just curious if you're able to help us understand what that means for the margin profile you guys are getting on that business relative to normalized this time last year, say.

Yeah, so, you know, because of the disposal, it's going to be compressed a little bit, but, you know, we think it's a temporary issue, and, you know, we'll work our way out of it.

Okay. Got it. Thanks, guys.

Thank you. Your next question comes from Michael Finnegar from Bank of America. Please go ahead.

Hey, thanks, guys, for taking my questions. This was kind of asked earlier. And I might have not heard properly. When a customer opens up, which sounds like you started to see at the end of the month, are they decreasing service levels and pickups versus where they were pre-COVID? And are they asking for a relief on that price point? And on this topic, it may be too early, but, you know, Chuck, can we see small mom and pops start to get aggressive on that line of business when the economy opens back up?

Yeah, so we're seeing people call back in. We're not seeing meaningful changes when they come back. They're coming back at the same service level. Obviously, it's a mix as we go forward. We've not seen any kind of movement in terms of expecting a different price point. We have customers who are under contract, and we've allowed them to temporarily pause that contract given the kind of once-in-a-hundred-year nature of this phenomenon. And they've been appreciative that we've allowed them to do that and been mindful of their timing. And as they're opening back up, they're eager to get back to business, right? And their first point of interest is not the price point of their waste and recycling service. It's getting, you know, their employees back safely and working and getting customers in there to work on that process. And then could we see people be aggressive? Yeah, we could. We see that all the time in select markets. There will always be a player who does a – tries to do a volume grab here or there at a specific time. I think it's too early to tell whether that's going to be a broad trend, but we've not seen any meaningful uptick in that activity in the last six, seven weeks.

Okay, good to hear. And I might have misheard this comment. Is the detrimental EBITDA margins – did you say it's 40%? Is that the total company? Is that collection, disposal, both? Is that an April comment? I was hoping you'd just flush that out for us.

Yeah, that's for the entire company. So if you think about, you know, where we're losing our volumes, it's not on the residential side of the business, right? It's on the small container and on the landfill side. And those have the highest margins in the company. So the detrimental margins are approximately 40%.

But, Michael, keep in mind, too, I mean, we haven't fully closed the books for April. So, you know, we're talking theoretically what that incremental margin will be. And we'll get more guidance kind of in the second quarter around all the numbers that we've been talking about here.

That's helpful. And just lastly, you mentioned the pipeline with M&A. In active discussions, are you seeing a recalibration of the multiples in that pipeline? So clearly, you know, the trailing EBITDA, gets a haircut post-COVID or, you know, in this new environment. I understand that portion. But I'm just curious if you think there's been a recalibration of just the multiples on that EBITDA or that potential future cash flow. Thanks, Steve.

Well, I'll start with Jonathan. I would say, first, it depends on the deal. It depends on the makeup of the revenue, right? So, yeah, we're smart enough to look at that, but it depends on what is the makeup of the business.

Yeah, so our activity remains higher than ever. We're continuing dialogue and discussions. We're not snapping the chalk line on pricing those deals. We're giving sellers an expectation of ranges, but we're waiting to sift through both things, where the economy nets out, what the future demand profile is going to be for those assets. And then over time, do multiple expectations come down because there's more willing sellers? Because Their life has changed, and it might be a little tougher to run the business in this environment. We'll see.

Thank you. Your next question comes from Brian McGuire from Goldman Sachs. Please go ahead.

Hey, good afternoon, everyone. I hope everyone's safe and doing well, and appreciate all the detail on trends in April with all the fluid situation here. And I know, you know, guidance has been pulled in a very tough environment to be able to provide any. So I appreciate giving the sort of billion-dollar free cash flow marker there. But I'm trying to just reconcile, you know, some sort of conflicting tone versus numbers. It seems like April, not as bad as we could have feared, but still obviously not immune to the environment. But really, you know, I'm getting a lot of optimism out of you guys about the pace of the recovery, you know, the ability to maybe even clip the low end of the original free cash range. And it's great that sequentially, maybe on a week-over-week basis, things are starting to improve a little bit. But, you know, I guess sitting here, how can you have any confidence that we're going to get back to anything close to normal in the back half of the year? I guess, you know, kind of embedded in the question is there's no way you get to a billion kind of at the current run rate, right? I mean, you need a a healthy kind of recovery in 3Q and 4Q to get there. So, you know, is there something you guys are seeing that we're missing that just would explain the heightened confidence to kind of get to whatever level you need to to get to even talking about clipping the low end of the prior range?

Yeah, look, I'd say the economic outlook broadly, there's still some uncertainty to it, right? And so if we get into a double dip, right, because we have a, reemergence at broad scale and have widespread sheltering in place in the fall, you know, that would be a different scenario. But based on what we're seeing now, based on where kind of consensus is going in a macro environment that we're going to have a tough Q2 and start to see growth in Q3 and Q4, coupled with what we're seeing, which is, again, a relatively high floor to what some of the early predictions were, and already seeing that flatten out and starting to see that move upward, I think those are all positive signs, and that's what's embedded in our perspective.

Yeah, so furthermore, right, for years, decades, as we've talked to you, the market, about what's great about the waste business, You know, we talk about the same things. We talk about our market position being number one and number two and 90-plus percent of the revenue. We talk about the fact that we're an essential service. We talk about the fact that 80% of our customers are under some type of contract. We talk to you about the fact that in our small container business and even in our residential business, the cost per household in the residential business is generally sub-35 bucks a month. The cost in a small container is sub-400. And these are not giant spends. These are not the numbers that keep them awake at night. These are not the major parts of their budgets, right? That's what makes the business great. In fact, everyone needs us, okay, and everyone pays us mostly in advance, right, for the service that we provide. And that's one of the reasons that we get strong pricing, you know, 4% or 5%, you know, core pricing or a 3% yield is really a small dollar amount for any business. All those things are true. We talk about the ability of how we can flex our cash flow or our spending in times like this to still produce strong free cash and maintain a strong balance sheet and have a balanced approach to cash allocation. All those things that we've been telling you, that frankly we've proved in the 2001 economic decline, in the Great Recession, and we'll prove again now. All those things are the truth that we've been telling you, and frankly I think it's may be going overlooked, you know, by some people during the last, you know, call it seven, eight weeks of this madness. But we're going to continue to do that. And that's not anything that's inconsistent with what we've done or what we've said in the past.

I appreciate that color and perspective. I would tend to agree with you on all those points. It's just none of us have lived through this. And Underlying assumption is that those businesses are coming back and continue to operate and that's kind of Michael's question earlier just seemed like the big wild card I think we'd all say. Just on OCC, the price has run up and I just wonder what you could say about volumes and how much of the move higher has been supply shock driven with the move in collections from brick and mortar retail and you know, establishments where it's usually very high recovery rates and more consumers through the e-commerce channel and maybe lower recovery rates there. Is this, you know, kind of really a supply shock driving it higher from what you can tell?

Yeah. So I think, you know.

Yeah, I mean, keep in mind that we're still down slightly, right, because while Resi's way up, commercial or small container is down, right? I mean, there's just less economic activity. going on right now overall from the supply standpoint. And then obviously from the demand side or demand signal out of the back door for second process centers, big pull for fiber, both to support e-commerce, but also to support, you know, all of the Kleenex and paper towel and toilet paper and wipes and everything else. And you could argue some of those are just a pull forward or a surge in demand. Some of those I would argue are more permanent. wipes, for example, paper towel, I think we're going to have an elevated level of demand for months or probably years to come.

Okay, this last one for me, I think I can't remember if somebody already asked it, but just on the capital reallocation, thoughts on the share repo, I think you sound like you're still committed to M&A, although maybe the stuff to do diligence when you can't travel, but on the share repo, still expecting to kind of continue at a similar pace, or does the uncertainty out there make you Maybe pull back a little bit on that.

Yeah, so I would tell you, first of all, you know, our stock is a bargain today, right? And we should be buying more of it. But, you know, with the uncertainty in the world right now, you know, the prudent thing for us to do is conserve cash, right? So Chuck talked about, you know, having plenty of cash on hand and having plenty of capacity in the revolver. That's the prudent thing for us to do at this moment. Of course, we'd much rather buy more businesses, do more M&A than buy our shares. That's still the best use of cash. So we're going to take a little latency approach. And as Chuck said, you know, we've been paying a dividend every quarter for 18 years. So while we don't have an exact dividend policy, we do have a practice that we've honored. So we think we're in a good position from a cash allocation perspective. You know, we look at the intrinsic value of the company today. And if it weren't for some of the uncertainty around COVID-19, you know, we'd buy a little more of it ourselves. But we're just going to kind of take away the approach.

Yep, fair enough. All right. Stay safe, guys. Best of luck. Great, too.

Thank you. Your next question comes from Kevin Chang from CIBC. place. Go ahead.

Thanks. Thanks for taking my question. Just one for me. I'm just wondering, as you help your commercial customers restart here, I suspect a lot of them or some of them are probably facing more financial duress. How do you manage the counterparty risk there in the event that they can't make it all the way through? Are you changing payment terms at all or Like what are you doing to make sure that you don't become an elevated bad debt expense sometime down the road?

Yeah, it's a good question. So our perspective does anticipate some elevated bad debt expense. There will inevitably be some customers who don't make it through that. I think that's obvious to everybody on the call. But, you know, we have a differentiated approach and a very thoughtful one. So customers with good credit ratings who need a little bit of help through this, we will extend terms to those customers. The longer they've been with us, obviously, we'll replay that loyalty to them and help them get through this time. On that front field, pretty good about our approach. We've trained all of our people, both in credit collections and all of our customer service representatives on all those policies, but also the approach. People are going through a very traumatic experience, and we start with a human-centered approach of understanding what they're going through, working with them, and getting to a good outcome. And we have long and loyal customers. Over seven years, our customers are with us. And so I'm pretty confident we're going to work through this together.

That's it for me. Thank you very much.

At this time, there appears to be no further questions. Mr. Slager, I'll turn the call back over to you for closing remarks.

Thank you, Rachel. In closing, given the foundational investments we've made in the business, We've been operating from a position of strength and we will continue to do so through the recovery and beyond. Our diversified footprint across the broad mix of markets nationwide position us well to benefit at each stage of the recovery. We look forward to working together with our customers and our communities as they resume operations. Once again, I'd like to thank all of the Republic employees for their ongoing hard work, commitment, and dedication to our customers and communities. Each of our employees truly embodies the committed-to-serve spirit. Have a good evening, everyone, and stay safe.

Ladies and gentlemen, this concludes the conference call. Thank you for attending.