Ladies and gentlemen, thank you for standing by, and welcome to the Waste Management Second Quarter 2020 Earnings Release Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ed Egl, Senior Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Marianne. Good morning, everyone, and thank you for joining us for our second quarter 2020 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim will cover high level financials and provide strategic update. John will cover an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules to the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections or opinions about future periods. We will also be discussing our updated financial outlook for 2020. This outlook excludes transaction and advisory thoughts and post closing financial contribution resulting from our pending acquisitions of Advance Disposal Services Incorporated which maybe also referred to ADS. Once we complete this acquisition we expect to provide updated outlook. All forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and our filings with the SEC, including our most recent Form 10-K and subsequent Form 10-Qs. John will discuss our results in the areas of yield and volume, which, unless otherwise stated, are more specifically references to internal revenue growth, or IRG, from yield or volume. During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise…

Thanks, Ed and thank you for joining us. The strength and resilience of our business was clearly demonstrated in the second quarter as our results exceeded our expectations. At the outset of the quarter governments and businesses across the continent were responding to the pandemic with stay-at-home orders and shutdowns of broad sections of the economy resulting in sharp volume declines in our collection and disposal business. Our immediate priorities were protecting our employees and providing safe and reliable service to our customers and communities. With a framework in place to achieve those early priorities we then focus on optimizing our business for the new environment and we saw measurable improvements as we progressed through the quarter. Year-over-year declines in operating EBITDA in the collection and disposal business improved each month of the quarter as we were able to successfully flex down our operating costs, eliminate discretionary spending and improved productivity. I am extremely proud of our team. Clearly the shutdown of the entire economy had a dramatic impact on the top line of our business. Yet even with a 10% decline in our second quarter revenues our team was able to improve operating expenses as a percent of revenue by 30 basis points, hold SG&A expenses as a percent of revenue relatively flat and most importantly deliver 10 basis points of operating EBITDA margin expansion. As we progress through the third quarter we are firmly confident in our operating model and are well-positioned to deliver on the revised expectations we have for the remainder of the year. Our second quarter results prove that putting our people first so they can take care of our customers communities and the environment is the right approach to ultimately rewarding our shareholders. Putting people first is fundamental not just to our ESG philosophy…

Thanks, Jim and good morning everybody. Our team has remained focused on the fundamentals of providing safe, reliable and efficient service to our customers despite the challenging backdrop. Our focus on execution paid off in the second quarter as we improved efficiency across the commercial, industrial and residential lines of business. By calibrating our cost to the current volume environment we achieved total company operating EBITDA of 28.8%, a 10 basis point improvement over 2019. The volume recovery trend we are seeing is encouraging. Volume declines in the collection and disposal business improved throughout the second quarter. Through the first few weeks of July we've seen further volume improvements despite certain areas of the country slowing their plans to reopen. We've adopted a proactive approach to service restoration and to-date we have resumed service for more than half of the commercial and industrial volumes that were suspended with the March shutdowns. While we are seeing some markets recover faster than others we are encouraged that commercial businesses, the backbone of the U.S., economy are showing strong signs of recovery. While residential container weights have declined from their peak increases they are still elevated by mid single digits when compared to last year. This strengthens our case with municipalities as we work to improve the profitability of our residential business and change the structure of residential contracts. It'll take some time to reshape this business but we are making headway. Turning landfill volume, external volumes for the quarter were down a little more than [18%] or around 13% if you adjust for natural disaster volumes in 2019 similar to what we experienced with our collection volumes our landfill volumes improved throughout the quarter with June being the best month down 11% compared to June of 2019 adjusted for work days and…

Thanks John and good morning. We're pleased with our second quarter financial results which reflect the resilience of our business model, the strong execution of our front line team members who safely and efficiently serve our customers and communities each day and the solid proactive steps our team has taken to manage costs and capital expenditures in this dynamic environment. Our strong performance in the second quarter positioned us to deliver on our top financial priorities of strong adjusted EBITDA margins and robust net cash provided by operating activities and free cash flow. As we started to assess the impacts of COVID-19 on our business several months ago we quickly focused on the EBITDA margin impacts that revenue declines in our highest margin industrial, commercial and landfill lines of business might have on our near-term results. We initially estimated that 2020 adjusted EBITDA margins could be impacted by as much as 100 basis points. In the second quarter of 2020 which we expect to have the toughest revenue comparisons of the year we managed costs to deliver an adjusted EBITDA margin that meaningfully exceeded those initial expectations. With the benefit of this strong performance in our economic outlook we now expect 2020 adjusted EBITDA margin to be in the range of 28% to 28.5% or flat to down 50 basis points on a year-over-year basis. Our strong adjusted EBITDA result is the largest single contributor to our cash flow results in the second quarter. Our net cash flow from operations was $856 million or about 24% of revenue in the quarter. As we saw at the end of March there is pressure on working capital from slowdown in customer receipts which we attribute to customers taking steps to protect their own financial positions. We are taking proactive steps to work…

Thank you. [Operator Instructions] Our first question comes from the line of Brian Maguire, Goldman Sachs.

Good morning Brian.

Good morning.

Good morning. This is [indiscernible] for Brian. Thanks for taking my questions. Appreciate the color and the details you provided so far on the exit rate volumes for 2Q and how things were looking in June and it sounds like things maybe are still sequentially improving through the first two weeks of July but just something maybe if you could quantify any of those numbers and amongst the different lines of business if you could.

Sure I mean we are to your point seeing July continue to accelerate albeit at a slightly slower pace. I mean look at this kind of went from zero to not 70 miles an hour but probably zero to 60 miles an hour pretty fast and now we're moving back towards 70 miles an hour. The one area that John focused on was really MSW that has really been impressive. The second area that's and we're down 3.5% in MSW. The other one that was surprising to us because we expressed some concern about it in the first quarter was commercial and at its low point the commercial line of business was down as much as 15% even more in some areas and that has returned to down kind of 5% or 6%. So it's really rebounded and it continues now through July to show improvement. The one that kind of is starting to jump a bit right now that's good for us is special waste. It had been down even through June it had been down pretty significantly on a year-over-year basis and when I looked at the rolling week numbers which compared to prior year just yesterday those numbers are starting to really show improvement in special ways. So we're now actually up double digits there in special waste where we have been down deep in the double digits previously. So we are pleased with the progress we're showing on virtually all of our waste streams and our collection lines of business.

I appreciate those details. Certainly it's encouraging. And then maybe if I could just get just the updated guidance for the year for 2020 with the revenues expected to be down 4% to 5%, just hoping maybe if you could help us better understand kind of the moving parts there. Does that basically assume that pricing yields or holds flat from 2Q levels for the rest of the year and maybe just the moving parts between pricing yield and volume and what your expectations are there? Thank you.

Yes. It's a great question. We're not specifically giving outlook for the back half of the year on the price and volume components but what I would say Jim just gave tremendous color with regard to the improving volume outlook and I think that coupled with the fact that the Q2 execution on pricing was intentional and focused on being customer-centric and so we certainly expect an improving result in the back half of the year on price. So you can expect that the yield component gets back to closer to normal levels or outlook for 2020 and an improving volume trend. When we look at the back half specifically we're projecting that you have a decline in revenue of in the range of 3.5% to 5.5% and that's more significant in Q3 and then tapers in Q4 to about half the Q3 levels what we're projecting. I do want to point out particularly given what we're seeing in the market today that fuel prices did have a 2% impact on the revenue line in Q2; difficult to predict that specifically. We weren't predicting any added pressure on the top line from fuel in the back half of the year but that's certainly out of our control and not necessarily representative of the strong execution of the business which we're really encouraged to see the momentum that we saw at the end of Q2 and beginning into Q3.

Got it. I appreciate all the details. Thanks. Good looking quarter.

Thank you.

Your next question comes from the line of Walter Spracklin, RBC Capital Markets.

Hi Walter.

Good morning.

Yes. So I'd like to start with margins obviously you've guided two impressive cost control doing much better than what you had thought you would be able to do which is great. Just curious on the structural nature of this when volumes start to come back can we see operating leverage such that you can maintain and you alluded to a better organization or a strong organization post-COVID. Does that mean you can run and you expect to run at margins above historical trends once advanced disposal is integrated or would you see that when volumes come back resources would have to come back as well and get you back to more normalized kind of historical levels?

Yes, Walter I will start this one. I think it's a really interesting question rather than specific on post ADS margin, I am going to focus really on WM based business because we're going to wait to give any financial outlook for the integration of ADS until post-closed but when we think about the strong margin execution in the second quarter, I mean hats off to our operators and the front line for doing a tremendous job and I think what you saw in those results is that we got the most expensive hour out of the route and we got the most expensive truck off of the street and so through efficiency, through improved maintenance, improved downtime there were really fundamental tremendous improvements in the operating nature of the business and those are things that the team is working hard to see how we hold on to in a post-COVID environment with improvement in volume outlook in commercial and industrial collection. I do think the residential collection margin impacts that we've talked about we're focused more on the price side of that equation to be sure that we recover the increase in our cost to serve but looking for efficiency in that part of the business as well. In terms of the strong execution in Q2 and how we think about that for the remainder of the year, I think the improving volume trends and price, price is really an important piece of that because we delivered this margin result in spite of having lower contributions from core price which we see really flow all the way through on margin. So particularly impressive when you consider that aspect. There are certain elements of the cost structure that increase in the back half of the year as an example fuel tax credits were something that we got a benefit for in the fourth quarter of 2019 instead of that being a second half of the year phenomenon this year those are spread, those benefits are spread over the course of the year. So that has some margin pressure in the back half as does the increased acceleration of spend on CSD which Jim spoke about. So really strong execution in operations and we expect that to continue particularly with the improving volume backdrop.

Okay. That's great and encouraging as well. So moving on to price I know you just alluded to it. Can you speak to what happened with core price as you mentioned you did not get the benefit of core price and what is the risk and how does it work that, you implied here that it is going to come back. Does that just come back because of the overall macro environment and easier to drive forward or is there something more detailed to that in addition to what you had mentioned with regards to residential and recapturing some of those higher volume through higher pricing.

Yes. I mean I think there's a couple of points to make here with respect to price and maybe the first one would be to your last point there I mean there is this price discipline that we've talked about this morning that remains. We certainly haven't lost any price discipline but we felt like that it was absolutely the right approach to take during the quarter to pause on these price increases and some fees and also to really help small business emerge out of this by giving them a free month of service. I mean I can't imagine if I were a small business owner sitting in my living room opening my mail and getting my big price increase from waste management. I mean that would not have gone over well with me as a small business owner. So it was unquestionably the right approach to take in Q2 and honestly into Q3 that will persist to a to a lesser degree because some of these small businesses have not reopened and what we told them with respect to the free month of service was that we would give you a free month of service once you reopen. So I'm sitting in downtown Houston and there are a lot of small businesses that have not opened in the central business district here. I suspect it's the same in other big cities. So we will still see some of that weakness in pricing but point that I think Devina was really touching on was that when you think about price discipline and once we get past this short-term [COVID] effect, the price discipline is still there. John talked about it too in terms of landfills and transfer. That is something that is truly ingrained in our culture and so we don't kind of kick that to the curb when COVID goes away that becomes immediately reestablished but there was of course in Q2 a big impact from this more kind of sympathetic approach to these customers and we'll see some of that in Q3 as well.

Okay. Makes a lot of sense. Appreciate the time as always. Thanks.

You bet.

Your next question comes from the line of Sean Eastman, KeyBanc Capital.

Hi Sean.

Thanks for taking my questions. So compliments on a good second quarter performance here. I just wanted to drill in on the second half. I mean, I am just trying to understand where you see the big swing factors in the second half ‘20. So visibility clearly improved around the volumes but I am just curious where you think some conservatism is still warranted in that second half outlook and just maybe where you guys don't want to get over your skis just yet as we think about trajectory here from a revenue margin perspective in the second half.

Yes, Sean I will start that and then I think the others can add some color. I think the place that we start that discussion is on the top line and as I mentioned the outlook for the back half of the year is currently revenues being down 3.5% to 5.5%. When you look at how we finish June and see July coming together we do think that there is some potential for optimism in the top line results for the back half of the year but it's appropriate for us to be reserved and going too far in terms of how quickly we start to see the recovery certainly with the number of case increases that have been seen across the southern part of the United States and so that's really where that back half question mark starts but we feel really good that 4% to 5% is representative of how we'll finish the year. In terms of the cost part of the equation it really does come down to the operating cost leverage as the biggest driver. There are certain elements of cost over time being one of them which John spoke a lot about in terms of our ability to flex the number of overtime hours. That translated into $45 million dollars of operating cost savings in the second quarter and that's a tremendous result but ensuring that as we see volumes grow back and whether it be the efficiency part of the business, increased traffic on the roads, thinking about how we manage the work day that $45 million of savings is something that we have our eye on. Other elements of the labor line which is the biggest single component of our cost structure is really where we're focused. The pieces that are in SG&A we have at hand. I would tell you that the results that you saw in the second quarter we're confident that we can continue to deliver. As I mentioned, the increased investment in CSD in the back half of the year means that those costs will increase but that's an intentional investment for the long-term growth and customer-centric nature of our business.

Yes and one quick thing and I think John wants to touch on OpEx too but Sean, when you think about the conversation we just had about price, obviously it was uniquely soft. I mean -- but that softness dissipates over the next quarter or two back to much more of a normalized level of price increases and where we've been prior to COVID. So that certainly is upside for us but we knew the downside was going to be there and it was the right thing to do and then of course volume which we talked about earlier early on in this call and we think that volume while it has started to slow from the really steep increase that we saw in June it still is increasing and I talked about special waste showing some really nice improvement and then MSW and commercial industrial has lagged a little bit It showed a nice pick up but we are seeing some differences by geography and it's interesting when you look at the kind of the southern part of our network versus the northern part of our network, the northern part of our network whether it was the U.S. or Canada tended to shut down a bit more quickly and reopen a little later and so we think there is some real opportunity. I was in Boston a couple of weeks ago and honestly Boston for the first time since COVID really started -- is starting to feel open. I mean we were in restaurants eating inside and so those businesses are starting to reopen and so while Boston and our New England area is still down relative to some of the areas in the south that will provide more of a kind of a spike upturn in volume for markets like New England, New Jersey, New York, those Pennsylvania.

Sean, the only thing I would add to your point about getting over our skis, I think when you look at and as Jim mentioned we're looking at this literally on a daily basis by region by line of business is making sure that we continue to hold tight on the reins in terms of adding costs back and I think when you look at some of the numbers we all referenced in our prepared remarks and even as late as yesterday looking at the ratio volume coming back and what we're still able to do on the cost side specifically over time as Devina mentioned that's the area where we are absolutely focused and I will tell you the ratios of volumes coming back versus overtime is still favorable. I think that's why when you think about us having the margins we had in Q2 compared to where we lost the volume which was really landfill, commercial and industrial for the team to hold those margins and there is puts and takes Devina mentioned some of them is really impressive but I think getting out over our skis that we are absolutely focused on making sure we keep the reins very tight on OpEx as we watch this volume shift.

Got it. Super helpful. Next one for me hopefully a little quicker, could you help bridge us from the down 100 basis points year-over-year margin outlook you provided on the 1Q call to the revised flat to down 50 basis points? Just any granularity between the volume recovery, cost control in that bridge would be appreciated.

Yes. I don't know that I can get super granular for you but what I would tell you is you've hit on two of the primary factors. So volume recovery outpaced our expectations and so that certainly had some upside impact on the margin decremental impact that we had originally predicted and then cost control particularly on the operating line was even better than expected based on what we know the margins of these lines of business to be. I mentioned over time specifically health and welfare costs are another example where we saw some value to the results from a granularity perspective I guess what I would tell you is that health and welfare by itself as an example is just one of those cost categories that's difficult to predict but it had a marked contribution and around 25 to 50 basis points is what we see as a benefit for the year in health and welfare costs alone.

Appreciate it. Very helpful. Thanks for the time.

Your next question comes from the line of Hamzah Mazari, Jefferies.

Good morning. Thank you. My first question is just around the election. If U.S. tax reform goes away, is that a $300 million headwind to you. I guess, pre-tax reform, the free cash flow base I think was close to 1.7 billion then it went to 2 billion. There was a big step change and then you also have bonus depreciation potentially going away too. So maybe if you could frame for us how to think about that potential tax headwind clearly we don't know what will happen with the election.

Yes. I think Hamzah that last point is really the most important one for us and rather than get too granular in terms of specifically measuring what we think tax reform could do. I think we all know that we went from a 35% rate to 22% and so that dramatic change in the tax rate to ongoing business that's going to have consequences the bonus depreciation that you mentioned could have consequences but just none of us are going to be able to predict the outcome of the election or then any follow-on impacts to tax policy should there be a change in a significant shift in and who's in office. So I think you've framed it well. I think all of the pieces that you mentioned are the ones that we are paying attention to and the level of impact to cash is something that is significant and therefore we'll have a close eye on that but not trying to predict it at this point.

Got it. Understood and then just on customer churn was pretty good. Traditionally, half of customer churn for the sector has been bankruptcies and so with stimulus running out, I appreciate your guided revenue growth down 4% to 5% but do you think that we're out of the words on commercial? Specifically do you think that small business bankruptcies are going to be a potential risk as you think about your revenue growth over the next 12, 13 months? Anything you're hearing from your customers or I realize you don't have a crystal ball but so any comments you can make high level would be appreciated.

Yes, Hamzah, this is John. So we've mentioned in early on when we were in the Q1 and the early innings of this that we were seeing cancellations just under 1%. We're seeing that numbers crept up to about 2.5, a little bit north of that but it's leveled out there. So we're not seeing big numbers in terms of cancellations. What we have seen what we talked about is obviously folks turning off their service or pausing their service and then gradually turning it back on. I think the one number we can center around is whether it's commercial or industrial we are over 50% recovered in terms of units and honestly if you look at commercial we all know education is a fairly good size chunk of our of the portfolio there and with the uncertainty there are actually our commercial recovery is over 60% if you net out the education facilities which we all know is kind of a moving target at this point.

Good. Got it. Lastly I'll turn it over just on the ADSW transaction, synergy is over $100 million on a smaller revenue base maybe you could just frame for us where you're seeing the upside come from and the $100 million does not include revenue synergies correct? Thank you.

That's correct. What I would tell you Hamzah is obviously this process particularly around COVID is taking a little bit longer and I guess the silver lining is it's afforded us the opportunity to do that much more work and we have that much more confidence in our integration plans and it's given us the opportunity to look more closely at a granular level not just about kind of the normal SG&A corporate overhead synergies but really get in a little bit further into the details and have that much more confidence in what we're going to be able to execute against in the field and that's really what's driving that number.

Got it. Thank you.

Thanks, Hamzah.

Your next question comes from the line of Kyle White, Deutsche Bank.

Hey, good morning. Thanks for taking my question. I wanted to go back to some of the regional differences that you briefly touched on. Is it possible to describe how the recovery has progressed and some of the states that were first reopened and now are seeing a bit of rising COVID cases states such as Florida, Georgia or Texas. Have you seen any stalling in the recovery in these states? Any service declines in recent weeks?

So it's an interesting question that we expected to be asked today. When I look at our commercial line of business and I look at those states that you just mentioned so the big four kind of in terms of spike, case spike have been Texas, Arizona, Georgia, Florida and so when I look at three of those are our best three in terms of year-over-year comparisons. Our best three in terms of year-over-year comparisons right now are Texas, Georgia and Arizona. Those are the best three out of 17 areas. Those are the top three in terms of commercial yards year-over-year comparison. So I would tell you that the spike and when you walk around Houston what's happening is that everybody's wearing a mask but businesses have not all of a sudden gone back to April or May. They're staying open but people are just more diligent about wearing masks and we're starting to see those cases level off. I heard Scott Godley last week on a business council called Talk About the fact that you're starting to see it particularly in Arizona, Texas those cases level off. So our business is actually quite strong there and as I said just a few minutes ago where we've seen a little bit of a lag are in those areas that that closed pretty quickly and then have stayed closed the longest such as New England, such as kind of the greater mid-Atlantic area, Pennsylvania but those are also starting to show some rebounds as well particularly as they start to move where some of these other states already are which is a reopening of businesses just with kind of a mask rule in place. So we're pretty encouraged by what we're seeing with respect to commercial reopenings. It's the one thing that probably stood out to us the most because we were least certain about it when we discussed it at the end of Q1.

That's very helpful. I wanted to also go back to the pricing discussion a bit and just I'm curious if you could talk about the competitive environment and pricing behavior especially among some of the smaller players. Anything notably different recently as a result of the kind of volume impact that some of these players may be experiencing?

I mean look, we haven't seen anything over the last couple of months but I really can only speak to our own price discipline and I would tell you as I said earlier that we haven't lost an ounce of price discipline. What you've seen in terms of price erosion if you want to call it that was intentional and that we will recover. It's just we're getting ourselves to get through this hopefully this short-term impact from COVID.

Sounds good. I'll leave there. Thanks.

Thank you.

Your next question comes from the line of Tyler Brown, Raymond James.

Hey good morning everyone.

Good morning Tyler.

Hey Devina, I hate to beat on the pricing optics here but can you isolate the revenue dollar impact that the price increase in fee suspensions had in the quarter?

We hadn't specifically quantified that. I mean, I think the best way to think about it is the delta between the yields that we reported and the 2.5% guide that we would have given for the year and I think that delta is pretty representative of what you could say that the price impact was for the quarter.

Okay. So not only, yes. Sorry go ahead.

I was just going to say the only thing, this is John, I would add is if you look at landfill and transfer station I would point you to that in terms of the where we've remained disciplined, I mean so the impact has really been commercial and industrial but the other lines of business we continue to show [white] performance.

Right. So not only was there a dollar contribution that was unusually low but and correct me if I'm wrong here but you also had a bit of a denominator problem. I mean your volumes were down 10%. So I'm guessing that was also a driver in the pricing optics. So I mean just to be I mean I know there's been a lot of talk about this but to be just crystal clear there has not been a change in your fundamental pricing strategy?

Not at all.

Absolutely not.

Okay. And then John, so I appreciate the resi container weight comments and I know we talked about this last quarter but what is the level of urgency around resi pricing specifically? I know you talked that it will take time but if I take a walk back in history, didn't you guys meaningfully move resi pricing? I think it was around the financial crisis if I recall. So can this be a material driver in ‘21?

Listen Tyler. I mean, we've talked about the added weights and the pressure that's put on the line of business. Here's what I can tell you is that, the additional weights that have come via this pandemic are certainly another discussion point we need to have with some of those residential customers but we started this program before that. Now I can't speak to what happened back the financial crisis. I'll trust you on that one I'm sure we probably had some efforts at the time. What I can tell you is that and Jim has mentioned this a few times we've seen obviously a lot of pressure on the residential line of business. We've seen margin erosion. My plan with the team and we have this down to the contract by region, by area to execute against long before this pandemic started. I will tell you what this pandemic has certainly helped us with is when you talk about further moving that line of business to automation containerizing being able to capture the waste, being able to price and get paid for the services including disposal that you provide for this is certainly an opportunity to highlight that.

Right. Okay. Yes. No, that's fantastic and then just my last one here Devina. So I know 2021 seems like it's a long way away but will the CARES Act represent call it an idiosyncratic headwind to cash flow next year? Is that something that we need to start contemplating?

Yes, that's definitely something that we've got our eye on. The $125 million that I talked about for the CARES Act deferral, payroll taxes that's something that hits us in 2021 because you effectively have a doubling of that obligation in the year ahead but I think that, yes it's half of next year, half in 2021 and then another half in 2022. What I think is really important though is that the flow through impacts, the really strong revenue acceleration that you should start to see in 2021 as some of the COVID-19 volume impacts and those pricing policy decisions that we made in the second quarter, we anniversary those. I think the flow through of that to cash flow should help us to offset that year-over-year headwind but you're exactly right Tyler.

There is also somewhat of a corollary there on to the CARES Act with working capital on DSO. I mean we're obviously seeing an impact this year and that's not unexpected at all or not surprising at all. So you'd like to think that as we get into 2021 that DSO starts to normalize.

Right. Okay. No, that's very helpful. Thanks guys.

Yes, thank you Tyler.

Your next question comes from the line of David Manthey, Baird.

Good morning. Thanks for taking my question. Building on a previous comment last quarter you detailed the weekly upward trajectory of your roll off business as sort of evidence of the improvement you were starting to see and based on your comments I assumed that trend continued but in the geographies like there in Texas or here in Florida where the COVID cases have worsened, are you seeing actual declines in any lines of business or were you indicating you're just seeing a leveling off in the pace of recovery?

Yes. It's really the latter. We're not seeing declines in any line of business. We're seeing as I mentioned a nice increase in special waste some of that's through our couple of combustion residual projects but not seeing declines anywhere. It's just by geography, it's a leveling a little bit where we saw big big spikes up in June and it's starting to accelerate a little bit in some of those places that were slower to reopen.

Okay. Thank you and last quarter you said that 10% of your commercial customers had a change in service and less than 1% canceled. Could you give us an update on those data points for the second quarter or in the same ballpark?

Yes. I mentioned earlier that the 1% number crept up to about 2.5% and is leveled off. There is a little higher than that to be exact but what we've seen is that is and those are the customers that have been impacted and identified as having a COVID impact. So 2.5%, 2.6%, I think is about right where we leveled off at in terms of cancellations.

Thank you very much.

You bet.

Your next question comes from the line of Noah Kaye, Oppenheimer.

Good morning. Thanks for taking the questions. To start with Jim, you mentioned I think expecting to see I think you said some early wins from the CSD effort as you engage in an investment development but what types of customers do you expect are likely to value those offerings more any way to dimension out as well what you think this could contribute to organic growth?

Yes. I think there's going to be in the near term more of a cost impacts, bottom line impact and then more of a topline impacts longer term as we truly kind of differentiate ourselves and by the way it's why we kind of chose to accelerate is we have talked about, we talked about it in investor day last year. So this isn't a strategy that's unfamiliar to you. It's just one that we've chosen to accelerate for a couple of reasons. One is that we really felt like we learned that when we do accelerate something we can make it happen quickly for all as I said my script all in unison behind it. So I do think there will be some changes in how our customer does business with us and that will impact us a bit on the cost side and then over time we think that really starts to separate us from the pack.

Yes. Thanks Jim and then just go back to the residential line of business, John I appreciate your commentary round levers for both pricing and technology investment but since you have got it's very granular plant, can you just maybe share with us the target or [indiscernible] profitability improvement in the residential line of business?

I think what Jim has mentioned and Devina in another calls is that we have been sub 10% from an EBIT line and clearly getting well above that is the direction we are going to go. I certainly see opportunities to get into the high teens or 20% over time and we're making some headway and to be real specific I probably when Tyler asked the question. When I looked at even for Q2 with the elevated weights we still on the same store sales comparison made margin improvement quarter-over-quarter in Q2. So we feel really confident about that plan and I think the granularity is going to helpful for us as we look at the investment opportunities at residential line of business going forward to make sure we're deploying the dollars the right way and I've said on other calls we don't want to do it for practice. We're going to make sure you get the right returns, the right margins and the right protections in those agreements and in some cases we are going to have to make some tough decisions. We are fully going to do that.

Perfect. Thanks. I will turn it over.

Your next question comes from the line of Jeffrey Silber, BMO Capital Markets.

Thanks so much. [indiscernible] I will ask just a couple of quick ones. You talk a little bit about pricing from a competitor's perspective. I'm just wondering are you seeing any smaller haulers close or under pressure that might provide some M&A tuck-in opportunity?

I don't know that I have seen or I haven't heard of any that of closed. I have heard of some places where they're running short on drivers. So that's not necessarily a great indication for them and that and I can't tell you whether that is a longer term trend which we've talked a lot about previously that Gen Z and millennials don't want to drive trucks and so therefore there's this pressure on the pool. I don't know whether that's it or whether it is or what the pressures are coming from but I have heard that. I have not heard though of any closures.

Okay. That's very interesting on the drivers. One number you'll talk about much is internalization. I know it picks up the last couple quarters. Is that because we're seeing less third-party disposal coming in or are you truly disposing more of your own collected waste? Thanks.

It's probably a bit of both Jeff, this is John. I think at the table was up about 200 basis points given 180 basis points for the quarter, 190 year-to-date might have the inverted but almost 200 basis points. So clearly when we're seeing some volume pressure at the landfill we're always reevaluating what's the best use of our network and those landfill assets. So without having a number in front of me it's probably a combination of both some third-party volumes that went out in Q2 and our decision to backfill some of those volumes where it made sense for us.

Okay. That's really helpful. Thanks so much.

Your next question comes from the line of Michael Hoffman, Stifel.

Thank you Jim, Devina and John for the questions. Hope all of you and your families are well.

Thanks Michael.

Thank you, Michael.

So I am going to ask the question different way Devina. Your original guidance was 2.5 for the year yield. You did two in the first quarter. If you hadn't have the pandemic what was the budget for a second quarter yield? And is that –

Yes. We don't necessarily budget. We don't necessarily budget Michael our yield quarter-to-quarter. We certainly have that 2.5%. You saw some of the early impacts on the Q1 results that you just mentioned from COVID-19 because there were some early steps on fees as an example to proactively engage with the customers in the right way given what we were seeing. I would tell you we've tried to estimate where we think the yield number ends up coming in for 2020 and it's just a really difficult number because of the impact of units on the measure. So what we focus more on is that core price execution and we expect healthy recovery in core price execution in the back half of the year.

Okay. John, on recycling if the trend holds there's $80 million year-over-year gain in revenue in that business. But what I'm thinking about the 4% to 5% down revenue, I got to account for that and then there is a follow-on question about fuel. I got to account for to sort of think about the down revenue?

Well, I think Michael certainly there was a bit of a tailwind in Q2 with fiber prices specifically OCC going up but as you probably know we've already seen that retract back and while we had a good quarter in Q2 I would tell you just a little bit under half of that was driven by price the rest of it was really Brent and team doing a great job on managing operating expenses in SG&A and other ancillary costs. So that's what drove the other half of that improvement. So we're not, we still think recycling is going to be a tailwind in the back half of the year, not as big though because that revenue number is not going to hold through the balance of the year. We don't think.

Okay. And then could you share with us what your fuel, average fuel cost was in 2Q, ‘20 versus ‘19 and then what it was in 3Q, ‘19 so we can try and accurately model that we can move that much.

I can get you those specifics after the call Michael but what I would tell you is the fuel impact to the quarter was $60 million to the revenue line.

In 2Q?

Yes.

Okay. And then just the point of clarification on the synergies just to be clear it's a free cash flow number and it's a mixture of OpEx saving, interest expense savings, capital spending. We presume the interest expense number is up because rates are down versus the expectation and then there's some incremental gains we gathered in the OpEx or CapEx that's the way to think about the pieces. That's what I understand by it.

I would tell you Michael that obviously when we recut the deal which was really a month ago obviously there's a reduced purchase price. There is higher synergies that we commented on despite over $100 more million of divestitures and certainly there's going to be a lower cost to the CapEx but I will let Devina speak to the financing piece.

Yes. I think what's really important Michael is that the $100 million in the confidence in the more than $100 million of synergies is not reflecting our savings in the interest line. The savings in the interest line is what we were thinking about in terms of the returns on disinvestment getting over our hurdle rate and cost of capital. It's early for us to be able to speak to specifically how much of an interest savings there might be but certainly when we look at the requirement to redeem the bonds and on a weighted average basis those were above 3.6% and if you compare that to current interest rates there certainly is some value to be had there. It's just too early for us to say. We are really excited to be in a position to be able to fund the transaction at close but this will be a phased process for us and we can't yet tell you what the long-term financing might look like.

Fair enough. And then a mechanical question on the [vtoes] on the 25th assume DOJ gets that, so there's a consent order not far behind that or about the same time. What happens after that? Do you close it right away or is there, is this like dry and clean clothes at the end of September but just mechanically what are we looking at?

I mean, I am not sure I know the answer to that. I mean because there is a number of pieces here involved but well what we did say was that this would be the end of Q3 which basically means sometime between the August 25 and September 30 which is a pretty narrow window and it's hard though to say well we want to do it on a certain date because we just don't have enough certainty to say what we're going to do it at the end of a month or at the end of a quarter. That's not our objective. Our objective is to work through with the DOJ and of course with ADS and get this final.

Okay. Great. Thank you very much.

Thank you, Michael.

Your next question comes from the line of Michael Feniger with Bank of America.

Good morning, Michael.

Good morning. I will try to keep it short. Jim, I know you guys have moved away from CPI over the years. Can you just remind us on the CPI exposure? I understand you're driving at the residential level and different contracts but I'm just curious with the CPI? How much of that in your control really in the next 6 to 12 months?

Well, Michael it's John. I would tell you that if you look at our pricing performance regardless of what CPI has done over the last quarters, handful of years, we've moved further and further away from that I think the example he gave is probably the best one which is historically the residential or franchise pieces of the business have been tied to CPI or some fraction of that and I think our ability to drive 3% core price in residential especially in this quarter is evidence that we're moving further and further away from that.

Got it and just like help me understand like when we talked about the top line, you guys provided a lot of color on Q3 versus Q4. How should we think of the business as we kind of like exit 2020 with the first half ? What we think is your mix of your businesses is when residential right now being your highest yield? How does that kind of impact the overall profitability going forward?

Well, it's a bit of a hard question because there is a lot in the mix here. I mean it is interesting though because in terms of a true kind of year-over-year comparative basis whether you're looking at EBITDA or whether you're looking at revenue or whatever you're looking at, I honestly don't think we get to a fair apples-to-apples year-over-year comparison until the first quarter ‘22 because I think ’20. Obviously, ‘20 is disadvantaged and then ‘21 will be greatly advantaged versus prior year. So what we're kind of looking at is when do we get to a true positive comparison versus 2019 and I think that probably happens sometime maybe as early as Q2 of next year, probably won't be Q1 but certainly Q2 looks like it could happen or Q2 or Q3 is when I think we truly get to a positive comparison versus the same quarter in 2019 and then to your question about what pieces are going to be moving in the right direction we've talked about a whole lot of along the call this morning definitely residential John talked about kind of sub-10% EBITDA margins and a lot of work being applied to that. CPI is not representative really of our cost structure anymore and so starting to move municipalities away from that price metric for us, some of which John's talked a lot about I would tell you this is kind of all in John's court but start starting to institutionalize some of the changes that we've seen on the operations side and maybe the same is true for SG&A. There is some expense that we just don't need. We don't need to have as much travel expenses as we thought we did. The Teams product that we use a lot the Microsoft product is a very-very good product and so I think that'll be a replacement for that and then as we think about some of these wins that we've discussed with customer service digitalization that will start to really have positive impact on us. So there's a whole lot of pieces here that go into this but we think by the time we get to 2021 kind of mid-2021 we're going to start seeing some positive comparisons to that 2019 period.

Understood. I will leave it there. Thanks Jim.

Yes.

Our next question comes from the line of Kevin Chiang, CIBC. Please go ahead.

Hi, thanks for taking my question. Just one quick one for me. I noticed that you changed your methodology for core price and that did result in a revision to your Q1 numbers. I was wondering it was this purely a methodology change or did this brings to light any untapped opportunities that you might not have been harvesting before in terms of pricing opportunities as you look ahead here and as volumes continue to recover?

This was purely a measurement change and we had actually made the decision in the fourth quarter and then just made an error in reporting our Q1 with everyone in the work from home mode and forgot that we had made the change in the fourth quarter and reverted to our old measure but the only difference in this is we've got more precise data as we've been able to use technology more effectively across the network to measure units and as we got more precise we were able to give you a more accurate and representative measure of core price and that's what we're using today.

Perfect. Thanks for the clarification.

At this time there are no further questions. I would now like to turn the conference over to James Fish for any closing remarks.

Thank you. So in closing today, I really want to reiterate what both John and Devina have said. I want to recognize the men and women in our operations around North America they have not missed a single day since the start of this pandemic and they are of course absolutely essential to keeping all of our streets clean, ensuring that we are good stewards of our environment through recycling, providing a safe reliable service that is absolutely critical to all citizens. So thank you to all of our men and women on our operations. And thank you all for joining us.

Ladies and gentlemen this concludes today's Waste Management Second Quarter 2020 Earnings Release Conference Call. Thank you for participating. You may now disconnect.