GFL Environmental Inc.

Ladies and gentlemen, thank you for standing by and welcome to the GFL Environmental Q2 earnings call. At this time, all participant lines are on mute. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your speaker today. Patrick DiVici, CEO of GFL, please go ahead.

Good morning, and thank you for joining the call. I hope everyone is staying safe as we continue navigating through these unprecedented times. This morning, we will be reviewing the results for the second quarter of 2020. I will provide an overview, and then Luke Pelosi, our CFO, will take us through Q2 financials. We will also spend some time today to update you on what we are seeing in the current operating environment. But before I get started, I'll pass the call over to Luke, who will provide some disclaimers.

Thank you, Patrick, and good morning, everyone. Before we get started, please note that we have filed our earnings press release, which includes important information. The press release is available on our website. Also, we have prepared a presentation to accompany this call that is also available on our website. During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators. Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date, and we do not assume any obligation to update these statements, whether as a result of new information, future events and developments, or otherwise. This call will include a discussion of certain non-GAAP measures, and a reconciliation of these non-GAAP measures can be found in our filings with the Canadian and U.S. securities regulators. I will now turn the call back over to Patrick, who will start off on page three of the presentation.

Thank you, Luke, and thank you, everyone, for joining us. We are very pleased with the results that we are sharing with you today that continue to prove out the resilient growth profile of our business. In the face of significant impact on general economic activity resulting from COVID-19, we delivered the highest revenue, adjusted EBITDA, and adjusted EBITDA margins in GFL's history. We attribute our success in the quarter to three key factors. First, the revenue profile of our business. As we have said many times before, The larger proportion of revenue coming from our service-based collection activities yields a more favorable variable cost structure that we can flex in response to lower volumes. Second, that we generate almost two-thirds of our solid waste revenue in secondary markets. We typically saw less volume impact in the secondary markets as compared to the larger metro areas like Toronto and Montreal. Third, and most importantly, the dedication and capabilities of our employees to adapt to the changing operating environment. I am humbled by the performance of our operators in the face of these unprecedented conditions. Truthfully, Luke, myself, and the rest of the senior leadership team have largely been cheerleaders during the past few months. It is our almost 14,000 employees who deserve the credit for this successful quarter. Our top priority continues to be ensuring the health and safety of our workforce. The incremental risk management steps and the protocols we outlined in our first quarter conference call continue to prove effective in keeping our employees safe, and we are continuing to update them as we navigate the complex process of market-specific reopenings. I remain inspired by the dedication of our frontline workers, and I once again extend my sincerest gratitude to them. In addition to the strong performance of our base business during the quarter, we were also able to get back to the M&A front. In June, we announced that we have agreed to acquire the asset divestiture package resulting from the waste management and advanced disposal transactions. As we said in our announcement, we view this acquisition as a unique opportunity to significantly expand our U.S. footprint through acquisition of a highly quality, vertically integrated set of assets in both our existing and adjacent fast-growing U.S. markets. The asset package will also form a base for us to pursue synergistic token acquisitions while creating opportunities that we believe will allow us to realize meaningful synergies in earnings accretion over time. We have also restarted our tuck-in M&A activity, closing two small transactions in the quarter. We continue to maintain a robust M&A pipeline and will remain disciplined in our approach towards capital allocation. We have sufficient liquidity on hand to self-fund our M&A plans while maintaining leverage in line with our overall philosophy. And we continue to evaluate long-term financing opportunities as they present themselves. Turning to page four of the presentation, you will see a summary of the growth we achieved in the quarter. At the bottom left of the page, we have represented the flash April numbers we provided in Q1. And at the top left of the page are the figures for the entire second quarter. As we said in the first quarter, the impact from COVID on our financial results varied greatly by market and were largely dependent on the characteristics of the rules of the shutdown that were imposed in each specific market. In our solid waste business, 4.1% of incremental revenue from price was offset by 8.3% of negative volume, mostly attributable to reduced volumes in our commercial and industrial collection business. Volumes in our residential collection business held up very well in the quarter. The relatively lower proportion of revenues that come from our volume-based post-collection activities mitigated the overall revenue impact from lower volumes at our transfer stations and landfills in the quarter. We temporarily paused the majority of our pricing initiatives during the quarter as we continue to work to support our customer base during these unprecedented times. We believe in nurturing long-term relationships with our customer base in addition to working with our customers on service intervals and payment terms. We view the temporary pause in pricing as the right thing to do. We also experienced a negative CPI adjustment on one of our largest municipal residential contracts in the quarter. This particular contract has a pricing formula highly correlated to diesel pricing, which were significantly lower on the contract anniversary date, resulting in a negative price adjustment. Offsetting these price impacts was a higher net price for recycled commodities, largely driven by the sudden spike in OCC pricing that occurred at the beginning of the quarter. Looking at the reductions in volume in the quarter, the main driver was the timing and scope of regional shutdowns in each of the affected markets. We saw the greatest volume impacts in our Canadian primary markets where shutdown orders were put in place earlier, lasted longer, and impacted a broader range of businesses that we service. Volumes in our secondary markets, as where I said earlier, we generate almost two-thirds of our solid waste revenues were far less impacted. Looking at the two tables on page four of the presentation, you can see the indication of the trend we're seeing in volumes. The 8.7% organic decline in April was reduced by half for the quarter as a whole when you look at the underlying data. What you see is sequential improvements week after week and month after month. The service level decreases in suspensions that commenced mid-March and bottomed in mid-April have reversed and now form an encouraging trend line. July was better than June, and as markets continue to reopen and customers continue to reengage, we expect the trends to continue to move in the right direction. Again, with a degree of uncertainty that still exists around how the reopening of the markets will take place and whether a new round or partial new shutdowns will be required in the fall and in winter months, it is difficult to forecast with a great deal of precision what the future holds. However, based on the current trends, with each day that passes, we are emboldened in our cautious optimism. Once again, when you're thinking about how these revenue impacts translate to margins, there are a few points to consider. First is the revenue profile of our business, with a larger proportion coming from our service-based collection activities. As I said earlier today, what comes with this revenue profile is a highly variable cost structure. Our relentless focus on optimizing collection routes is improved asset utilization and productivity. Parking trucks and reorganizing our workforce across our service offerings and business lines has saved dollars while minimizing the disruption to our employees. Our safety stats have also improved, and our absenteeism is at all-time lows. We did incur incremental costs in the corridor for the enhanced safety and hygiene protocol that I described earlier, but those costs were more than offset by the enhanced productivity. All of these factors together with correspondingly lower disposal, R&M, and fuel costs that naturally flexed out with the lower volumes have continued to more than offset the impact of COVID-related volume reductions on our margins. The second point to consider is our focus on discretionary SG&A costs, where we eliminated substantially all travel and entertainment costs, and we postponed annual merit increases for salaried employees until Q4. We took these measures to avoid incremental headcount reductions and retain our highly engaged workforce to position us well for market reopenings. Finally, we have some macro tailwinds that have, and we believe will continue to mitigate impacts to margins. Commodity prices were up during the quarter with the blended basket price being 40% over the prior year. Pricing has since come down, but we are still sitting at levels of 20% above the prior year. Diesel costs continue to be at historical lows, which can negatively impact fuel surcharge revenues in certain residential pricing, but on balance provide the net margin benefit over the prior year. And finally, FX rates continue to provide a favorable margin impact by translating the relatively higher margin U.S. business into Canadian dollars at a higher rate. The result of all of this was solid waste margins of nearly 31% for the quarter, 180 basis points increased over the comparable quarter last year, and a result far in excess of our expectations. Looking at soil and infrastructure, the business continues to demonstrate the success of our strategy as we realize 3.7% organic revenue growth compared to Q2 of last year, despite the disruption from government-imposed COVID mitigation measures in the Canadian markets where we generate most of our revenue in the segment. While the substantial majority of our larger activity projects deemed essential and therefore were able to continue during the quarter, we saw lower volume for many of the small-volume, high-frequency solar remediation customers that we typically service, resulting from the temporary suspension of those customer solar remediation activities in response to COVID. With the market reopening, Being rolled out across these impacted markets, we've started to see much of that volume return, following a similar sequential weekly trend and monthly trend to what I described for our solid waste business. Consistent with what we reported during the first quarter, our liquid waste business was our most impacted segment during Q2. On the used motor oil collection side of the business, reduced volumes being generated as a result of COVID-related shutdowns continue to negatively impact revenues. Collected volumes were down 30% compared to the prior year, while volumes sold were down 45% or 30% after adjusting for a bulk sale in the prior period, reflecting reduced demand tied to the temporary suspension of certain customers' operations in response to COVID. While we anticipate the volume trends to continue improving in the back half of the year, we expect volumes to remain significantly below prior year as system-wide inventory levels take time to normalize. It should be noted that the current situation is entirely a volume story, as net UMO pricing is now flat to better than the prior year as a result of incremental charges for oil that are significantly higher this year than last. Regarding the core industrial service component of our liquid business, as we had previously said, many of our customers were deemed non-essential and had to temporarily shut down. While we have seen an increased level of customer engagement over the past two months, we expect that some of the customers will reduce spending on certain services as a part of the COVID mitigation measures, and these actions will continue to provide volume headwind in the back half of the year. On balance, while current data highlights continued substantial volume improvements, we anticipate the overall pace of the volume recovery in liquid waste to be a little bit more tempered than we are seeing in our solid waste and our soil business. I will now hand the call over to Luke to walk through in more detail the financial results for the quarter and then turn it over to the operator for questions.

Thanks, Patrick. Turning to page five, we've provided a summary of results by operating segment. In solid waste, core price and surcharges drove 3.7% revenue growth as compared to 4.9% in the first quarter of this year and 4.4% in the prior year comparable period. As we've told you, our pricing activities are front-end loaded and this year's plan anticipated a step down in pricing levels throughout the year. Obviously, the COVID-related disruptions were not in our original plan and our decision to temporarily suspend the majority of our pricing initiatives in an effort to support our small and medium-sized customer base during these challenging times impacted overall pricing. However, we expect these impacts will be temporarily in nature and we believe we still have a meaningful latent pricing opportunity within our legacy customer base. Overall, we continue to see pricing discipline in the industry and we remain confident in our ability to deliver on our stated pricing goals for this year and beyond. In addition to growth in core pricing, we realized an incremental 40 basis points tied to commodity prices, where we realized a blended basket price nearly 40% higher than that of the prior year, largely driven by the spike in OCC that occurred during the quarter. OCC prices have come down since their May peak, but current pricing remains above that realized in the prior year. Patrick walked you through the overall solid waste volume decline, but I'll give you a little bit more color on the components. Overall volume was down 8.3%. 80% of that decline came from IC&I collection, and the decline in IC&I collection in Canada was twice what we saw in the U.S. Again, recall that for the first 10 weeks of the year, volume was running positive 100 basis points or so, And we therefore view this volume decline as entirely a COVID-related impact. As Patrick said, however, the sequential trend line continues to move in the right direction. Solid waste adjusted EBITDA margin was 30.6% for the quarter, the highest margin we've ever reported and 180 basis point increase over the same period in the prior year. Obviously, a lot of moving parts in the quarter, but the key components of the margin walk include 110 basis point benefit from lower diesel costs and a 25 basis point benefit from higher commodity pricing. Offsetting these macro tailwinds were 50 basis points of decremental margin from incremental COVID safety costs, 30 basis points from incremental COVID-related bad debt expense, and a 40 basis point net drag from acquisitions. a decrease primarily attributable to Canadian tuck-in acquisitions that have yet to achieve their anticipated margin profile. Excluding these items, the base solid waste business drove nearly 125 basis points of organic margin expansion over the prior year, despite the decremental impact of COVID volume declines. A testament to the effectiveness of our team's ability to manage our cost structure through the volume decrease, as well as the positive impact of our previously communicated pricing and procurement initiatives, Looking at soil and infrastructure, the key message here is around the margin impact of the change in business mix. The volume impacts we saw were primarily related to our small volume, high frequency soil remediation customers, which typically generate highly accretive revenue due to the relatively fixed cost structure of our soil remediation facilities. We have started to see these customers return as markets reopen, and while there will likely be continued margin pressure in the third quarter, we expect the margin profile of the business will return to the historical trajectory in subsequent quarters. Our liquid waste business was the most impacted segment during the quarter. Patrick spoke about the changes to the top line, driven by a combination of lower sales volumes of UMO and a reduced activity in our core industrial services business. UMO selling prices were down approximately 30% across the network from approximately $0.30 per liter in the prior period to $0.20 per liter during the quarter. However, the net charge for oil was approximately $0.10 during the quarter compared to roughly nil in the prior period, resulting in a flat net selling price period over period. Collected volumes were down approximately 30% and volumes sold were down 45% or 30% when normalizing for a bulk sale in the prior period. Our commercial and industrial collection volumes were also down approximately 15% as many of our customers were deemed non-essential and had to temporarily shut down or reduce activities. Margin pressure in the liquid line of business was greater than our solid waste business due to our relatively less variable cost structure. Fewer collection vehicles and more fixed facilities yield a more sticky cost structure. Although we flexed nearly $9 million of operating costs out of the base business on a like-for-like basis, mostly around direct labor and vehicle costs, the cost flexed was less than the volumetric impact to revenue, and we realized margin compression as a result. We also realized COVID-related PP&E debt expenses that added another 100 basis points of pressure to margins. As volumes return, we anticipate achieving meaningful operating leverage as we realize the benefits of these structural cost changes. On page six, we've presented our income statement highlights, but I'm going to skip over that page and point you to the MD&A as posted on our website for an explanation of the period over period variances in the income statement. Therefore, turning to page seven, reported cash flows from operating activities were $132.2 million in the quarter as compared to $56 million in the comparable period of the prior year, an increase of 137%. Excluding the impact of transaction and acquisition-related amounts, cash flows from operating activities were $160 million. Looking at the bridge presented on that page from $160 million at the top of the table to $132.2 as the cash flows from operating activities, those are basically your adjustments to arrive at a free cash flow number. So if you deduct $116 million net CapEx for the quarter from that $160.2 million at the top of the table, you'd get an adjusted free cash flow of approximately $44 million. A couple of points to highlight here. First is the cadence of our interest payments on our current debt obligations. Our current run rate annual cash interest expense, inclusive of the most recent secured notes offerings, is approximately $275 million. However, the coupon payments on the bonds are concentrated in the second and fourth quarters of the year, with just under 40% of the annual cost incurred in Q2 and Q4, and just over 10% of the cost in Q1 and Q3. So there's a need for some straight lining when you're thinking about your models in this regard. The second item is around working capital. Our historical seasonality around working capital saw significant investment in the first half of the year and then a recovery in working capital in the back half. The diversification of the geographic breadth of our business together with active projects we are implementing around optimizing our working capital processes should see flattening of this curve and an overall recovery of some of the historical investment in working capital. Year-to-date investment in working capital stands at just over $80 million. which is slightly better than our original plan when normalizing for COVID-related volume losses. We are actively monitoring our credit exposures and collections remain strong. We did take an incremental $3 million charge for COVID-related bad debts during the quarter, primarily related to small businesses that we don't see returning. But we have not identified any material credit exposures in our book of businesses. We continue to actively manage our cash balances and pushing up AP balance at the end of the quarter. When thinking about the back half of the year, the original plan was to recover in excess of the first half investment and see working capital contribute positive $10 to $20 million cash flow for the year. Despite my comments about the strength of collections, given the uncertainty in the current environment, we think it's prudent to adjust these expectations to remaining flat for working capital for the year as a whole. We continue to see real upside opportunity in the area of working capital. We're just recalibrating expectations as to when those dollars will be realized. In terms of the cadence, the anticipated Q3 revenue increase as we rebound from Q2 will put pressure on Q3's working capital, so we expect Q3 to be close to flat when the majority of the second half recovery will be realized in Q4. One last point on working capital is we didn't realize the material benefit in the quarter from the various government relief programs have been made available. Although we have deferred current payroll taxes until 2021 in some of our U.S. businesses, which helps working capital of approximately $5 million. In terms of investing activities, as Patrick mentioned, in addition to announcing the pending acquisition of WMADS divestiture package, we closed two small tuck-in acquisitions in the quarter that, although were individually insignificant, were important in marking the return of our M&A tuck-in program. We continue to see a lot of opportunity and are excited to get back to work on our pipeline. On capital expenditures, we spent $120 million for the quarter and continue to evaluate where we should be investing for the remainder of the year. As we said last quarter, we identified approximately $100 million of discretionary replacement and growth capital within the original 2020 plan that could be eliminated this year if we need to. Since that time, we have identified an incremental $20 to $30 million of growth opportunities that we think make sense for this year. and as a result, currently sit with a view of $360 to $370 million spend on CapEx for the year. Our actual spend will depend on how things evolve over the rest of this year, as we still intend to capitalize on attractive opportunities that may arise. Cash flows from financing activities are primarily comprised of the new U.S. dollar $500 million four-and-a-quarter five-year notes we issued at the beginning of the quarter. Turning to page 8, we've presented a summary of net leverage at the end of the quarter. As a reminder, although substantially all of our long-term debt is denominated the U.S. dollar and is hedged to Canadian at fixed rates, for financial reporting purposes, our U.S. dollar denominated debt is revalued to Canadian dollars at the FX rate at the end of the period. During periods of foreign exchange volatility, we may realize non-cash foreign exchange adjustments on our balance sheet that are in excess of the foreign exchange fluctuations realized in our P&L. The foreign exchange rate was 1.36 at quarter end as compared to 1.3 at year end, a change that resulted in incremental $245 million of long-term debt recognized on our balance sheet. To facilitate a comparison of net leverage to the amounts that were presented as part of the IPO Roadshow, we have presented our quarter end long-term debt balances translated to U.S. dollars using the 2019 year end foreign exchange rate, which you can see in the middle column on that page yields a net leverage amount of just over four at the end of the quarter. When you think about how cash flow and leverage should play out over the balance of the year, we should incur an additional $140 to $150 million of CapEx and approximately $140, $145 million of cash interest costs in the second half of the year. If you layer on the conservative assumption of working capital ending the year as cash flow neutral, you get to a free cash flow number somewhere between $275 and $300 million for the back half of the year, depending on your views of where we end up in terms of EBITDA. Applying that free cash flow to the balance sheet would yield year-end leverage levels in the low fours of today's FX rate. The bridge I just walked through on free cash flow and leverage is excluding the impact of the WMADS transaction. We currently have sufficient available liquidity between cash on hand on our revolver to fund the transaction without securing incremental financing, and doing so would raise leverage levels approximately half a turn over the numbers I just walked through on a pro forma basis. We believe this outcome is consistent with our stated goals around leverage and does not preclude us from continuing to execute on our M&A. That's the review of the quarterly results for the period. And with that, I'll now turn the call over to the operator to open the line for questions.

At this time, we will be conducting our question and answer session. In order to ask a question, please press star, then the number one on your telephone keypad. In order to allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. You may then re-enter the queue for any additional questions. Your first question comes from the line of Hamza Mazari with Jefferies. Hamza, your line is open.

Hey, good morning. Thank you. My first question is just on pricing. I realize pricing was a bit weaker due to COVID. But how do you think about the sustainability of long-term pricing? Is it closer to 4.5%, 5% or is it closer to 3%, 3.5%? As you look forward in a normalized environment, I realize historically you were building route density focused on M&A and integrating assets. and then there was this little bit of a pricing catch-up, and, you know, we saw Q1 pricing very strong. How do you think about just normalized pricing, you know, going forward when we come out of COVID eventually?

Yeah, so good morning, Hamza. It's Luke. I think what we have said for our plan and our model going forward, we were targeting sort of 3.5% to 4% pricing. You know, we thought that was the right level and a sustainable level for for us to be able to continue on our volume growth expectations as well as achieve the pricing we need to sort of cover our internal cost inflation and drive the margin. So what we said is in addition to that, we had this sort of latent pricing opportunity that we'd be harvesting over the sort of 12 to 18 months, which would drive on the short-term basis pricing in excess of those levels, but really living in that sort of three and a half to four was where we wanted to play. So what you saw in Q1, was the rollover effect of last year's sort of latent catch-up opportunities, a lot of which was done in April of last year. We started harvesting across our Canadian legacy book of business. So you have the benefit of that, plus just regular way Q1 price increases for this year. Q2, as we mentioned, we paused a lot of those pricing initiatives in light of the sort of backdrop. And into Q3, we've continued to be very tempered. We have started implementing in certain situations, but still a more temperate approach. So I think what you're going to see, which is consistent with what we said in Q1, is throughout the year, the PIs would step down after the Q1 high of 4.9, and then the year somewhere in the 4s range. And again, going forward, when we look at our existing book, we think that's a sustainable level for the sort of midterm. Again, that's sort of 3.5% to 4% on a recurring run rate basis.

Gotcha. Very helpful. And my follow-up question, I'll turn it over, is I may have missed it, but could you talk about what you saw in July, either from a revenue perspective? I know you mentioned sequential activity increases, you know, since the April boredom. But just any color, what you're seeing in July in your markets, that would be helpful. Thank you.

Yeah, I mean, from our perspective, you know, there was – It's been an interesting chart to watch as we've sort of gone through this. As the shutdowns, you know, as things started opening up, we saw a fairly large spike in revenue, and then that sort of flatlined because there was sort of a bunch of pent-up work that needed to get done. And then things sort of tapered off a little bit, but then you sort of look at the trend now. The last sort of three weeks, you know, post, I would say, the July long weekend, We've seen the business significantly uptick and is trending much closer to budget than we've been for the whole year. So all signs are pointing in the right direction. I mean, there's a lot of noise in media, watching CNN and Fox News about what's actually happening in the world. But I can tell you on the street, You know, I think people are going about their life and trying to get back to normal as quickly as possible. But we are seeing those trends trend much closer to budget. Similar to what we saw through April through June, we continue to see those upticking closer to budget now for the last sort of three weeks from week 28 through 30.

Great. Great. Thanks so much, guys. Thanks, Thompson.

Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Walter, your line is open.

Thanks very much, operator. Good morning, everyone. I just want to focus a little bit on as volumes start to rebound, and you've seen that since April, have the incremental margins come in as expected, or are you seeing the need for additional costs to come back a little bit quicker? Is, you know, traffic levels on the streets causing some pressure there? Any of the things that might have artificially benefited you during COVID-19 from a cost perspective? Is there anything unexpected coming back on that cost view here as volumes return?

No, I mean, I think you'll see over time a little bit start creeping back in just because of the fact things are getting busier, but we've we've made our route so much more efficient today and parked so many trucks that that would be a sort of natural cadence that you'll start seeing some overtime creep back in. But other than that, listen, a lot of the costs we took out are, you know, it's our expectation that they will come back in a lot slower than the revenue comes back in. So I think, you know, this three months of, of sort of sitting and really looking at the business will benefit us. And like I said previously, I think we come out of this stronger than we went into it. So there will be some costs come, but I think the revenue is coming back much faster than some of those other costs.

Makes sense. And then turning to your tuck-in, you were indicating in your prepared remarks that you were reengaging your tuck-in program. What do you think is the limiter here? Is there a lot of interest out there? Has that picked up? Or selling interest, I mean. Or are you more mindful? I think your results have demonstrated that you can certainly tolerate higher debt levels through a cycle. How do you look at your balance sheet capacity and square that off with the willingness for sellers out there today?

Sure. So, you know, we got this question a lot when we marketed the IPO and, you know, investors are always concerned with leverage. And I think people ask the question, what happens in a recession? And I think we sat back and said, well, nothing could be worse than, you know, September of 2008. And I think what you've just seen is significantly worse than 2008 and a quarter. And I think what you're able to see is what we've been able to demonstrate is that Leverage didn't move in probably the biggest downturn that anyone's seen on this call. So I think when you look at the leverage perspective, that is the sort of case study of, you know, that leverage is not an issue for us. Again, like we've told investors, we'll maintain leverage and low to mid fours, lever up as high as mid fours for the right opportunity. We feel very comfortable with that. We continue to feel comfortable with that. the business, like we said, in the back half of the year is going to generate almost $275 to $300 million of free cash flow. And, you know, I turn my attention to, you look at where our debt's trading today, I think the repricing opportunity will continue to be something that sort of leads the way for us. I mean, our capital structure today, you know, our bonds and term loaner trading all sort of in the low threes to just above four. So, you know, I think as we continue to expand, it's a bit of a perfect storm for a company that has a defensible growth story. Number one, you know, we can protect our base earnings. And number two, we can finance M&A at very attractive prices today because of where, you know, the cost of capital has gone. So, you know, All of that, put that all in a blender, which leads us to sort of, as Luke said, re-engage on the M&A program. I will say equity will not be an impediment to us executing on our M&A program. You know, as I said on the calls previously, there's lots of people around the table that are interested in putting in equity for us to maintain certain leverage for the right opportunities. And when I look at our pipeline today, you know, I'm going to get a little more granular than I have in the past because of where we are. You know, I think we have it, let's start with the ADS transaction that we all talked about and had a call on. I think from the ADS perspective, you know, we are ready to hit the switch. From an integration perspective, we spent, you know, obviously the constructive relationship with ADS and waste management, we spent a lot of time on planning to make sure that this goes smoothly. We have a full roadmap to actually get this done from an integration perspective and we're just truthfully waiting to get the final DOJ sign off so waste management can close theirs and then we can close our transaction five days later with them. Offer letters are going out to all the employees this week and we're just gonna sort of be in a bit of a holding pattern until the DOJ gives their final stamp and their blessing for us to proceed with that transaction. And then beyond that, listen, you know, I bucketed into three different groups. We have the pipeline that, you know, diligence has largely completed, and I think when you look at that pipeline today, that's about $80 million of revenue of opportunities that exist that were in later stage diligence moving towards closing. And other stuff that sort of we have under LOI in early stage diligence, that's another sort of couple hundred billion dollars of revenue. that we're working through. And then, you know, as we talked about before, there was another large acquisition that continues to hang around that we continue to do diligence on, and it may be an opportunity in the future. So the pipeline is as full as it's ever been. I think, you know, with what we see today and the comfort we have from the base business through the second quarter, we're going to continue focusing on doing what we've done for the last 14 years, We've done 143 acquisitions to date, and we're going to do what this team has been set up to do, which is create shareholder value and deploying capital smartly to create shareholder value over the sort of long term. And I'm the biggest benefactor of that around this table, so I think from my perspective, we and the team feel very comfortable with where we are, and everybody's back engaged, and we're ready to continue moving forward. But That's what I sort of see today on the M&A program.

Okay, appreciate the color. Congrats on the great quarter.

Thanks, Walter.

Your next question comes from the line of Mark Neville with Scotiabank. Mark, your line is open.

Hi, good morning, guys. Great quarter. First, maybe just on the business itself, maybe you can just speak to some of these primary markets in Canada that sort of where they're at in terms of sort of getting back to budget or getting back to, you know, close to normal, whatever you want to call it. And then within the U.S., you know, again, we're seeing resurgence in certain states. Maybe we have some footprint. If there's any sort of impact or if you've seen any noticeable change in trends in those parts or regions of your business.

I mean, outside of, I would say, really Montreal, Toronto, and Vancouver – You know, the markets were far less impacted. I was, you know, I still look at the large private markets, Toronto, Montreal. I mean, Montreal, you know, is tracking actually 101% of budget through, you know, July. So again, they recovered. How much of that is sort of pent up and how much of that is pent up and, you know, are you going to see that little dip after the work gets done? I don't know, but it seems to be moving much, much better. I mean, Toronto, again, it's, again, a bit of a revenue mix. You know, we do a lot of work in the downtown core in Toronto. So, again, office buildings, et cetera. So that's been, I think, slower to come back, and I still think it's off, you know, 10-plus percent. And I think the same in Vancouver. We're still off sort of 10-plus percent. But, you know, as we enter into these phase three stages now and hopefully people start getting back out, that those are going to recover faster. And the secondary markets have largely been on plan for the last sort of six weeks. So I think we're moving in the right direction. Obviously, if there's incremental shutdowns that happen, we can't control that. But where we sit today, things are all trending right back to, you know, where we thought they would be.

Okay. And the U.S., sorry, the... Any impact from sort of a resurgence in certain geographies of COVID cases?

We're seeing a little. I mean, we're seeing a little bit on the sort of on the roll-off side of the business in the southeast. You know, the budget, you know, guys are still off sort of, you know, 5% to 6% on roll-off pulls. Commercial seems pretty stable and going well, but I think it's been fairly minimal in our U.S. operations today.

Okay, let's hope we can discuss one more. Luke, you gave a few numbers and bridges, one on free cash flow for the second half and one on just the margin impact and sort of the puts and takes through the quarter. If you could go through those or at least the free cash walk would be helpful. Thanks.

Yeah, so... Mark, in terms of the free cash flow, what I gave were the sort of components of the sort of costs. And, you know, we haven't come out and said EBITDA number, but, I mean, I think during the year pre-WM, you know, with the COVID reduction, people's numbers were sort of 1040 to 1050 of EBITDA for the year. So if you think about that as the number for the year, and then you've done 485 for the first six months, That's leaving you with the 555 to 565 of EBITDA to do in the back half before considering incremental M&A. So from that, if you take off 150 for CapEx, take off 145 for interest, if you assume working capital gets back to flat, which I think there's a little bit of upside on, but assume it gets back to flat for conservatism, that's when you add 80 in the back half of the year. And then, you know, deduct 50 for all the sort of other sort of loose ends, odds and sods. That's basically getting you to an adjusted free cash flow number for the back half of the year, somewhere between $275 and $300 million. Okay, okay.

So that helps. And so maybe just sort of see if I'm last. Patrick, you said 80 million revenue off our late-stage diligence. Yeah. Yeah, maybe just remind us sort of, for what you'd consider late stage. Just sort of curious how close or how far away they may be versus the couple hundred million at early stage.

Yeah, I mean, from our perspective, that's stuff that'll close over the next sort of two to three months. You know, could be quicker. I'm just taking the conservative that. And, you know, some of that other $200 million will close this year for sure as well. So I think, you know, we're very sort of well positioned. And like we talked about previously, you know, we talked about two larger opportunities. One's been done and there's potentially one other one. You know, we continue to work through that as well. So, you know, I think we're set up very favorably here. You know, when you sort of look at the numbers Luke just talked about and sort of look at some of the analyst consensus numbers for 2021, I'm sort of looking at what the consensus numbers are. showing like, you know, a billion 250 to a billion three of EBITDA for 2021. I think, you know, from our perspective, that number is very reasonable. And I think if some of this stuff crosses like we're talking about, the number will be in excess of that. But, you know, it'll be M&A dependent. But I think we're very comfortable with sort of the base business and where we are, and there's upside to the base business, as well as upside to the M&A case that, you know, we've discussed previously. You know, we've been conservative, you know, previous to this, but I think there's no reason to sort of sugarcoat it. That's, you know, that's what we're expecting. That's what we're seeing. And I think that's where you're going to see us deliver over the, you know, balance of the year and into sort of Q1 of next year. And I think we're just setting ourselves up very favorably for that.

Okay. That's very helpful. And, again, great job managing through this. Thanks, Mark. Thanks, Mark.

Your next question comes from the line of Michael Hoffman with Stifel. Michael, your line is open.

Hey, Patrick, Luke. Thanks for taking the questions. Morning, Michael. Morning, Michael. Morning. Morning. Can we circle back to pre-cash just so I make sure I'm hearing everything correctly? The 270 to 300 is the second half generation. So if I add the first, then I'm ending up at a three to three and a quarter, or is it the whole year, 275 to 300? I just want to make sure I understood that correctly.

Yeah, so Michael, the numbers I was giving was the second half of the year. My issue is normalizing of Q1 with the debt levels and the pre-delevering. It's just a little bit difficult for me to sort of normalize that. So the way I would think about a full year is if you take, let's just use the 1050 number of EBITDA, you have $360 million of CapEx. you have $250 million of interest. Now I'm saying 250 there versus the 280 because really the 280 of interest is burdened by the new debt to finance WMADS. 1050 excludes that. So like for like normalized, I would say I have a $250 million interest expense against the 1050 of EBITDA. And then another 50 for the sort of other odds and ends. So if you do that on a normalized basis, that's a number, I think that math gets you like 390 or 400. So Q1 is difficult to sort of normalize by itself. If you look at a normalized Q2, it's about a $45 million number, and then you're adding the back half at 275 to 300, and then you would add a normalized Q1, if that makes sense.

Yep, that was what I was trying to get at. You had talked about a $400 million number coming out of the year pre any ADS or the 80 or 200 million incremental contributions. So we're still on that 400 million run rate out of the year, and there's upside from 100 million of EBITDA from ADS and, you know, whatever you think you end up getting, 20 million from the other 80, another 50 million from the 200. Yeah, that's correct. That's the right way to think about it. Okay. Correct. On the PIs, What was the budget for 2Q before the world changed? And therefore, is the difference between the budget and the 3.7 how we think about what you did to be responsive to your customer?

Yeah, so the budget was low fours. I think it's important to understand that 3.7 is really a blend of the Canadian really driven by Toronto and Montreal. being low threes number and the U.S. business being mid fours number. So the U.S. business was largely on plan, a little bit off. The U.S. business, the budget was a high mid fours. And so it was really the Canadian business that was off. So that 3.7 would compare to a budget number on the blend, like I think it was 4.2. And so yeah, I think you can think of that delta as what we didn't do in, you know, in working with our customer base.

So that about 50 basis points, some of it's going to walk back through net normal sequential compression in the in the in the pricing anyway, because of things like CPI and the like.

Yeah, correct. You'll have some of that. I mean, part of it is driven. Yes. Yes, you're correct, Michael.

Okay. And then last one for me. At over $30 Canadian, are you at a price that the TSX would consider putting you in the big index?

I mean, there's no guarantees. I think, you know, I think. We'll, in TSX-60 inclusion, if we were going to be indexed, would come in December. You know, that's the next available entrance point for us, so we would know. I think, I don't know. It's probably a guesstimate, but I think we're guessing that potentially we would get TSX-60 inclusion in December, but it's not really a decision for us to make, someone else to make, but I'm I'm guessing with a $10 billion market cap in Canada that we probably will be included, but I don't know.

And that's a $4 to $6 million share of incremental buy to do that, right?

Yeah, roughly. I think, yeah, that's about right today. Okay, cool.

Thanks. Nice job. Thanks, Michael. Thanks, Michael.

Your next question comes from the line of Rupert Murr with National Bank. Rupert, your line is open.

Thank you. Good morning, guys. Morning, Rupert. So, Patrick, you gave us some color on the M&A pipeline. Wondering if you could give us an update on how COVID is changing the dynamic in M&A. How is it impacting your activity levels or pricing? And how are you managing through the pandemic?

You know, I'm a people person, so I like to get in front of people. And, you know, I find that always a more constructive way to get acquisitions done. You know, we've never been ones to sort of sit back and try and do it remotely. But, you know, that's been a, I would say that's been the biggest impediment, truthfully. It's just, you know, getting people mobile and trying to get people in the same room. So I would say from a valuation perspective, it's always, you know, trying to understand, you know, what the earnings were pre-COVID, what the earnings were during COVID, and what we think the earnings are going to be post-COVID, right, and what that expectation is. and coming up with an adjusted number that sort of makes sense, which is probably a hybrid of the two. From a multiple perspective, I haven't really seen much change. Yeah, there's been a few desperate sellers that, you know, have business models in specific regions that just aren't, you know, going to make it. So you buy that revenue, stick it on your back, and those will be highly accretive to us. But, you know, there's been a few of those. But I think largely managing M&A through the pandemic is just time. I just feel like everything takes more time today. because you can't get people together and it's just, it's harder to do things. I mean, we, you know, we have been doing environmental diligence, site visits, et cetera. It just takes more time to move those people around. And, you know, that's been the sort of biggest impediment. I don't, from an integration perspective and from a diligence perspective, it's all the same work streams, just taking more time. So that's what I think is the biggest impediment in managing through the COVID dynamic.

And is it causing you to look more at the U.S. than Canada today? Are things easier there, much like it is with your activities in the solid waste business?

I wouldn't say that. I mean, Canada, I mean, listen, Canada is a great place to be today given the number of COVID cases. So I think, you know, I think, you know, there's more angst around people traveling to certain parts of the U.S. just given sort of some of the outbreaks. But I think, you know, Again, as I've said before and I've said in the past, the number of acquisitions we do will probably still be more weighted to Canada, but they're significantly smaller than, you know, I would say the revenue weighting to the U.S. So, you know, 60% of our deals will probably still get done in Canada, you know, 40% in the U.S., but on a volume and a revenue basis, you know, it will be significantly more weighted to the U.S. just given the size of the opportunities in the U.S.

Great. I'll leave it there. Thank you.

Your next question comes from the line of Adam Wyden with ADW Capital. Adam, your line is open.

Hey, guys. Congratulations on a great quarter. I just kind of wanted to sharpen your answer on the M&A pipeline. I guess the last few years, and you guys have done very quickly, obviously, I guess you went from zero to whatever, billion three in 13 years. The last couple of years, you've been averaging about 150 to 200 million US dollar EBITDA. Now, obviously, the COVID has slown down the M&A pipeline for all businesses, I guess, with the exception of the internet. So obviously, the pipeline you have today is probably not necessarily reflective of kind of a pipeline in a normalized year. I mean, Can you try and edify, like, if you think that it's possible that you could do $125, $150, $200 million of U.S. dollar EBITDA, you know, kind of for the intermediate term once things kind of normalize in terms of M&A?

Yeah, I mean, I don't know if I'd characterize it as this. I think we had a pause, but if you take into consideration the sort of waste management acquisition at, you know, called $95 to $100 million of EBITDA And then later on, the other opportunities I'm talking about, I think, you know, you get back to that number. So this year I think will be another outsized year. You know, anything is possible. I think from our perspective, you know, like I said, we've acquired between 100 and 200 million of EBITDA a year for the last, you know, as we've said, the last three, four years. So is it impossible? No. Is it very possible? Yes. I mean, we haven't modeled that because we've taken the under-promise and over-deliver approach. But from our perspective, you know, that's what we've done in the last four years. So, no, I don't think that's a stretch.

Okay. Let me follow up with something else. So, I just, you know, obviously a lot of the waste management companies have already reported. So, you know, I've had the benefit of being able to kind of brief through, you know, the analyst reports and, You know, I think, you know, obviously you have Casella and Waste Connections as kind of the closest comparables from kind of a business mix perspective. But, I mean, I'm thinking of one analyst report in particular has a 35 times 2021 free cash flow estimate as a kind of a target price. If you look at the consensus numbers for this specific company, Casella, Casella is trading at roughly – 40 times levered free cash flow. So if I, if I kind of, you know, back out kind of free cash flow in Canadian dollar, uh, of roughly 600 million in 2021, and then obviously going to 700 plus in 2022, I put a, uh, a 40 multiple, uh, on 600. That's, that's 24 billion Canadian. And I, I own the, I own the Yankee stock, right? But if I put, multiply that by 71, uh, 71 cents on the dollar, that gets me to a 17 billion U.S. dollar market cap divided by 314 million shares. That's roughly a $55 stock. I think I'm doing my math right. and obviously more going forward, you know, as you kind of get the benefit of a full year of refinances into 2022. How do you think about that disconnect? I mean, you know, Casella is taking them 30 years to get to $150 million of EBITDA, and you've effectively gone in 13 years from zero to $1.4 billion in Canadian, and clearly, you know, you're not stopping. You know, you did the advanced disposal deal. You obviously... are on the hunt for these hundred plus million dollar EBITDA deals. I mean, what do you think is going on? I mean, what is it that the sell side likes about Casella, you know, that they don't like about you? I mean, you're doing it. They're just kind of doing nothing. They're telling people they're going to stop doing it. Yeah.

I mean, I said this in the past. I can't control the stock price and I can't control what other people write about the company. What I can do is control how we operate the company and and how we create significant amount of shareholder value over the sort of foreseeable future. I mean, this is a marathon, not a sprint. So from my perspective, where I sort of sit today, I think it's getting people comfortable with our business and with our business model. We're new to the public markets. I think over time, as we continue doing what we say we're going to do, I think, you know, it's taken them 30 years to trade at, you know, 18 to 20 times EBITDA, right? And, you know, we all aspire to be Casella and Waste Connections. I'm sure everybody on this call wants us to be Casella and Waste Connections. And between you and I, I want to be Casella and Waste Connections. And I think we have that ability to do that. I think our business model, as we've shown, is resilient and We know how to do M&A, so you have a resilient growth file with a great sort of M&A backdrop. But I think, I mean, just to touch on a couple of things, 2021, you know, I think $600 million of free cash flow in 2021 would be aspirational. I think it's, you know, 500 plus, you know, and then as you sort of work through the refinancing and you bring down interest costs, you pick up another 40 to $50 million going into 2022. So I think there's, uh, you know, significant upside to that by the end of 2022 and we can refinance out the entire capital structure, you know, but I think, you know, relatively quickly you get to 700 plus million. So I think you're, you're right. I think, but you know, we need to prove to the public markets that, you know, we can continue doing what we've done and we can continue demonstrating, uh, a free cash flow profile, the resilience of the business and continued margin expansion. And we will, we'll get there. I mean, I think you look at it. Yeah. I think today is, is the stock, you know, very well priced. I would say probably yes. I mean, it's, you know, trading at, I mean, I'm looking at a sheet here where we're sort of trading, you know, call it 11 and a half times, sort of 2021, 11 and a half to 12 times. And yeah, there's a big gap between us, between Cassell and Waste Connections, but yeah, They've been around a long time, and I think we aspire to be them. I think, you know, as the equity investors continue trusting us, we will. I mean, I think the one material thing I would point out, again, to you and others, is that I have hundreds of millions of equity in this. So for me, this is a capital appreciation play. This isn't, you know, Patrick trying to make a salary and a bonus and keeping a job for the next 15, 20 years. I want my capital to appreciate alongside each and every one of yours. So, you know, everything we do is with that mindset and that backdrop that has been the last, you know, 14 years. And we've made a lot of investors over the years, a lot of money, and we anticipate that we'll do the same for each one of you guys. So that's where, you know, that's all I can really say. I don't really... have any specific views on what people write about it or why it trades where it does, but over time, we will continue proving ourselves, and that multiple will continue to expand.

Good. Well, look, I think you guys have done an excellent job, and I think if you look at the cadence of Casella's results over 30 years, clearly the results have improved materially over the last four to five, but I mean, I think if you look at the the kind of the compendium of the last 30 years, I think you guys have done a lot more in 14 than they've done in 30. So maybe they should aspire to be you and you should trade at a higher multiple than them. But that's for everyone else to decide, not me.

Well, maybe we've got to give you a job in IR because you're pretty good at them.

All right. Take it easy, guys. Thank you.

Your next question comes from the line of Keith Rosenblum with Cruiser Capital. Keith, your line is open.

Hi, guys. When you offer Adam Wyden that IR job, let me know. He's a very good analyst. Guys, I wanted to ask a question for those who aren't as familiar with the Canadian rules in terms of what your growth path can be in terms of acquiring other businesses there. Are there Hart-Scott-Rodino issues? issues in Canada in terms of what market share you can be that may limit your growth at all? And when you want to bump up against those?

Yeah, I don't, we won't, I mean, again, so think about the Canadian market, $10 million market, big three control 30, 35%, 60, 65% is fragmented. Our equivalent of the Hartscott-Rodino HSR file is called the Competition Bureau in Canada. Competition Bureau of Canada only reviews transactions that are more than $95 million of enterprise value today. So I would say 99% of what we do in Canada is less than $95 million of enterprise value. So we won't or shouldn't bump into that issue moving forward.

Also, when you look in the Canadian versus the U.S., a lot of the U.S. focus of HSR tends to be around landfill concentration and private ownership of landfills. In Canada, a lot of the M&A and the secondary markets, these are disposal neutral markets where the municipality or county or regional authority owns the landfill. So that's also just a very sort of different dynamic when you think about it.

That's very helpful. That's very helpful. Guys, thank you. You just keep delivering on what you say you're going to do. Thanks a lot.

Thank you.

Gentlemen, your final question comes from the line of Brian McGuire with Goldman Sachs. Brian, your line is open.

Hey, good morning. Thanks for squeezing me in. Just a couple of questions. I was wondering if you could comment on the churn rate you're seeing, whether it's bankruptcies or customers defecting, just sort of what trends you're seeing there. I know we saw one of the larger peers talk about kind of an all-time low on that rate. Just wondering if you're seeing similar trends and then Sort of related to that, what are you seeing on DSOs and collections? I know you said you took a little bit of a charge for bad debt. It doesn't sound like much, but are you seeing any change in trends there?

Churn has been status quo. Commercial and clearly residential, residential less. I mean, churn on the commercial has been, you know, still sitting at this sort of 6%, 7%, 8% range. It's been pretty low. I just don't think people have been active or during COVID are too focused on switching service providers. So I think that's consistent with what we're seeing today. And, you know, from a working capital perspective and collections, I mean, Q2 was, you know, we weren't sure what to expect, but it was, again, you know, on plan with expectations. So, yes, we did take a little bit of a charge and a provision for some incremental bad justice to be prudent, but, you know, nothing sort of out of the ordinary today with Luke, you know, You think differently?

No, Brian, as Patrick said, you know, obviously concerns around collection. There's a little bit of softness in Toronto and Montreal, which is where the majority of that bad debt provision has been taken. But again, some of the friction is just driven by people not being in the office and just still the complexities of working remotely because we see what used to be big collections on June 30th coming in sort of early July. So I think where we sit right now, we don't anticipate a material drag on the sort of bad debt side, but obviously an area that we're actively monitoring.

Okay. And then just one on some of the recent M&A that you were able to complete before the pandemic broke out, the county waste and the like. Can you just comment on how the integration of those has gone? surprises or are things generally just going along with your expectations there?

I'd say along with the revised expectations associated with COVID and what I mean by that is we paused on bringing them on to some of our financial systems just because in doing so we like to have our boots on the ground training With folks there, we feel that yields the best results, and so we've paused some of that and are just translating their results from their system into ours. But operationally in the plan and the integration from an operational perspective, I'd say has gone completely as expected. Some certain outperformance, particularly when we started thinking about what the COVID-related adjustments should have been for those businesses. So I think very... very pleased with how that's come together in the face of the COVID-related disruptions.

Okay. And, Luke, I think I heard you say that the lower diesel costs, I think you said there were 110 basis point benefit for margins year over year. Is that right? And just remind me how long you get to keep that forward. I think on the residential contracts you keep it for some time, but commercially you pass it through pretty quickly. Is that right?

Well, I mean, that's part of it. If you think about where some of our relating pricing opportunity in Canada is, you know, around surcharges and customers we don't have surcharges with. So, meaning, you know, you're not getting the surcharge, but you're also not necessarily passing it back. So, yeah, it was 110 basis points for the year benefit. On those residential contracts that, you know, reset at their anniversary date, yes, you'll give some of that back. but on balance if you think about the residential book of business if we have a billion dollars of residential revenue you have a large subscription book of business in the US you have a bunch of US contracts that have been decoupled from CPI so you're left with call it $400 million or so of revenue that really has a sort of true CPI type link. And so I think on balance, the lower diesel costs, I mean, today we're sort of 30% less on diesel year over year, on balance is still a net benefit. But yeah, as you get the resets, you will give some of that back.

Okay. Good luck closing the deal and good luck in the quarter.

Thank you, Brian.

This concludes our question and answer session. I will now turn the call back over to Patrick DiVigi for closing remarks.

Thank you, everyone. I look forward to speaking with you in the near future. Thanks. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.