GFL Environmental Inc. (GFL) Earnings Call Transcript

Good morning, everyone, and welcome to the GFL Environmental Update Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Luke Pelosi, Chief Financial Officer of GFL. Sir, please go ahead.

Thank you. Good morning, everyone. Thanks for joining. I'm here with Patrick, and I'll turn it over to him in a moment, but first, let's maybe go through our forward-looking disclaimer. Please note that we have filed a press release, which includes important information, and the press release is available on our website. Also, we have prepared a presentation to accompany this call that is also available on our website. During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators. Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date, and we do not assume any obligation to update these statements whether as a result of new information, future events and developments or otherwise. This call will include a discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. securities regulators. I will now turn the call over to Patrick.

Good morning, everyone, and thanks for joining us. From my perspective, we'll try and be as brief as possible, then turn it over to Luke to go through some of the financial attributes of the acquisition and how that sort of layers into our existing base business plan and how that rolls over to sort of 2021 and into 2022. So on the Terrapure acquisition, I mean, people have asked sort of, why now? And I think from my perspective, my job here is to create shareholder value. And when you look at what we did in 2020, particularly with the 2 larger deals in WCA and ADS and WM divestitures, those are largely sort of behind us now. Integration is largely complete, and we still have another 4 months -- 4-plus months before we actually would be able to close on Terrapure in our opinion. Again, in keeping with our philosophy, we're able to negotiate something with a seller that was known to us that made sense for both of us. We got our hands on high-quality landfill assets, an organic business and environmental services business that's in our backyard at a price that, to us, was very compelling. We've looked at this business in 2014. We looked at it again in 2019, but both times, we couldn't get there because the battery recycling business wasn't of interest to us. And at this time, we were able to carve that business out. We started actually building out this, that will be really in 2008. So again, all of these markets are very well-known to us. When you look at this deal, the power of the deal is really on Page 5. We're getting a highly complementary set of assets in Western Canada and as well as Central Canada, and this will give us a large presence in Eastern Canada, where we already have a large solid waste presence. This will afford us the ability to realize a significant amount of synergies over the near term. So I think from my perspective and from you, as shareholders, I mean this was a very unique opportunity to acquire a unique set of assets. When you look at the Canadian business over the time of COVID, outside of Q2, our Canadian business largely performed exceptionally well and was getting closer back to budget as we tail through the year. When you look at this opportunity, I think we've looked at it in the most punitive way possible, obviously, buying it off an LTM set of numbers that have some COVID impacts, so the numbers that we've put on the piece of paper here are the most punitive way we could think of presenting them. So we think there's significant upside to these numbers. When you look at the free cash flow of the business, again, we're modeling $45 million, again, largely debt financed. Now if you added back in the interest component of that, you'd be closer to $80 million of free cash flow. Again, we think there's significant upside from the synergy numbers that we presented on the page. So again, from our perspective, again, very compelling on every financial metric. And I think we'll -- over the near and medium term, this is going to create significant shareholder value for all of us. So with that, I'll turn it over to Luke, and then we'll open it up for questions, as I think it will be a better use of our time.

So if you look at Page 6 of the presentation, we've presented some high-level illustrative pro forma financial information. I'll just walk through and orient the page and provide some high-level sort of color. I think the math is pretty self-explanatory. But really, the first column lays out the midpoint of the guidance that we provided in late February, so this is before including any of the upside opportunities that we articulated. And you'll recall our color around the inherent conservatism, we believe, to be baked in the guidance, particularly as it is related to the volume tied to sort of reopening activities. Recall, our guidance was predicated on the trends we were seeing at the beginning of the year, and therefore, did not sort of fully bake in the expected volume recoveries as markets reopen throughout our platform. So if you take the first column as our base business, what we've done in the second column there is laid out numbers for Terrapure. As Patrick said, we're using LTM numbers here that are inclusive of COVID-related impacts. You can see the top line there, $375 million. For context, 2019 for this business was $410 million, so clearly some conservatism in what we believe to be the ultimate earnings power of this business. If you roll forward, we're ultimately going to have this in 2022 as our first year of contribution, a time for which we think the COVID-related impacts will have subsided, and there's probably meaningful upside above and beyond what we've shown here. But we went with the LTM numbers, it's inclusive of the $12.5 million of synergies. We think that's the sort of near-term achievement, and there's probably upside on top of that number. And then as Patrick said, have sort of fully burdened this for debt financing costs, this little column in the middle, anticipate $750 million of incremental financing at 4.5% interest rate. In reality, by the end of the year with free cash flow generation depending on when this closes, the actual financing package may be something different than what we've articulated here. But for conservatism, we've used the full $750 million at sort of 4.5%. The delta between the $750 million and the purchase price is reflective of cash on hand, anticipated to be available to the company by the end of the year. And then if you think about what that does to the pro forma column, so on the right, basically accretive across every financial measure from margins to free cash flow margin to free cash flow conversion, which, as we said in our February call, is going to be a continued focus. We're just going to keep speaking to those financial metrics on each of the calls that we have. And from a financial metric perspective, we believe this ticks all of the boxes being immediately accretive to the free cash flow line to the tune of almost 10%. At the bottom of the page, we've just really highlighted the continued evolution of our total revenue by segment. If you go back to 2017, you can see at that time, solid was 70% of the total business. We ended late last year with solid representing high 70s. And even inclusive of the liquid waste component that's coming with Terrapure, the model still suggests as we go forward, we're still -- solid is going to continue to outpace in terms of growth and be 80% plus of the overall business in the near term. And that's what we're highlighting at the bottom of Page 6. Page 7, just quickly. This is the bridge that we had presented as part of our guidance, showing the base 2021 guidance and then upside opportunities, areas that we thought we could affect change during the year, just had some uncertainty as to when in the year, and therefore, we presented them in this manner. All we have done on here is updated the page to reflect the contribution from Terrapure. And so you can see, the first step there is the incremental $45 million. And so if you put that all together, you can see ending the year with a potential free cash flow run rate in the range of $575 million to $625 million. There's other steps on the page, the potential incremental acquisitions, the refinancing and redeployment. We are still progressing on each of those steps and still anticipate to be able to deliver on those by the end of the year. And we will update you throughout the year as we affect those changes. With that, operator, we're going to turn the call over for questions and answers.

[Operator Instructions] Our first question today comes from Kevin Chiang from CIBC.

Just a couple for me. Just one on the cross-selling opportunities. Can you give us a sense of how much of Terrapure's customers may have used more than one of their services versus maybe what you see within your own Canadian platform? And just the opportunity to accelerate that cross-selling as you look to capture more of your customers' wallet?

Yes. I think in Canada, particularly, if you look at where we're acquiring these assets, I think the interesting part about this business is, I don't think there's a significant amount of cross-selling within their existing book. But when you look at the ability, we're acquiring a business that we have solid waste presence in each one of these markets. We're going to have a very large opportunity to cross-sell our solid waste services into those 7,000 customers that Terrapure has today.

Okay. That's helpful. And then just second one for me. Once the Terrapure deal is consummated, just what does your pipeline within Canada look like in terms of tuck-in opportunities? Does the acquisition of Terrapure increase that runway as it gets you a little bit further East, a little bit denser out Western and Central Canada?

Yes. I mean Canada has always been a home. Like we said, if you look at the pipeline today, our pipeline today is -- almost half of that pipeline today is in Canada. I think the size of the opportunities in Canada continue to be smaller, just they're sort of more in the $1 million to $5 million of EBITDA range versus some of the opportunities in the U.S. that continue to be a little bit larger than that. But I think from our perspective, I think the factory will continue in Canada, particularly with the singles and doubles to tuck-in to -- again, just this footprint and the expanded footprint, I mean, I think now when you look at the business, we literally have coverage of all of our services from basically Vancouver Island all the way to Newfoundland, which is highly compelling from our perspective, if you look at our solid waste presence, particularly in the maritimes, since we started building out that business in 2015. Again, we looked at the business that Terrapure had acquired a few years ago, and they were the successful performer in that, which is a company called Envirosystems, which gives us a big presence out there and has been a large player out there for a long time. So I think for all the reasons we articulated earlier, that's why it sort of makes sense. And I mean, I think getting a landfill asset like we're getting that is within spitting distance of the Greater Toronto Area that just recently got a 14-plus year expansion, I mean, I think that's an extremely unique opportunity and then having a highly complementary organics business to ours, again, we continue to see big opportunities in the organic space, and I think that's going to continue rolling out into the U.S. as well as people are continue -- continues to be a focus on diversion of different food waste streams from landfills. So I think we're -- this positions us extremely well with an asset that is literally in our backyard. And we were the architect of building this business across Canada really since September of 2008, which is when we closed our first acquisition in the space, and now you sort of layer on all those different pieces to the puzzle, I mean, I think it just really solidifies our presence here and uniquely positions us for future growth.

Our next question comes from Tyler Brown from Raymond James.

Patrick, so hoping for a little more color on the Stoney Creek landfill. It seems obviously like a very interesting asset. So first off, maybe how much is that landfill permitted to take and kind of what is its current intake?

Yes. So the site is basically permitted for 700,000 to 750,000 tonnes a year. I think one of the more compelling things, and going back to Luke's point, we've taken a conservative view on their earnings numbers that are presented here. I mean they were going through an approval process to have that landfill permit expanded and extended. And through that process, what they do is back off on the fill rate. So if you look at the numbers today, the intake was basically 275,000 to 300,000 tonnes a year for the last couple of years while they went through that permit increase process. Our anticipation is that, that number will trend back closer up to 600,000 or 700,000 tonnes a year, particularly with the power of our existing platform. And we will go to maximize price at that landfill and put in the highest priced tonnes that we can. So I think there's a big opportunity for us, specifically at that asset, that will provide incremental upside to what we put on the page.

Okay. Right. So lots of upsides from utilization, but to be clear, that's not in that $12.5 million of synergies?

No.

Okay. And then again, kind of without getting too specific, is it safe to assume that gate rates for industrial waste are multiples higher than what MSW gate rates are in the region?

Yes.

Okay. And then just my last one on the CapEx. So you got this 14-year expansion -- or not you, but Terrapure got this 14-year expansion. But to be clear, when we see expansions like that, they're usually a big sell, buildout. So is that the case here? Or is that contemplated in the $30 million of CapEx?

So again, we've taken a very conservative view on CapEx for this business. I think when you look at it, the lion's share of that CapEx is going to get spent under the existing seller's watch over the course of this year. So by the time we close, that CapEx spend will be made. I think the interesting part about this expansion was they got a vertical expansion, not a horizontal expansion so far. So I mean when you think about it again from a liner perspective, the cost to go up are a lot cheaper than going wide. So again, that will largely be done and I think position us very well from a free cash flow perspective. If you look historically, the business ran at sort of 5% to 6% CapEx. We've modeled in 7.5-ish percent, again, just taking a very conservative view to take into consideration any unknowns. But again, we feel very comfortable with the potential upside from the free cash flow because of that asset.

Yes, Tyler, to your point, on the sell expansion, I mean, I think there was sort of $10 million to $12 million this year, but as Patrick said, that's going to be substantially on prior owner's watch. Depending on close, a little bit of that may trickle into our spend. But the go forward -- that will be behind us, that sort of onetime sell, buildout.

And our next question comes from Michael Hoffman from Stifel.

Could you, for the Americans, help us understand what the milestones are for the Canadian Competition Bureau, sort of when do you file, how long does it take, what are we looking at?

So our hope -- our anticipation is we'll file by the end of the week. It was basically a 2-week grace period for the Competition Bureau to review the file, and then there's basically a 45-day clock that starts ticking. In that 45 days, they can come back and ask for a second request. They come back and ask for a second request, and that process generally extends for another 30 to 60 days. And then generally, at the end of the 30 to 60 days post that initial sort of 60 days, you'll have remedy solutions presented by the Competition Bureau if there are any issues. I mean we don't anticipate any material issues here. I think there's enough other competition in the markets where we are. Yes, it will be -- we're requiring a large presence, but at the end of the day, there's enough competitors in the markets across Canada that we believe there'll be minimal issues here. And given -- I think there's a lot of other files on the Competition Bureau's desk today, so I think we will work with them as we worked with the DOJ and the Competition Bureau in the past to get through these efficiently, and we feel very confident that we'll get through. I mean we looked at these -- all these issues in 2014, and we looked at all these issues in 2019. So we are very well prepared, knowing if there be anything, but our view is, there's very little that could be of concern for the Competition Bureau.

Okay. And then can you share with us, for modeling purposes, how would we -- should we split the sales and the EBITDA between solid waste and liquids of the $375 million and the $110 million.

Yes, Michael, I'd say the $375 million, again, this is the LTM number. Obviously, 2022 will be -- we'll guide at that time, it is likely going to be something greater. But $375 million in right now is split 1/3 of the revenue to solid and 2/3 to liquid. We're still internally making sure we're mapping that -- how it lines up with us. There might be a little bit more solid when all said and done. But at the EBITDA level, with that landfill, the EBITDA is sort of higher-margin. So you're probably having on that solid revenue that's coming in, it's sort of mid- to high 30s EBITDA margins, and that yields at the liquid business of sort of low to mid-20s. Again, we're saying that's a very sort of conservative starting point, and we think that ramps up quite quickly from there.

Okay. That's helpful. And then, are there any things within your balance sheet, from a timing standpoint, where you might be able to couple the financing of this and a refinancing of the balance sheet and come out of this at a lower cost? Should we be aware of timing issues related to instrument restraints and things like that, restrictions?

Yes. I mean we're going to be opportunistic, obviously. We have time. I think from our perspective, refinancing like Luke has on one of the pillars here of -- for the adjusted free cash flow bridge, we're looking at -- there's a whole bunch of it. As always, the market continues to evolve, and there's a significant amount of products available to us. But yes, I mean, I would anticipate that interest costs are going to decrease, and our average coupons are going to decrease at the same time. So we will look at a holistic financing package as we get closer to closing.

Okay. And then just for clarification. From my part, I was in the understanding that in Canada, MSW tip fees are actually pretty steep. They're $60 to $80 a tonne. And that industrial -- your opportunity here is to improve the pricing in Canada pricing. Your disposal costs are pretty attractive because you're coming into Michigan. And that's why -- yes, and this is so attractive is, you've got an opportunity to walk this up for in Canada volume.

That's -- yes, that's right. I would say, depending on what part of Canada you're in, I mean disposal fees range from $30 a tonne to $120 a tonne. If we focus on the Ontario market, which is the MSW market, it's generally, I would say, controlled in Ontario by 3 parties, which is a company called Walker Brothers. And then you have Waste Connections and then you have Waste Management, that all have landfills in Ontario. The lion's share of those landfills take industrial commercial volumes and MSW. They're not taking industrial waste, particularly with the proximity to Toronto. That's the benefit of this landfill. I mean, as you know, people look at disposal on a T&D basis. I mean the lion's share of the volumes are in the GTA. So I think when you look at the gate rates today for solid waste, I mean, generally range between $30 and $40 at the gate. I think when you look at the industrial landfill rates today, those are moving up north of $50 and probably be between -- somewhere between $60 and $70 at the gate, again, just because there's scarcity value of opportunities to disposal of those materials, and this landfill happens to be permitted for those. So the highest and best use will not be to put MSW, particularly with our proximity to Michigan, and obviously, with our newly acquired landfill in Michigan as part of the ADS transaction. So we'll continue internalizing as much volume as we can into Michigan from our facilities, and then put the highest and best use tonnes into this landfill in Stoney Creek.

Okay. Since we've got you, could you give us a quick mid-quarter update on the state of business of existing GFL?

Yes. I mean we were through January and February. I think everything continues to trend on plan, even with, I would say, a little bit of a slower reopening in Canada so far. I mean parts of Canada are opening up, but there's still -- Toronto and Montreal continue to take a perspective that locking people in their homes is better than letting them out. But as vaccines slowly start to trickle in and we're supposed to get a big ramp in vaccines here over the next 6 weeks, our anticipation is that over the next 8 weeks, things are going to start opening up. And the hope is, by June 1, we're somewhat back to normal. But I think from outside of that, everything is trending in line. And I think, obviously, we don't see any surprises to the previous guidance that we put out.

And our next question comes from Hamzah Mazari from Jefferies.

My first question, Patrick, is just how do you think about this deal compared to others you've done, just in terms of your excitement level, confidence level? How do you think about ROIC on this deal versus others? And then do you have an updated view on noncore asset sales post sort of this announcement?

Yes. I mean from my perspective, and as most of you know, I mean, you follow the market. I mean, to get as an asset, and assets of this quality at this price don't come along every day, and I think it just speaks to the way that we were able to get deals done. And not to toot anybody's horn, but I think the guys on the BD side and on the environmental side and on the legal side, I mean, just were able to move quick, and the seller had a reason that he wanted this business carved out because he had other plans for their battery business, and we were able to move and get it done quickly. I mean I think on any financial or operating metric, I mean, I think, like I said, from a complementary perspective, I don't think there's any asset that's any better than it could be in Canada. I mean when you look at those maps and literally, their business is sitting on top of ours. So again, the opportunity for us to realize meaningful synergies, I think, are exceptional. I think when you look at some of the recent trades in the private equity market of environmental services business, solid waste businesses, I mean, these things are trading now sort of between 12.5 and 15x privately. I mean there've been big trades. I think it will be -- if you look at the Covanta assets and the guidance that's been given on the environmental services business for Covanta, I mean, significantly higher multiple than what we're applying for this business. And from a return on invested capital perspective, particularly with us not having to use any equity to finance this, given the multiple and synergy opportunity here, I mean, I think for us, as shareholders, it's very compelling. And from a return on invested capital perspective, I mean, on an unlevered basis and a levered basis, I think it's very good. And I think if you look at the opportunity of what that looks like and what this will look like for us over the next 3 years, it's going to be as good or better than any deal in my view that we've done that's of any size or scale. So I think it's just -- it's a great deal for us, and it's a great deal for all the shareholders.

Hamzah, something I'd add. I think it's a unique position when we have these deals that we've looked at several times over the years. And I think, as Patrick said, we first looked at this almost 7 years ago, and you see the forward projections of what the business is supposed to do. And we looked at it again sort of 2 years ago and then looking at it again today. And being able to have that sort of visibility and look back, I think, also affords you a very unique sort of perspective in really understanding what the business is and what it is capable of. And any time we've had instances and scenarios like that, we've had great success of being able to sort of predict the upside and what that was actually going to look like. And so having that 7-year history with this business I think really informs our view when we say this $375 million and $110 million that we're starting is a highly conservative number that we can outperform, I think that's greatly substantiated and bolstered by that look back perspective we have.