Earnings Call Transcript
GFL Environmental Inc. (GFL)
Earnings Call Transcript - GFL Q1 2020
Operator, Operator
Future events and developments will be discussed. This call will cover certain non-IFRS measures, and a reconciliation of these measures can be found in our filings with the Canadian and U.S. Securities Regulators. I will now hand the call back to Patrick, who will begin on page 3 of the presentation.
Patrick Dovigi, CEO
Thank you, Luke. I would like to start by thanking all of you, both equity and debt investors, for sticking with us through one of the biggest stock market declines since the Great Depression. Given management's equity ownership, we are in this together for the long haul to continue increasing shareholder value over the years to come. When we took GFO public at the beginning of March, none of us thought we were at the start of an unprecedented global health crisis that has brought the personal and economic disruptions we have seen from the shutdowns and other measures taken by governments across North America to stop the spread of COVID-19. Despite the significant impact on general economic activity resulting from these measures, we delivered an exceptionally strong quarter, growing adjusted EBITDA by 25% to $223 million and completing over $1 billion in M&A in the quarter. When we were on the road for the IPO in February, our recurring message was about GFL's resilient growth profile. Our first quarter results are a testament to our ability to deliver on that profile. Let me first and foremost mention that none of our success in managing through the pandemic would be possible without our employees. Our top priority since the start of this crisis, as we began to navigate through the loosening of government restrictions, continues to be ensuring the health and safety of our more than 13,000 employees. To protect our employees, we took immediate steps, including setting up risk management teams of our senior leadership and operational leads to identify, assess, and respond to the changing internal and external dynamics on a daily basis and to provide real-time direction for the fields to address issues as they arose. We have implemented and continue to follow physical distancing protocols as recommended by public health authorities across all of our operations, including work-from-home arrangements where appropriate, and we have limited all non-essential travel. We have invested in PPE and sanitation practices and increased the frequency and depth of cleaning our facilities and our high-touch services at all of our facilities. As an essential service, many of our frontline employees have continued to come to work every day, and the measures we have implemented have proven successful in keeping them safe. The loyalty and dedication of our employees who have continued to deliver our essential service during these unprecedented times is truly inspiring and something for which I am extremely grateful. We have also been touched by the outpouring of support our employees have shown by our customers and communities. We have in turn given back to our communities by continuing our financial support of local charities, including through our first full circle project and donations to local hospitals of medical grade PPE that we have sought to support local healthcare workers. In terms of COVID-19 impacts on our financial results for the quarter, the effects we saw varied greatly by market and were largely dependent on the characteristics of the rules of the shutdowns imposed in each market. The COVID-19 related impact on our solid waste revenue in Q1 was mostly attributable to reduced volume in our commercial and industrial collection business during the last two weeks of March. Restricted economic activity from regional shutdowns reduced demand for our ICI collection services. The timing and scope of the shutdowns drove the magnitude of their impact on revenue in each of the affected markets; our residential collection business held up very well and actually outperformed in most Canadian markets where we are paid by the time under municipal contracts. Also, a relatively lower proportion of our revenues comes from volume-based closed collection activities which mitigated the overall revenue impact from the reduction in C&D and special waste volumes into our landfills in the quarter. We saw the greatest volume impacts in the primary markets in which we operate, most notably Toronto and Montreal where stay-at-home orders were put in place earlier than other markets and covered a broader scope of service offerings. Volumes in our secondary markets, where we generated almost two-thirds of our solid waste revenues, were far less impacted. Our pricing during the first quarter was very strong, contributing 4.9% to revenue growth. We continue to see pricing discipline in the industry and, as of now, we have not experienced any significant pricing-related impacts from COVID. As we said on our investor call in April, because of the high proportion of our revenues coming from our service-based collection, we have a highly variable cost structure; as volume slowed, we reduced our operating costs by consolidating collection routes, parking trucks, and reducing overtime hours, while our disposal costs, labor costs, and fuel costs naturally flexed down with reduced volumes. At the same time, we reorganized our workforce across our service offerings and business lines to minimize the disruption to our employees. Because of our focus on the safety of our employees, we did incur incremental costs in the quarter for the enhanced safety and hygiene protocols that we implemented that I described earlier. We also looked at our SG&A costs and significantly reduced discretionary spending there as well. We have eliminated substantially all travel and entertainment costs, and we postponed annual merit increases for salaried employees but not for our hourly employees until we have greater clarity on the impact of the virus on our operations. We have taken these measures to avoid incremental headcount reductions, recognizing that our employees are our number one asset, and we want to continue having our engaged workforce ready to carry on once we get on the other side of this pandemic. On capital expenditures, we have evaluated what can be eliminated or deferred for the remainder of the year. During the IPO Roadshow, the view for 2020 was a total spend of approximately $440 million on capital expenditures, which included a significant component of discretionary replacement and growth capital. As we have said before, because of our relatively lower landfill concentration, our replacement CapEx needs run at approximately 8% of revenue. Looking at our 2020 spend, we've identified $100 million of spend that we can eliminate for this year if we need to. Our actual spend will depend on how things evolve over the rest of the year. We plan to continue to capitalize on attractive opportunities that may arise and, as we have seen in the past, we expect that crises will generate opportunities. We expect that having a strong balance sheet, a flexible capital structure, and a very supportive group of both equity and debt investors will position us well to capitalize on these opportunities as they continue to arise. I will now pass it over to Luke who will discuss the financial results for the quarter.
Luke Pelosi, CFO
Thanks, Patrick. Turning to slide four on the presentation, revenue for the quarter was $931.3 million, a 29% increase compared to the prior year. Revenue from new acquisitions accounted for approximately $180 million of the increase, with the balance of the growth coming from organic price and volume. I will walk through the details of the price and volume growth by segments on the following page. Cost of sales as a percentage of revenue was 91.5%. Under IFRS, depreciation and amortization expense related operations is recognized within cost of sales. Cost of sales excluding G&A and acquisition-related costs was 67.5% of revenue as compared to 66.5% in the prior period. The year-over-year change is primarily attributable to the impact of acquisitions both in terms of business mix and margin profile. The one extra day in 2020 attributable to the leap year also increased total cost of sales in amount and percentage. Fuel cost as a percentage of revenue was 4.5% compared to 5% in the prior period; a decrease attributable to both revenue mix and diesel prices. Diesel costs vary by region but were down approximately $0.04 compared to the prior year. Commodity prices were down approximately 32% period-over-period which resulted in higher amounts paid to third-party processors of our recyclable volumes. COVID-related impacts including decremental margins on volume losses, incremental equipment rental expenses in our infrastructure business attributable to delays in receiving equipment, and additional spending on enhanced safety and hygiene activities also increased cost of sales. SG&A expense excluding IPO and acquisition transaction cost and depreciation expense. Again, IFRS requires us to recognize depreciation expense with SG&A was $96.7 million for the quarter, or 10.4% as a percentage of revenue. Total G&A expense was $221.8 million, a period-over-period increase of $47 million, which was driven by the incremental G&A expense associated with tangible and intangible assets acquired organically and through M&A since the prior period. Interests and other finance costs were $269.4 million, an increase of $145.5 million as compared to the prior year. The increase is primarily attributable to refinancing costs incurred in relation to the IPO, all of which were contemplated in the IPO offering documents. The change in other income and expenses is primarily attributable to the non-cash foreign exchange fluctuations on our U.S. dollar denominated term loan and the mark-to-market revaluation of the purchase contract component of our tangible equity units. With respect to income taxes, the change in the deferred tax recovery is largely attributable to the cost and credit respective to IPO. For current income taxes, we continue to have minimal cash tax obligations. GAAP net loss was $0.77, as compared to a net loss per share of $0.64 in the prior period. On an adjusted basis, net loss per share was $0.3. Turning to page five, you'll notice a summary of results by operating segments. In solid waste, price and surcharges drove 4.9% growth as compared to 4% in the prior year period. As we told you before, our focus on pricing is going to lead to incremental growth from this lever as compared to prior periods, and this quarter’s results are a testament to that. As we've also told you our pricing activities are front-end loaded, so this level of pricing will taper down throughout the year. Volume for the quarter was negative 0.1%, but the volume story needs to be split into a couple of parts to be fully understood. First, volume for the first 10 weeks of the year was running positive 100 basis points. So we view this entirely as a COVID-related impact. Second, the volume decline is largely attributable to our commercial industrial collection businesses, as residential collection and the majority of our post-collection businesses were positive or flat in March. And third, that decline varies significantly by market, with the Montreal and Toronto markets seeing double-digit decreases starting in mid-March as compared to the prior year. Current trends, however, appear promising with sequential volume increases week after week, and Patrick will speak more to that in a moment. These were the impacts we realized in the last few weeks of the quarter. Solid waste adjusted EBITDA margin was 28.5% for the quarter compared to 20.9% in the prior year. Included in the current quarter margin is a 50 basis point decline due to the extra leap day, a 40 basis point rise from commodity pricing, and about 120 basis points derived from acquisitions, a decrease primarily attributable to the Canada Fibres acquisition that has yet to achieve the anticipated margin profile. Excluding these items, the base solid waste business drove nearly a 150 basis point organic margin expansion over the prior year, consistent with our previously communicated expectations regarding the anticipated impact of our pricing and procurement initiatives, both of which we've discussed with you in the past. The disruptions from COVID, both in terms of lost margins on volume declines and incremental health and safety related costs, also served as a headwind to margins. Looking at soil and infrastructure, the success of our previously discussed strategy continues to be demonstrated as we realize 6% organic revenue growth during the quarter despite certain projects being disrupted and/or put on hold in response to the government-imposed COVID mitigation measures. In terms of margins, the prior quarter benefited from several high-margin specialty projects that did not repeat in the current quarter. Additionally, delays in the acquisition of planned equipment purchases to support growth in the infrastructure and soil remediation business resulted in increased equipment rental costs as compared to the prior quarter. We believe these impacts to be timing-related and that the margin profile of the business will return to its historical trajectory in subsequent quarters. Our liquid waste business was our most impacted segment during the first quarter. Revenue was impacted by not only COVID-related volume disruptions but also depressed WTI prices and the impact on the used motor oil market, as well as some difficult comps in the prior quarter where we benefited from an increased level of high-margin emergency response activities and a bulk sale of inventory of used motor oil that we had acquired in an acquisition in late 2018. Used motor oil selling prices were down 19% in Canada and 12% in the U.S. in the quarter, while we've modified our charge for oil rates to mitigate the ultimate spread compression. There's a time lag which ultimately impacts current period results. While volume sold in Canada were relatively comparable to the prior period, U.S. volumes were down 45% when considering the bulk sale in the prior period. Collected volumes in the quarter were down approximately 25% compared to the prior year, a decrease we believe is attributable to the COVID-19 disruptions. Turning to page 6, reported cash flows from operating activities were a use of $91.3 million in the current quarter as compared to $19.4 million in the comparable period of the prior year. The change was primarily attributable to costs incurred in connection with the IPO of $145 million. Excluding these IPO costs and the changes in non-cash working capital, cash flows from operating activities were positive at $108 million, an increase of 34% compared to the prior period. That's attributable to the increase in adjusted EBITDA. On the point of working capital, we've yet to see any material impacts on cash collection activities. We are actively monitoring our credit exposures but to-date have not seen any material changes. We did hold onto cash during the end of March, pushing up AP balances at month end. In terms of investing activities, as Patrick mentioned, we spent $1.1 billion on M&A during the quarter, the substantial majority of which was contemplated in the IPO offering documents. We also spent $100 million on capital expenditures in the period, which was below plan due to delays in receiving certain equipment from overseas. Cash flow from operating activities less capital expenditures was a use of $46 million, but excluding the IPO costs, there was an improvement of 61% over the prior period. As we've said before, the seasonality of our business coupled with front-end loading of our CapEx results in free cash flow being generated in the back half of the year. With the IPO transaction costs behind us and our significantly reduced interest costs going forward, we see a clear path to material free cash flow generation by the end of the year. Cash flow from financing activities were the outcome of the IPO and the pre-closing capital transactions, all of which were detailed in our perspectives. Additionally, subsequent to the quarter end, we issued a new U.S. $500 million, 4.25% five-year notes. This was an opportunistic financing that lowered our overall interest cost and bolstered our liquidity, which positions us favorably to capitalize on any opportunities that may arise. Turning to page 7, we have presented a summary of our net leverage at the end of the quarter. As forecasted in the IPO offering documents, net debt and net leverage materially decreased as a result of the application of the IPO proceeds to debt repayment. Substantially all of our long-term debt is denominated in U.S. dollars and is hedged to Canadian at fixed rates. However, for financial reporting purposes, our U.S.-dollar denominated debt is revalued to Canadian dollars at the FX rate at the end of the period. During periods of foreign exchange volatility, such as that experienced toward the end of the first quarter, we may realize significant non-cash foreign exchange adjustments on our balance sheet that exceed the foreign exchange fluctuations realized on our P&L. The foreign exchange rate was 1.42 at quarter end as compared to 1.3 at year-end, a change that resulted in an incremental $395 million of long-term debt recognized on our balance sheet. To facilitate the comparison of net leverage to the amounts that were presented as part of the IPO Roadshow, we have presented our quarter-end long-term debt balances translated to U.S. dollars using the year-end foreign exchange rate, which you can see in the middle column of the net leverage amount, approximately 4 times at the end of the quarter. Not reflected on this balance sheet is the April bond offering, which was a leverage-neutral transaction. Considering that transaction, we have over $1.3 billion of liquidity on hand with no material debt maturities in the near term. I will now pass it back to Patrick who will discuss the trends we are seeing in the business.
Patrick Dovigi, CEO
Thank you, Luke. Despite the great first quarter, I know everyone is more interested in what we think the second quarter and the balance of the year are going to look like. Unfortunately, with the degree of uncertainty that still exists around the reopening of markets, it's difficult to forecast with a great deal of precision as to what the future holds. However, the current trends appear promising, so we want to shed some light on what we are currently seeing. If you look at page 8, as noted in our press release, April revenue was up 16% when compared to April of 2019. If you back out the M&A and FX adjustments, we saw a 9.9% revenue decline on a like-for-like basis. Looking at solid waste, as I said earlier, there was greater disparity in the COVID-related impacts by market, with our Canadian ICI business seeing declines nearly four times greater than in our more secondary market-focused promotional industrial business in the U.S. and Canada. The impact on Canadian revenue is primarily the result of business shutdowns in Ontario, Quebec, and British Columbia. I think it's important to emphasize that the revenue impacts we saw in April are heavily weighted towards our commercial and industrial collection volumes. Our municipal revenue in both Canada and the U.S. has not been significantly impacted, and our relatively low landfill revenue translates to a lesser impact from the lost volume in that line of business. Looking at the activity in the ICI and collection business starting the third week of March, we saw roll-off halts start to decline week over week until approximately the beginning of the third week of April, at which point halts were down approximately 18% compared to the pre-COVID week. Since the third week of April, however, we have seen weekly halt counts increase sequentially, and although we are still not at the levels we saw in early March, we are moving in the right direction day by day. It is a similar story for our commercial collection activity. Starting in the second week of March, we were seeing service level decreases and temporary suspensions, and the decrease increased sequentially through to mid-April. Since then, we are now having customers re-engage as they're preparing to reopen, which is another sign we perceive as indicating the worst is behind us. Working in our daily trackers, we expect this week's ICI collection revenues to show an increase over last week and next week to be even better, assuming that the governments continue to loosen restrictions on the timetable that have been announced. Again, ultimately only time will tell the full extent of the impact, but from where we sit today we're feeling cautiously optimistic. Thinking about how these revenue impacts translate into margin, I think there's a few points that need to be teased out. First is the revenue profile of our business; with a larger proportion coming from service-based collection activities, our lower level concentration results in a lower blended decremental margin impact than if we had a meaningful portion of our revenue tied to our very high-margin landfill volumes. As I said earlier, tied into that point, it’s the highly variable cost structure that comes with our revenue profile. Since this began, we have reduced overtime hours by approximately 30%. We have consolidated collection routes and parked vehicles to improve asset utilization, and in many markets, we've experienced improved productivity thanks to reduced traffic patterns. Our safety stats have also improved, with April being the best month of the year, and our absenteeism is at all-time lows. All of these factors, together with the natural flex of our disposal costs and fuel costs that I described earlier, will help mitigate the impact on margin from the revenue decline resulting from COVID-related volume reductions. Finally, we have some macro tailwinds which we believe will further mitigate the margin impacts. As you've heard from others, commodities have had significant run over the past six weeks, with OCC commanding over $200 a ton in certain markets. Fuel costs continue to be at historical lows, which benefits both our residential and post-collection service lines, and FX continues to be higher than last year, which improves our blended margin profile by translating the relatively higher margin U.S. business into Canadian dollars at a higher rate. Looking at infrastructure and soil remediation, as we have previously said, the majority of the projects we are involved in have been deemed essential services and continue to progress. Based on what we're seeing today, it's looking like May will be better than April, and hopefully that trend continues. Finally, on liquid waste, as we previously told you, we expect this segment will be the most impacted by the current market conditions. On the used motor oil collection side of the business, suppression of the oil-related indices on which used oil selling prices are based, combined with the reduced volumes being generated as a result of COVID-related shutdowns, will continue to negatively impact revenues from this service line in the near term. Regarding the core industrial service component of the business, COVID-related shutdowns have had a negative impact on the portion of our customer base that should have been deemed non-essential and therefore temporarily shut down in many markets. The ultimate impact will depend on the nature and shape of the recovery in each of the markets we service, but again the trend line we are seeing today continues to be very positive and encouraging. Before we open it up for questions, I want to end by saying thank you to all of the GFL employees who deserve all the credit for the great results in the quarter and to all the investors who supported us on the IPO and since then. We thank you for your time and look forward to speaking with you as the quarters continue to come. I will now turn the call over to the operator to open it up for any questions.
Operator, Operator
Thank you. We'll take our first question from Tyler Brown with Raymond James.
Tyler Brown, Analyst
Hey good morning guys.
Patrick Dovigi, CEO
Good morning, Tyler.
Tyler Brown, Analyst
Good morning. Hey, appreciate the April details, but I do want to come back to the comments on pricing. I think the 4.9% pricing was quite strong. You kind of touched on it; the big picture it feels that over the past couple of years, pricing has accelerated. So I was hoping that you could talk a little bit about your go-to-market strategy and maybe philosophy around pricing as that changed with time and maybe should we be expecting this general level of pricing into the future?
Patrick Dovigi, CEO
Yes. So I mean, as we've discussed in the past, previous to 2018, we did not spend much time focusing on price as we were building the business. We were much more focused on growing volume and market share rather than on growing price. After the acquisition of waste industries and watching how they increased the margins from around 23% to 24% up to about 27.5% to 28.5%, we took that playbook and started rationalizing our entire book of business in the nine provinces in Canada and 23 states in the U.S. Pricing continues to be strong. I think as we've rationalized the existing book and level set that existing book, we're going to continue to focus on prices as we've discussed in the past.
Tyler Brown, Analyst
Yes. Okay. That's great to hear. And then Luke, so, I appreciate the comments that you have a highly variable cost model, but there's a lot of moving pieces here. So maybe to boil it down for simple people like me, could you run through at a high level maybe an incremental/decremental type of margin that we should think about by line?
Luke Pelosi, CFO
Yes. I mean there's a lot of moving pieces, Tyler, as you said. But I mean, if you take the residential line out of the equation, I mean this is probably going to be less so than what we said on our April update call, in Canada maybe we're getting a little bit of benefit but in the U.S. it may load a little bit heavier. So maybe you think about the residential margin profile as a bit of a wash. So then left with commercial and industrial, obviously the industrial or the roll-off line of business is easier to flex by nature of the route days and what those look like. If you look at the number of trucks and how quickly we can park the vehicles and therefore defray all of that engine hour-related cost, that's a much more variable cost structure on that line, so therefore a better ability to mitigate margin pressure versus commercial. While we have been parking some trucks in the markets that have been most significantly impacted, as you know, it’s not as nimble to flex the operating structure of those routes, so you eat that a little bit more. So in that collection and you think about a relatively lower landfill concentration, I mean, you listen to others; everyone is saying somewhere in the sort of 30% to 40% decrementals on a blended basis is what this margin is looking like. Given our cost structure, I think we're on the lower end of that range, but again it’s market-specific, and there are other factors that are offsetting some of this pain as Patrick said; the lower traffic patterns as well as diesel are presenting some benefits from that. So I think it's difficult to model perfectly, but hopefully, that's helpful directional lines.
Tyler Brown, Analyst
Yes. Sorry I was not much within solid waste but about the liquids and soil piece, would those be 20% decremental, good way to think about it, 25 something like that?
Luke Pelosi, CFO
I mean, you're not giving too much forward again, but if you look at infrastructure, I don't really see margin decreasing coming from that sort of line of business. I mean that cost structure flexes very well. On the liquid side, I think when you think that sort of what we're seeing, yes I think a reasonable number on the liquid side is probably in the range of 25% today when I sort of look at April. If that’s the work that's going to get better from there, but that's what we're seeing today.
Tyler Brown, Analyst
Okay. That's helpful. All right guys, I'll turn it over. Thank you.
Operator, Operator
Thank you. We'll take our next question from Brian Maguire of Goldman Sachs.
Brian Maguire, Analyst
Hey good morning Patrick, good morning Luke.
Patrick Dovigi, CEO
Good morning, Brian.
Brian Maguire, Analyst
Glad to hear that we seem to have reached a bottom in April. I was just wondering if you could maybe provide a little bit of color on it's very early days, but the size and shape of the recovery so far. Are we seeing a decent-sized rebound in some markets? I'm sure it's going to vary, but given some of the harder-hit markets like Toronto and Montreal, are we seeing a little bit of a snapback so far, or are you seeing more of a gradual improvement but it's going to take some time to be able to call it a snapback?
Luke Pelosi, CFO
Yes. The real data shows that the most significant impact we've observed in those markets is definitely in the roll-off line. In the Toronto market, for instance, we typically handle between 450 and 475 lifts daily. During the peak of the downturn, that number fell to around 250. However, we are now seeing an upward trend, with lifts increasing to about 300 to 325 a day. This indicates progress in the right direction. The local governments have enforced stricter measures compared to the U.S., requiring mandatory stay-at-home orders rather than optional ones. As they implement phases over the next six weeks, I expect those numbers will continue to rise. Overall, I anticipate significant recovery in Toronto and Montreal over the next two months.
Brian Maguire, Analyst
Okay. It's very helpful. The next one is on the topic of the dropping crude oil prices. I mean, you guys have touched oil in a lot of different ways. The UMO side, your own fuels cost, some of the Canadian provinces of exposure to oil and gas extraction. Just as you think about it, overall that's not something you were really concentrated at the time of the IPO either. How would you kind of frame the overall impact of the dropped oil prices on the bottom line or however you want to think about it? There are a lot of moving parts there.
Patrick Dovigi, CEO
Yes. So I mean, when you look at it; first off, we have no exposure directly to E&P wastes. So we have the macro exposure to what happens in Alberta, but as it relates to direct E&P exposure, we have none. So start with that; obviously we have a natural hedge with our own diesel cost in dropping oil prices, but I would say the biggest exposure is in Alberta. People worry about Alberta, which has been depressed since 2015 and 2016. All the small junior producers have been out; it’s really been a business that’s been run by the majors and those guys are still producing today. Is there new development? No, there's not new development, but that wouldn't really affect our P&L anyways because we have virtually no exposure to that. On the macro side, since the crash in 2015-2016, Alberta really hasn't recovered. The biggest exposure on oil will be the UMO collection business and again we can manage the spread, as you've seen with clean harbors and others putting charges for oil in. It’s essentially the market and everybody is doing it. So for maintaining a spread, that's not an issue today. Really what the issue comes down to is servicing dealerships that have been ordered to close and not deemed essential services, that volume you see is defined as collected volume down to sort of 40% to 35%. That’s where the gap is going to come. That will recover. It will come back. It's just a question of when because at the end of the day, people are going to need to get their car serviced as they start driving again. When you think about that in the grand scheme of the business, we collect around 75 million gallons in a historical period selling that at $0.60 to $0.70 a gallon; that's not a material number in overall $4 billion of revenue. You're talking about $35 million to $40 million of revenue coming out of that service line. We don't shift a little bit because we're going to be getting more revenue from the charge for oil versus the actual selling of the oil, but that's where we sort of sit today. Going back to Q1 was a really good comparative period because we did that acquisition in the U.S.; there was almost 4 million gallons we inherited that we have to sell for in Q1. So the numbers look a lot, but if you strip that out, the business performed relatively the same quarter-over-quarter. So I don't see a big impact from oil dropping. I think at the end of the day, we'll be in net benefit. When you think about our overall fuel expense, we spend about $170 million on diesel in any one year. If you look at diesel pricing today down to the tune of almost 40%, that far offsets any degradation we would see on the used motor oil collection business.
Brian Maguire, Analyst
On the diesel, because a lot of the U.S. based guys are surcharging pretty quickly. Do you think how much of this lower diesel cost do you think you're getting cheaper and how much of that is passed through?
Patrick Dovigi, CEO
Yes. We pass on surcharges for commercial contracts; if costs increase, we charge more, and if they decrease, we lower our prices. The advantage lies in certain municipal contracts where there are annual adjustments to surcharges, as opposed to monthly ones. We benefit in those instances, and it's important to note that our fuel surcharges for pulse collection operations don't function in the same way as they do in the commercial sector.
Operator, Operator
Thank you. We'll take our next question from Walter Spracklin of RBC Capital Markets.
Walter Spracklin, Analyst
Yes. Thanks very much. Good morning, everyone.
Patrick Dovigi, CEO
Hi Walter.
Walter Spracklin, Analyst
I think I would like to come back to the contracts that you have and the volume-based ones that you’re benefiting up here in Canada. Just curious, and I know one of your competitors has signaled their intention to go back to municipalities with an effort to adjust their contracts before expiry, the more volume-based, and I was wondering if you have that opportunity among the U.S. contracts where you're not volume based? Are you looking into or making efforts or getting some investments of the contracts with higher costs?
Patrick Dovigi, CEO
Yes. I mean it's a similar dynamic to what we experienced in 2018, really around the patent depressed commodity pricing. Some municipalities you can rely on force majeure and other things that are in the contract to try and renegotiate, which is always an opportunity. You'll get some municipalities that are open to realizing the issue and not wanting to argue about it, and then there are others that just say, hey, the contract is the contract and they're going to argue about it. I mean when I look at our business, if I think about Canada on the residential collection side, it's either neutral to a benefit with increased volumes just because of the contracted nature and structure of the municipal contracts in Canada. So it’s really not a negative impact on the Canadian residential book from increased volumes at the curb. On balance, it could be potentially a bit of a positive. If you think about the U.S., 40% of our U.S. residential business is subscription. So unless we have the ability to move pricing on a monthly or quarterly basis if we see increased volume, that is better; and then you have that balance of the 60% of the U.S. residential municipal contracts that are tied to house count versus volume, which could be a bit of a negative. But if you think about what we've seen, I think, again, it's regional specific, but if you look at specific markets, I look at Toronto for example, which is a big market, you saw increased volumes of like sort of 12% to 15% in the last two weeks of March, and then you slowly seen that taper down as people moved to a more normal state. I think where we look, this week volumes are sort of around 6% to 7% versus the sort of 12% to 15% we saw right when the shutdown happened. In the U.S., it's been a wide range where there’s been virtually no impact and there have been other markets that we see increased volume of sort of 15% like we've seen in Michigan that has similar orders that they have in Canada. So we will work with the municipalities to try and get more money out of them, but is it something I'm banking on? Given what we experienced in 2018 with the recycling, I’m going to say it would be all added and bonus if we were able to get something.
Walter Spracklin, Analyst
Got it. Appreciate that color. My second question here is on M&A trends. Patrick, can you give us a little bit of an update over the last since we last spoke on how the tenor of the conversations have been, how the logistics of acting on a deal has improved or hasn’t improved, and what your thoughts are on the advanced disposal trends? Has there been any update regarding how enticing that might be to you and your ability to capitalize or take advantage of any opportunities out of the advanced disposal transaction? Thank you.
Patrick Dovigi, CEO
Sure. I mean I won't comment on specific M&A, but going into the IPO, our pipeline was very full and it's been a thesis of ours. Since we founded it, I mean completing over 135 acquisitions since our founding, I think it's something we do well. When we looked at the pipeline before we closed on 80-plus opportunities in Q1. As we said as part of the COVID update calls, we were going to pause and have paused for the short of the last six to seven weeks, just trying to understand what the impact would be on April. I think sitting here talking now, I think we're one of the fortunate industries and businesses. This is probably the reason why a lot of investors want to own this space; we're talking about revenues being off 9% on an organic level when the bulk of other industries are sort of down 50% to 90%. From a free cash flow perspective, we believe that we can manage our free cash flow to the expectations that we saw as part of the IPO. So when you think about it from that perspective, I think we're starting to feel more and more comfortable about where the base business is going and where the free cash flow generation of the business is going for the balance of the year, which allows us to maintain leverage. I think we're going to start re-engaging on M&A here over the next two to three weeks and sort of get back on that. I think when you think about acquisitions, listen, the way I think about it, there's gold, silver, and bronze. People have asked about valuations. I think valuations for gold will not change much and some of those opportunities. Again, when you think about the silver and bronze and where the opportunities are, when you're thinking from a multiple perspective, maybe there may be more willing sellers that don't want to live through another downturn like we saw in 2008 and 2009 and 2015 and 2016. So getting some guys to the table gets them a little bit more realistic, and I think we're seeing that on some of our pipelines today where we had a little bit of a price gap. The sellers are becoming a little bit more realistic, and I think that'll lead itself to a good bunch of execution opportunities over the next sort of six months here.
Walter Spracklin, Analyst
Okay. Appreciate the time. I hope everyone's staying healthy and safe. Thanks.
Patrick Dovigi, CEO
Thanks, Walter.
Operator, Operator
Thank you. We will take our next question from Rupert Merer of National Bank.
Rupert Merer, Analyst
Good morning guys. Congratulations on results and your first quarter as a public company.
Patrick Dovigi, CEO
Thanks, Rupert.
Rupert Merer, Analyst
Maybe too early to see, but do you have any sense of any permanent impairments of volumes that could come from the pandemic? Have you seen any abnormalities in terms of service cancellations?
Patrick Dovigi, CEO
Sure. We've had very minimal service cancellations. Like we said, with our service days revenue, we have contracts whether there’s a pound in the bid or whether there’s a hundred pounds in a bid where there’s a thousand pounds in the bid, we generally have to collect it and charge for that. I think obviously we want the bulk of our customers to be growing concerns. So as customers have called in and asked to temporarily suspend their service because they're closed, we've worked with those customers on a case-by-case basis. So I would say there's been very little sort of out-and-out terminations. I think if you look at the customer base today, about 6% to 7% of the commercial customer base has called in and asked to either temporarily suspend or change their frequencies. So I don't think there's a permanent impairment, but again, it's still early days. People don't understand; I think our governments are struggling to actually figure out how to reopen. It's easy to shut it down, but I think you're trying to understand how they actually reopen. But we are seeing some material uptick in people now wanting to get their service back online. So it's going to take some time to get back to the service levels we were at, but I think all in all, from what we're seeing, there have been very few terminations of the services.
Rupert Merer, Analyst
Great, thanks. Secondly, on cost. Can you give us a little more color on the puts and takes on what you're seeing on costs? You talked about some cost savings and discretionary costs, but you've got increased costs of safety and hygiene. Can you give us a little more color on those costs and exactly is there any sort of long-term benefits that could emerge from efficiencies you've realized over the last month?
Patrick Dovigi, CEO
Yes. So Rupert, in terms of some of the puts and takes on the cost side, the common incremental sort of enhanced PPE costs but there are incremental costs coming out of that. You see we didn't add any of that back because I think there's also some offsetting benefits from this unique environment; when you think about sort of traffic and some of the productivity safety related and traffic level productivity. So I mean if you think of how to quantify those exactly, the incremental PPE cost, we can put a dollar on that in Q2, but the incremental productivity is offsetting that. So I don't have a COVID-related AD back; whether or not we will in the future remains to be seen. I think one of the most natural levers we've seen is on the overtime side; really if you think about our normal overtime hours being sort of 15% to 20% of total hours, I mean we reduced overtime by about 30% where we sit at 27% for the quarter or post-COVID impacts. So I think that's the most natural sort of cost flex we've had in response to this, in addition to the reduced direct variable costs. So think about disposal, fuel, and RNM associated with the lower volume. So we'll continue to monitor and use that lever to mitigate the impacts. But the other puts and takes, I don't want to say perfectly offset, but I think those things sort of go both ways there. And then obviously, as we alluded to, some of the discretionary SG&A, those are very quantifiable dollars. There's been no travel; there have been no merit increases, etc. Those are other levers that have been pulled to offset the free cash flow impacts of this.
Luke Pelosi, CFO
Yes, and one thing we didn't touch on earlier is that cash collections in April were on target for us. We were worried about what the working capital impact on the business would be, but as we got through April, we were on plan and on target without a significant amount of any material defaults. So again, felt very good about cash collection of the business over April.
Rupert Merer, Analyst
Right. Thanks. I will leave it at that.
Operator, Operator
Thank you. We will take our next question from Michael Hoffman of Stifel.
Michael Hoffman, Analyst
Hey Patrick, Luke, if we could circle back to the free cash flow and set some guardrails. So let's remind everybody what you thought it would look like for 2020 before the pandemic and then how do you think about how that trend. I'm assuming that the decremental on the cash isn't any different than the decremental on the EBITDA?
Patrick Dovigi, CEO
Yes. So Michael, I mean pre-COVID, the IPO Roadshow there was a view just for round numbers that sort of realized EBITDA in the year was $1,161.5 to $1,150. There was an interest expense on that of sort of 260 to 275. There was a CapEx expense on that of 420 to 440 and there was another for ARO cash taxes, whatever of another sort of $50 million. So that's where we were before, and that brings you down to the sort of pre-TEU, pre-dividend, free cash flow number. Where we sit today, I'm going to go backwards. I'm going to say we have an interest cost, never mind Q1 which had all this sort of noise. But really today, actually the new bonds, we have an interest cost today of $236 million. That's where we sit today. So I have that. I have a CapEx number of $340 to $350 is what it is looking at today when you look at what we've sort of paused or deferred for the time being. And then I have $50 million-ish of sorts of odd sides and ARO cash taxes, etc. So that brings me down to sort of $630 million cost against the free cash flow line. Where I sit today, and then working capital. Now in the quarter, with a great Q1, cheerfully better than the prior period from a working capital perspective. As many of you know, we had. So we were beginning to undertake a whole order-to-cash optimization process. We believe working capital is a place we can drive incremental benefit with all the tapping and that's been sort of temporarily paused, but we still think there's an opportunity to drive working capital improvements. Even if we say it doesn't get any better for the balance of the year, working capital is in the source. I stick with my minus 50. I have $630 million against whatever the EBITDA number is going to be. Now we come out exactly said what the new EBITDA number is. I think the consensus estimate of the group today is somewhere around $1,040 to $1,050. If you apply those costs, I said against that $1,050 EBITDA, I think that's a decent proxy for where your free cash flow is going to be on a normal 12-month run sitting where we sit today, before considering the TEU and the dividend.
Michael Hoffman, Analyst
Terrific. Again, just to be clear that actual reported loss reflects on $150 million of IPO cash outflows and all that that were in the first quarter. But on an adjusted number would be the $1,045 less the $630.
Patrick Dovigi, CEO
Yes, correct. Again Q1, if you really want to adjust Q1, I mean there's $233 of EBITDA; I mean really the normal interest cost that should have been burden against that is just under $60 million; you think of our new sort of run rate; and then $100 million of CapEx and there was a $50 million of ARO and working capital. That would be the real normalized number. But I think as you framed it for the year, that’s correct before considering the IPO friction.
Michael Hoffman, Analyst
Okay. And then did you help us just appreciate the 30% reduction of EOT, but what was EOT pre-COVID as a percentage of direct labor just so we understand the scope of what's coming down?
Patrick Dovigi, CEO
From an hours perspective of 15% of total hours and the labor line low 20s in 2019.
Michael Hoffman, Analyst
Okay. And then do you think it's likely that you'll add incremental sales at a better incremental margin because you won't have to add costs as quickly? Is that getting lean like this has that kind of a benefit and let's have incremental costs lower than we add to the sale?
Patrick Dovigi, CEO
Yes. I think it will be a benefit moving forward on multiple fronts. In like these times that we're living in, when guys actually have to hunker down and look at every single expense, you really realize what things you actually need to run the business. So I think as the existing business that was temporarily suspended or temporarily lost comes back online, and then you bolt on new business, yes, I think you could see some sort of outside margin expansion that comes from it. So I want to quantify it today, no, but intuitively that would make sense.
Michael Hoffman, Analyst
I am just curious if you thought you'd be able to hold on to that in the manner we just discussed. All right. Thanks for taking the questions.
Patrick Dovigi, CEO
Thanks Michael.
Operator, Operator
Thank you. We will take our next question from Mark Neville of Scotiabank.
Mark Neville, Analyst
Hey, good morning guys.
Patrick Dovigi, CEO
Good morning.
Mark Neville, Analyst
Maybe just want to start following up on commercial. At peak, it sounds like roll-off was off about 18%. That's come back a bit. I was curious if you had sort of similar round ballpark numbers for the commercial line?
Patrick Dovigi, CEO
Yes. When we look at the commercial line, I think it was as far as last, but thinking about 7%, was where we saw the commercial sort of revenue stream come off, and that today is sitting at about 4% to 4.5%.
Mark Neville, Analyst
Okay. That's helpful. I think Patrick last time you spoke, I think you talked about you said roughly 80% of your sites you were on with the restructure soil were up and running. I am just curious if there's an updated number? I assume it’s gone a bit higher but just curious where it’s now?
Patrick Dovigi, CEO
Yes, today about 85%. We are expecting other sites to come back online in the next two weeks. There has been a bit of delay due to some postponements on some of the sites just because the municipalities are not fully functioning. So permit issuance on some of them has been slower than we’d like, but again as municipalities come back online over the next week or two, hopefully that bottleneck removes itself.
Mark Neville, Analyst
Okay. Maybe just some of the decremental, I want to make sure I understood; Luke, I think you said with consolidated sort of in the range of 30% to 40%, but sort of towards the lower end, and then liquid waste around 25%, did I understand all that correctly?
Luke Pelosi, CFO
Yes. So this is always what I'm saying; the decrementals of period the sort of COVID impacts. So you take that lost revenue and you apply that. Now there's a bunch of tailwinds offsetting that if you look at the peel it all back; look, the organic margin expansion we're having in the base business throughout the first sort of quarter. I think it's going to more than offset on a year-over-year basis. But yes, if you think about the volume loss on solid waste, that's the right way of thinking about it; and then similarly on as Patrick said on liquid. Liquid you flex the rebate on the used motor oil side which ultimately mitigates a lot of that. There is a bit of a timing difference, but at the end of the day, I think that's the right way of thinking about liquid margins.
Mark Neville, Analyst
Fair. If I could maybe ask one last question? Just last time you spoke, you talked about the COVID cleaning business; appreciate it's small, but just curious how that's trended over the last six or seven weeks and if it's something that maybe sticks around sort of the next little while.
Patrick Dovigi, CEO
Yes. I mean it's become a new line of business. I think as long as COVID around, what we've seen the biggest uptick in that; I mean is really around large sort of industrial projects and industrial businesses such as manufacturing plants where they've had a few cases of COVID and potentially are concerned about COVID outbreaks, and they shut down those facilities and go in for extensive amounts of cleaning. I think if you look at what we’ve done the last six weeks, it’s sort of been in the range of about $1.5 million to $2 million, which is double what it was before. I think that continues to evolve, and as businesses come back online, I think that's going to continue to be an opportunity because people will like to start going back in offices and they want to ensure these new clean facilities.
Operator, Operator
Thank you. We will take our last question from Kevin Chiang of CIBC.
Kevin Chiang, Analyst
Hi, good morning. Thanks for taking my question, Patrick and Luke. Maybe just about pricing question. If I ask it in a different way, what percentage of your solid waste revenue do you think is underpriced or part of putting a bucket like what is the ultimate low-hanging fruit that you think as you get through the crisis you should be able to go out and get significantly above average pricing?
Patrick Dovigi, CEO
Yes. So Kevin, what we have said at the start of this was halfway through the process of optimizing that existing book; we said there's now $25 million to go out and get. We probably got about $5 million of that since we last spoke about that. So where we look is there's probably another over $20 million to come out of that. So that's what we continue to view that opportunity to be, and as we realize that, I think that's going to help produce some of this outsized pricing release for us.
Kevin Chiang, Analyst
That's helpful. I have one last question. I've noticed that your waste business, which accounts for about 10% of your revenue, seems to be the most volatile, especially considering the recent crisis. Looking ahead, how significant is this business as a growth driver for you, or is it of lesser importance? Additionally, could you discuss the more stable segments like infrastructure and solid waste?
Patrick Dovigi, CEO
Yes. I mean it's obviously continuing to become a smaller and smaller piece, but I would say they were unfairly sort of penalized with what's happened just because it was things out of their control. If there was an issue with the business, particularly on the used motor oil side related to managing the spread, then that's from my perspective as managing the business; that's an issue. But if dealerships said that everything was closed, which is normally open, I think it's similar to what you experienced on the solid waste revenue when you saw sort of 25% behind in the commercial business; if you saw 25% to 30% less volume collected because dealerships were closed. I don't think it's a fair structural issue with the business. I just think it's a question of a COVID-related issue with bad luck when it comes to the volumes that people couldn't collect instead because the spread hasn't changed in the business. We put on the charge for oil. So we're still going to maintain that spread faster than we did historically as soon as WPI drops as quickly as it did; we put in those, implemented those stop charges in a way to charge more quickly. So really it's just we need the businesses to reopen so we can start collecting the volumes again.
Luke Pelosi, CFO
And Kevin, if you look at that business, if you chart it out back to the beginning in 2011 and looked at that, I mean, there have really been two material volatile spikes in it. It was 2015 when oil crashed and now. So you do in the, but if you look at those, they're really just short-term in short term intra-quarter or intra-month period. If you look at the chart and in totality, that business continues to grow at very attractive organic growth rates. It is a great free cash flow generator, and if you take out the noise of oil that seems to happen every sort of five years with these one-quarter spikes, you have a very nice predictable sort of growth line coming out of that business with attractive free cash flows and great returns on capital. And that compliment of how it fits in with our broader sort of solid waste service offering is what we do.
Patrick Dovigi, CEO
Yes, if you consider the analyst model, it shows a budget of just over $7 million in EBITDA for April. Even during the shutdown, that business generated mid-fives in EBITDA, which means it was about $1.5 million off the budgeted EBITDA due to its flexible cost structure. So, it didn't drop to zero; it was slightly below expectations, but from a materiality standpoint, it was very minimal.
Kevin Chiang, Analyst
That's very helpful color. Thank you very much.
Operator, Operator
Thank you. We'll take our last question from Jeff Silbe of BMO Capital Markets.
Jeff Silbe, Analyst
Thank you very much. I have a quick question about the used motor oil business. I believe you mentioned earlier that the volumes in Canada remained stable, but there was a significant decline in the U.S. Could you confirm that? If so, I'm curious about the reason for this difference.
Luke Pelosi, CFO
Yes. So Jeff, you're accurate with what I said in the comments about the volumes. But the U.S. is really disproportionately impacted by what I'll call sort of one-time events in Q1 of last year. Really if you think about the U.S. business we bought in November of 2018, it came with a huge amount of oil inventory that the former vendor was just stockpiling. Didn't want to sell it during the transaction. So when we got in Q1, we had this excess inventory that we all sold in a one-time shot. So unusually large volume. This just makes for a very tough comp. I think if you back that out, the U.S. volumes were slightly down period over period, which is really the impact of late March as things started tightening up in and around the Midwest.
Jeff Silbe, Analyst
Okay. Appreciate you clarifying that. I thought for some reason there were some strange driving going on in the U.S. versus Canada. So I appreciate. Thanks.
Operator, Operator
Thank you. We will take our next question from Michael Feniger of Bank of America.
Michael Feniger, Analyst
Thank you guys for taking my question. Can you just help me understand how you can select your buyback? I know you guys have acquired a lot of different businesses that might not have had fleet or equipment as young as yours, but you guys also have solar and landfill exposure, like mentioned before. So can you help me understand how you can select your CapEx decreased lower from longer type of demand environment?
Luke Pelosi, CFO
Yes. So Mike, if you think about and you go back to our April sort of update deck where we sort of show where we normally spend our CapEx, with the lower landfill concentration it's just a lower need in that department and an overall lower base maintenance CapEx. I mean we've said consistently that our maintenance CapEx spend is sort of 7.5% to 8%, that's what we need. Now we've been growing as you said through M&A and organically, and we've been deploying a lot of strategic incremental growth capital above and beyond that. That's why our historical CapEx spend has been levels above that, but if I have to keep the lights on, I can do so very easily with a sort of 7.5% to 8% spend, which is again largely just predicated on the lower dollars going into landfills. So when we looked at what we had in the plan for this year, we had some growth-oriented items, which are more nice to have. We don't need to be doing. And then I think we've always asserted we have a very not aggressive but our replacement schedule; we’re maintaining what we believe to be a great fleet and a great set of facilities. So in uncertain periods such as this, we can defer some of that replacement CapEx just a slightly different replacement schedule, and I think those things together give us a lot of latitude within that original $440 million number.
Michael Feniger, Analyst
Okay. That's very helpful. And you mentioned that your customer starts to reengage as the public economy reopens. I think customers engaged, are they asking for any type of price concession or much lower service levels compared with pre-COVID? Do you see anything specific with customer bases in the hotel user space or education or airline sector?
Patrick Dovigi, CEO
Yes. So no one has asked for reduced pricing. Well, I shouldn’t say no. I’m sure everyone will ask if they get the opportunity presents itself, but we haven't seen a material issue with people asking for price reductions. Again, there are contracted revenue streams for three to five years. Again we are working with individuals that were maybe getting service three times a week and now they want to reduce the frequency to one or two times a week as things slowly come back online. We are seeing, we don't have any real exposure to any of the airlines. We do have a couple of airport contracts like in Denver, part of the Vancouver airports and a little bit of Pearson in Toronto. So obviously that has slowed, but again, it's insignificant in terms of dollars. We are seeing hotels coming back online, but again our hardest affected markets are sort of Toronto, Montreal, and Vancouver. Even sort of in the pandemic, they went down to sort of service once a week, and we've seen in some of those they're now moving to sort of twice a week where historically it would have been three to four times a week. So again, it's all going to be depending on how fast they open and how fast it's going to recover; but we are seeing the uptick today and where they're moving.
Michael Feniger, Analyst
Thank you.
Operator, Operator
Thank you. We will take our last question from David Kupperman of DB Group.
Unidentified Analyst, Analyst
Hi guys. I was wondering if you can comment on any discussions you may have had with your municipal city clients compared to smart cities initiatives, something on which they're quite focused these days, whether using technologies for data collection of garbage set out or other non-waste collections? So have you had any in that regard to what extent is that something that may be on the data that you participate in?
Patrick Dovigi, CEO
Yes. I would say it's very early days on that. I mean a Google-owned entity sort of has been the pioneer in terms of trying to actually design smart cities. So there were some trials being done with Google, and we had done a JV partnership with them. They had utilized our single-stream strategy to identify different sort of cradle-to-grave recycling streams, particularly around the circular economy and extended producer responsibility legislation that is coming out in Canada. I would say in the U.S. it's been very minimal to date, but recently that smart city project that Google is going to do, they've recently pulled out of that. So when COVID hit, it’s actually not going forward with that project. So I’m assuming that will subside over the next little while, but we have explored that with some of those providers.
Unidentified Analyst, Analyst
Thanks, and I have one more follow-up. Can you quantify from the period of
Patrick Dovigi, CEO
Sorry. Can you repeat the question? It was muffled. I apologize.
Unidentified Analyst, Analyst
Yes. No problem. I will repeat. Just wondering if you have the metric on the number of kilometers that your waste vehicles cover and whether you track that period-over-period.
Patrick Dovigi, CEO
We definitely track it as part of our compliance, but I don't have that number at my fingertips.
Unidentified Analyst, Analyst
Fair. Thanks.
Patrick Dovigi, CEO
Okay. Now thank you very much. If there are no more questions, operator, we will conclude this call. As always, Luke and I are available to answer questions over the course of the day.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.