Republic Services, Inc.

Good afternoon and welcome to the Republic Services Second 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 listen-only mode. Should you need assistance, please signal a 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 one on your touchtone phone. So we'll draw your question. Please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Nicole Giannino, Senior Vice President of Business Transformation and Communications. Nicole?

Hi. I would like to welcome everyone to Republic Services' second quarter 2020 conference call. Don Slager, our CEO, John Van Der Ark, our president, and Brian DelGaccio, 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 discussed 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 discussed today is time-sensitive. If, in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is August 6, 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 a gap reconciliation table, and a discussion of business activities, along with the recording of this call, are all available on Republic's website at republicservices.com. 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. We are extremely pleased with our second quarter results, which clearly demonstrate the resiliency of our business, the power of our operating model, and the strength of our cash flow. We delivered strong results in the second quarter by leveraging the solid foundation we built over the last decade. During the quarter, we increased adjusted earnings per share, delivered double-digit growth in adjusted free cash flow and expanded adjusted EBITDA margin, 170 basis points to 29.6%. I'm proud of the results the team delivered and truly inspired by their dedication to the Republic Way. Our leaders are working tirelessly to keep our people safe, adjust our operations to changing demand, and ensure consistent, reliable service to our customers. Our frontline employees continue to show up every day for our customers and each other. And our support personnel quickly adjusted to a new way of working. It was the collective effort of all 36,000 employees that delivered these results. Our economic outlook is positive. Since April, total volume has increased month over month through July. In our small container business, We are seeing a similar volume trend. Additionally, container weights increased sequentially through July, indicating steady improvement in consumption and economic activity. As always, we are running our business for the long term and continue to make investments to enhance the customer experience, improve the efficiency of our operations, and strengthen our market position. These investments will position us well for future growth. In the second quarter, we continue to effectively allocate capital by investing in value-creating acquisitions and returning excess cash to shareholders. Year-to-date, we've invested $124 million in acquisitions to further enhance our market position and grow free cash flow. Our deal pipeline continues to be strong, and we remain on track to invest $600 to $650 million in acquisitions this year. In July, our board approved the 5% increase in the quarterly dividend. The consistent growth in the dividend demonstrates the stability and predictability of our cash flows, as well as our confidence in delivering future cash flow growth. And year-to-date, we've returned $99 million to our shareholders through share repurchases and have approximately $600 million remaining on our share repurchase authorization. We now have greater clarity on how the pandemic impacts our business and how we can continue to adjust operations and effectively manage spending. As a result, we are reinstating our full year adjusted free cash flow guidance. We expect to generate adjusted free cash flow of $1.1 billion to $1.175 billion. Our ability to achieve the low end of our original free cash flow guidance demonstrates the tenacity of our team, the flexibility of our operating model, and the strength and stability of our free cash flow. As an essential service provider, we play a critical role in our communities. This starts by providing uninterrupted service regardless of the circumstances and being a responsible and ethical partner in the community. This quarter, we were recognized for our efforts and were named to 3BL Media's 100 Best Corporate Citizens list for the first time. For this list, 1,000 of the largest U.S. public companies were evaluated and ranked based on transparency and performance across 141 environmental, social, and governance factors. Lastly, we recently published our 2019 Sustainability Report. which highlights the progress we are making on our most significant opportunities to positively impact our customers, employees, communities, shareholders, and the environment. I would encourage you to give it a look. It's a great read. Now I'll turn the call over to John.

Thanks, Don. In the second quarter, we remain focused on our priorities, putting our people first, keeping our facilities running smoothly, and taking care of our customers. By staying focused on these priorities, we successfully executed our plan and delivered strong financial and operational results. These results clearly demonstrate we are well positioned to come out of this pandemic stronger and better than before. As expected, revenue decreased in the quarter due to customers temporarily suspending or reducing service levels. Volume decreased 7.4% versus the prior year. The volume decline was steepest in April and sequentially improved throughout the quarter. In April, total volume decreased 10.2%. In June, volume improved to a 5.4% decline versus the prior year. The depth of the decline in volume and pace of recovery varied by line of business and by market. Landfill special waste volume was impacted the most, decreasing 17% versus the prior year. Special waste volumes were down 22% in April, and in June, were down 13%. The decrease in special waste volume was primarily due to jobs being deferred, not canceled, and the pipeline remained strong. In the second quarter, landfill MSW volume decreased 3.5%, and landfill C&D volume was essentially flat. Second quarter small container volume decreased by 8.8%. In April, small container volume was down 10.5%. By June, volume sequentially improved 300 basis points and was down 7.5% versus the prior year. Second quarter large container volume decreased 12.4%. In April, large container volume was down 17.3%. And by June, volume was down 7.2% versus the prior year. We expect volume to continue to recover over the remainder of the year. During the quarter, we waived contractual terms to support our customers in their time of need. We made pausing and resuming service simple and easy. We waived late fees and offered flexible payment plans to our most loyal customers in need of assistance. Our results demonstrate that customers appreciated our efforts and value our service. Our net promoter score increased nine points from the prior year, and we maintained our customer churn of 7%. Additionally, we successfully executed our pricing program to cover our cost of inflation. This enabled us to continue to deliver the essential services we provide while being mindful of the challenges our customers faced. Total core price was 4.7%. This included open market pricing of 5.5% and restricted pricing of 3.4%. Core price represents price increases to our same store customers netted rollbacks. Average yield was 2.5%. Average yields measures the change in average price per unit and takes into account the impact of customer churn. Thanks to the team's relentless efforts, we effectively managed our cost and expanded adjusted EBITDA margin 170 basis points versus the prior year. Due to our investments in innovative routing and workforce planning tools, we were able to quickly adjust our routes for changes in demand. This enabled us to reduce overtime by 25% versus the prior year and increase productivity across our entire collection business. For example, in our large container line of business, productivity improved approximately 230 basis points. Throughout the quarter, our drivers remained engaged and focused. Attendance remained at all-time highs and turnover was at multi-year lows. We also decreased safety-related expenses by 19% or 13 basis points of revenue, 30 basis points of revenue compared to the prior year. We achieved the best safety performance in the company's history, reducing safety incidences by approximately 20% versus the prior year. During the quarter, we continued to partner with our municipal customers and discuss the impact of COVID on our business. In the second quarter, residential weights were up 10.1% versus the prior year. Weights tapered down during the quarter, And by June, residential weights were up 7.6% versus the prior year. We also continued to renegotiate contracts with favorable pricing terms. We now have $850 million of annual revenue, or 34% of our CPI-based book of business, tied to a waste-related index, or a fixed-rate increase of 3% or greater. Next, turning to environmental services. During the quarter, environmental services revenue decreased 26% from the prior year. This was primarily due to a decrease in drilling activity and the delay of in-plant project work. The decrease in environmental services revenue resulted in a 90 basis point headwind to total revenue growth. We expect this headwind to continue in the second half of the year. Turning to recycling. During the second quarter, recycled commodity prices increased 29% to $101 per ton, compared to $78 per ton in the prior year. The benefit from higher recycled commodity prices was partially offset by an 11% decrease in inbound recycling volume. Finally, preliminary results for July indicate total revenue increased approximately 1.5% from June. we typically see July revenue increase from June due to seasonality. Total revenue in July was down approximately 3% from the prior year. For reference purposes, total revenue in June was down 3.5% from the prior year. With that, I will now turn the call over to Brian.

Thanks, John. Year-to-date adjusted free cash flow was $743 million, an increase of approximately 20% over the prior year. Free cash flow growth was driven by an improvement in working capital, which was partially offset by a $51 million increase in capital expenditures when compared to the prior year. The increase in capital expenditures demonstrates our commitment to invest throughout the pandemic, which will protect and improve the long-term health of our business. The contribution from working capital includes a one-day improvement in DSO, a two-day improvement in DPO, and a $35 million payroll tax deferral under the CARES Act. We expect a total payroll tax deferral of approximately $100 million in 2020, which will flip over the next two years. To date, cash collections have remained strong. We believe our DSO performance reflects our customers' willingness to pay for the high-quality service we provide and the essential nature of our business. We expect the working capital benefit from DSO and DPO to anniversary in the second half of the year, since we saw improvement in these metrics in the latter part of 2019. With respect to EBITDA margin, the 170 basis points of expansion over the prior year included 110 basis points of improvement from favorable net fuel and higher recycled commodity prices, and 60 basis points of improvement in the underlying business. The business absorbed $31 million of COVID-related costs during the quarter. These costs related to the investment made in our Committed to Serve initiative to recognize our frontline employees and support our small business customers, additional PPE and enhanced facility cleaning to help keep our people safe, and supplemental paid time off and enhanced medical benefits for employees and their families. EBITDA margin expansion resulted from reducing operating and SG&A costs by a combined $151 million, or 8%. This completely offset the $151 million, or 5.8%, decline in revenue. Most of the cost reductions resulted from effective cost management. that positively impacted nearly all P&L line items. Our focus on cost control will enable us to gain leverage on volume growth as demand returns. Some of the cost improvement resulted from macroeconomic factors that positively impacted results. For example, transfer and disposal costs were down 80 basis points compared to the prior year, primarily due to lower container weights in our small container business. Container weights were at their lowest level in April and progressively got heavier throughout the quarter. While we are not providing specific EBITDA margin guidance, we expect second half margin to be at or slightly above the second half of last year. This would result in full year margin expansion. During the quarter, total debt decreased to $8.7 billion and total liquidity increased to $2.3 billion. Interest expense in the second quarter was $92 million and included $16 million of non-cash amortization. Our leverage ratio was approximately three times. Our adjusted effective tax rate in the second quarter was 24.1%, and in line with our expectations. Finally, as Don mentioned, we are reinstating full-year adjusted free cash flow guidance $1.1 billion to $1.175 billion. This guidance assumes continued gradual improvement in economic activity through the remainder of the year. And with that, operator, I'd like to open the call to questions.

We will now begin the question and answer session. To ask a question, you may press star then one 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 your question has been answered and you would like to withdraw your request, you may do so by pressing star then two. If you are using a speakerphone, please pick up your handset before pressing the key. At this time, we will pause momentarily to assemble our roster. Our first question will come from Walter Spracklin with RBC Capital Markets. Please go ahead. Thanks very much.

Good afternoon, everyone. Good afternoon. Hi, Walter. So I guess I'd like to start. That was a great color you gave into July on down 3% and then down 3.5% the month before. If you're seeing that trend, and taking into consideration seasonality, is there anything to suggest that you wouldn't be into positive growth territory year over year by the end of the year?

Well, look, as we've said, right, I mean, we have a positive outlook on the trend, right? And we feel good about a couple of things. One, residential weight increases have stabilized, right? And now small container weights are resuming. So again, strength of American business, consumption rates, the consumer we think is getting stronger. People are adjusting to a new way of doing things. You see it all around you, right? So we have a very, very positive outlook. Exactly when it will go positive, we can't put our finger on that. And so the guidance we've given is around cash flow, which we think is strong. We told you in April we thought we, you know, saw a scenario we could catch the bottom end of the range, and now we're telling you we're even more confident than that. And all the trends are positive. John gave you a lot of great trends, you know, on cost management, on CapEx, on people paying their bills, the whole nine yards, so to speak. So, look, when it goes positive, you know, we'll have more for you in the next quarter. And, you know, hopefully that'll be another good news story we can share with everybody.

Yeah, no, absolutely. Trends are certainly in the right direction here. But I guess now looking out a little further and not asking for guidance here, but just conceptually, you did a great job of managing costs on the way down so that margin expansion, in fact, occurred. Is there anything that suggests that, you know, as volume comes back through the rest of the year, you look out to 2021 and And assuming we have a more, you know, hopefully knock on wood here, we have a macro situation with a lot more normalcy to it. Is it not out of the question that margin enhancement here as volumes come back could be quite substantial given how well you were able to, in fact, improve margins on the way down?

Yeah, let me give you a couple of thoughts there. So there were certainly some macroeconomic benefits that we realized in the second quarter. We kind of talked about that. So, for example, some of the things we saw around container waste. We would expect those benefits, I would say, to moderate as we look forward. But I would say that being said, we do expect to be more profitable as we look forward. We've learned things about ourselves on how we can operate differently, one within cost of operations as well as within SG&A. And we would expect those benefits to accrue to the P&L in future periods.

Right. So, look, John mentioned safety is a bright spot. Employee engagement is at an all-time high. We expect that to continue. We're still doing great work to take care of our frontline people. Talk about the acquisition pipeline being full. We're talking about tuck-ins. Obviously, you know, we're tucking in, you know, into current markets. That's a margin enhancement in and of its own. We talk about running the business for the long term. You know, in sort of the depths of COVID, you know, we were busy sort of, you know, adapting to a new way of doing business, but we're back at, you know, long-term planning into business. John and his team, they're still rolling out the RISE platform across the organization. You know, all the digital tools, you know, they're well on their way there. So we're back at it, and all those things are going to be margin enhancers as we go forward. So there's still a lot of good news we'll be talking about here as we take these next couple of quarters off. That makes a lot of sense.

Congrats on the great quarter. Thanks very much.

Thanks.

Our next question will come from Tyler Brown with Raymond James. Please go ahead.

Hey, good afternoon, guys. Hey, Tyler. Hey, John. So I know, you know, there's been a lot of chatter out there about rural versus large urban markets. I think you guys are about a third, a third, a third rural franchise and urban market. You gave some great color and aggregate on volume trends, but is there any way you could kind of bifurcate urban versus maybe those small markets, if even anecdotally? Just basically, is there a big difference going on in those different types of markets?

No, it's very geographic, your point, Tyler. You know, we've looked at a lot of productivity data and circumstances to understand what You know, with less traffic, obviously, we're more efficient in getting the recycling and the garbage off the ground. And surprisingly, we're seeing pretty steady trends across both rural and urban markets. And you'd think you'd get a much bigger advantage in urban markets. And we're seeing kind of the same advantage across all of those markets, which, to Brian's earlier point, gives us some confidence that some of the costs that we've captured on the way down, we're going to keep that on the way back in those productivity improvements. And I wouldn't, you know, again, we haven't, we're not releasing this data, but I haven't seen dramatic differences between urban, suburban, and rural, right, in terms of kind of the activity levels and volume.

Okay, no, that's extremely helpful. Hey, Brian, just a quick clarification on CAPEX. So, I think coming into this year, you guys were looking for some heightened spend, I think, on break rooms and such, and I think that stemmed all the way back from the tax bill. First off, is that the case, and did you make that spend? And number two, I know 2021 is a long way away, but should we be thinking about that incremental spend peeling off in 21?

Yeah. So, Tyler, of the original 100 that we were talking about spending, it's probably going to be closer to about 60. So, $40 million of that will roll into 2021.

Okay. That's very helpful. And then just my last one here, if I can. So, Don, you reiterated that you plan to spend $600 to $650. I think you've done, I think you said $125 year-to-date or so. Is the preponderance of that half a billion sitting in one property, or are there more kind of multiple sizable deals out there?

Yeah, there's one big deal out there, right, that we've talked about. But there are some others. Again, I continue to say, look, there are a number of really nice companies out there, well-run and good markets, good people, getting to a place in their life cycle where talking to us makes sense. You know, we're engaged in some really good conversations. So we have a lot of confidence in the pipeline. But there's one big deal out there that will carry the bulk of that.

I think one of the bright spots of this is, well, we slowed down pricing deals, right, in the decline here to understand what demand was going to happen. We never stopped conversation. And our acquisition pipeline remains very robust, very active. And we now are starting to write deals with sellers. We've got a lot more confidence in our outlook and theirs. I feel really confident going forward for the rest of this year and next year in terms of the acquisition pipeline.

Absolutely.

Okay. Sounds great. Well, great quarter, guys.

Thanks. Thank you.

Our next question will come from Cosma Mazzari with Jefferies. Please go ahead.

Hey, good afternoon. First of all, congratulations, Brian, on the CFO role. Thank you. My first question is, you know, you talked about second half margins being, you know, slightly above last year, and I realize, you know, you're going to have some costs that come back into the system as container weights get heavier, et cetera. But maybe could you talk about what you see as sort of permanent cost saves during COVID-19, anything sort of structurally different that you think you can take out of your business, whether it be real estate footprint or maybe there's other stuff that maybe you can talk about that may be more permanent in nature?

Yeah, I'll give you three. Real estate is certainly one of them, and we're reevaluating what roles should always be in the office, what roles can be permanently at home, and what roles will have some flexibility to them. And therefore, we capture... Real estate savings on the ones at home are the ones that are flexible. I think travel is another one. The tools that we've used to work remotely, we have been far more connected and efficient than we expected. There is a role for travel going forward, so operating completely virtual is not a norm that we'll have, but we'll certainly be spending less on T&E as we go forward, as we kind of think about best of both worlds. And then just in terms of labor productivity, I think our ability to flex labor and move people, cross-train people, move people across different lines of business has allowed us to serve customers really, really well, as well as manage costs at the same time. And we'll certainly carry some of those forward as we recover from the pandemic.

Gotcha. And then just on pricing, I know a lot of the pricing is already locked in in Q1, but and I'm not asking you to comment on your competitor, but they had much lower average yield and maybe were giving more price relief. Could you just maybe talk about how you were able to keep pricing pretty steady as well as in the face of really down volume? Maybe just talk about your pricing tools and how you see pricing build up

for the balance of the year or you expect it to be pretty consistent yeah so we looked at a range of options obviously during given it was an unprecedented event and definitely wanted to be empathetic to customers who were their businesses were changing dramatically so as i talked about we let people break contracts to suspend service uh and we're in constant communication with them about when They could come back at a time that was right for them. We were flexible on payment terms with some of our customers and certainly offered that to many more who didn't take us up on it. And then spent a lot of time and energy on committed to serve. So we put money in the hands of our frontline people to serve our customers. So our philosophy was that customers, while they maybe needed a little cost relief, what they really needed is customers and revenue. And we got our local teams engaged and energized to power our small business customers through a very difficult time and got a lot of positive feedback from our customers on that front. And listen, we are out there every day in a tough environment picking up the recycling and the garbage and doing a hard job, and our customers are noticing it, and they're paying us a fair price for the hard work that we're doing. So I think that's the primary reason we've been able to sustain it. And going forward, I think we see, you know, more of the same. Obviously, there's some puts and takes in terms of year over year and some fees that might change year over year, but the philosophy is not changing, and we, you know, expect a strong pricing performance in the second half.

And look, they're paying us a fair price, and they're paying us on time. And I think, to John's point, I think they value the service in rewarding us for the hard work and the effort our frontline people are putting out, so.

Gotcha. And I just have a last clarification question that's very helpful. The $600 to $650 million in M&A, is that a new normal going forward for you guys? It used to be a lot smaller, but you're seeing your peers do a lot more transactions. And so has the philosophy changed at all, or this is just sort of, a time where you're just seeing much more in the pipeline, and then it goes back to sort of a normalized. I think it was maybe it was 300 million of annual deals you used to do.

Well, I think, you know, even John just said, you know, with the pipeline not only strong for the remainder of the year, the 6 to 650 range we've given, but we think it's strong into next year. So, you know, do I have an outlook, you know, for the next 10 years? I don't. But I would tell you just based on where we are in this point in history, again, there's a lot of great companies out there. We know where they are, who they are. We have ongoing conversations. You know, we think that – You know, sort of a robust pipeline of deals and a continued appetite for good deals, good companies is going to be somewhat of a regular diet for us, at least, you know, into the future here that we can see. And certainly we have the appetite, we have the ability, and the team continues to demonstrate their ability to very – efficiently integrate these things. And after we get everything up to sort of company standards, really turning the cash flow on that we think they generate. And as we look back at the deals we've done, we've got a high degree of confidence in what they've delivered. So we know that we're paying the right price for deals and making the right assumptions on the way in. So it gives us all more confidence to keep on going.

Great. Thank you so much.

Our next question will come from Brian McGuire with Goldman Sachs. Please go ahead.

Hey, good afternoon, and I want to echo everybody's congratulations on the next quarter. Solid job managing the cost there. Thank you. Just on the – back on the margin outlook, there's one thing I'm trying to reconcile is 2Q is the worst for volumes, down 7.5% or so, and the best for year-over-year margins, and Volumes are getting better on a year-on-year comp basis for the rest of the year, it sounds like, but the margin gains aren't getting there quite as good. Is that really as simple as a recycling and fuel kind of contribution sort of going away and maybe a little bit from the higher container weights, or are there some other puts and takes and factors in there?

Yeah, I would sit there and say it's what you just mentioned, quite honestly. So, you know, from where fuel prices are right now, we think sequentially that steps down about 40 basis points. So starting with our 29.6 in the second quarter, that would be a sequential decline of 40 basis points. And then commodity prices would be another 20, right? So you're already down 60 basis points just with those two. And I talked about the container weights, right? And we saw those lighter by 20% in April, and actually by July, that's down to about 6%. So, you know, that benefit that we enjoyed in the second quarter, we don't expect that to repeat at the same level, you know, going forward. But quite honestly, while it's a near-term cost headwind, it's actually a good sign, right? It's a really good sign for the health of our small business customers.

And, Brian, the other thing to keep in mind, if you recall when the CNG tax credit was passed, we recognize two years worth of benefit in the fourth quarter of 2019. And so that is giving us a headwind, for example, in the fourth quarter of 50 basis point headwind. So about, call it 30 for the second half.

Yeah, so that's something we have to overcome.

We were talking about a second half margin, a cumulative number. So 3Q could be quite a bit better, but 4Q will have that unique headwind, like you said.

Yeah, which is just a timing thing.

Yep. Makes sense. And then just a question on capital reallocation with the outlook being a little bit better and being able to get back to providing guidance. Do you think we get back to buying shares back more periodically like the course you were on beforehand or is it a little too early to be thinking about reopening that window?

Look, as I said, we've got $600 million remaining on the authorization. We continue to look at the intrinsic value of the business. Again, we look at that based on our three-year outlook and our three-year plan, right? So we're looking at a real actionable plan against you know, how we think the stock will perform. You can look at our track record. We've always taken a balanced approach with that intrinsic mindset. At the same time, we've said, look, we'll flex buyback based on opportunity in the market as it relates to M&A and maintain the optimal, you know, leverage ratio. I'll call it, you know, right around three times. And so all those things are in play. We've got a lot of flexibility. We've got a lot of dry powder. We've got a lot of capability. So we're in a good place. And if the market allows it and we see an opportunity, you know, we'll buy opportunistically just as we have. And frankly, I think we beat the market. you know, year in and year out. So that balanced approach won't change, but we'll continue to look to put our money to work and return to shareholders the best way, you know, that we can. I think we think we do it as efficiently as anybody.

Okay, just last one for me, just back on the pricing outlook. It sounds like we saw a little bit of a step down in the year-over-year growth rate, which was expected, I think. Just as the year progresses, the comps get a little bit tougher and a year-over-year basis, so should we just expect a little bit of more gradual deflation in that line item?

Yeah, I'd say gradual. Again, there's some timing things year-over-year, so some of our fees are impacted by fuel declines. There's a year-over-year decline on that, but our core pricing philosophy is not changing. We want to send a fair price for the hard work that we do, and customers reward and value that and pay us.

Yeah, makes sense. All right. Congrats again. Have a great quarter.

Thanks, man. Our next question will come from Kyle White with Deutsche Bank. Please go ahead.

Hey, good afternoon. Thanks for taking the question. Hey, John, thank you for the details regarding how volumes progressed through the quarter and the details on total revenue in July. But curious if you could kind of give a similar level of details on how volumes were in July by line of business, you know, how a small container and roll-off and such.

No, we're not giving that level of detail on July, but, you know, getting steady recovery across that. And I would say that we have a little bit of a geographic headwind that we've had to overcome as the COVID cases, you know, initially started out in the northeast and were heavily impacted, where we have a lighter footprint. The heavier caseload in the last couple of months has been in the south and southwest, so Florida, Georgia, Texas. Arizona, California, we have significant market positions in all of those markets, and yet we're still seeing volumes recover. So that gives us a lot of optimism that the outlook is positive. There's still uncertainty, of course. There's going to be puts and takes across different geographies and week to week. We're running the business for the long term, but we feel like You know, we've certainly far more than exceeded the floor, and we're on our way to a nice day of recovery.

And I think, you know, John's prepared remarks. He mentioned seasonality, right? So we actually are seeing some seasonality in the business. And so with all that John just mentioned, overcoming, you know, what's happening out there, again, that leads us to our positive outlook.

Gotcha. That's helpful. And apologies if I missed this and appreciate the free cash flow guidance provided. But did you provide any of the kind of moving parts there? You know, what do you expect for a CapEx for the full year? What about working capital?

Yeah, we actually, in our guidance, we provided the various components, including, you know, what we expect from a cash from operations as well as, you know, CapEx. So you can actually see, you know, the various components in our EK filings. If you kind of take the midpoint of, you know, the range, though, what we're kind of thinking, it's approximately $1.1 billion of CapEx.

And the other color I have on that is our CapEx plan naturally pulls back when we, you know, don't have the volume. Ten percent of our annual CapEx typically is for volume growth, and we're not seeing that growth, and we're naturally not going to spend that CapEx. So when we see decline in some of our replacement schedules for trucks naturally push out, we're still investing in the business. We're still working on projects, still investing in our digital operations platform, which is Rise, and running the business for the long term. So the team's done a great job in the face of a pandemic, not just working the quarter, but working for our multi-year plan.

Again, it just reiterates the flexibility we have in the business model. When these things happen, we've got the ability to flex very quickly and still produce the cash flow. and meet our obligations. So, again, I think just a great outcome, a lot of great work from the team, but, again, it just really shines a bright light on how resilient the business model is.

And, Kyle, as I mentioned, you know, the midpoint of right around $1.1 billion, the range is $1.075 billion to $1.15 billion. Perfect.

Thanks. I'll turn it over.

Our next question will come from Sean Eastman with KeyBank Capital Markets. Please go ahead. Sean, your line may be muted on your end.

Hey, sorry about that, guys. I'm at my mom's house, so, you know, just trying to keep it quiet. So... Guys, really impressive job. Congratulations. I just wanted to ask sort of a higher level question. I mean, you know, post-COVID, it does seem like, you know, we could see pockets of population growth in, you know, pretty different parts of the country relative to what we've seen, you I'm just wondering whether that or anything else sort of in the post-COVID world is changing how you guys are prioritizing or focusing your capital investment dollars or M&A dollars. Any thoughts there would be great.

So, look, our strategy around market position hasn't changed, right? We strive to be number one or number two in the markets we serve. We strive to be vertically integrated. And, you know, again, the results you see today are a result of decades of building around that pillar of our strategy. You know, we want to get in front of the growth, right? We want to be where people are. And so when you think about, you know, the Sun Belt that we talk about from Seattle, Washington, down the coast, across Texas, up into the Carolinas, and all the other little pockets that people are moving into, hot spots like Nashville, right? We're there. We've got a great business mix, a great business portfolio of urban centers, which sort of picks up some of the growth around sort of the urbanization trend. We've got a great business position in secondary markets, right? And So, look, you won't see us necessarily wander into markets we're not in and do startups just because they're hot spots for people. But if we can take a number one or number two position in an adjacent market that we're not in currently but is next door or a brand-new market, we'll do that. And we've done that. We've done that over the last couple of years. You've seen us go into some new secondary markets because we were able to take a nice position. So again, we've got a great pipeline. We've got a great M&A team, a great leader in that group. And again, we've got the balance sheet to continue to grow that way. Great thing about our business, again, as population grows, as business formation grows around that, we're very well situated with our portfolio. And the fact that we're east and west and north and south kind of insulates us when they're sort of micro pockets of bad news, right? So while there may be a couple of cities right now where, you know, the epidemic's still in the upswing, we're plenty of cities where the numbers are going the other way. And so we're We're getting that balanced benefit. So, again, that's the strength of the portfolio, the power of the portfolio. And so one thing that will change in our outlook is just as John said. I mean, we've learned a lot on how we can work a little differently and And we're taking all those lessons to heart. That will make us better. It will make us an even more attractive company to work for. It will make our employees even more engaged. It will make us leaner. But it won't change our outlook on how we grow. And, again, I think we're very well situated for all of that.

Yeah, that makes sense. Good answer. And next I just wanted to give Brian the floor. I mean, congrats on the CFO role. Just curious, you know, over the next 12 months, you know, where you think you're going to be spending the biggest chunk of your time, you know, from an operational perspective, what's the big priority as you come into the big seat here?

Well, look, I mean, I think the traditional role of the CFO, when you just think about making sure that we have good quality financials, I mean, going to be spending, obviously, my time on that. But even more so when you think about, you know, me keeping, you right, the IT department. And when we think about our investments in technology, how they're enabling things like our RISE platform, how they're doing things, quite honestly, even on the SG&A side. And when we think about modernizing our core systems, that's where I'm going to be spending a majority of my time, just to make sure that we set ourselves up well for future growth and enhanced profitability.

Got it. I appreciate the time and nice work again.

Our next question will come from David Manthe with Baird. Please go ahead.

Thank you. Good afternoon, everyone. On the call, you mentioned that you were questioning your own real estate footprint. I'm wondering, do you have an opinion on the near-term outlook for commercial construction in general and how that might influence your business into 2021?

Not a strong one, given the uncertainty, only that construction has held up pretty well. If you think about C&D tons into our landfill, it was pretty strong quarter there. I think in many markets, construction has been the bright spot. While everything else was shut down and people were sheltering in place, in most markets, construction had an exemption. Really strong, obviously, on the residential side. Probably a lot of current projects getting finished, but we're still seeing new activity in market, so probably too early to tell in terms of the longer term outlook.

Yeah, one thing I would add to that is, you know, I'm hearing a lot of people talk about how they'll use space differently, not necessarily having less space, but having more open space and having more space between cubicles and You know, I know for us, for a long time, you know, we needed more office space, so we went from the, you know, 10 by 8 cubicle to the 8 by 8 cubicle to the 6 by 6 cubicle, you know, just to sort of squeeze people in. So, you know, I've heard that from a number of companies that they're going to, you know, use this opportunity to maybe, you know, maintain some of the space they have. just make it more more wide open more more sunlight for their people more meeting space that's required that kind of thing and just to appeal to you know the next generation of workforce so I think I think that's going to be true for a lot of people okay thank you and then

DNA and tax rate expectations for the full year 2020 if you didn't give those. And then somewhat related, the July revenue month to month increase of 1.5. If you could just tell us what the normal seasonality range is from June to July.

That's pretty typical of what we see.

Okay. Yep. And then as far as tax rate goes, our assumptions haven't changed from the original guidance that we provided. So we're looking for For the full year, it adjusted effective tax rate of 21%. And then just keep in mind, we also have a tax-related non-cash solar charge that shows up below operating income. We expect that charge to be about $110 million and weighted to the fourth quarter.

All right. Thank you.

Our next question will come from Michael Hoffman with Spiegel. Please go ahead.

Thanks. Hi, Don, John, Del. Welcome back. Hey, Michael. Hey, Michael. I'd like to tease out the free cash flow outlook because as I lay the pieces out and I think about your typical ratios, like you've been tracking at 40% 42% conversion ratio or your cash flow from ops or 22, 23% of revenues. You know, just sort of teasing all those pieces together to try and figure out what's going on. It feels like this should be better than 1-1 to 1-7-5. So what's our headwinds in the second half? You gave a couple of them earlier. But take if... that only will give you about $4 million of incremental free cash to be at the midpoint.

Yeah, Michael, let me give you a couple of numbers here. So I talked about in my prepared remarks that we expect the working capital benefit to flip in the second half of the year. And quite honestly, that's just because we saw really strong DSO and DPO performance in the second half of 2019. So it's not that we expect those to step down in the current year. It's just, they're going to anniversary. Okay. So we no longer enjoy that working capital benefit in the second half, but the real big piece is really cash taxes. So when you take a look at what we expect to spend in cash taxes in the second half, it's over a hundred million dollars more than what we spent the first half. The other thing I'll just point out is just because we had some refunds in the prior year, we would expect cash taxes to be at least $100 million more on a full-year basis than in 2019. And just to put a finer point, cash tax as a percent of provision was about 12% last year. This year we're expecting it to be about 70.

One seven or seven zero? Seven zero.

Seven zero.

Hey, Michael, did we mention that we reinstated our original free cash flow guidance?

Yes. I know, but your original guidance is actually $100 million on the upper end, on the higher end. So it feels like maybe that's not actually out of reach.

Well, look, nothing's ever out of reach. Okay. How's that? Good.

Are the ratios I talked about – still consistent, kind of 40% to 42% of EBITDA or 22% to 23% of cash flow from options percentage of revenues? Those are the ways I think about things. Yeah, that's fair.

And, you know, again, I think the big, you know, impact there is just going to be cash taxes with what you're seeing at that 50-plus conversion that we're seeing in the first half versus what a more normalized rate would be. Got it.

And just to close on the acquisition side, please. Tech's $450 million, so that leaves you $200 million to do tuck-in. That's kind of what you've spent consistently for a decade is $200 million tuck-in.

Yeah, I don't know if there's a question there unless you're just, you know, emphatically agreeing with me. Yeah, no, I am.

It just seems like there's confusion, and I'm like, there's not any confusion. No, no, there's –

Look, hey, look back for all the years you've known us. We have a really good track record of telling what we're going to do and then doing what we say. And, you know, we wouldn't tell you what we're telling you if we didn't have a pretty good handle on it, right? So we're very committed to growing through acquisitions. I can't say enough about the team that we have in place, the person who leads that team, the amount of time that we spend talking about it, and the amount of great companies that we see out there. Yeah. You know, we're in that game, and we're going to continue to make intelligent investments in growing our business and expanding our business that way. And that's going to be, you know, we'll be right in the hunt along with anyone else. And hopefully because of relationships, because of our style, because of, you know, our ability to get things done, you know, we'll get more than our fair share.

Okay, cool. Thanks.

Our next question will come from Michael Finneger with Bank of America. Please go ahead.

Hey, everyone. Thanks for squeezing me in. Don, can we just take a step back? For a very long time, there was the goal for a public to get back to its prior peak margins in that 30% or 31% range. It's been out there for a while. And some investors were frustrated, didn't know if the maintenance of one fleet and these initiatives were actually going to benefit. And then you guys put up this quarter. And I know that some of that, like Brian said, is macroeconomic driven with what we're seeing on the container weights. But, you know, Don, maybe you can kind of talk about how you think about those margin targets. We haven't heard about that in a while. You know, the maintenance expense, it seems like, is really under control this quarter. landfill costs. I'm just curious how you view this quarter in the context of getting-and what you guys talked about the margins on the full year basis this year in the context of those prior peak margins.

David Chambers- Sure. Well, let me start by stating that the 30 percent margin goal is still very much in our minds and very, very real. There are two main things that have sort of been our nemesis there. One was the CPI escalator built into all of our contracts for decades that we've been overcoming. And John mentioned in his remarks the great progress that the team has made in moving away from that archaic escalator element of our contract into something that is more relevant. And the team's doing a great job there. And so that's just another way of showing that once we put our minds to something, we move the needle, we move the market. We did that with the recovery fee. We're doing it now with alternative index. And then the other thing that's been our nemesis is recycling. And again, we have really put a stake in the ground here. We talk about recycling, reimagining recycling 2.0. The team has made an incredible improvement in progress in moving off of the old way of pricing and sharing in the risk and getting that risk appropriately balanced. And that's more to come. So not only are we getting it done with our customers because our customers, you know, value what we do and are willing to pay and understand the fairness of it, but the market is moving, right? We're seeing that become more and more of a norm because it's just common sense to do it that way. And so, again, as those two things continue to shift, as we close the gaps on that alternative index, and on the recycling sharing arrangement, those two things by themselves will go a long way toward getting us to 30%. Now, just those two things. And, again, if you look at the progress, just trend them out. And, you know, the team is fighting hard, and, you know, John is committed as I am to get that done and believes that he will. Now, you add on top of that, You know, again, some of the things we've talked about, some of the learnings through COVID-19, some of the way we think about how we'll move forward and some of the putting those learnings to work, the way we'll work differently, remote working, even the – I think we can maintain some of our safety performance and some of our productivity performance, as John said. The team's committed to do that. Now you layer in RISE. You know, the team's been hard at work getting that put into the business, and we've got a great percentage of it implemented. You know, and that's just the first phase. And this is going to be the gift that keeps on giving, right? Once we get sort of digitized there and we get the initial benefits, then it's going to be one chapter after another of new opportunity that that will present to us, right? And so, look, there's a lot of great stuff on the horizon. You can't bake all that, obviously, into the remainder of 2020. But as we get further along, as we always do, you know, we'll come to you, you know, in October with preliminary outlook. And then we'll share some of those details with you. And as the world starts to settle down too, right, then we'll start sharing some of that with you in February next year. But we think outlook is very bright. And, again, 30% margins is very much in our minds and very, very reasonable goal in our perceptions.

Great. Thanks for that color, Don. And just lastly, you know, over the years, your volumes were a little lighter than your peers. And you guys were shedding business. You would talk about non-reputable losses. Is your book of business now higher quality than it was a few years ago to help get through a time like this? You guys kind of talked about those non-regrettable losses in a while. I'm just curious if you can help us with the context of you guys going through that process and where that leaves you now in this tough, tough backdrop. Thanks, Tom.

Yeah, we spend a lot of time understanding the customer. Not all customers are equal and they all don't have the same need. So we specifically put a lot of time and energy targeting customers that are willing to pay and willing to stay. So loyalty is a big part of our and where we invest our time and energy. And to your point, we had some optimization due across the portfolio, and a little bit of that will happen all the time as we acquire smaller talk-ins. We'll find bits and pieces of that business. But we feel very, very good about our portfolio in terms of customers who are willing to pay at all levels, from residential subscription all the way up to national accounts. And everybody has got to pay their fair share, and we feel really good about the progress we've made.

Our next question will come from Henry Chain with BMO. Please go ahead.

Hey, good afternoon. Thanks for squeezing me in. I just wanted to dig in a little bit and ask about the pricing dynamics. I mean, it's been very strong. And, yeah, I just was curious if you could talk a little bit more about, you know, what's driving that and, you know, how much of that is just, you know, a structural issue supply shortage, if you will, in disposal capacity or in how much of it is like what you were saying before and just providing more value to your customers and kind of what that is of just keeping that price at a pretty solid rate?

Well, sure. Let's start with this notion of being an essential service, right? we really are an essential service. And with all the work we've done, as John just mentioned, to understand customers, what they want, what they value, what do they want to pay for, you know, that reliability is top of mind, right? And just like when you go to turn on the faucet, you expect the water to come out. When you go to flip the light switch, you expect the lights to come on. When you roll the cart to the street, you expect it to be gone that same day within the same window of time. The work we've been doing operationally with OneFleet, our fleet health, fleet reliability, is paying dividends today. The work we've done around, you know, our workforce planning and our employee engagement and route readiness, all those things, right, are coming to bear today. You know, employee engagement, you know, not only makes us safer, but it makes our – our entire organization think about how we better serve the customer, right? And so we talk about NPS going up, what is it, nine points, you know? We're very much wired around that. So when we think, you know, we have a service that is valued by our customers, when we show up the way we do with, you know, that relentless attitude to get the job done, and then we do that even in a difficult time, we feel like we can continue to price through that event, and we did that, and our customers rewarded us for our hard work. If you back all the way up to the macro, right, you have a rational environment out there. When you think about the cost of disposal, the cost The limited amount of landfill space, even though we have a lot of years ahead of us, I mean, it's more and more difficult to get that space permitted and so on. All those things continue to play into just a strong environment. And I'm really encouraged when we think about – and we were talking about this before the call – You know, the strength of American business and the business mentality of people, you know, clawing their way back, the strength of the free market, you know, not to get too patriotic, but the American spirit, right? I mean, you know, what we've seen in our own people showing up every day, I mean, that's happening in other companies as well. That's happening in other businesses. That's happening with our customers. And, you know, people have a much more positive outlook, I think, in the world than what you read in the headlines. And we're seeing it right here in our numbers. We're seeing it right here in the consumption and the waste generation rates. Our story tells a different story than what you might read if you just read the newspaper. So, look, that strength on the business model and our pricing tools and the way our field leaders work with our pricing leaders here and that belief that what we do is really important. and has value, and we're not done yet. The digital tools will further enhance that relationship. We're going to connect cabs to customers. We're going to further improve the quality of the product, and that's going to give us continued pricing power as we move ahead. Yeah, got it.

Okay, that's great. Awesome. Thanks so much.

Again, if you'd like to ask a question, it is star then one, star then one to ask a question. Our next question will come from Noah Kay with Oppenheimer. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking the question. You know, Don, you've now mentioned a couple of times the digital investment in RISE. You know, you started to roll that out last year. And it seems like the initial focus was really about improving dispatch effect efficacy, you know, real-time routing information and enhanced data visualization. You mentioned that you had implemented a fair amount of that pre-pandemic Then the pandemic hit, you know, and froze, I would imagine, some new variables into the next three operations and kind of test that platform. So, you know, how did it perform? What impact did it make? What benefits did you see? You know, how does that experience inform your visualization plans going forward?

Yeah, I mean, it performed well just purely from a plumbing standpoint, right? The IT team did an incredible job that, everything ran, right? We moved people around, and including the RISE platform, right, operated without a hitch. So, the technical side of it operated very well. Now, the performance side operated well in two capacities. One, those that had it implemented already used it to really reconfigure the operation, right? As weight got heavy on residential and there was more demand there and then things got constrained or constricted and small container, large container. We were able to optimize routes in a great way. And then the deployment itself, back to the cost of what goes away. Our deployment was a typically hand-to-hand combat model where we would go out and spend a couple of weeks working shoulder to shoulder. COVID didn't allow us to do that. So we've deployed those things entirely remotely. We didn't stop the pace. We kept going. And the performance in a remote deployment has been on par, the deployment and the in-person deployment. So as we think about continuing to put tablets in the cab and all the further waves of digital operations, our ability to do that, both from a cost and a speed standpoint, improves.

And that's a great learning coming out of COPE. Yeah, look, when you think about that from a change management perspective, You know, we've gone from sort of push to pull, right? The things that we're producing here are value-added in the minds of our frontline leaders, and they're anxious to get those tools in their hands. So they're very willing and able to implement them, but they're pulling that capability. And so, you know, I'm hopeful that, you know, our speed of change – the more and more we do these things, our speed of change can actually increase as well.

Yeah, that's great, Collar. And maybe just one more, and you mentioned it a couple times here, the progress on moving the CPI book of business to an alternative pricing mechanism. I go back three years. You've basically almost doubled your revenue exposure to an alternative index. But just given that you're highlighting that as one of the keys to kind of continue to move the margin profile up. Can you share with us any targets or benchmarks that you're really hoping to get to, say, over the next couple of years? How do you want investors to kind of judge that progress? And, frankly, how does what's happening now, the current environment, impact that?

No, we haven't actually shared an absolute goal. And, look, I would just ask you to look at the progress we've made as a testament to the ability to do it. You know, there are a lot of factors. You know, the when contracts come due, the size of contracts, you know, and, you know, just the pace of change, the dynamic of the market. I mean, all those things are variables that you have to work through. But I will tell you that, again, we're committed. We see the market moving. And, you know, we're going to stand here every quarter and tell you about the progress we're making, and you can hold us to that.

Yeah, I think the progress we've made during this pandemic is a good indication of our resolve and commitment. Our municipal sales team is pretty busy at City Hall because we still have some customers from a recycling standpoint that we need to get into a different relationship with. Still some work to do on alternative index, obviously. And as more people work from home, and we are going to envision probably being a little heavier than those initial contracts contemplated, we're going to have a dialogue about getting paid for the work we do And that's going to be a very important piece. Again, fairness is on our side. All we're trying to do is get paid for the work we do, and we've got a pretty good track record when that's our argument of our customers working with us.

That's great. And, again, that's offside. Yep. Much appreciated. Thanks again.

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

Thank you, Grant. In closing, we are very pleased with our second quarter performance, and we are well positioned as volume continues to recover. Despite volume declines, we grew earnings, delivered double-digit free cash flow, expanded, adjusted EBITDA margins. We also reinstated full-year adjusted free cash flow guidance, which includes the low end of our original 2020 guidance range. And did we mention that we raised our dividend for 16 years straight? That's a lovely stat. Once again, I'd like to thank all 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 and stay safe.

Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.