Q2 2020 GFL Environmental Inc Earnings Call
Thank you for your patience.
[music].
Ladies and Gents then they keep it anytime [laughter] G.S.L. 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 speakers presentation. There will be a question and answer session.
Can you ask the question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn the call over to your speaker today, Patrick to Beachy CEO of GFL. Please go ahead.
Good morning, Thank you for joining the call I hope everyone is think savings. We can continue navigating through these unprecedented times. This morning, we will be reviewing results for the second quarter of 2020.
I will provide an overview and then loopholes here she or he will take us through Q2 financial [laughter], we will spend some time today to update you on what we're seeing the current operating environment, but before I get started I'll pass the call over to lean could provide some disclaimers.
Thank you Patrick and good morning, everyone before we get started please note that we filed our earnings press release, which includes important information. The press releases available on our website also we have prepared a presentation to accompany this called is also available on our website. During this call will be making some forward looking statements within the meaning of applicable Canadian in U.S. securities laws, including state.
Month regarding events or developments that we believe we 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 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 and U.S. securities regulators I'll now turn the call.
Back over to Patrick who will start off on page three of the presentation.
Thank you Luke and thank you for everyone for joining us [noise].
We're very pleased with results that we're sharing with you today that continue to prove out a resilient growth profile of our business in the face a significant impact on general economic activity, resulting from Cobank team, we delivered the highest revenue adjusted EBITDA and adjusted EBITDA margins in GFS history.
We attribute our success in the quarter three key factors first the revenue profile of our business as we've said many times before the larger proportion or revenue coming from our service bays collection activities yields a more favorable variable cost structure that we can flex in response to lower volumes second we gena.
Great almost two thirds of our solid waste revenue in secondary markets. We've typically saw last volume impact in the secondary markets as compared to the larger metro areas like Toronto in Montreal.
Third and most importantly, the dedication and capabilities of our employees to adapt to the changing operating environment.
Im humbled by the performance of our operators in the face these unprecedented conditions truthfully Luke myself from the rest of the senior leadership team have largely been cheerleaders during the past few months.
It is our almost 14000 employees, who deserve the credit for the successful quarter.
Our top priority continues to be ensuring the health and safety of our workforce incremental risk management staff and the protocol, we outlined in our first quarter conference call continue to prove effective in keeping our employee safe and we're continuing to update them as we navigate the complex process of market specifically openings I remain inspired by the dedication of our frontline workers.
And I once again extend my sincere gratitude to them.
In addition to the strong performance of our base business. During the quarter. We were also able to get back on to the M&A front in June we announced that we've agreed to acquire the acid debenture package, resulting from the waste management in advance of formal transaction.
As we said in their announcement, we view this acquisition has a unique opportunity to significantly expand our us footprint through acquisition of a high quality vertically integrated set of assets in both our existing and adjacent fast growing use markets.
The asset package will also for the base for us to pursue surgeon synergistic tuck in acquisitions, while creating opportunities that we believe will allow us to realize meaningful synergies and 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 we'll remain disciplined or 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 lots of the page we have represented the Flash April numbers, we provided in Q1 and at the top left of the page or the figures for the entire second quarter.
As we said in the first quarter the impact from coal bid on our financial results vary greatly by market and were largely depend on the characteristics of the rules of the shutdown that were opposed 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.
Relatively lower proportion of revenues that come from our volume based pulls collection activities mitigated the overall revenue impact from lower volumes at our transportation's and landfills in the quarter.
We temporarily pause the majority of our pricing initiatives during the quarters, we continue to work to support our customer base. During these unprecedented times.
We believe and nurturing long term relationships with our customer base. In addition to working with our customers on service intervals or payment terms, we view the temporary pause and pricing as the right thing to do.
We also experienced the 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 southern spiking ULCC 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 shutdown that each of the affected markets. We saw the greatest volume impacts in our Canadian primary markets, where shutdown order book for place earlier lasted longer and impacted a broader range of businesses that we service.
Volumes in our secondary market does 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.
2.7% organic decline in April was reduced by half for the quarter as a whole when you look at the underlying data.
What do you see a sequential improvements week after week in month after month.
The service level decreases and suspensions that commenced mid March in bottomed in mid May April have reversed and now form an encouraging trend line.
July was better than June and if markets continue to reopen and customers continue to Reengage, we expect the trend to continue to move in the right direction.
Again with the degree of uncertainty that's still exists around how the reopening of the markets will take place in weather, a new round or partial new shutdowns will be required in the fall and winter months. It is difficult to forecast with a great deal of precision what the future holds however, based on the current trends what each day that passes we are building in our cautious off.
Ism.
Once again, when you're thinking about how these revenue impact translate to margins. There are 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 the highly variable cost structure.
A relentless focus on optimizing collection rates improved asset utilization and productivity.
Parking trucks and reorganizing our workforce across our service offerings and visit line has saved dollars, while minimizing the disruption to our employees.
Our safety stats have also improved at our absenteeism as an all time lows, we did incur incremental costs in the quarter for the enhance safety and hygiene protocol that I described earlier, but those costs were more than offset by the enhance productivity.
All of these factors together with correspondingly lower disposal, our Nam and fuel costs. The natural reflects down with the lower volumes have continued to more than offset the impact of cold cold and related volume reductions on our margins.
The second point to consider as our focus on discretionary asked unit costs, where we eliminated substantially all travel and entertainment cost and we postponed annual merit increases for salaried employees until Q4.
We took these measures to avoid incremental headcount reductions in marine retain our highly engaged workforce to position us well for market Reopenings.
Finally, we have some macro tailwinds that have and we believe we'll continue to mitigate impact 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 cost continued to be at historical lows, which could 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 us business into Canadian dollars at a higher rate.
As of last year, despite the disruption from government imposed Colby mitigation measures in the Canadian markets, where we generate most of our revenue in the segment.
While the substantial majority of our larger activity project essential and therefore, we are able to continue during the quarter. We saw lower volume for many of the small volume high frequency soil remediation customers that we typically service, resulting from a temporary suspension of those customer saw remediation activities in response to cogan.
With the market Reopenings.
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 segments during Q2.
On the years more oil collection side of the business reduced volumes being generated as a result of co bid related shutdowns continued to negatively impact revenues collected volumes were down 30% compared to the prior year, while volume 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 Covance.
While we anticipate the volume trends to continue improving in the back half the year, we expect volumes to remain significantly below prior year system wide inventory level take time to normalize it should be noted that the current situation is entirely of volume story.
Net you more 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 according to industrial service component of our like a business as we had previously said many of our customers were deemed non essential had a 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 of our services as a part of the.
Cobot 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 sequential volume improvements we anticipate the overall paid to the volume recovery in liquid waste to be a little bit more tempered than we're seeing in our solid waste in our soil business I will now on the call over to Luke to walk through in more detail.
The other 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 pricing 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 our front end loaded in the future.
Plan anticipated to step down in pricing levels throughout the year.
Lastly, the Kobin 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 temporary in nature and we believe we still have a meaningful late in pricing opportunity within our like.
Yes, the customer base overall, we continue to see pricing discipline in the industry and we remain confident in our ability to deliver on our stated bracing goals for this year and beyond.
In addition to core in addition to growth in core pricing, we realized an incremental 40 basis points tied the commodity prices, where we realized a blended basket price nearly 40% higher than that of the prior year largely driven by the spike in LTC that occurred during the quarter Onecc prices have come down since the 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 Eni collection and the decline in IC Eni 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 is entirely a coded 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 those 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 coded safety cost.
30 basis points from incremental coded related bad debt expense and a 40 basis point net drive 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 detrimental impact of coated volume declines a testament to the effectiveness of our team's ability to manage our cost structure.
Through the volume decreased 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 impacted the changing 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 slow remediation facilities, we have started to.
These customers return as markets reopened 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 most impacted segment during the quarter.
Patrick spoke about the changes to the topline driven by a combination of lower sales volumes of Umo and a reduced activity in our core industrial services business.
You most selling prices were down approximately 30% across the network from approximately 30 cents per leader in the prior period to 20 cents per liter during the quarter. However, the net charge for oil was approximately 10 cents during the quarter compared to roughly nil in the prior period, resulting in a flat net selling price period over period.
Elected 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 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 a relatively less variable cost structure fewer collection vehicles and more fixed facilities yield a more sticky cost structure, although we flex nearly $9 million of operating costs out of the base business on like for like basis, mostly around direct labor and vehicle costs.
The cost to flex was less than the volume metric impact to revenue and we realized margin compression as a result.
We also realized kobin related peaking in bad debt expenses that added another 100 basis points are pressured margins.
As volumes return, we anticipate achieving meaningful operating leverage as we realize the benefits of the structural cost changes.
On page six we presented our income statement highlights, but I'm going to skip over that page in point you to the Mdna adds posted on our website for an explanation of the period over period variances an income statement.
Before 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 flow from operating activities were $160 million.
Looking at the bridge presented on that page from $160 million at the top of the tables 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 a $116 million net capex for the quarter from that 160.2 million of the top of the table you'd get adjusted free cash.
Actual 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 annual cost incurred in Q2.
In Q4, and just over 10% of the cost in Q1 in Q3, so theres 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 the 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 seek 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 corporate related ball.
During losses, we are actively monitor our credit exposures and collections remains strong we did take an incremental three millions of dollars charge for Colgate related bad debts during the quarter, primarily related to small businesses that we don't see returning but we've not identified any material credit exposures in our book of businesses.
We continue to actively manage our cash balances and pushing up 80 balance of ended the quarter.
When thinking about the back half the year. The original plan was to recover in excess of the first half investment and see working capital contribute positive $10 million to $20 million cash flow for the year. Despite my comments with 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 years a hole.
We continue to see real upside opportunity in that 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 didnt 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 us businesses, which helps working capital of approximately $5 million.
In terms of investing activities as Patrick mentioned in addition, announcing the pending acquisition of Wmds divestiture package. We closed two small tuck in acquisitions in the quarter that although we are individually insignificant. We are important in marketing 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 in 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 million to $30 million of growth opportunity.
Is that we think makes sense for this year and as a result currently sit with a view of 360 $370 million to $70 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 for in a quarter five year notes, we should the beginning in the quarter.
Turning to page eight we've presented a summary of net leverage at the end of the quarter as a reminder of a substantially all of our long term debt denominated in us 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. The ended the period during periods of foreign exchange volatility we may real.
As noncash foreign exchange adjustments on our balance sheet, there in excess of for foreign exchange flush fluctuations realized in our piano.
The foreign exchange rate was 1.36 at quarter end as compared to 1.3 at year end a change that resulted in incremental.
The $5 million of long term debt recognized on our balance sheet.
To facilitate a comparison of net leverage the announced that were present as part of the IPO Roadshow, we have presented our quarter end long term debt balances translated to US dollars using the 2019 year end foreign exchange rate, which you can see in the middle column on that page yields the net leverage amount of just over four at the ended the quarter.
When you think about how our cash flow and leverage should play out over the balance of the year.
We should incur an additional $140 million 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 with yields year end leverage levels in the low fours at today's FX rate.
The bridge I, just walked through on free cash flow and leverage is excluding the impact of the wmds 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.
Thats the review of the quarterly results for the period and with that ill now turn the call over the operator to open the line for questions.
At this time, we will be conducting our question and answer session in order to ask your 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 question.
Question with one related follow up you May then reenter the queue for any additional questions. Your first question comes from the line of hands from is already with Jefferies. Your line is open.
Hey, good morning, Thank you.
My first question as I, just just on pricing.
I realize.
Pricing was weaker due to do to covered.
Hi, how are you thinking about sustainability.
Long term pricing.
It is closer to four and a half 5% or is it closer to.
Three three and a half percentage as you look forward in a normalized environment I realize historically Youre building route density focused on M&A and integrating assets and then there was this a little bit of a pricing got shop, and we saw Q1 pricing very strong how do you think about just north.
Realized pricing.
Going forward when we come article that eventually.
Yes, so good morning hands as Luke.
I think what we've said for our plan in our model as going forward, we were targeting sort of three and a half the 4% pricing we thought that was the right level of and sustainable level.
For us to be able to continue on our volume growth expectations as well as achieved 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 have that sort of late pricing opportunity that we'd be harvesting over this way to 12, 18 months, which would drive on the short term basis price.
I think in excess of those levels.
But really living in that sort of three in App to four ways was where we wanted to play. So what you saw in Q1 was the rollover effect of last year's sort of late and catch up opportunities lot of which was done in April of last year, we started harvesting across our Canadian legacy book of business see the benefit of that plus just regular way Q1 price increases for this year.
Sure.
In 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 tempered approach. So I think what youre going to see which is what we said in Q1 is throughout the year. The pie is would step down after the Q1 high of four nine and end the year somewhere in the four is range.
And again going forward when we look at at our existing book, we think Thats, a sustainable level for that sort of mid term again that sort of three and a half the 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 part, but what could you talk about working you saw in July either from a revenue perspective, I know you mentioned sequential activity increases since the April bottom, but just any color worked on what youre seeing in July in your markets.
Very helpful. Thank you.
Yes, I mean from our perspective there was.
It's been an interesting chart to watch as we sort of gone through the inside the as the shutdowns start things started opening up we saw a fairly large spike.
In revenue and then that sort of flat line, because there were sort of a bunch of pent up work that needs to get done and then things sort of paper off a little bit, but then you sort of look at the trend now so last sort of three weeks post elevated July long weekend, we've seen the business significantly.
Okay and is trending much closer to budget than we've been for the whole year. So.
You know all signs are pointing in the right direction I mean, there's a lot of noise.
And media.
Launching CNN and Fox news about what's actually happening in the world, but I can tell you on the street.
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 and we continue to see those upticking quotient a budget now for the loss or three weeks when we 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 well, Sir Your line is open.
Thanks, very much operate and good morning, everyone.
Just wanted to focus a little bit on as volumes start to rebound and you've seen that since April.
Incremental I mean has there been.
The incremental margins come in them.
Expected.
Are you seeing the need for additional costs to come back a little bit quicker.
Traffic levels on the streets, causing causing some pressure there any other things that might artificially benefited Q. During copel 19 Cross perspective is there anything unexpected coming back on that cost view.
No I mean, I think you'll see over time, a little bit start creeping back end just because of the fact things are getting video, but we've we've made our route so much more efficient today in park. So many trucks that that would be in sort of natural cadence. So you'll start seeing some overtime creep back in but.
Other than that lives and a lot of the costs, we took out our.
It's our expectation that whether they will come back in a lot slower than the revenue comes back in so I think.
This three months of.
Sure I was sitting and really looking at the business, who will benefit action like I said previously I think we come out of this stronger than we went into it so.
There'll be some costs come but I think the revenues coming back much faster than some of those sales over the comps.
Okay, and then turning to your tuck in.
Indicating in prepared remarks.
Gauging tuck in program.
What do you think what do you think is preliminary here is there a lot of interest out there has that picked up showing interest I mean.
Or are you more mindful and make your results demonstrated that you can.
Alright higher debt levels through the cycle.
How do you look at your balance sheet capacity square that off with.
Willingness for for sellers out there today.
Sure. So we got this question a lot when we marketed the IPO and.
Investors always concerned with leverage I think people asked the question what happens in a recession and I think we.
Hi back its involve nothing could be worse in September of 2008.
And I think what you've just seen is significantly worse than 2008 in the quarter.
I think what you're able to see is what we've been able to demonstrated that leverage didn't move in probably the biggest downturn that anyone seen on this call.
So I think when you were going to leverage perspective that is this sort of case study of so.
That leverage is not an issue for US again like we told investors, we will maintain leveraging low to mid fourth lever up as high as mid fours for the right opportunity.
We feel very comfortable with that we continue to feel comfortable that the business like we said in the back half of the year is going to generate almost $275 million to $300 million of free cash flow.
No I turn my attention too.
You look at our where our debt trading today I think there repricing opportunity, we'll continue to be something.
That sort of leads that leads the way for our affirming our capital structure today.
Our bonds in term lower trading all sort of been below three used just above four.
So you know I think as we continue to expand its a bit of a perfect storm for a company that has.
The defensible growth story number one we can protect our base earnings and number two we can finance M&A at very attractive prices today, because of where the cost of capital has gone. So you know all of that put that on a blender, which leads us to sort of as long said re engage on the M&A program.
I will say equity will not be equity will not be an impediment to us executing on our M&A program.
As I said on the call previously there's lots of people around the table that are interested in putting in equity for us to maintain term leverage for the right opportunities.
I look at our pipeline today im going to get a little more granular might have in the past because of where we are I think we have it let's start with the ABS transaction that we all talked about another call along I think from the perspective, you know we are ready to hit the switch from an integration perspective, we spent with me obviously.
We are constructive relationship with Adss Bleach management, we spent a lot of time I'm planning to make sure that this goes smoothly, we have a full roll back to actually get done.
From an integration perspective, and we're just truthfully waiting to get the final DLJ sign off so waste management controls, there's an than we can close our transaction five days later with them.
In the offer letters are going out all the employees. This week and we're just going to sort of being a bit of a holding countered until the DLJ gives their final stamp on their blessing.
For us to proceed with that transaction.
And then beyond that listen lean I bucketed into three different groups. We have the pipeline that diligence largely completed and I think when you look at our pipeline today Thats about 80 million a revenue.
Some of opportunities that exist that were later stage diligence moving towards closing.
And other stopped short of we have under our line early stage diligence thats, another sort a couple of hundred billion dollars or revenue.
That we're working through.
And then you know as we talk a little for those other large acquisition that continues to hang around.
No we continue to due diligence on in may be an opportunity in the future. So the pipeline is falls it's ever been.
I think you know with what we see today in 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 and we've done a 143 acquisitions to date and now we're going to do with this team has been sort of do which is create shareholder value and deploying capital smartly.
To create shareholder value over the sort of long term.
On the biggest benefactor of that around this table. So I think from my perspective, we and the team feel very comfortable where we are and everybody back engaged in 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 great quarter.
Thanks Walter.
Your next question comes from the line of Mark Neville Mr. Bank Mark Your line is open.
Hi, good morning, guys.
I am wondering order.
First.
Maybe just on.
The business itself.
Moving to speak to some of these primary markets in Canada.
Where they're at in terms of so getting back to budget or.
Going back to close normal whatever you want to call. It and then within the US you know again, we're seeing resurgence in certain states may agree us some footprint, if there's any sort of.
Impact if you've seen a noticeable change in trends in those parts or region limits.
I mean, I mean outside I mean outside of I would say really Montreal, Toronto and Vancouver.
The markets were far less impacted iOS I still look into large primary parliamentary all I mean Montreal.
Is tracking actually 101% of budget through July so again, they recovered how much of that in sort of pad often.
How much did not impact often are you going to see that little dip after the work as Don I don't know, but it seems to be will be much.
Much better I mean throughout all again, Toronto, it's again a bit of the revenue mix.
We do a lot of work in the downtown core into water also again on the office buildings et cetera. So thats been I think slower to come back and I still think is off 10 plus percent than I think the same in Vancouver, we're still off sort of 10 plus percent.
As we enter into these phase three stages now and hopefully people start getting back out to those are going to recover quicker in the secondary markets.
I have largely been on on plan.
Sorry, the any impacter from sort of a resurgence in certain geography's go over here.
Yeah. She has a little I mean, we're seeing a little bit on sort of on the wall off side of the business in the southeast.
The budget guys are still long sort of 5% to 6% on rohloff pools <unk>.
Commercial seems pretty stable and for a while but I think it's it's been fairly minimal.
R U S operations to do.
Okay. That's helpful that can just add one more lucky gave.
You numbers bridges, one on three cashless secondhand.
One on just some margin.
Pack or sort of the puts it takes through the quarter.
If you could go through those are at least the the free cash walk we'd we'd be helpful. Thanks.
Yeah, So mark in terms of the free casual what I gave her that sort of components of the sort of costs and <unk>.
Haven't come out and said EBIT number, but I mean, I think during the year free WN with the Covid reduction People's numbers were supposed to 10 48 to 10 50 of EBIT. The year. So if you think about doctor as the number for the year and then you've done 485 for the first six months.
Leaving you with 555 to $5 65 of EBIT to do in the back half before considering incremental M&A. So from that if you take off 150 for Capex.
Off of 145 for interest.
If you assume working capital gets back to flat.
Which I think there's a little bit of upside ombre assume it gets back to flat for conservatism. That's in it you add 80 in the back half of the year and then.
The duct 50 for all those sort of others loose ends odds and solids.
That's basically getting you to a free cat and adjusted free cash flow number for the back half of the year somewhere between 275 and $200 million.
Okay, Okay, although it helps us or maybe just just sort of secret lost.
Okay, you said 80 million revenue offer late late stage diligence.
Yeah.
Okay, Yeah, maybe just.
[noise] remind us sort of.
What you would you consider late fees, you'll just sort of curious how closer how far away. They may be in versus a couple 100 million under really stage.
Yeah, I mean from from our perspective that stopped at a cold over the next sort of two to three months.
Could be quicker I'm, just taking the conservative that in some of that other that other $200 million, we'll have this year for sure as well.
So I think we're.
Very sort of well position and like we talked about previously and we talked about two larger opportunities one has been done and potentially one other one.
We continue to work through that as well so.
I think we're set out very favorably here.
When you sort of look at those numbers look just talked about and sort of look at some of the analyst consensus numbers for 2021, I'm sort of looking at what they can set the numbers are showing like $1 billion 52, 1 billion three of EBITDA for 2021 I think.
From our perspective that number is.
Very reasonable and I think in some other stuff crosses like we're talking about.
It'll be in excess of that.
But it will be M&A dependent, but I think we're very comfortable with sort of the beach business and where we are in theirs upside to the to the base business as well as upside to the M&A case that we've discussed previously.
Well, we've been conservative previous to this but I think there's no reason to sort of sugar coated that's that's what we're expecting that's what we're seeing and I think that's where you're going to see his deliver over the.
A year and sort of Q1 of next year and I think we're just setting ourselves a very favorably for that.
Okay, that's very helpful and again, great John mentioned through this.
Thanks Bye thanks burnt.
Your next question.
A line of Michael Hoffman with Stifel. Michael Your line is open.
Hey, Patrick glue, thanks for taking the questions.
Good morning, Michael.
Mourning mourning can we circle back to free cash to so.
Make sure I'm hearing everything correctly, but 270 300 is the second half generation South add the first then I'm ending up at the three to three and a quarter or is that the full year 275 to 300, I just Wanna make sure I understood that correctly.
Yeah, So Michael the numbers I was giving was.
Second half of the year My issue is normalizing of Q1 with the debt levels in 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 10 50 number of EBITDA you have $360 million, a capex yep $250 million of interest and I'm paying 250, there versus the 280 because really.
280 of interest is burdened by the new that to finance Wmds 10, 50 excludes that so like for like normalized.
They have a $250 million interest expense against the 10 50 of EBITDA and then another 50 for that sort of other odds and ends. So if you do that on a normalized basis. That's the number I think that map like 390 or 400. So Q1 is difficult just wanted to normalize by itself. If you look at a normalized Q too it's about it.
$45 million number and then you're adding the back half of 275 to 300, and then you would add a normalized Q1, if that makes sense.
Yep that was when I was trying to get out.
You have talked about a $400 million number coming out of the year pre any.
Avs or <unk>.
200, maryanne incremental contributions so we're still on that 400 million run right out of the year and there was upside from.
$100 million in EBITDA from Adf's.
And.
Whatever you again to up getting $20 million from the other 80, another $50 million from the 200.
Yeah.
That's right away to think about it okay correct on the P is.
Is the budget for <unk>.
Sure.
Changed and therefore is the difference between the budget and the three seven.
Think about what you did to be responses to your customer.
Yeah. So the budget was low fours I think it's important and understand that three seven is really a blend of the Canadian really driven by Toronto and Montreal being low three number in 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.
Hi, maybe fours and so it was really the Canadian business. I was also that three seven would compare to a budget number on the blend like I think it was four two.
So yeah, I think you can think of that Delta.
As what we didn't do.
And working with our customer base.
So that about 50 basis points some of it's going to walk back through net normal.
Sequential compression and.
The pricing anyway, because it seems like CPI and the like.
Yes, correct, you'll have some of that part of it is driven.
Yes, Yes, you are correct Michael Okay, and then last one for me over $30 Canadian are you at a price.
PSX, we consider putting you in the Big index.
I mean, there's no guarantees.
I think.
Pink.
Well.
PSX 60 inclusion if we were going to be index would come in December.
That's the next available entered point for us so.
With no I think I don't know.
It's probably.
It's probably.
Against demand for I think we're guessing are potentially we would get PSX 60 inclusion in December.
It's not it's not really decision for us to make someone else donate but I'm.
I'm guessing when the $10 billion market gone up in Canada, we probably will be included but I don't know.
And that's a four to 6 million sure incremental by to do that right.
Yeah, roughly a headache.
So that's about right today.
Okay cool, thanks nice job.
Thanks Bye thanks, Michael.
Your next question comes from the line of root beer with National Bank repeat your line is open.
Thank you good morning, guys.
Good morning River.
So Patrick you gave us some color on the M&A pipeline wondering if you could give us an update on how cove. It is changing the dynamic and M&A how's it impacting your activity levels or pricing and how you how you managing how're you managing through the pandemic.
I'm a people person so I'd like to get in front of people and.
I find that always a more constructive way to get acquisitions Dawn.
Never been one to sort of sit back and try and do a remotely.
But that's been it I wouldn't say that's been the biggest impediment truthfully, it's just.
Getting people mobile and trying to get people in the same room, so I would say.
From evaluation perspective, it's always trying to understand.
What the earnings were pre Covid, what the earnings were during cold weather. What we think the earnings are going to be postcode with bright or what that expectation is coming up on that just a number that sort of makes sense, which is probably a hybrid of the two for a multiple perspective I haven't really seen much change yeah. There's been a few desperate sellers that.
Business model of them specific regions that just aren't going to make it. So you buy that revenue sticking on your back and those will be highly accretive to ask but.
There's been a few of those but I think largely managing emanated through the pandemic is just time.
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 we have been doing environmental diligence site visits et cetera.
It just takes more time to move those people around.
And that's been the biggest impediment.
For integration perspective in from a diligence perspective, it's all the same work streams.
Just taking more time, so that's what I think of the biggest impediment managing through the cold with dynamic.
And is it.
Causing you to look more.
S in Canada today or things easier there much like it is with your activities in the solid waste business.
I wouldn't say that I mean, Canada.
Janet is a great place to be today, given the number of Kobe cases, so I think.
Hi, thank.
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.
Again, as I said before and I said in the back.
The number of acquisitions, we do will probably still be more waited to Canada.
But there are significantly smaller than.
I would say the revenue waiting to the U S. So.
60% of our deals will probably still get done in Canada, 40% of the U S on a volume in a revenue basis.
It'll be significantly more waited to the U S. Just given the size of the opportunities in the U S.
Alright, I'll leave it there thank you.
Your next question comes from the land line of Adam why didn't with Agw capital Adam Your line is open.
Hey, guys congratulations on a great quarter.
I just kind of wanted to sharpen your answer on the on the M&A pipeline.
Against the last few years.
Very quickly obviously I guess, one 3021 number 1 billion 313 years. The last couple of years, you've been averaging about 150 200 million U S. Dollar EBITDA Nah, obviously coded has slowed down the Yemeni pipeline for all businesses I guess with the exception the internet so.
Obviously the pipeline today is probably not necessarily reflect I'm I'm kind of a pipeline and and Normalised year, I mean can you try and edify like.
You'd think that it's possible that you could do 120 550 $200 million a U S dollar EBITDA kind of.
It turned once things kind of normal lives.
In terms of lemonade.
Yeah, I don't know if I'd characterize as this.
I think we had a pause, but if you take into consideration that sort of wage management acquisition.
Nine called $95 million to $100 million of EBITDA and then later on the other opportunities I'm talking about I think.
Get back to that number I initial this year I think it'll be another outside year.
Anything is possible I think from our perspective like I said, we've we've acquired.
Between 100 and $200 million of EBITDA year for the last <unk>.
<unk> said on the last three four years so is it.
B as in impossible no is it very possible, yes, I mean, we haven't model that because we've taken the under problems and over deliver approach.
But from our perspective.
That's what we've done the last four years. So no I don't think that's a that's a stretch.
Okay, Let me follow up with something else.
So I've just obviously a lot of the waste management companies have already reported so I've had the benefit of being able to kind of leads through the analyst reports and I think.
Obviously, you have casella at least connections as kind of the closest comparable so I'm kind of a business mixed perspective, but I mean I'm thinking of one analyst reported in particular has a 35 times 2021, three cash flow estimate as a kind of a target price.
If you look at the consensus numbers for this specific company casella.
Training at roughly.
40 times laboratory cash flow.
I kind of back out.
Three cash flow and Canadian.
$600 million and 2021, and then obviously going to 700, plus and try and 22 I tunnel.
A 40 multiple.
On 600.
$24 billion Canadian I own my own Yankee stock rank, but if I put multiply that by 71.
71 cents on the dollar that gets me to 17 billion U S.
Captivated by $3 and 14 million chairs, that's roughly $55.
I think I'm doing my mouth right.
And obviously more going forward.
As you kind of against the benefit of a full year refinances into into 2022, how do you think about that disconnect in yet.
Taking them 30 years of 100 to get to 151 of EBITDA and you effectively gone.
And 13 years from 021 billion for Canadian and clearly.
Not stopping EBIT advance disposal deal you obviously.
Hunt for these hundred plus million dollars EBITDA deals.
What do you think is going on and what is it the south side hikes about pesola.
They don't like about you you're doing it they're just kind of doing nothing no telling people, they're going to stop doing here.
I said I said this isn't the past can control the stock price and I can't control what other people right about the company.
What I can do is control how we operate the company and how we create.
Significant amount of shareholder value over this.
Foreseeable future.
This is a marathon noticed brand so from my perspective, where I sort of sit today I think it.
Getting people come stool.
With our business and with our business model, where new to the public Margaret I think.
Over time as we continue doing what we say we're going to do I think we will get it taken them 30 years to trade at.
18 to 20 times EBITDA alright, and.
We always fire to be casella, and waste connections I'm sure everybody on this call wanted to be because I'm always connection between you and I want to be <unk> wage connections and I think we have that ability to do that.
I think our business model is we've shown is Brazilian and.
We know how to do M&A. So you have a resilient <unk> with a great sort of M&A backdrop and I think.
I mean, just talk to him a couple of these 2021.
I think $600 million free cash flow in 2021 would be aspirational I think.
500, plus and then as you sort of work through the refinancing and you bring down interest costs, you pick up another $40 million to $50 million going into 2022, So I think there's.
Significant upside to that by the end of 2022, and we can refinance hope you're tired capital structure, but.
But I think.
They really quickly you get to 700 plus million dollars. So I think you're you're right I think we need to prove to the public markets that we can continue doing what we've done and we continued demonstrating the free cash flow profile of the resilience of the business and continued margin expansion and we will we will get there I mean.
I think you can look at it yeah I think today is because the stock.
Very well priced I would say probably yes, I mean, it's.
Trading at I mean, I'm looking at a sheet here, we're sort of trading.
At 11, and a half time sort of 2021, 11 12 times and.
There's a big gap between us.
Between <unk> connections, but they've been around a long time, and I think we aspire to be them and I think.
The equity investors continued trusting us.
I think the one material thing I would point out again to you and others of that I have hundreds of millions of equity in there. So.
For me this is a capital appreciation player.
Patrick trying to make a salary in 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.
Everything we do with with that mine that amount of Doctor Oz and had been.
The last.
14 years, and we made a lot of investors over the year of a lotta money in dissipate that will do the same for each one of you guys. So that's where.
That's all I can really say I don't really.
I have any specific views on where people right about in Hawaii trades, where it does but it'll overtime. We will continue proving ourselves in that multiple will continue to exam.
Well I'll look I think you guys as an excellent job and I think I think if you look at the cadence <unk> results over 30 years. The results are improved materially over the last four to five but I mean, I think if you look at the.
Kind of a compendium of the last 30 years I think you guys have done a lot more than 14, and they've done and 30. So maybe they should aspire to be you and you should training, Ohio, multiple then them, but that's for everyone else to decide not me.
Well, maybe we gotta give you a job and IR because you are pretty good.
Alright take it easy.
Thank you.
Your next question comes from the line of Keith Roselyn Terrace, with Teresa capital Keith Your line is open.
Hi, guys.
When you offer item wise that IR job, let me know.
[laughter].
Very good at one.
I wanted to.
For those or orange familiar with the Canadian rules.
In terms of what your growth path can be.
And.
In terms of acquiring other business is there are their hearts Scott Rodino.
Issues in Canada in terms of what market share you can be that may limit your growth at all.
And when I didn't want to pop up against us.
Yeah.
We won't.
Again, so thinking about the Canadian market 10 million dollar market Big three control 30, 35% 60, 65% is fragmented.
Equivalent of the Hartsdale Rodino HSR filing there is called the competition Bureau in Canada competition Bureau in Canada, only reviews transactions that are more than $95 million a enterprise value today. So.
I would say 99% of what we do in Canada is less than $95 million, a enterprise value, so we won't or.
Sure and bump into that issue moving forward also when you look in the Canadian versus the U S. A lot of the U S focus for HSR tends to be around landfill concentration in private ownership of landfills in Canada, a lot of the M&A in the secondary market. These are disposal neutral markets, where the municipality or <unk>.
One of your original authority onto 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.
Thank you you.
Just give delivering on what they're going to do thanks a lot.
Thank you.
Okay and I'll need your final question comes from the line of Brian Mcgwire with Goldman Sachs, Brian Caroline is open.
Okay. Good learning things for squeezing then.
Just a couple of questions.
Wondering if you could comment on that you're right you're seeing any.
Whether it's bankruptcies or customers.
<unk>.
Trans you're seeing there I know we saw one of the larger peers talk about kind of an all time low on on that right. Just wonder if you're seeing similar trends and then instead of a related to that what are you seeing on Dsos and collections. I know you. You said you took a little bit of a charge for that that does sound like much but.
Are you seen any any change and trends there.
Sure it's been status quo.
Commercial and clearly residential residential less churn on the commercials been still sitting at that sort of 678% range pretty low.
Yeah, I, just don't think people have been active.
During cold too focused on switching service providers. So I think that's consistent.
What we're seeing thing.
From a working capital perspective, and collections I mean, Q2 was we weren't sure what to expect but it was again.
On plan with expectation. So yes, we did take a little bit of a charge an a provision for some incremented by gen supposed to be prudent but.
Nothing sort of out of the ordinary it's been.
I think differently no Bryan is Patrick said.
Obviously concerns around selection there is a little bit of softness in Toronto, and Montreal, which is where the majority of that bad that provision that's 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 anticipated material drag.
On the bed that side.
But obviously an area that we're actively monitoring.
Okay.
And they just want on some of the recent M&A.
And then a complete before the pandemic broke out the county away from the like can you just kind of out of how the integration of those has gone any surprises there are things generally is going.
Along with your expectations there.
I'd say along with the revised expectations associated with Cove. It I mean by that is we paused on bringing on demand to some of our financial systems, just because in doing so we'd like to have our boots on the ground training with folks there.
We feel that yields the best result, since we poured some of that in there just.
Translating their results from their system into ours.
But operationally in the plan and the integration from an operational perspective, I'd say is gone.
Completely as expected.
Certain outperformance, particularly when we started thinking about what the covid related adjustments would've been for those businesses.
So I think berry.
Very pleased with how that's come together.
And the face of the covered related disruptions.
Okay and looked at I heard you say the lower diesel costs I think there were a 110 basis point benefit from Arjun year over year is that right.
Just remind me how long you get to keep that forward you get to I think I'm. The residential contracts you keep it for some time, but commercially as it through quickly is that right.
Well I mean, that's part of it if you think about whereas some of our relate in pricing opportunity in Canada is.
Round surcharges investments, we don't have surcharges with.
So, meaning you're not getting tortured vilcanota passing fast so yeah. It was 110 basis points for the year benefit.
On those residential contracts that reset.
Anniversary day, yes, you'll give some of that back.
But on balance lower do you think about the residential book a business if we have.
$1 billion a residential revenue.
Have a large subscription book a business in the U S. You have a bunch of U S contracts that had been decoupled from CPI, So you're left with call. It.
$400 million or so of revenue that really as a sort of true CPI type link.
And so I think unbalanced lower diesel cost I mean today, which are the 30% less on diesel year over year on balance is still in that benefit but yeah. As you as you get the reset you will give some of that back.
Okay. Good luck closing the deal and good luck in the corner.
Thank you Brian.
This concludes that question and answer session I will now turn the call back over to attach it to be J closing remarks.
Thank you everyone 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 know disconnect.
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Okay.
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Three.