Waste Connections Inc (WCN) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Waste Connections Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, October 29, 2020.

I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

Great. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our third quarter results and our outlook for Q4 and to provide some early thoughts for 2021. I'm joined this morning safely distanced by Mary Anne Whitney, our CFO.

As noted in our earnings release, sequential improvement in solid waste volumes and increased recovered commodity values drove better-than-expected results in the third quarter and provide incremental momentum going forward. We believe our strong operating results, financial performance and front line support continue to differentiate Waste Connections during this year's unprecedented health, economic and social challenges. Higher margin flow-through from improving revenue during the quarter provided better-than-expected adjusted EBITDA margin and adjusted free cash flow generation. Adjusted EBITDA as a percentage of revenue in the period was approximately 40 basis points above our outlook in spite of 30 basis points higher-than-expected discretionary frontline and incentive compensation costs impacting the quarter, which resulted from our more than $35 million commitment in incremental costs, primarily directed to discretionary supplemental pay for frontline employees. Solid waste margins expanded by almost 200 basis points compared to the year ago period, with collection, transfer and disposal accounting for 80% of that increase. Moreover, year-to-date adjusted free cash flow of $778 million or 19.2% of revenue, increased year-over-year, putting us firmly on track to exceed the adjusted free cash flow outlook for the full year that we communicated in August, and positioning us for double-digit growth in adjusted free cash flow in 2021.

Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

Thank you, Worthing, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement included in our October 28 earnings release, and in greater detail in Waste Connections' filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements, as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date.

On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share, and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently.

I will now turn the call back over to Worthing.

Thank you, Mary Anne. We're extremely pleased by our performance in the third quarter as our results reflect both resilience of our solid waste business, and the accountability of our over 18,000 employees who have stepped up during such a challenging year. Better-than-expected 390 basis points sequential solid waste volume improvement in Q3 as compared to Q2 drove strong results in the period. The rates of recovery in solid waste revenue largely reflect the extent to which the reopening process has affected economic activity levels following slowdowns due to the closure restrictions or requirements in effect since the onset of the COVID-19 pandemic. The shape and pace of recovery of lost revenue continues to vary by geography, market size and customer mix. The volume improvement we saw in Q3 was most pronounced in regions which had experienced the greatest impacts from COVID, with Canada showing 750 basis points sequential improvement, and our Eastern region, which includes the Northeast U.S., up approximately 600 basis points sequentially.

In the aggregate through Q3, about 68% of solid waste commercial customers and 57% of associated revenue in competitive markets we track that had suspended or reduced service had reached out for the resumption of service or increase in frequency, up from 53% and 42%, respectively, at the end of Q2. Not surprisingly, the most impacted regions accounted for the majority of the Q3 increase as the less affected markets had already led the commercial revenue recovery we saw in Q2. And the rate of growth in those markets has since slowed, in many cases hitting a near-term plateau in the range of 60% to 65% revenue recovery levels. While the shape and pace of recovery may vary by region and market, our focus on quality of revenue and cost control has been consistent, as evidenced by the strong underlying solid waste margin expansion during the third quarter in spite of about 80 basis points in additional discretionary frontline and incentive compensation costs. We are well on the way to meeting our commitment of over $35 million this year in incremental employee support, primarily directed at supplemental pay for our frontline employees.

Our safety focused, servant leadership-driven culture has guided Waste Connections' response to this year's unprecedented health, economic and social challenges. And that response has resulted in higher engagement, lower voluntary turnover and improved safety, providing for execution at a high level. Our safety-related incident rates continue to decline even as economies reopen and volumes return, such that we are seeing incident rate levels at multiyear lows. These improvements have been augmented by a more than 20% reduction in voluntary turnover year-to-date, as another benefit of a more stable experienced workforce is fewer incidents and accidents. And we are excited to further improve on these trends as we complete our fleet-wide rollout of the next generation of onboard camera technology that incorporates machine vision and AI. Our commitment to the health, welfare and development of our employees, environmental stewardship and the support of our local communities are detailed in our 2020 sustainability report released earlier this week, which includes long-term aspirational targets and our commitment of over $500 million over a 15-year period for investments to meet or exceed our targets. These investments primarily focus on reducing emissions, increasing resource recovery of both recyclable commodities and biogas, reducing reliance on off-site disposal for leachate, increasing employee engagement and further improving our industry-leading safety performance. At Waste Connections, sustainability initiatives have always been integral to and consistent with our strategy and focus on long-term value creation for our shareholders. As such, the investments will be undertaken in the ordinary course of business with attractive ROI expectations and are not additive to what we consider to be typical capital expenditures.

Looking at acquisitions, we're on pace for another solid year of activity in spite of COVID related constraints. In fact, the pace of activity has increased over the past few months. Year-to-date, we have signed or closed 16 acquisitions in 11 states in the U.S. and 1 province in Canada, totaling approximately $135 million in annualized revenue. They include, as noted last quarter, a new market collection transfer and recycling company with about $40 million in annualized revenue, and more recently, another new market and collection transfer company with about $25 million in annualized revenue, both of which are on track to close mid Q4. Dialogue remains as active as we have seen in years, especially with some tax-driven sellers interested in getting deals closed by year-end. Our strong operating performance, free cash flow generation and balance sheet strength positioned us for a double-digit percentage increase in our quarterly cash dividend. As announced yesterday, our Board of Directors authorized a 10.8% increase in our regular quarterly cash dividend, our tenth consecutive double-digit percentage increase since initiating the dividend in 2010. Still, our dividend remains at less than 25% of adjusted free cash flow. That level, coupled with liquidity of over $2 billion and leverage of about 2.3x net debt to EBITDA, provides tremendous flexibility to fund both continued outsized acquisition activity and opportunistic share repurchases.

Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the third quarter and provide a detailed outlook for Q4. I will then wrap up and provide some early thoughts on 2021 before heading into Q&A.

Thank you, Worthing. In the third quarter, revenue was $1.39 billion or about $20 million above our outlook on better-than-expected solid waste volumes during the period and higher recovered commodity values. Revenue on a reported basis was down $22 million or 1.6% year-over-year, on E&P waste activity, down $43 million year-over-year. Acquisitions completed since the year ago period contributed about $47.1 million of revenue in the quarter or about $44.2 million net of divestitures. Solid waste price plus volume growth on a same-store basis in Q3 was negative 2%, reflecting an improvement of 330 basis points from Q2 and ranging from positive 2.6% in our mostly exclusive West Coast markets to negative 4.5% to 5% in our most COVID-impacted Eastern and Canada regions.

Pricing growth overall in Q3 was 3.7%, including core price of 4.1%, partially offset by a 40 basis point reduction in surcharges. Pricing ranged from 2.6% in our more exclusive markets in the Western region to an average of over 4% in our more competitive regions. Solid waste volume growth in Q3 was down 5.7%, ranging from flat volumes in our Western region to down approximately 9% in our most impacted regions in the Northeast U.S. and Canada. As we have noted, our volumes largely reflect the pace and shape of shutdown and reopening activity across our markets, which varies and depends on geography, size and customer mix in each market.

Looking at year-over-year results in the periods on a same-store basis, we saw sequential improvement in Q3 from Q2 in solid waste in every line of business. Commercial collection revenue, which was down 7.6% in Q2, improved by over 500 basis points to down approximately 2.5% in Q3. Excluding the most impacted markets in the Northeast and Canada, commercial collection revenue was up about 30 basis points year-over-year. Roll off revenue decreased approximately 8% on pulls down about 7% year-over-year and at revenue per pull down about 1% on lower weights. This compares to revenue and pulls down 13% and 12%, respectively, in Q2. Solid waste landfill average price per ton increased 4% year-over-year on revenue down about 2% on a same-store basis, as total tons declined about 6% year-over-year, about 400 basis points better than Q2. Q3 MSW tons were down about 3%, special waste was down 9% and C&D was down 12%.

Looking at E&P waste activity. We reported $23.6 million of E&P waste revenue in the third quarter, down about 64% year-over-year, in line with our expectations on reduced drilling activity, which appears to have found bottom around current levels, with rig counts up nominally in recent weeks.

Looking at Q3 revenues from recovered commodities; that is, recycled commodities, landfill gas and renewable energy credits or RINs. Excluding acquisitions, in the aggregate, they were up about 25% year-over-year due to both higher RINs and higher recycled commodity revenues due to strong fiber values. Adjusted EBITDA for Q3, as reconciled in our earnings release, was $432.6 million, about $13 million above our outlook due to higher revenue and stronger flow-through from returning disposal and commercial collection volumes as well as higher recovered commodity values. Adjusted EBITDA as a percentage of revenue was 31.1% in Q3, about 40 basis points above our outlook and down 30 basis points year-over-year. A 190 basis point year-over-year improvement in solid waste, including a 30 basis point benefit from recycling and RINs, was more than offset by a 130 basis point drag from lower E&P waste activity, an 80 basis point impact from discretionary COVID related front line and incentive comp, plus another 10 basis points from the margin dilutive impact of acquisitions completed since the year ago period. Fuel expense in Q3 was about 3.4% of revenue, down about 40 basis points year-over-year on fewer gallons, lower rates and a CNG credit of about $900,000. We averaged approximately $2.33 per gallon for diesel in the quarter, down about 10% or $0.27 from the year ago period. Our effective tax rate for the third quarter was 17.6%, slightly lower than expected. GAAP net income per diluted share was $0.60, and adjusted net income per diluted share was $0.72 in the third quarter. Adjusted net income in Q3 primarily excludes intangibles amortization and other acquisition-related items. Year-to-date adjusted free cash flow of $778.4 million or 19.2% of revenue and 63% of adjusted EBITDA, was up $15.5 million year-over-year in spite of lower EBITDA, given the benefits of working capital, including reduced DSOs and the deferral of payroll taxes as provided for by the CARES Act. As noted earlier, given our outsized conversion of adjusted EBITDA to adjusted free cash flow, we are well on our way to exceed the full year outlook for adjusted free cash flow of $805 million to $835 million, that we communicated in August. Debt outstanding at quarter end remained at about $4.7 billion.

As Worthing noted, total available liquidity remains over $2 billion, including cash balances of $859 million. Our leverage ratio, as defined in our credit agreement, was about 2.7x debt-to-EBITDA and on a net debt basis, our leverage remained at around 2.3x debt-to-EBITDA at the end of Q3. Our current weighted average cost of debt is approximately 3.3%, with essentially all of our debt at fixed rates.

I will now review our outlook for the fourth quarter 2020. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the securities commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period. Revenue in Q4 is estimated to be approximately $1.335 billion. We expect solid waste price of approximately 4% and volumes of approximately negative 6%. Although we haven't seen a weakening in volumes, we think it's appropriate to remain cautious as we have throughout the pandemic, given concerns about additional shutdowns or other restrictions potentially being imposed, especially as we head into the winter months. In addition, we expect revenue from both resource recovery activities and E&P waste to remain similar to Q3. Adjusted EBITDA in Q4 is estimated to be approximately $400 million or about 30% of revenue, which would be down 80 basis points on a reported basis and down just 30 basis points year-over-year, adjusted for the 50 basis point benefit from CNG in 2019, which resulted from the 2 year catch up in CNG credits in that period.

Our outlook cautiously assumes that certain costs, such as medical, which was down 30 basis points as a percentage of revenue in Q3, become headwinds in Q4 in the event that deferred or discretionary individual spending patterns should change. Depreciation and amortization expense for the fourth quarter is estimated to be about 13.8% of revenue. Of that amount, amortization of intangibles in the quarter is estimated to be about $32.5 million or about $0.09 per diluted share net of taxes. Interest expense, net of interest income in Q4, is estimated to be approximately $40 million. And finally, our effective tax rate in Q4 is estimated to be at about 20.5%.

And now let me turn the call back over to Worthing for some final remarks before Q&A.

Thank you, Mary Anne. Again, we are extremely pleased with our year-to-date performance, particularly given the challenge of projecting the business and managing through COVID-driven uncertainties, which have been amplified by the headwinds of high-margin decrementals from lower E&P waste activity and negative solid waste volumes. In spite of it all, we are continuing to raised the bar and consistently beaten our expectations. Our Q3 results and Q4 outlook would put us about $60 million of revenue, $25 million in adjusted EBITDA and 20 basis points in adjusted EBITDA margin above the full year outlook we provided in August, without the benefit of expected incremental acquisition contribution and with strong free cash flow conversion.

In this evolving environment, our employees have remained focused on controlling what they can with an uncompromising commitment to protecting the health and safety of their colleagues, providing the highest level of customer service and supporting the communities we have the privilege to serve.

I'd like to reiterate how incredibly proud I am of the way our team has supported our front line and their families, and delivered on their commitments to drive these results. We've always maintained that at Waste Connections, it's our people who are our greatest differentiator, and this year has made that all the more important and apparent. As we look ahead, we expect to emerge from this challenging period better positioned financially with tremendous flexibility with respect to capital allocation. And operationally, with higher operating leverage in solid waste and both safety-related incidents and voluntary turnover levels already achieving multiyear lows. We expect to expand reported margins in 2021 and capitalize on additional growth opportunities. Moreover, given the strength of our year-to-date adjusted free cash flow, we are well positioned for double-digit percentage growth in adjusted free cash flow in 2021.

Although we won't provide formal outlook for 2021 until next February, we're able to provide some early thoughts, assuming no change in the current economic environment. In summary, we believe 2021 likely sets up for solid waste price growth to range between 3.5% and 4%, with volumes expected to turn positive after we anniversary the start of the pandemic. Price-led organic growth and high flow-through from improving volumes should drive underlying margin expansion in solid waste collection, transfer and disposal in spite of the hopeful turn of certain discretionary expenses that we either reduced or eliminated this year due to the pandemic, or the normalization of other expenses that declined as a result of the shutdowns. In addition, depending on the level of activity between now and year-end, we could enter 2021 with more than 2% in revenue growth in place from completed acquisitions. We would expect to have better visibility on the tone of the economy and expected acquisition contribution, E&P waste activity and recovered commodity-driven revenue in February when we provide our formal outlook for the upcoming year.

We appreciate your time today, and I'll now turn this call over to the operator to open the lines up for your questions. Operator?

(Operator Instructions) And our first question comes from the line of Tyler Brown with Raymond James.

Worthing, so thanks for the details about the recovery. It feels like things are kind of on track here. And I appreciate that 68% of the paused commercial customers have returned. And maybe you guys gave this figure a couple of quarters ago, but what percent of the commercial book is that applicable to? And at this point, based on the intelligence that you have, how do you feel about that last 30%? Is it structurally gone or do you still feel like there's -- some of that will come back?

Yes. So Tyler, a good question. So where we track it, obviously, is where we have a sales force that we can track account-by-account and account-by-account recovery and the payouts for that. That probably accounts for about 80% of our commercial business because obviously, in markets where we have franchises, we do not have sales people. We have 100% of the business. And so that accounts for about 80% or so of the commercial activity.

Look, it's hard to say with regards to those that have not returned yet. We definitely assume that there are some permanently closed shops, right? And it's hard to see, hard to anticipate or project that those shops are reopening and returning. So if this is the new jumping off point, perhaps there's incremental positive volume growth next year, if through another stimulus plan, those shops try to get recharged and reopened. But without a doubt, there will be casualties in small business as a result of the pandemic and we're not going to sit here and project a percentage recovery in that because to your point, I think some of that's permanently gone.

And Tyler, just to follow-up on that. I would say that we continue to believe that customer cancellation statistics aren't a good barometer because we continue to not see a material difference year-over-year. And therefore -- to Worthing's point, we know that there are cancellations coming.

Okay. Yes. No, that's very helpful. And then, Mary Anne, so just -- obviously, margins were very good this quarter, particularly at the core level. And I think you mentioned it right at the tail end. I just want to make sure it's clear. So in Q3, health care was actually a tailwind. We didn't see that actually shift over to a headwind, but you are expecting it as a headwind, presumably in Q4 and then probably into '21?

Yes, Tyler. That's a fair way to characterize it. We had talked about the fact that in Q2, it was a nice tailwind. And we said that we expected that as people started getting out more, this would be one of those costs that went away as a result of shutdowns, right? So it impacted behavior, and we thought that, that would behavior would begin to normalize over time. And what I'd say is Q3 versus Q2, some of those costs came back, but it continued to be a tailwind. And yes, specifically, I mentioned that if you're thinking about sequentially, why is the margin -- the underlying margin expansion in solid waste in our projection, our outlook for Q4 less than Q3. That would be an example of what we're factoring in. To the extent that we're wrong and it doesn't come back as much as we thought, it would continue to be a tailwind in Q4.

Okay. Okay. And then -- so this is a conceptual question. You guys talked about it a little bit. 2020 has been very bizarre on many fronts. I think we could all agree on that. But particularly with all of the movement in costs, you guys talked about expanding solid waste margins. So that into '21, despite all of the idiosyncratic things, travel, right? Health care, things like COVID, supplemental comp, kind of maybe easing. But is there any way to kind of just frame for us what we're kind of thinking next year from a solid waste margin perspective? Is that a 50 basis points? Or just, any just high-level thoughts there?

Yes. Good question because we were clear in our script that we expect reported margins to expand next year. And to the extent that E&P just remains flat year-over-year or even at current -- if it remains at current run rates even, I mean, that obviously provides or could provide a 40 or a 50 basis point headwind to reported margins next year. And so for us to say that reported margins were expanding, to your point, it means that solid waste margins are expected to expand north of 50 basis points next year.

Okay. Okay. Very helpful. And then just last quick modeling question. So Mary Anne, just based on the deals signed or closed, just from a modeling perspective right now based on everything, how much acquired revenue should we think about in '21?

Sure. So if you think about $995 million in '21 and the cadence being kind of, by quarter 30 30, 15 15 is a fair way -- or 20 15 is a fair way to think about it.

And then Tyler, there will be some additional things that will likely get done this year that will be additives to that as we give formal guidance in February.

And our next question comes from the line of Kyle White with Deutsche Bank. Mr. Kyle White, can you please check the mute function on your phone? I'm sorry, sir, we're unable to hear you. We'll move on to the next question. And our next question comes from the line of Jeff Goldstein with Morgan Stanley.

I'm going to ask the question. I just want to ask the recovery question a little different. So just looking at the pace here, volumes were down 5.7% in the quarter, which is better than you thought, but also in line with -- I know when you had disclosed in July, basically implying trends have been flat. And then now your guidance for 4Q is a similar number. So I guess just kind of bigger picture, is it -- do we need a vaccine? Are you looking for additional maybe stimulus post election? Just like what do we need here really to get volumes moving towards flat again?

Yes. Well, again, I think it's the anniversary-ing, as we've said all along of the pandemic, right? I mean, we'll -- the pandemic started hitting numbers in the middle of March. And so once we get through Q1, and we fully anniversary the effects of the pandemic, volumes should start turning positive in Q2. That's not dependent on a vaccine. That's not dependent on a stimulus. That's just math, because if you look at the rate of recovery since the lows of Q2, our revenue run rate and every metric is much stronger than what was reported in Q2 of this year. And so just running flat to the current levels of activity produces positive volumes beginning in Q2. Now to the extent that the economy reopens because of a vaccine or because of a stimulus plan that provides some juice to the activity, then that's just further improvements in reported volumes in that year. I wish I could say it was more insightful than math, but it is math.

No, I appreciate it. And then I was just hoping for some more color on the temporary roll off side, especially around housing. And if that at all has impacted the improvement down 8%, which I think was about a 500 basis point acceleration. Just given what we're seeing kind of in the strength of the housing market and what we're hearing around continued supply constraints there. Are you seeing any type of benefit? Do you think it could continue? Just what are you seeing on temporary rollouts, really?

Sure. So to your point, we did see nice sequential improvement in roll off. I'd say that, certainly that the housing can be a factor on that. There's also just the reopening. And I look at, for instance, where that sequential improvement was strongest and it was in Canada, by way of example, where you had the whole holistic shutdowns of the economies and there was arguably some pent-up demand when they turned things back on, and we saw construction projects that had been put on hold get restarted. And so I'd say that was as much a factor, if not more, than for instance, the housing numbers getting a little better. I'd say the other thing that stands out is I just think, in general, our -- the best volumes we continue to see are on the West Coast, where I'd say that over the past few quarters, we have seen that, that return of housing did help those numbers. So it's a factor, but it's one of a few different factors that I think are driving that sequential improvement.

It's -- I know it feels like this has been a dog year with regards to remembering things. But recall when the shutdowns happened in Q2, not every state or -- shut down construction as well, right? Washington, for instance, was a state that shut down construction as part of the pandemic. And so you saw a great large snapback in Q3, sequentially Q2 to Q3 in Washington. Canada the same way. We look at Ontario or Québec especially, which shut down construction activity as part of the closures. And to Mary Anne's point, as those reopened, obviously, you have a snapback sequential improvement, Q2 to Q3 in that area as well.

And our next question comes from the line of Sean Eastman with KeyBanc.

This is Hamza Jaffer speaking for Sean Eastman. I just wanted to turn the question over to volumes. So last quarter, we talked about a monthly volume trend. I was just curious if you could give us more color on September. And we've seen this de urbanization trend this year, but it's been -- it remains to be seen. I was just curious if you could think Waste Connections has been benefiting from this dynamic with such a significant amount of volume driven by secondary markets and whether you think this could be a nice tailwind for the business in the coming years?

Well, first in the secondary markets, as we laid out in the script, a lot of those markets were not as heavily impacted in COVID, and were kind of early to recover most of what they had lost in Q2, and that was a big contributor to Q2's uplift. We still continue to see volume strength in those marketplaces. And in many of those markets, we expect positive volume potentially in Q4. And so while most of those reflected that flat volume year-over-year in Q3, that continued momentum could turn positive in Q4. With regards to the current trends, again, I think we laid out in our outlook that we still expect volume declines to be about 6%, we're probably running a little bit better than that as we sit here today. But as Mary Anne pointed out, it's important to stay cautious as you look ahead given the winter season that we're entering into. And so obviously, if the trends that we see right now continue through the balance of the quarter, we should set ourselves up for a nice repeat on the top line with regards to revenue reported versus expectations.

Got it. And then just level setting on the M&A environment. Clearly, the election and policy is a big variable. So just as we look out into 2021 and 2022, what are the primary watch points there in terms of whether we see greater or less than normal acquisition activity for Waste Connections?

Sure. If you look at this year, I mean, look, in spite of pandemic, this will be an above-average year in total revenue activity for us. And what I would call an average year or a typical year with regards to the number of transactions. I mean this year we'll get probably 3 or 4 transactions done in that $25 million to $40 million range. We'll probably get a dozen or more tuck-ins done as well. So to be doing kind of 16 to 20 or so transactions, I'd call it a typical year, which is, again, remarkable given the backdrop that we were in. I say that as a set up because we've also said a lot of our transactions are kind of lineage transition driven. And those will continue to influence the sale of companies in '21 and beyond. Obviously, exhaustion can also lead to folks' desire to sell. I mean, it's tougher and tougher to -- it was tough running a business before the pandemic, given many constraints, and the pandemic's made that even more magnified for many operators. So exhaustion can also lead to that. Obviously, tax-driven transactions as well. That's driven some people to come off the sidelines this year and get some things done. And to the extent that the tax dialogue in '21, if tax law changes in '21, is it retroactive or not, do they -- like in the Trump period in the first 2 years, it took them 2 years to get tax reform in place. So do they get it done in '22, which might prompt people to get deals done in '21, it's uncertain. But look, what drives our typical transactions with second, third to fourth generation type businesses is lineage transition, and we expect M&A activity to continue beyond this year.

Congratulations on the excellent quarter.

And our next question comes from the line of Mark Neville with Scotia Bank.

First, great quarter, and just a generally great job managing through the pandemic. So good on you. Maybe just going back to the recovery. I apologize if you touched on some of these points, but I guess just from a high level, I'm just curious, in the markets that were sort of first to open, are you still seeing sort of month-over-month, week-over-week sort of sequential improvements in the volume recovery? Or is there certain markets where you're sort of finally sort of hitting a ceiling? And then I guess a similar type question to the markets that are slower to open or reclosing like here in Montreal. I'm just sort of curious sort of how -- not much else specific, just generally -- how much sort of room upward is there before you sort of get to sort of a more normalized or sort of to where the other markets may be?

Sure. So happy to cover that, Mark. So what we said was that in the aggregate, the recovery of revenue in the commercial markets we track is about 57%. And I would break that into the ones that you described, had come back more quickly and were less impacted. So the less impacted markets are in the low to mid-60s, about between 60% and 65% recovered as contrasted with what we would describe as the more impacted, Canada, the Northeast U.S. are in the low 50s. So that's the delta we're seeing that remains between those 2 buckets, if you will, and to your question about the rate of recovery, we've absolutely seen that slowdown in those less impacted markets. And that as Worthing described in his remarks, that really what led the Q2 recovery were those markets. And that what led Q3 were the more impacted markets. We talked about the sequential improvement in Canada, for instance, being 750 basis points overall volumes and the East -- our Eastern region, 600 basis points. You contrast that with, say, a 300 basis point improvement in a place like the West Coast or our Southern region.

And look at individual markets, some -- a place like Toronto, which through Q2 had about 30% recovery is now in that low to mid 50s. So a perfect example of one of those impacted markets coming back strong in Q3. And I'd contrast that with, for instance, North Texas, in a place like Dallas, where through Q2, they were already back to the low to mid-50s and now they're back to the low mid-60s, again, in line with the average we're seeing in those markets. So I think that speaks to the flattening. And again, we don't know where the ceiling is. We describe it as a near-term plateauing because that's what we've been seeing over the past few months.

Okay. That's super helpful. I'm sorry, the -- in those markets, the low 60s or 60, 65 Dallas. Again, is there still -- maybe you just gave us the answer, but is there still sort of sequential improvements happening there? Or is it really just leveled off almost completely?

Again, to be clear, I mean we saw it throughout Q3, and there's still opportunity, okay, because you have various markets within those buckets. And for instance, New York City. We -- I talk about this hey, these impacted markets are on average around back 50%, 55%. New York City is still the mid-30s.

So it's our fastest-growing market right now.

Right. It's a great point, smaller base, but fast growing. So yes, there's still absolutely opportunity. We're just talking at high level in what we're seeing.

Yes, no, I appreciate that. Again, this is pretty fluid. So again, I don't want to get too, too deep, but I appreciate all that. Maybe just on the free cash for next year. Sorry, go ahead.

The week-to-week trends, for instance, in New York City are quite notable. It's interesting to see how the city is turning back on.

Okay. Okay. Again, maybe just on the free cash then. Just for 2021, again, I know you like to sort of talk free cash conversion over time down to the low 50s, obviously be much better. When we sort of think about next year, is there any sort of discrete or certain items you want to point out or and maybe you don't want to give us an exact side on where you think the conversion falls, but just something -- just anything you want us to keep in mind when we're modeling out next year's free cash conversion?

Yes. Look, I think we've been consistent throughout the third quarter in laying out our expectations about 2021. And that's been to put a marker at $950 million and just lay out an expectation that we ought to do $950 million or better for the full year and then you back into that, and that's why we talk about double-digit growth in free cash flow year-to-year.

Okay. Sorry, just one last one. Worthing, you mentioned some deals in Q4 that look set to close, and I think you put some numbers around those? I just didn't catch them.

Well, I think Mary Anne put the numbers around the quarterly expectations for next year based on the $135 million we had already signed or closed. And what I've said is anything that we do, which we should get a few more things done this year would be additive to that. And that we would lay that expectation and those numbers in, in February. But in the aggregate, what we said is that if you look at what we've signed or closed and what we think we'll get done, we'll likely go into 2021 with 2% top line growth already in hand from M&A.

And our next question comes from the line of Hamzah Mazari with Jefferies.

My question is largely around share buyback. Is there a reason why you're not buying back more stock? And why I ask is, historically when the company had average to slightly above-average M&A years, I think you still bought back stock at the same time and size because your leverage is the lowest it's been in history. You're sitting on a lot of cash. Free cash flow is growing double digits. And it looks like acquisitions are not going to be as big as 2018 and '19. Even if you look out, 2020 is almost done, 2021 is a big question mark. I doubt it will be as high as 2019 or '18 unless you say otherwise. So just any views there, or any high-level thoughts or what you're thinking?

Sure. Look, we were active earlier this year in buying back our stock. We always use the word opportunistic with regards to the timing of when we do things, because we also like to maintain flexibility for growth opportunities that come along. Look, you tell me who's going to win the Presidential election, you tell me what's going to happen to tax laws next year. You tell me what's going to happen in the stock market as a result of that. But a lot of folks, as you know, talk about a sugar high if a stimulus gets done, which will flow through the stock market and may prop it up into early next year. And then if the realities of a tax law changed, that could be harsh, but that could create opportunities to buy the stock back. We try to play the long road here. We try to look ahead at expectations around the stock markets. And I'd rather be patient and buy right, than just be a willy-nilly buyer at any price every day.

Got it. And then my other question is just around ESG. And I actually want to ask about the E rather than the S and the G. And I know you put out your sustainability report. But I know you do renewable landfill gas and recycling. But how do you view landfills as part of the E equation? Do you think they're misunderstood by the ESG community and that they're sort of bad for the environment? Any thoughts as to the E, where you rank there, what you can do better there?

Sure, what I think what we can all do better is just continue to be more upfront and more visible at what we do. Look, a lot of things that we talked about in our ESG report are things we've been doing for 20-plus years, we've just stayed below the radar screen in telling our story. With regards to landfills, look, landfills, you tell me, first off, I mean look at other economies without the type of strict hygiene and regulatory environment around waste disposal, I'll put what we do in the U.S. up against any other economy, and landfills play a big part of that. But landfills are also a big biogas generator and renewable energy source. And you see some -- many of our efforts around increasing investments within biogas facilities now that our landfills are getting more mature and gas-generative enough to do that. So by all means. I mean, landfills, that's -- you're right, it does. They do have bad names and bad connotations in many communities. Many cases in which communities that weren't there when the landfills were built and built themselves up next to landfills. But look, it's a double-edged thing. What the scarcity of landfills turns into pricing opportunities within many markets because it is a scarce resource. It's an ever-increasing increasingly higher cost to operate landfills and to build-out landfills, and that will drive higher pricing of landfills. But again, it's sourced for renewable energy is one that will become better understood if we tell the story right. Because the opportunities there are tremendous. And the returns on those kinds of investments, more importantly, are incredible. Look, ESG doesn't mean you throw -- you should go and throw away money and dilute returns. We're talking about our opportunities and running the good business that are not only good for the E, as you say, but also good for the P&L, too.

Got it. And last question, I'll turn it over. We talked a lot about commercial volume. Just how do you think this cycle is different than past down cycles for waste? And at a high level, waste lags going into a downturn, lags coming out, it doesn't look like it's lagging coming out today. So that may be a difference. I don't know, maybe the cost structure is different because some of what you alluded to a little bit on the margin performance this quarter. Just any thoughts as to how this cycle is different for Waste than prior cycles?

Sure. I think you almost answered your own question, in that prior cycles were more coincident with the decline in temporary activity and commercial stayed strong. This is a decline that hit commercial. So the way it was hit is almost tracking the way the macro economy has been hit and GDP has been hit, meaning the temporary side of the businesses still remain, I guess, a little more resilient than what we saw as a quick contraction in commercial. But commercial as it recovers is very sticky. And so as that recovers and you see the high margin flow through, that will continue to benefit this industry. But to your other point, the cost structure is different. And I think that's a statement that could be said about most businesses across multiple industries. How we accept it in how we did things, how we travel, what we spend money on, et cetera, has changed. And so that -- I don't see all those costs really ever coming back fully into the P&L because we will be doing things differently. We still want -- we still pine for the days that we're together, that we're having big parties, that we're spending a lot at the bar, so to speak. But clearly, as the economy reopens, as people get more comfortable being together based on changes in the pandemic or vaccines, et cetera, it's still hard to see that the shape of how we do things is -- gets back to where it was pre pandemic, and that creates a different cost structure in our P&L and others'.

And our next question comes from the line of Kevin Chiang with CIBC.

Worthing, Mary Anne, congrats on a good quarter there. Maybe if I could just dig into some of your assumptions, I guess, for volumes in the fourth quarter? And maybe specifically, I appreciate the conservatism, just given all that we don't know, and some of the rollbacks and the reopenings in some of these economies like here in Canada, and I suspect, in parts of the U.S. Has that changed how you think about maybe your bad debt assumptions as you get through the winter season, just anecdotally here in Toronto, a lot of small businesses have been pretty clear that if they have to get through another shutdown, they probably don't make it through the other side of this, through a tough winter season? Just wondering how you're looking at your bad debts over the next quarter or 2?

Sure. So interestingly, Kevin, we talked about bad debt last quarter as being one of the costs, if you will, of COVID. And it's actually come down this quarter, and it's actually closer to a more normalized rate for us. And we've talked about DSOs coming down as well. A portion of that would be E&P, of course. And it's also solid waste. What we're finding is that as customers come back, they're paying us, right? So we're seeing the recovery of volumes, coincidental with that is a reduction in bad debt. So that's encouraging. And to your point about those customers who aren't going to come back, as I said earlier, we're not -- we're mindful of the fact that cancellation rates are still what I would say is artificially low. And so that's why we're not baking in more recovery, and we think it's prudent at this point to kind of think in terms of current levels remaining the same. So I'm not expecting any big bad debt comeback, but I'm not expecting it to get materially worse from here at this point.

And we've been cautious on how we positioned ourselves for potential deteriorations in bad debt.

Yes. So we're already positioned for that, and it's not as bad as we think. Again, that's -- that will be upside.

Maybe my second question here, and I think Mark was asking about the free cash flow. If I just take -- and I know you'll exceed it just based on your comments today. But if I look at your free cash flow guidance, I guess, your conversion from the outlook you provided last quarter, it's about 52% of EBITDA. You're tracking well ahead of that through year-to-date. You're getting good flow-through, even with the challenges of E&P. If I ask this question maybe a different way, do you think you can get back to like a mid-50% free cash flow conversion of EBITDA, even with E&P sitting where it's at today, just given how strong your conversion has been through a very challenging year already?

Yes. Well, look, we've always said own us for 50 to 52, love us in the years we do 55, right? And so I would never model a -- do a long-term model like consistent with 55%. Obviously, things can change as you look ahead, going to be tax law changes in the U.S. around bonus appreciation as those wean off in '23. Changes in tax rates, obviously, could influence that a little bit as well. So look, we're still comfortable in that longer-term view of 50% to 52%, even without E&P coming back. Obviously, to your point, if E&P comes back, that's another potential boost and a tailwind to get that higher as well. But look, we're already well positioned to do the upper end of that or better this year. That is still leaps and bounds ahead of our peers. And the years that we do a [better than] 52% we'll just -- we'll take that and enjoy it.

For sure. And maybe just one housekeeping question for me, maybe just to Mary Anne. Maybe surprising to Mary Anne. I did notice the core price sequentially did improve in Canada. I'm just wondering if that's just a reflection of that sharp volume rebound you noted, that you saw in Q3? Or is there anything unique that happened in Canada in the third quarter?

Sure. So good point, Kevin, you did see that increase, which went counter to, right, the rest of the price movement, which, of course, is playing out as we expected, right? That it's stepping down. In Canada, you had some PIs that were pushed out last quarter that got implemented in Q3. And so that's why you saw that. It dropped a little lower in Q2 than we would have otherwise planned and came back a little in Q3.

It was a conscious decision to defer those price increases.

And our next question comes from the line of Chris Murray with ATB Capital Markets.

Worthing, just thinking about acquisitions. Historically, you've always talked about acquisitions being kind of 3% to 4% of revenue as you go into the next year. You're kind of calling out 2 this year. I guess, maybe as we start thinking about the next couple of years, is it a function of kind of the law of large numbers? Or was it just something around the acquisition pacing, how much of that was impacted by COVID this year? And is it something that we should be thinking about getting back to that number? So I'm just trying to maybe frame it over how to think about acquisition growth over the next couple of years?

Sure. We've typically -- we look at typical year and think in terms of $125 million to $150 million of required revenue, right? And that right there is -- I'm just going to round -- 2% to 3% or so of growth in a year. If you look at this year, again, we're knocking down -- we've already knocked down the midpoint of that $125 million to $150 million, and anything we do in the balance of the year will push that to the upper end or higher. Going into a year at 2% growth, obviously, what we don't have in that number yet is everything we get done in 2021, which will be additive to that 2%. And so look, we're not chasing a growth rate, to your other point. Obviously, as the business grows, a typical year 125 to 150 will be a slightly lower percentage as time passes. But without a doubt you episodically see larger transactions, $50 million to $100 million type revenue transactions into the mix that individually can push that 2% to 3% to something like 3% to 4%, right? And so we've seen that year in, year out, the past few years, but we always think in terms of average year being that 125% to 150% and the percentage top line will be what it is.

Okay. So just think about that as the base number in terms of what you're kind of looking for growth? That's fair enough.

We always say don't own us for that, but let that be upside...

Sure. Sure. Going back to your ESG report and sort of your thoughts around the $500 million in spending. One of the things that I know we've certainly been discussing with clients is in the changes of administration probably like we saw in the change of the last administration, different things happened, RIN pricing certainly moved around with changes in regulation. And I know it's hard to try to figure out where this goes. But certainly, if you think about things like gas capture and RIN credits and even vehicles and shifting there. And certainly, California has made -- had made some disclosures about wanting to get off any sort of fossil fuel-type-powered vehicles in the next few years. What's the feasibility of your ability to either accelerate or pivot into some of those technologies? Or -- and I guess what I'm curious about is, it still seems like early days or do you think that the maturity of the technology is more than just a science project at this point?

No. Look, if you -- to some of your observations with regards, for instance, to gas, I mean, the maturing of our landfill network, creates more opportunities looking ahead for biogas capture investments with very attractive ROIs than the rearview mirror, right? And so we are very bullish on that. And that's -- obviously, you mentioned the changing administration. I mean, we know what this current administration has -- and how that's influenced our P&L with regards to the value of gas spreads, things like that. If the changing administration happens and you know their platform, the value of those -- of that kind of line of business should go up dramatically. With regards to EV, look, we've already taken delivery of our first full EV truck, obviously we're beta testing it. We expect that to meet all of our weight limits and route distance limits with regards to battery life. And so look, the limiter there, while even though state regulations have passed, for instance, in California, the limiter is still the manufacturing capacity, right? And so many of the units you see people talk about are EV chassis but not electric bodies. And the future should be a combination of both of those so it is a full EV product. So all we can do is make sure we're beta testing and positioned to know how those fleets behave. Make sure the route models are proven, make sure the maintenance cost reductions are as promised, to make sure that the incremental cost of the unit is -- has the payback. Or more importantly in markets, can we put it in the rate base to make sure that we don't have stranded capital. So look, I think we're well positioned for all of the above. We try to lay that out in our sustainability report. I think this industry is very well positioned with regards to the opportunities that lay ahead with -- if there's a change in administration, for instance, as you point out. And so no, we feel quite good about how we're laying out our money, expected returns and more importantly, what it does with regards to broadening sustainability initiatives.

And Chris, just to add one point to what Worthing said about the landfill gas, the biogas project. It's not as though we need to pivot or accelerate something. We're actually -- we have a number of projects on the drawing board and are in conversation about them. And so to your point, if there's a more favorable environment, it just means you probably move forward more quickly on things that we're already planning to do.

A number of these conversations are years -- already years old. I mean, this isn't something you just wake up and say, "Hey, let's do this. " This is -- we've been at this for quite some time.

Yes. No, that was actually my point. I was like, it's kind of nice to -- everybody says let's go green tomorrow, but it takes some time to get done, right? So and you worry about the technology and how resilient it is before you apply it. So.

We just put -- I think we're probably one of the largest robotic orders in -- for our recycling facilities. To your point, we didn't run in at Version 1.0, we waited for Version 2.0 or later to make sure the technology is proven and we can get the kind of the payback that we're looking for with that kind of deployment.

And our next question comes from the line of Michael Hoffman with Stifel.

Someday, one of these days, somebody is actually going to pronounce the name of the firm right. Free cash flow. If we can come back to that. You've given guidance of 805 to 835 for this year, 778 now. 805 to 835, if I recall correctly, did not include the benefit of $40 million from the CARES Act. But did I understand your comment correctly, Mary Anne, the 778 has it in it from a reported standpoint at the moment, year-to-date?

That's correct, Michael.

Okay. So your intention is to still be inside your guidance or at the top end of it. So the expectation would be everybody should be prepared for the conversion rate in 4Q isn't going to be even 50%. Could [well] be less because you've got a lot of cash outflow things planned for fourth quarter.

That's a fair way to think about it, Michael, yes. That would be the math behind, still achieving what we said, we're positioned to exceed the 805 to 835. But so if you took the high end or just above that, and use that conversion rate, it would absolutely be below what we've demonstrated our ability to do this year, which says we are paying out more outflows in Q4. Yes.

Just apply 52%, the upper end of the 50% to 52% range to our year-to-date EBITDA plus our guidance, Q4 EBITDA, and you'll get a number above the 835, that was the prior upper end of our original range.

Right. And you've always talked about Worthing, are even getting credit for exceeding that number this year? So prepay everything you can, pull forward capital spending. So to that end, what is your revised view of cash flow from ops and capital spending for 2020?

It really depends on what we can take delivery of. I mean, we've already put another 20 million of orders out there for fleet and yellow iron. We're trying to take advantage of some units that fit our specs that are still sitting on some lots out there. If we can get that in there, that will be kind of a good -- a nice head start to the outlays for 2021. Obviously, taxes go up in Q4. There's another cash tax payment due middle of December. The size of that is hard to determine because, obviously, if that yellow iron and fleet comes in, that will increase the bonus appreciation. Acquisitions, if they get done prior to that date, that increases the deductibility of acquired CapEx. And so there are a lot of moving components in this thing. But what we know is that to your point, we can manage where we want to come out at year-end based on the flexibility that we have. It's a better conversation to have than asking, can you make your number?

Yes. No, I get that. I just -- you've given us a double-digit improvement year-over-year, 950, if I just use 10%, I'm at 865 is the starting number. But I'm also curious, like why not prepay the CARES Act instead of just having this lingering around in the numbers for 2 years?

We have a lot of flexibility to do a lot of things, Michael.

Okay. You were very clear about telegraphing for the market in 2020, how to think about the cadence of price and volume trends. And I know you don't have a guidance out, but is there anything that should be noted about how to think about cadence for '21? For instance, 1Q is ugly in volume, but 2Q is positive. So the first half kind of nets itself out. And then the second half is positive. Is that the right way to think about it? And then price -- sorry, go ahead.

Sorry I didn't mean to interrupt. I was going to say, yes, I mean that's just the way I would characterize the volume side. And as you'll recall, in kind of a typical year for us, pricing, the cadence is that on a reported basis, it always starts out high in Q1 and decreases over the course of the year. Just really relating to the size of the denominator and the timing of our price increases, which -- the majority of which are put in early in the year, mostly in Q1. So the 3.5% to 4% that Worthing talked about for price next year. If you started at the high end there and worked your way down to the lower end, that might be a fair way to think about the cadence for next year. And to your point, volumes are negative in Q1, turned positive with the easiest comp in Q2, right? And then you see that to the extent there's any reopening or improvement, more positive volumes in the back half of the year.

Okay. And then I'm less about the volume that I am sort of the total number of customer on the commercial side. Do I recollect correctly that in the Great Recession, if you take the '08 through, say, '13 before the housing cycle recovered, that the lost number of customers was approaching 5%. And that happened over a very long time, and you could absorb it very gradually. Are we looking at something like that, but just more compressed based on the level of recovered if it stops here? And accordingly, you'll adjust the business model, have to do it faster, but you'll adjust it like you did '08 to '13, improved productivity dramatically, you got a lot more pricing and so on and so forth?

Well, the adjustment is already in place, and I think you see the strength of the flow-through and the shape of the cost structure by just -- even at the current levels with 65% or so of the customers that have reached out in what, 55 or more percent of the revenue, you see a 200 basis point margin improvement year-over-year. So I think the performance is already there to see. You're right that in the Great Recession, it was about a 5% loss in revenue. I use -- we use revenue, not customer base but revenue. And again, you look at right now, you'll see the stats that we gave for this year. Look, the recovery that's plateaued right now, but for some markets that are still expanding. That's the jumping-off point for any further recovery within that customer base. But we've already kind of adjusted or adapted the shape of the business based on the realities that we currently have. We're not waiting to adjust the shape of the business.

All right. And that's what I was -- probably teased that out poorly. Is the point being is anything that happens from this point forward, is fine-tuning. You don't have to take another big swing to account for if that group never comes back?

Well, because of the shape of the structure, the cost structure of the business has already been adjusted for it. That's why you see as revenue comes back, such a high flow through.

Right. One of the correlations in the business has been at good household formation has historically driven new business formation. So I get it's early. But in places where it's healthier, so maybe some of the secondary markets, places like that, where they're longer in a cycle, are you seeing any empty storefronts starting to sit backfill? Is there -- because housing is very strong on a relative basis, we're at 1 million, 4 million or 4.5 million start. So it's a pretty healthy number.

Yes. Where you've had, what I would call the pandemic migration, so to speak, of -- out of some more densely populated areas into some more rural, kind of the 3 hour drive away from where you're currently living, as you've seen increased population settlements or resettlements in the near term, we have been seeing storefronts open, right? I mean, it's -- they're following the people, they're following the money. But it's a tough thing to say as a broad statement that business formation is going to follow household formation in general. Because right now, most of the household formations are just folks people moving from one home to another and deciding to reenroll -- or enroll their kids in school or do it remote from a far away place. And again, the economic activity that's followed those people is following and benefiting local businesses.

Okay. There's a little bit of hope there.

Well, it depends on where you live.

And our next question comes from the line of Walter Spracklin with RBC Capital Markets.

I'd like to start here with the contract, and we've gone through 7 months now since COVID started and you've negotiated a number of contracts, both in the commercial and residential side since then. And Worthing, I was wondering if you could tell us a little bit about the key differences between a contract negotiated since then and what would have been negotiated before. And if you could touch on a little bit and both in residential and commercial, is pricing discussions really altered in terms of getting them through for whatever reason, is the term changing at all versus what happened before? And then third, is the structure of the contract much different? I know you were making an effort to move residential over to a volume base versus per household. Is there any other examples of real changes in the contract and its nature in recent contract negotiations, versus what you would have done prior to COVID?

Walter, our approach to contract negotiations will reflect the period in which they're being negotiated. And those that are being negotiated right now obviously recognize that labor costs are going up, despite record unemployment as with essential workers and you've seen what we've done for our front line, that's rising labor costs. Obviously, right now, we're mindful of the shift that's already occurred into higher loads within the residential. That's impacting those residential contracts. Obviously, you've seen the increase in cost to handle more contaminated waste streams within the recycling side of the business. And so the cost of recycling has gone up and many of the contracts that are up for renegotiation were originally done back when China was still open and the cost -- and the profile and the shape of the recycling business was fundamentally different. And so a long way of saying that many of the contracts that are getting renegotiated or discussed now, the cost structure is fundamentally different than where it might have been 7 or 10 years ago. The type of fleet that is being asked for today versus what was running under the current contract, if you have to switch over a fleet, make it even more expensive. And so no, the dialogue is dynamic. It's reflective of the times that we're in right now. And you've seen, in many cases, easily double-digit increases in pricing because of those inputs. Commercial, right now, I mean that dialogue hasn't changed. You see the strength of the price that we have right now and especially the spread in the CPI, I'd say one of the biggest areas that we do well in is competing for accounts that have been poorly serviced, and we see those opportunities across multiple markets. And again, that's a tip of the hat to all of our frontline folks that show up every day and service their accounts and give us a good reputation in those markets and provide opportunities for our sales force to take advantage of that and gain share where possible.

That's great color. For my second question here, just turning a little bit to trends. You've highlighted a number of things that are cause for optimism, and I really hope that the reopening continues, recovery continues. But I'm seeing, obviously, with the new case counts in many jurisdictions, going up higher than they were when everything was shut down. Are you seeing any indications of policy change that would reverse some of those gains in certain jurisdictions that might, if they continue in others in the same type of trend, result in a backpedal here in terms of the reopening, any risk of that in your view from what you're seeing right up into the kind of the day to day -- right up to the minute kind of indications? And I know -- or is there things that are different, I mean schools, obviously, are opening now despite higher case count than when they closed. Is it just -- we've understood things a little bit better about how this all works, and we're taking a different approach than we did back in March?

Sure. I'd say we haven't seen it yet. In fact, October likely will play out a little better than we had originally expected to your point, in other words, we haven't seen a rollover in that. But certainly, the way we have guided the quarter, we have assumed that there may be some -- that it's prudent to stay cautious as we look ahead into November and December. We just haven't seen it yet in the numbers. I'd say the biggest -- right now, it's more operational, as I think about what, not worries me, but what we're mindful of, and that is, look, you hear it over the media about COVID fatigue or pandemic fatigue and our 18,000 plus employees need to stay vigilant and have -- in their operating procedures, in their attestations on a daily basis with regards to their health, with regards to showing up and working. Because, look, as you're seeing increases in positives throughout many markets, understand if for every 1 person that might test positive, if they were at the office, meaning if they're at their operating location, that impacts other people went through contract tracing. And in some markets where you see things pop high, 2 or 3 people that might pop high, might cause a quarantine of a number higher than that, which makes operations that much more challenging for our local folks. And the best thing we can do is remain vigilant, remind our folks about operating procedures, don't get COVID fatigue, don't get tired, don't relax your standards because I do think the next couple of months, 2 to 3 months, will be -- will be pretty widespread. And you've seen the numbers already pop. And so as long as we continue to do what we know how to do, our folks will be safe and attendance will still stay above 99%. But it's a constant reminder to our people to stay vigilant throughout this.

(Operator Instructions) Our next question comes from the line of Noah Kaye with Oppenheimer.

So I'll just keep mine to one. It follows right up on Walter's. Which is you've got -- obviously, there's a risk of rising cases again and what that might mean in terms of slowdown in activity or potential lockdowns. And so the question is, you had very strong margin performance in 2Q. I think you commented at the time, in some cases, activity bounced back so quickly in certain markets that you didn't really have time to put in structural cost changes. If we do go into a second lockdown, what might you do differently? Or how do you think you'll be better positioned to handle it?

Well, look, the best way to prepare for any restrictions is take care of your people. And look, we just announced a thank you bonus, an appreciation bonus ahead of the holidays for our people. That's $800 for more than 90% of the front line. If you joined us more recently, it may just be $400. But nonetheless, it's -- you lay that on top of supplemental wages that we've done through the year, emergency wages to keep people fully compensated even if they have to stay home for quarantine or child care or to take care of a family member, et cetera. Raising the minimum wage to $15 from a target standpoint to help those that may be below it to get up to that level. These are all things that you've got to do to position our people to strengthen their mental fortitude for the challenges that lay ahead. And by getting ahead with the thank you bonus ahead of the holidays, we felt that was another way to show the support, to get people steeled, so to speak, for what's ahead. And so if you focus on your people and you strengthen their commitment, their health, focus on their health, their welfare. Look, our people want to serve their communities. And to do that, they need to be positioned to stay healthy, to stay financially sound. And certainly, that's the way we're looking at kind of the next 2 to -- the challenges in the next 2 to 3 months, stay ahead of it in your support, don't lag it.

And Noah, just to follow up, you made reference to the fact that the nice incrementals as those volumes came back and the commentary around not having structurally really changed the business. That's actually a good sign. What it meant is that there was such a small reduction in volume that there really wasn't the need, or the opportunity, said another way, to do something like a reroute. So it's not as though it's an issue of not being prepared. The good news is most of the markets weren't that impacted. Clearly, not that we're looking for this. But in those more impacted markets, that's where you do make the changes and you actually make cuts. And so clearly, if that was the scenario, we would approach it the same way we have this time around.

And Mr. Jackman, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, Jason. Again, if there are no further questions, on behalf of our entire management team, we appreciate you listening to and interest in the call today. Mary Anne and I are available today to answer any direct questions that we did not cover that we're able and allowed to answer under Regulation FD, Reg G, our applicable securities laws in Canada. Thank you again. We look forward to speaking to you at upcoming virtual investor conferences or on our next earnings call. Stay safe and healthy.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.