Q3 2020 GFL Environmental Inc Earnings Call
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This event is recorded.
Oh now like the 10 o'clock.
Patrick the Beachy Thingy and found out hopefully I felt please go ahead.
Thank you and good morning, I would like to welcome everyone to today's call and thank you for joining US. This morning, we will be reviewing results for the third quarter. We will also provide an update on recent M&A activities and our outlook of what we expect to finish the year.
I am doing this morning.
C. R C F O who will take us three or four they're looking disclaimer before we get into the details.
Thank you Patrick and good morning, everyone and thank you for joining please note that we've father earnings press release, which includes important information the press releases available on our web site also we prepared a presentation to accompany in this call that is also available on our website.
During this call will 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 are 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.
Business.
The impact of colder died team continue to vary by service line in region with our solid waste business continuing to stroll show a strong resilience.
Negative volumes continue to be primarily attributed to our commercial and industrial collection and post collection business with residential collection and recycling volumes positive for the quarter.
From a market perspective, our primary solid waste markets, where we saw the greatest volume declines in Q2, where the markets that were had the greatest sequential improvements in Q3.
For example, our eastern Canada solid waste business that includes our Toronto and Montreal markets saw over 1000 basis points of volume improvement sequentially over Q2.
Volumes in our secondary markets also improved although the sequential increases in these markets were more muted as the initial declines were less than what we saw in the primary markets.
In our infrastructure, so liquid businesses the rate of recovery was slower than what we saw in solid waste as our customers delayed their capital and maintenance expenditures as part of their own cobot impact mitigation measures.
Impact demand for our services. We also saw the impact of coal that related regulatory permitting delays impacting the start of new projects or project phases. Once again, the extent of the impacts vary by region infrastructure and saw revenues in the us business, which is concentrated in the highly coveted impacted north.
Eastern California markets saw greater volume impacts in our Canadian business.
Liquid waste revenues were a similar story with the volume recovery slower in our Midwest U.S market, where cold weather related disruptions had an outsized impact on our customers demand for our services.
Liquid waste revenues in Canada saw 1300 basis points of volume improvement sequentially over Q2 with volumes in eastern Canada, almost flat compared to the prior year.
Across both the infrastructure and liquid businesses, we expect the volume decrease to simply be a timing shift and will return as our customers reset their budgets in 2021 and reengage on their capital and maintenance projects. We have a line of sight into a healthy backlog of work in these segments and anticipate volumes will continue to recover and can.
Injunction with a market specific reopening activity.
Looking at how the revenue impacts translated to the bottom line. The overall increase in revenue coupled with our ongoing focus on cost control and efficiencies resulted in 240 basis points of margin expansion.
In our solid waste business and 200 basis points for the company as a whole, resulting in the highest adjusted EBITDA margin in the company's history as I mentioned earlier drive.
Drivers of the margin expansion on the same themes, we covered last quarter.
Overarching are the impacts of our pricing procurement and synergy rash realization initiatives, we discussed previously.
We are also seeing the benefits of our continued Colgate related focus on improved asset utilization and productivity coupled with cost control of discretionary FTD costs. Finally.
Finally, the macro factors of higher commodity and lower diesel fuel prices provided a net margin benefit as compared to the prior year.
In terms of FX.
With over half of our results being generated in us dollars the transactional impact from fluctuating FX rate impacts our results, which are reported in Canadian dollars.
The U.S.D.A. Cat exchange rate resulted in 0.5 revenue increase over the prior year, although the average exchange rate for the quarter was 300 basis points.
Less than in the second quarter, the offset to the lower revenue and profits reported during a period of weakening us Steve is that our US denominated debt is also revalued at the lower FX rate, reducing our debt balance and leverage ratios.
The expanded EBITDA margin, coupled with continued focus on working capital management and disciplined capital allocation contributed to nearly $180 million of free cash flow generated during the quarter.
Result in excess of our expectations and a new record for the company.
Looking at working capital specifically, our previously discussed initiatives around order to cash cycle time continue to show improvements and you can clearly see the results in the year over year collection experience. The DS all improvements or something I know our whole team is very proud of and an area that we continue to believe there is incremental.
Side.
Not to downplay the record financial performance, but the most impressive aspect of the quarter and this is an exact repeat away said in our prior calls is this continued dedication and capabilities of our employees to respond to the ever changing operating environment.
Acquisitions calls you will see us for pursuing these opportunities before.
Before turning the call over to Luke to walk through the financial information in more detail I want to walk everyone through page four of the presentation, which we thought would be a helpful. Sell mortgage summary of the messages we have consistently delivered.
On the left hand side of the page we've listed the five key things that we communicated during the IPO and that we have consistently echoed since then.
Pretty incredible outcome, considering the backdrop.
For the quarter, the 3.5% net price was slightly ahead of our expectations and was achieved despite the impact of volume decreases in the Ipi service lines, which are typically a big contributor to price.
Our overall pricing excludes the impact of pricing initiatives of our 2020, M&A and continues to be impacted by negative CPI adjustments and certain municipal contracts.
Williams in the Midwest U S lagging the recoveries, we've seen in our Canadian markets.
What played out during the quarter and continues to play out in business lines as a more tempered recovery than we had anticipated based on the trend line that we were seeing in late queue too early Q3.
Are guided assumed infrastructure would be negative low single digits and the liquid waste would be organically negative high single digits.
As Patrick said, we expect the most part that this is a timing issue and we expect the volume returned as we roll into 2021.
Turning to page six we've summarized margins by segment solid waste adjusted EBITDA margin was 36% for the quarter, which was a 240 basis point increase over the same period in the prior year.
Patrick provided overall drivers of the expansion, but in terms of the specifics of the margin walk. The key components include 72 basis point benefit from lower diesel costs 53 basis point benefit from a higher commodity pricing.
Offsetting these macro tailwind was in approximately 10 basis point dragged incremental covid related costs.
Acquisitions were basically margin neutral primarily attributable to Canadian tuck in acquisitions that have yet to achieve their anticipated margin profile offset by margin accretive contributions from 2020 acquisitions in the U S.
Excluding these items the base solid waste business drove 125 basis points of organic margin expansion over the prior year. Despite the detrimental impact of Covid volume declines.
Consistent with what we said in the prior quarter soil and infrastructure margins are being impacted by the change in business mix, reflecting reduce volumes from low volume high frequency customers recall that due to the relatively fixed cost structure of our soil mediation facilities. There is a higher decremental margin and back from reduce volumes the relatively muted impact in margie.
Ins year over year, despite the $27 million revenue decrease is attributable to the cost control strategies that we have implemented and are indicative of the underlying margin improvement we've been focusing on this line of business. We expect that is volumes recover will see significant margin expansion consistent with what we have previewed as the opportunity within this segment.
Our liquid waste business continues to be the segment most impacted by Covid related disruptions in response to the volume decreases reflects over $7 million of operating costs out of the base business on a like for like basis, mostly around direct labor and vehicle costs. This.
This cost flecks in conjunction we continued synergy realization in the nearly 13% increase in net you most selling prices drove the organic margin expansion as compared to the prior year.
The balances at month end.
In terms of investing activities, we closed three tuck in acquisitions late in the quarter, representing approximately $20 million in annualized revenues the longer than expected delays with the waste management EPS divestiture pack assets push back the timing of some of the opportunities we've been working on but the pipeline is full and we're very actively pursuing several opportunities.
On capital expenditures, we spent $86 million for the quarter, which included approximately $8 million in what I call remedial capital related to recent acquisitions, which was incremental to our original guidance.
Cash flow from financing activities are primarily comprised of the new U.S dollars $750 million, 3.5% five year notes we issued in August.
Free cash flow for the quarter calculate as cash flow from operations less net capital expenditures was $177.1 million, which includes acquisition related costs and the soil liquid in FX revenue impacts previously discussed.
Mental growth capital, we're on track to meet our Capex target.
Before turning the page I will touch on the WC and waste management eds acquisitions, but I will be brief as as early days on both of these transactions.
As we've told you before these assets have been performing very well this year and had great third quarters. So we're very excited about the go forward opportunity are robust integration plans are well underway and we remain confident in our ability to deliver the underwritten synergies within the Timeframes. We've previously discussed.
WC will contribute a full quarter revenue to our queue for results and the waste management avs assets will contribute two months of revenue.
Q4.
We are deep into the process of forecasting our 2021 plan and we'll provide more specific updates when we report our fourth quarter results. What I will say now is although there have and will be some puts and takes mainly around FX and the specialty waste volumes and the timing of the deal closings, we remain confident in our two.
2021 revenue in EBITDA jump off point that we provided as part of our guidance in August subject to FX related fluctuations.
Or assets and et cetera et cetera.
[laughter], Okay, well wasn't expecting the question but.
Yeah, I mean, I think from my perspective listen My mother always told me. If you have nothing good to say don't say anything so I will reference the short seller by name.
I mean, the reality is from our perspective.
Let the numbers talk and just deliver on the plan and deliver on the plan that we articulated to all investors as part of the IPO in life, there's always going to be haters and you know what these guys take whatever position they take but it's hard for me.
As an analyst spent a lot of time with the company trying to understand the company.
What I will tell you as I.
Never spoken to the short sellers never heard from the short seller, whether it was before the report or even after the report so.
Other than seeing a bunch of tweets and a bunch of noise I don't really.
Have much to.
Interaction with them. The fact is.
We've delivered the highest margin the highest EBITDA the highest free cash flow in our history.
One of the only I think.
Peers in the comp said that actually posted organic growth in our solid waste business.
We articulated our margins are going to keep going higher.
We delivered 170 million dollar $177 million, a free cash flow in the quarter or volume in pricing was extremely strong.
And.
Over 14 years, we've done nothing but make investors money I mean, if you go back over the last 14 years Genuity in health care of Ontario pension plan I made almost seven times their money you're capital them at three times their mind, you Ed Hvis that they'd almost three times their money and yet Macquarie make two times of their money.
And you have a new shareholder groups that I've done extremely well.
Is.
Those guys and I think if you look at what the past is in the trajectory of where we're going we are on a path to do exactly what we said we're going to do.
I think if you look at it and today I mean.
Let's put aside the character assassination for a second just because of Italian doesn't make me a mobster, but that's the tasteful and whenever it's hurtful and it is what it is but I'll park that aside I mean at the end of the day. He tried to blow offer financing you failed he tried to blow up our acquisitions you've failed.
He tried to scare institutional investors away you failed.
Tried to match with our audit opinions and comfort letters with our Auditor Deloitte you failed.
He told US we can integrate businesses and we overpaid Bracted I think you are clearly seen we've had 12 basically quarters in a row, where we've delivered margin expansion. So tomorrow wasn't working the business will be going backwards. It wouldn't be going forward. So again I don't I don't think in terms of.
Overpaying keep.
Keep in mind.
We've been under private equity.
Partnerships for 14 years private equity investors expectations of return on equity and a return on invested capital R. A lot higher truthfully, what the public market through and most investors create a significant discipline on onto the management team and that goes for these new.
You are busy partners, Ontario teachers pension plan, and GIC or insider than this company.
Go off to approve.
Substantial acquisitions and believe me, if we weren't delivering wrong.
A return on equity returns are birds vested capital. We these acquisitions would not be approved so that's that's what I would say on that I think if you look at where we are we told you.
Luke just said, we would deliver on the free Castro profile of the business.
On the back half of the year all of that is playing out exactly how we said one if you look at sort of 2021, which was the launch off point for 2021.
For all intents and purposes today.
Not giving forward guidance, you have 500 million plus a free cash flow.
For 2021.
If you look at that today, what we're saying you mean today, we're training out of six 5% to 7% free casually the pier such trading at $2 75 to a 4% free cancel yield.
37, 30, $40 stock even have a lower number and we'll be in the second anything Sierra belong baseball game I mean.
Just getting started.
You, we talked a little different things from.
Delevering right. We do have are now with overlap how long our average cost of capital, which is a big focus of ours going in so.
Yeah, I think all of the things. We said we are doing we will continue to do and at the end of the day and the overarching theme of it is if we have a shareholder group the shareholder room, if they didn't have the confidence in management to deliver the plan what I've never allowed this company to go public nobody was sellers, they work year and a half or two years into their.
Investment, where they normally would things for five to seven years.
We know what we can do we know what we will deliver a execute the plan over time and we know we along with all your shareholders I've invested in the IP all will will get rewarded with the plan, we have and how we were going to execute overtime.
Sorry about that covered your question I ran very long yeah. No. That's that's very that's very clear.
In the U.S. and we already were.
And you know we were able to get quarterly and close that earlier. So one month ahead of schedule in terms of owning the asset.
We have a full plan from our operating system infrastructure financial systems customer experience shared services, which are building a our cash JP workday, which is our HR platform with our GFL benefits and our maintenance platform to have that fully integrated by Q2 of 2021 I can tell you it's been an exceptional.
And waste management that helps us get through that very smoothly, we did a lot of dry ones.
And that team truthfully without a lot of pain was able to get us up and operating and basically sort of shark attacks off from any transition services agreement that we would have needed with waste management now.
Now we are still relying on them for some infrastructure related.
Related issue, but I think I'd be able to be the most important system the operating system financial systems and.
Basically the shared services billing cashing Pete.
Are now in our system. So we feel extremely gray and coughing about where we are.
And the integration process with the businesses in the open in the markets, where we have overlap is well underway.
So.
Part that I guess could have been feared the most was the actual.
Better.
Yes, so Michael it's Luc speaking, what I would say I think a key driver of the differentiation in Canada versus us in this quarter was really on the strength of the merchant processing volumes that we referred to in the prepared remarks I mean, if you think you go back to the Canada fibers business, we saw as the recycling market was.
The expectation there again slightly off the sort of straight prorated math, but it's for the seasonality that I spoke to I mean, Michael EBITDA margin. We're still early days coming with that if you looked at the blend of what we said for the annualized EBITDA margin for those I think out the gate with the seasonally low.
Two months as well as just the integration something a little bit less than what those blended averages we had said.
But we're still sort of early days on the avs Wmc's, what I'd say on the cash flow.
Is like there's a couple of nuances I spoke about on the script and it's really some sort of catch up tight capex catch ups the wrong word, but some known capex spend and then this working capital component that are going to appear as cash flow items in our queue for statements and the cash flow from operations, but.
Really purchase price sort of considerations I mean, if you look at the WC a business paying 12 12, I mean, it really should have been more like 12 25, when you're considered some of these puts and takes on capital and working out and then similarly, the purchase price of of Wmds.
Part of that negotiation contemplated that there was no working capital you won't have to invest 10.
10 $15 million into it. So those two items are going to appear as negative sort of cash flow from operations in queue for I would characterize the more sort of purchase price type items, So X that.
With the EBITDA margin sort of direction I was just providing I think you'll see those as sort of cash flow neutral in the quarter, obviously, excluding the deal related advisory costs.
Okay, and originally we were sort of.
Mid to low or high twenties splendid margins between the two businesses. Your suggestion was seasonality, we're probably low twenties to mid twenties.
I mean I.
I think made is probably the right way to be I mean, I think there's some of the synergies will be able to realize sooner than anticipated, which is going to help but again. If you think about the Wisconsin type business I mean with the seasonal profile of their Q4 is a significantly lower margin in Q3 and Q. So you remember seeing that and 80 SW when they reported.
What's the rollover of all your M&A for on and to 21 sales. So we got that number right.
You will end the year about I mean again, it's sort of FX sense, then you're just a backup in general and that effects I mean, we're going to now have sort of.
Call at $700 million of EBITDA, That's U S dollar denominated.
At the revenue side think about that sort of 252 $6 billion of revenue and I mean, so every penny there of FX.
Has.
Significant impact so if I look right now.
The diversified offerings across recycling et cetera, So whalen liquidity to continue I think weve assumed at the current levels. So if you think about our guide at the revenue line for the year was sort of 40 40 60 in the Middle 40 45 on the low end I mean, I think FX alone sort of brings you to the low end and then.
In the soil and liquid continues to sort of be a drag there now offsetting that WCS done a month earlier than anticipated that provide some sort of offset and then again some of the strength in the other sort of solid waste services. So I think that could be puts or takes that the revenue and line.
Driven by by those changes, but as Patrick said I think with some improved cash management and working capital performance. We can hold the line on the free cash flow line okay.
Okay. Thank you very much.
Thanks, Michael.
Alright, instead, so you're not gonna so to see that catch up this year, but I think if the world continues on the path to Moreno Maliseet, we'll revisit sort of harvesting of that opportunity in 2021 in the sort of normal cadence of a regular pricing regimes by market.
Okay. That's that's Super helpful. And then just a second one for me I'm just trying to wrap my head around and what's the and also run rate EBITDA margin for liquid waste, so a big a big margin quarter.
North of 28% as you pointed out organic growth has been.
On I.
I mean I know it's early in integration is the focus but anecdotally how is the morale.
Of all of the folks that you brought over particularly in those markets that you overlap and then number two.
I think it obviously, if you look at it Theres number of call. It theatres of war here and so should we simply think about tuck ins.
It's kind of feeling around those triangles.
Yeah. So.
On I mean double you see I mean, I think okay.
And there was a lot of nervousness.
For people just trying to understand what the plan was I mean, because again they knew a lot about corporate functions weren't going to be needed and in Houston right. So.
You know I think people have settled down I mean from an operational perspective listen everyone doing their chairs everybody's happy everybody's relieved.
And you know the changes that would have to get made a corporate have been well articulated. The individuals that are on that are staying for a period of time, Ron transition services agreements and have transitioned bonuses and stay bonuses. So thats gone you know you never know what's going to go but it's gone extremely well.
On the W. emanate. He asked front I mean, you know it was like Forrest Gump sort of running up you know up the whole because there were big that team was just so tired.
You know that process dragged out I take my hat off to Richards.
His entire team at 80, Aaron's for being able to keep that.
Grouped together for as long as he did because you know what that drag number 17 months you know create a lot of uneasiness was employees. So you know the employee that we kept an employee that weighs Magnus cap everybody is so excited and relieved and just really looking forward to the future. So I would say the morale problem.
Never been better and everybody sort of.
Energizing rejuvenated I think when you look at the map there's been some of its overlap some of its new Beach heads I think all in all again focused on the integration, but you know, there's a very well defined talking program.
Behind some of these beach heads that we acquired with particularly in the Midwest and parts of Florida, you know and you know closing in the gap in parts of the Midwest I think we have a very sort of well defined and articulated plan.
To continue the sort of tuck in program.
Nothing of any sort of substantial size or scale, just all stuff that works well within the profile that we discussed earlier, which again is using free cash flow.
You know in borrowing but at the same time de levering and you know I think we've articulated that plan numerous times over the last year.
Your and I still think that we will continue to prove it out so I mean, we still have a plan.
To acquiring I think everyone's sort of modeled acquiring sort of 50 to 75 million of EBITDA year in those markets. I mean, I still think it's conceivable that we could acquire sort of $75 million to $100 million year of EBITDA of tuck ins around our existing platform and the new beachheads, but you know with cold and things have slowed down evidence seems to.
We just taking a little bit longer, but I think when you look, particularly at the next two years, we're very well positioned to execute on that.
Okay, and then where were the three tuck ins you closed this quarter I'm just curious.
So there was two in Ontario, and one in the US Okay. Okay, and then look I got a couple of modeling questions. So.
Pro forma I guess or just layering in all the landfills, where do you think your closure post close your cash out the door will be eight annually.
Tyler, it's something to figure the Ats side that we're working through right now so you're going to have to give me till we come back and with a more sort of formal guide.
So, whereas when we provided the guidance for that sort of fully bake, but I mean, when you look at where we're at today basically sort of doubling the overall sort of landfill capacity across it. So I mean, that's a simplified proxy I'm, citing 25 to 30, if I'm putting 25. It is today its going to 50, but the actual sort of.
Number as you know there is sometimes some cadence and timing with how that sort of shakes out. So I'll give you an actual 2021 number as we get to the sort of engineering and all done okay that'd be that'd be great and then I just want to make sure I'm clear so a penny move in the Canadian dollar that's about 7 million in annual EBITDA is that right.
Correct, Yes, I mean, if you look at the launch off point that we're talking about him before is that a 13 40 launch off point right and getting that was sort of as 134 135, I mean, there is $700 million of us dollar denominated EBITDA in there. So every penny is 7 million Bucks. So if you if I now end at 1.30.
A little flat, where it looks today versus the 1.341 0.35 sort of 25 $30 million difference from what I had said before now as I said work on some constant currency those sort of carve that noise out and.
Truthfully, they might become a time, where we flip the currency and you'll see everything and you STM and make it easier for you guys, but.
But that's the those are the facts, where we sit today, but just to reiterate launch allpoint, yes.
Yes, we had said 13 40, they said now I think there's some puts and takes with this but absent FX that holds true I mean, but again with the FX, It's best to sensitivity Edison Yeah. Okay. Perfect. Then just last one I just just to be clear. These deals you don't expect them to change your cash tax paying status anytime soon.
No I mean again, we're still working on how to continue to push that out longer runway than we have today, but we still have the several years that we previously disclosed then I mean, adding this.
The may be an opportunity to slightly sort of extend that.
But it doesn't certainly doesn't accelerate anything from the Burke said keep in mind to Adobe emanating out doing the deal was structured rated asset deals for guidance.
Lot to cover too.
Yes, okay.
All right I appreciate the time guys.
Thank you.
Thank you. Your next question comes from Walter Spracklin from RBC Capital markets. Please go ahead and thanks very much operator, good morning, everyone.
Hi, good morning, no longer.
Well I'll start here with.
Your specialty waste side on the on the liquid it infrastructure and show on it it sounded in your prepared remarks as though this is in order of magnitude or a little deeper than what you were expecting as we went through co bid.
By now.
If you could confirm that and perhaps.
I know Patrick.
Patrick you would kind of signaled that you expect it to come back Luke I think you signaled that it yes, but it probably won't in the fourth quarter.
Let me know if I'm getting all this right and then finally, what's your visibility when can you say, okay. Now we have clear visibility here, we're seeing those budgets come back.
We can say with a higher degree.
Certainty that yes, we will see this level off and stabilize as of.
Quarter ex.
Yes so.
So on the on.
On the infrastructure side this oil side I mean I think.
The.
Number one.
The government is going to deploy a significant amount of capital into the infrastructure what you've seen.
Many of the announcement that all being said I think a lot of it as you know with perma, driven like we talked about a quarter, we're seeing delays and people getting permits because these municipal offices theres no one sitting in the office. It all sitting at home so time to get their permits et cetera bar I look at the infrastructure business alone our current work in hand.
Today is about $375 million right. So that is probably the highest number we've ever had going into a new year right. So into 2021 375 ish million dollars on hand, and our prior probability average weighted pipeline today is another 500.
<unk> million dollars of work that we price that we believe we're going to be selected I'm very not 100% of that come in in 2021 no.
But I think from where we sit today and the conversations we're having thats you know the the ship is going to turn there.
The two pieces that.
A little bit uncertain for obviously, our northeastern soil operations.
And.
So operation in California have been very slow now I don't know if after the election things change.
That sort of gets back back on gets back in action, but I think those are the two that again, we're just waiting for sort of visibility on but other than that I think we're you know it's I think it's going to come back I mean, when you look at the liquids side the liquid business in Canada. It's been very good it's bounced back again.
Again, we were relatively flat sort of in the third quarter I mean, the bulk of what we've had is some of the industrial cleaning business and then obviously use more loss goes to have been sort of.
Land, I mean or sort of headwinds from our perspective.
But I think we only think of Enbridges the world and some of these other companies that we do a lot of industrial work for that when oil dropped there. We're looking to conserve capital I mean, if then the data work needs to be done. It's just a question of when I mean, you can put it off for six months you put off for a month, but we're going to have to do the work. So we believe we'll be doing the work and they have communicated to us we will be doing the work sort of going in 2000.
21, let me revise their budget so.
All in all I think it's yes.
Yes, it's a little bit more than we thought but and again in a day fairly.
Consistent with what we've seen so far.
Okay, and then moving your solid waste you referenced the monthly improvement.
As we continue here into the fourth quarter is it fair to say from a modeling perspective now that you're you're improvement that we should see a fourth quarter, that's better than third.
Still a weaker first quarter, but better than fourth and then obviously start lapping in the second quarters is that how you're.
Is that how should we look at it any different than that in terms of the cadence as we as we emerge as we go into early part of 2021.
Yeah, Walter Luke I would say that's right the only caveat being I mean, you're here in Toronto and now with the way the wind blows with some of these Canadian sort of provincial governments right. So I think on the current trend, yes Thats correct.
Obviously any material deviations from these current reopenings or material incremental restrictions could could hamper that but that's how I would be modeling it today.
Okay perfect and.
Finally on on M&A here, you mentioned Youre your pipeline is full with regards to tuck ins.
Can you give us any indication as to regional focus where would you like to see based on the pipeline that exists which ones would you say you're going after is areas you really want to build some density in some some.
Some added.
Added into the into your current operation geographically.
Yeah, I mean, so when you I mean, I know again big focus is obviously on tuck ins in the existing markets, where we already operate but when you look at the new platforms we've acquired.
By way of the sort of VBS divestures.
If you look at when we acquired I mean, we acquired some actual imposed collection operations and we acquired you know axle in sort of commercial front load routes.
That.
Are some of the best businesses and all of us as waste peers old.
Now we have to do is again the focus is on building out the the roll off side of our business.
And looking at adding incremental high margin volumes to the landfills landfills that we've acquired in those markets. So thats, what I think you'll see the focus on I think thats, what will get the best Bang for our box in terms of.
Dollar spend particularly around the M&A front moving forward.
I appreciate the time as always.
Thanks Walter.
Thank you.
Next question comes from PNOC Nibble at Scotia Bank. Please go ahead.
Hi, good morning, guys good.
Good morning, Mark first congrats.
Congrats again those deals across the finish line.
Maybe just to round out the free cash flow discussion just for the Q4 loop.
The the two deals aside from advisory.
Are expected to be cash flow neutral that's with all the sort of one time investment in working capital actually spoke to sorry.
No I would say.
Yes, all of those items I mean like the the working capital investment again, that's really I've been made whole for that in the purchase price line, that's going to show up as a drag on the cash flow line. I mean, if you think about $135 million to $145 million of revenue coming out of those businesses you apply a sort of EBITDA margin.
And the way we were talking about that just sort of starting point. If you have a bit of outsized capex again really just purchase price and then you have the investment in working capital on the WMS assets I mean, that's going to be more than an offset against whenever that normal flow cash flow from operations. There was so.
But again I'm characterizing those I think is more purchase price adjustments as opposed to us with a true operational cash flow, they're just going to manifest themselves in that section of the cash flow statement.
Sure and that's just it's it's all sort of captured in the queue for those vessels that doesn't spill over to Q1.
Well I mean, the Capex no. We'll all be Q4, the working capital I mean might take three months to build up to a normal position right, but you know I think you'll see the majority of that investment in Q4, maybe you got a little bit into January but by that time, you should be at that normal run rate of working capital. The reason I do say three cause of the seasonality profile of that business.
This.
There will be a little bit more investment as you come out of Q1, but I think for the most part of the Q4 noise.
Right.
And just to me the solid waste.
On the margin there is some good color on where you think the margin will end the year and where it goes im just because maybe just trying to understand that the Q3.
Sort of what was there any sort of.
I don't have the pricing spread or is this what really explain the strength in Q3 and they'd be wise will step element keyboards is anything that.
Goes away I guess I mean before.
Yes, so I think the margin as a whole if you will look to whats driving solid waste margins I mean across all the geographies. What you have is meaningful expansion of operating margins in the collection businesses.
Offset today by foot a drag in the post collection businesses, which is just more of a sort of volumetric impacts from covidien. Those so that's what's driving it if you think of what's actually underlying in there I then I think it goes to the pricing strategy that we've been talking about and seeing the benefit of that coming through collection the.
Synergy realization as we brought those sort of businesses together and you're now sort of realizing that and then you have some coded benefit.
As we've taken the most expensive our most expensive truck those costs out of the system. So the Q4 step down if you will is more just a function of the seasonal profile the business primarily in the Canadian market, where you guys have.
Lower activity and lower dollars.
Contributing and therefore sort of bigger fixed cost base that falling through so the overall strategy of what's driving the margin expansion I don't think that is changing in Q4, it's more just the sort of seasonality profile by Q4 is typically a lower margin quarter, if that makes sense.
Yeah. So the question was on disrupt liquid waste.
Like the Q3 to that you called out again, we can take that offline.
Interest at times.
But again.
Thanks to my questions Nope.
No problem.
Thank you. Your next question comes from Bruce, but never at National Bank. Please go ahead.
Hi, Good morning, just a quick question on the tuck ins that you made in the quarter. If you talk about the the multiples on those deals and how multiples are trending is there any deviation from your previous guidance.
Rubber I mean, we've said this if you look we deployed sort of $20 million plus on these small little deals as we've said before multiples in the deals isn't really a construct or consideration from a vendor from a negotiation perspective, I mean, they blend out to something in the sort of five to six times.
James is what we're acquiring them for but as we've said on these smaller ones, they're often don't sort of thought about in that what is the multiple perspective from the vendors perspective, I just reiterate that guidance.
What we've said and I think what we finished say is we're not seeing any sort of differentiation from a multiple or from a valuation perspective on the small stuff obviously the larger stuff over the last few years. This would have traded up but the small sort of tuck in program. We continue to believe us sort of six to seven times.
Valuation is remains true and where you will see us transacting at in the in the near term.
And then just finally, given that you now have a broader platform.
More geographies I imagine the the pipeline of opportunities is going to to grow here are you seeing that and does that end up giving you sort of a better.
A pool of deals.
Deals to select from do you think it makes it high grade the pipeline for you going forward.
Yes, I mean, when we look at the sort of pipeline as it sits today I mean, we sort of buckets combined sort of tier a.
Theory opportunities in tier B.
One of the most accretive in which are sort of less accretive to the.
What the current strategy, which I just articulated for you know there is 29 opportunities that sort of set.
In that theory bucket and there is.
18 that sit in the PRB bucket and I mean these range from you know purchase prices or I'll say, a couple couple of million to $60 million. So I mean, I think that pipeline is very full and highly synergistic. So I think you know we will work to sort of execute on that.
As we get through the integration process here over the next two months make sure you know any little bumps in the road gets smoothed out and everything is running the way we thought it was going to run and is meeting or exceeding our expectations. So.
Yes, I mean.
Good day for US like we talk about this numerous times its capital allocation right you can only part and do so much in one specific market at a specific time or something is going to fail right. So whether it's your organic is suffering where the inorganic suffering with the acquisition integration suffering so again us allocating the capital.
Amongst the nine provinces in Canada now in 27 states in the US is sort of going to be top of mind.
And our integration team has to be ready you know like we've talked before we do it all internally so that integration pms to be ready to take on more to be able to integrate into those.
New acquisition, so getting those into.
The two larger ones done on a platform now is definitely Paramount and then we'll turn our attention back to the normal steady Eddie everyday sort of tuck in opportunities.
Great. Thanks, I'll leave it there thanks for the color.
Thanks Rupert.
Thank you. Your next question comes from Tim Jain at TD Securities. Please go ahead.
Hi, Thanks, good morning, and congratulations on the positive developments in the quarter.
My first question Im just wondering if you feel now that the footprint you built over the years.
Is actually allowing you to capitalize and I'm thinking in terms of organic growth as opposed to M&A and maybe more specifically, Canada, but I'm wondering if if that slit trench, if you're seeing opportunities to capitalize on the challenges of some of your competitors.
During the pandemic or is it really too soon to gauge that at this point.
Yeah, I mean, certainly there's been a little bit of that you know what I would say that is.
Front and center no I mean, there are smaller competitors in markets that have been significantly affected by this and don't have the balance sheet to sort of ride it out.
And those again create opportunities.
You know part of 10 a day. This is a good Brazilian business and lot of our competitors I think what you're seeing now is.
It's just two people want to be similar to what we saw in 2008 2009. When you had the financial crisis and just like from from People's perspective, their perspective on life changes right.
And they say do I really want to live through another pandemic I really want to live through another year of this.
You know sort of want to live my life on enjoying my family.
And that is more of a theme were seeing from a lot of these family run businesses that have been huge focus of ours over time. So I think that's where we'll see which lending itself to the opportunities that we're seeing today. So I think that theme will continue to persist.
Before I mean, I think some of the tax reform stuff that in the us that people were focused on I mean.
I'm not exactly sure what happens with the election I remember I think it's sort of leaning towards.
Biden camping it looks like the Republicans have probably kept.
The Senate, so I'm not sure there'll be some sweeping tax reform, that's going to drive people to try and get things done quicker, but who knows that seems to change on a on a hourly to daily basis, but I think you know.
The opportunity is there just continues to be what I said.
Okay. That's helpful. Thank you.
My next question just looking at liquid waste in particular and the really impressive.
Margin expansion in that business year over year, the presentation sites and I think you walk through it look a couple of reasons for that.
Possible to kind of quantify a little bit or or or rank the.
The importance for significance of those impacts for.
Driving that liquid waste margin expansion.
Yeah. So what I'd say is on the year over year basis really what you have coming through is the sort of the synergy component of having the both us and Canadian businesses, where the gel together right. So the original sorta thesis was that there as I said 200 basis points of expansion just by bringing those would have businesses together I think.
That sort of first and foremost.
Second in the quarter I mean, obviously the cost control measures implemented in Q2 at some of the volume came back sequentially. In Q3, you benefited from that I'd say, that's probably the sort of second in terms of priority of what was driving still give us some of that back but some of those cost control measures. As we said are permanent and therefore, we hope to be able to enjoy that so.
Going forward on a more permanent basis and then the third is you have the used motor oil net pricing right. So when you went from Q1 to Q2 pricing went backwards you ended up those margin decrease live as you've now flip the pricing and you had sort of a plus 13%.
On the overall blended net pricing, that's obviously becomes margin accretive as we are now in the Grand scheme of it are used motor oil sales or a relatively smaller part of the overall liquid waste business. So it doesn't have as much of an impact, but it's certainly a benefit and when you look sort of quarter over quarter.
Okay, great. Thank you very much.
Thank you.
That concludes our question and answer session I would now like to hand back for closing or not.
Well, thank you very much.
Forward very well look forward to speaking with everyone. After Q4, and as always lupin IR around to answer any color any questions or.
Call that anyone wants to catch up on thank you very much. Thank you.
Ladies and gentlemen, thank you for participating today you may now disconnect your line.
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