Earnings Call: Q2 2020

Aug 6, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the GSL 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. I would now like to turn the call over to your speaker today, Patrick DiVici, CEO of GFL. Please go ahead. Good morning, and thank you for joining the call. I hope everyone is staying safe as we continue navigating through these unprecedented times. This morning, we will be reviewing our results for the Q2 of 2020. I will provide an overview and then Luke Pelosi, our CFO, will take us through Q2 financials. We will also spend some time today to update you on what we are seeing in the current operating environment. But before I get started, I'll pass the call over to Luke, who will provide some disclaimers. Thank you, Patrick, and good morning, everyone. Before we get started, please note that we have filed our earnings press release, which includes important information. The press release is available on our website. Also, we have prepared a presentation to accompany this call that is also available on our website. During this call, we 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 or anticipate may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U. S. Securities regulators. Any forward looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward looking statements. These forward looking statements speak only as of today's date, and we do not assume any obligation to update these statements whether as a result of new information, future events and developments or otherwise. This call will include a discussion of certain non GAAP measures, and a reconciliation of these non GAAP measures can be found in our filings with the Canadian and U. S. Securities regulators. I will now turn the call back over to Patrick, who will start off on Page 3 of the presentation. Thank you, Luke, and thank you for everyone for joining us. We are very pleased with the results that we are sharing with you today that continue to prove out the resilient growth profile of our business. In the face of significant impact on general economic activity resulting from COVID-nineteen, we delivered the highest revenue, adjusted EBITDA and adjusted EBITDA margins in GFL's history. We attribute our success in the quarter to 3 key factors. 1st, the revenue profile of our business. As we have said many times before, the larger proportion of revenue coming from our service based collection activity yields a more favorable variable cost structure that we can flex in response to lower volumes. 2nd, that we generate almost 2 thirds of our solid waste revenue in secondary markets. We typically saw less volume impact in these secondary markets as compared to the larger metro areas like Toronto and Montreal. 3rd, and most importantly, the dedication and capabilities of our employees to adapt to the changing operating environment. I am humbled by the performance of our operators in the face these unprecedented conditions. Truthfully, Luke, myself and the rest of the senior leadership team have largely been cheerleaders during the past few months. It is our almost 14,000 employees who deserve the credit for this successful quarter. Our top priority continues to be ensuring the health and safety of our workforce. The incremental risk management steps and the protocols we outlined in our Q1 conference call continue to prove effective in keeping our employees safe, and we are continuing to update them as we navigate the complex process of market specific re 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 and A front. In June, we announced that we've agreed to acquire the asset divestiture package resulting from the Waste Management and Advanced Disposal transaction. As we said in our announcement, we view this acquisition as a unique opportunity to significantly expand our U. S. Footprint through acquisition of a highly quality vertically integrated set of assets in both our existing and adjacent fast growing U. S. Markets. The asset package will also form a base for us to pursue synergistic 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 and A activity closing 2 small transactions in the quarter. We continue to maintain a robust M and A pipeline and will remain disciplined in our approach towards capital allocation. We have sufficient liquidity on hand to self fund our M and 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 4 of the presentation, you will see a summary of the growth And at the top left of the page are the figures for the entire second quarter. And at the top left of the page are the figures for the entire Q2. As we said in the Q1, the impacts from COVID on our financial results vary greatly by market and were largely dependent on the characteristics of the rules of the shutdown that were imposed in each specific market. In our solid waste business, 4.1% of incremental revenue from price was offset by 8.3% of negative volume, mostly attributable to reduced volumes in our commercial and industrial collection business. Volumes in our residential collection business held up very well in the quarter. The relatively lower proportion of revenues that come from our volume based post collection activities mitigated the overall revenue impact from lower volumes at our transfer stations and landfills in the quarter. We temporarily paused the majority of our pricing initiatives during the quarter as we continue to work to support our customer base during these unprecedented times. We believe in nurturing long term relationships with our customer base in addition to working with our customers on service intervals and payment terms, we view the temporary pause in pricing as the right thing to do. We also experienced a negative CPI adjustment on one of our largest municipal residential contracts in the quarter. This particular contract has a pricing formula highly correlated to diesel pricing, which were significantly lower on the contract anniversary date, resulting in a negative price adjustment. Offsetting these price impacts was a higher net price for recycled commodities, largely driven by the sudden spike in OCC pricing that occurred at the beginning of the quarter. Looking at the reductions in volume in the quarter, the main driver was the timing and scope of regional shutdowns in each of the affected markets. We saw the greatest volume impacts in our Canadian primary markets where shutdown orders were put in place earlier, lasted longer and impacted a broader range of businesses that we service. Volumes in our secondary markets as where I said earlier, we generated almost 2 thirds of our solid waste revenues were far less impacted. Looking at the two tables on Page 4 of the presentation, you can see the indication of the trend we're seeing in volumes. The 8.7% organic decline in April was reduced by half for the quarter as a whole when you look at the underlying data. What you see is sequential improvements week after week and month after month. The service level decreases in suspensions that commenced mid March and bottomed in mid April have reversed and now form an encouraging trend line. July was better than June and as markets continue to reopen and customers continue to reengage, we expect the trend to continue to move in the right direction. Again, with a degree of uncertainty that still exists around how the reopening of the markets will take place and whether a new round or partial new shutdowns will be required in the fall and in winter months, it is difficult to forecast with a great deal of precision what the future holds. However, based on the current trends, with each day that passes, we are emboldened in our cautious optimism. Once again, when you're thinking about how these revenue impacts translate to margins, there are a few points to consider. 1st is the revenue profile of our business with a larger proportion coming from our service based collection activities. As I said earlier today, what comes with this revenue profile is a highly variable cost structure. Our relentless focus on optimizing collection routes is improved asset utilization and productivity. Parking trucks and reorganizing our workforce across our service offerings and business lines has saved dollars while minimizing the disruption to our employees. Our safety stats have also improved and our absenteeism is at all time lows. We did incur incremental costs in the quarter for the enhanced safety and hygiene protocol that I described earlier, but those costs were more than offset by the enhanced productivity. All of these factors together with correspondingly lower disposal, R and M and fuel costs that naturally flexed out with the lower volumes have continued to more than offset the impact of COVID related volume reductions on our margins. The second point to consider is our focus on discretionary SG and A costs, where we eliminated substantially all travel and entertainment costs and we postponed annual merit increases for salaried employees until Q4. We took these measures to avoid incremental headcount reductions and retain our highly engaged workforce to position us well for market reopenings. Finally, we have some macro tailwinds that have and we believe will continue to mitigate impacts to margins. Commodity prices were up during the quarter with the blended basket price being 40% over the prior year. Pricing has since come down, but we are still sitting at levels of 20 percent above the prior year. Diesel costs continue to be at historical lows, which can negatively impact fuel surcharge revenues and certain residential pricing, but on balance provides a net margin benefit over the prior year. And finally, FX rates continue to provide a favorable margin impact by translating the relatively higher margin U. S. Business into Canadian dollars at a higher rate. The result of all of this was solid waste margins of nearly 31% for the quarter, 180 basis points increase over the comparable quarter last year and a result far in excess of our expectations. Looking at solar and infrastructure, the business continues to demonstrate the success of our strategy as we realized 3.7% organic revenue growth compared to Q2 of last year despite the disruption from government imposed COVID mitigation measures in the Canadian markets where we generate most of our revenue in the segment. While the substantial majority of our larger activity projects deemed essential and therefore we're able to continue during the quarter, we saw lower volume for many of the small volume high frequency solar mediation customers that we typically service resulting from a temporary suspension of those customers' solar remediation activities in response to COVID. 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 Q1, our liquid waste business was our most impacted segment during Q2. On the News More Oil Collection side of the business, reduced volumes being generated as a result of COVID related shutdowns continue to negatively impact revenues. Collected volumes were down 30% compared to the prior year, while volumes sold were down 45% or 30% after adjusting for a bulk sale in the prior period, reflecting reduced demand tied to the temporary suspension of certain customers' operations in response to COVID. While we anticipate the volume trends to continue improving in the back half of the year, we expect volumes to remain significantly below prior year as system wide inventory levels take time to normalize. It should be noted that the current situation is entirely a volume story. As net new mold pricing is now flat to better than the prior year as a result of incremental charges for oil that are significantly higher this year than last. Regarding the core industrial service component of our liquid business, as we had previously said, many of our customers were deemed non essential had to temporarily shut down. While we have seen an increased level of customer engagement over the past 2 months, we expect that some of the customers will reduce spending on certain of our services as a part of the COVID mitigation measures and these actions will continue to provide volume headwind in the back half of the year. On balance, while current data highlights continue to run through volume improvements, we anticipate the overall pace of the volume recovery in liquid waste to be a little bit more tempered than we are seeing in our solid waste and our soil business. I will now hand the call over to Luke to walk through in more detail the financial results for the quarter and then turn it over to the operator for questions. Thanks, Patrick. Turning to Page 5, we've provided a summary of results by operating segment. In solid waste, core price and surcharges drove 3.7 percent revenue growth as compared to 4.9% in the Q1 of this year and 4.4% in the prior year comparable period. As we told you, our pricing activities are front end loaded and this year's plan anticipated a step down in pricing levels throughout the year. Obviously, the COVID related disruptions were not in our original plan and our decision to temporarily suspend the majority of our pricing initiatives in an effort to support our small and medium sized customer base during these challenging times impacted overall pricing. However, we expect these impacts will be temporarily in nature, and we believe we still have a meaningful latent pricing opportunity within our legacy customer base. Overall, we continue to see pricing discipline in in the industry and we remain confident in our ability to deliver on our stated pricing goals for this year and beyond. In addition to growth in core pricing, we realized an incremental 40 basis points tied to commodity prices, where we realized a blended basket price nearly 40% higher than that of the prior year, largely driven by the spike in OCC that occurred during the quarter. OCC prices have come down since their May peak, but current pricing remains above that realized in the prior year. Patrick walked you through the overall solid waste volume decline, but I'll give you a little bit more color on the components. Overall volume was down 8.3%. 80% of that decline came from IC and I collection, and the decline in IC and I collection in Canada was twice what we saw in the U. S. Again, recall that for the 1st 10 weeks of the year, volume was running positive 100 basis points or so, and we therefore view this volume decline as entirely a COVID related impact. As Patrick said, however, the sequential trend line continues to move in the right direction. Solid waste adjusted EBITDA margin was 30.6 percent for the quarter, the highest margin we've ever reported and 180 basis point increase over the same period in the prior year. Obviously, a lot of moving parts in the quarter, but the key components of the margin walk include 110 basis point benefit from lower diesel costs and a 25 basis point benefit from higher commodity pricing. Offsetting these macro tailwinds were 50 basis points of decremental margin from incremental COVID safety costs, 30 basis points from incremental COVID related bad debt expense and a 40 basis point net drag from acquisitions, a decrease primarily attributable to Canadian tuck in acquisitions that have yet to achieve their anticipated margin profile. Excluding these items, the base solid waste business drove nearly 125 basis points of organic margin expansion over the prior year, despite the decremental impact of COVID volume declines, a testament to the effectiveness of our team's ability to manage our cost structure through the volume decrease as well as the positive impact of our previously communicated pricing and procurement initiatives. Looking at soil and infrastructure, the key message here is around the margin impact of the change in business mix. The volume impacts we saw were primarily related to our small volume high frequency soil remediation customers, which typically generate highly accretive revenue due to the relatively fixed cost structure of our soil remediation facilities. We have started to see these customers return as markets reopen. And while there will likely be continued margin pressure in the Q3, we expect the margin profile of the business will return to the historical trajectory in subsequent quarters. Our liquid waste business was mostly impacted segment during the quarter. Patrick spoke about the changes to the top line, driven by a combination of lower sales volumes of Yumo and a reduced activity in our core Industrial Services business. Yumo selling prices were down approximately 30% across the network from approximately $0.30 per liter in the prior period to $0.20 per liter during the quarter. However, the net charge for oil was approximately $0.10 during the quarter compared to roughly 0 in the prior period, resulting in a flat net selling price period over period. Collected volumes were down approximately 30% and volumes sold were down 45% or 30% when normalizing for a bulk sale in the prior period. Our commercial and industrial collection volumes were also down approximately 15% as many of our customers were deemed non essential and had to temporarily shut down or reduce activities. Margin pressure in the liquid line of business was greater than our solid waste business due to a relatively less variable cost structure. Fewer collection vehicles and more fixed facilities yield a more sticky cost structure. Although we flex nearly $9,000,000 of operating costs out of the base business on a like for like basis, mostly around direct labor and vehicle costs, the cost flex was less than the volumetric impact to revenue and we realized margin compression as a result. We also realized COVID related PP and E bad debt expenses that added another 100 basis points of pressure to margins. As volumes return, we anticipate achieving meaningful operating leverage as we realize the benefits of these structural cost changes. On Page 6, we presented our income statement highlights, but I'm going to skip over that page and point you to the MD and A as posted on our website for an explanation of the period over period variances in the income statement. Therefore, turning to Page 7. Reported cash flows from operating activities were $132,200,000 in the quarter as compared to $56,000,000 in the comparable period of the prior year, an increase of 137%. Excluding the impact of transaction and acquisition related amounts, cash flows from operating activities were $160,000,000 Looking at the bridge presented on that page from $160,000,000 at the top of the table to $132,200,000 as the cash flows from operating activities. Those are basically your adjustments to arrive at a free cash flow number. So if you deduct $116,000,000 net CapEx for the quarter from that $160,200,000 at the top of the table, you get an adjusted free cash flow of approximately $44,000,000 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 $275,000,000 However, the coupon payments on the bonds are concentrated in the 2nd and 4th quarters of the year with just under 40% of the annual cost incurred in Q2 and Q4 and just over 10% of the cost in Q1 and Q3. So there's a need for some straight lining when you're thinking about your models in this regard. The second item is around working capital. Our historical seasonality around working capital saw significant investment in the first half of the year and then a recovery in working capital in the back half. The diversification of the geographic breadth of our business together with active projects we are implementing around optimizing our working capital processes should see flattening of this curve and an overall recovery of some of the historical investment in working capital. Year to date investment in working capital stands at just over $80,000,000 which is slightly better than our original plan when normalizing for COVID related volume losses. We are actively monitoring our credit exposures and collections remain strong. We did take an incremental $3,000,000 charge for COVID related bad debts during the quarter, primarily related to small businesses that we don't see returning. But we have not identified any material credit exposures in our book of businesses. We continue to actively manage our cash balances and pushing up AP balance at the end of the quarter. When thinking about the back half of the year, the original plan was to recover in excess of the first half investment and see working capital contribute positive $10,000,000 to $20,000,000 of cash flow for the year. Despite my comments about the strength of collections, given the uncertainty in the current environment, we think it's prudent to adjust these expectations to remaining flat for working capital for the year as a whole. We continue to see real upside opportunity in the area of working capital. We're just recalibrating expectations as to when those dollars will be realized. In terms of the cadence, the anticipated Q3 revenue as we rebound from Q2 will put pressure on Q3's working capital. So we expect Q3 to be close to flat when the majority of the second half recovery will be realized in Q4. One last point on working capital is we didn't realize a material benefit in the quarter from the various government relief programs have been made available. Although we have deferred current payroll taxes until 2021 in some of our U. S. Businesses, which helped working capital of approximately $5,000,000 In terms of investing activities, as Patrick mentioned, in addition to announcing the pending acquisition of WMADS divestiture package, we closed 2 small tuck in acquisitions in the quarter that although were individually insignificant were important in marking the return of our M and 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 $120,000,000 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 $100,000,000 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 $20,000,000 to $30,000,000 of growth opportunities that we think makes sense for this year. And as a result, currently sit with a view of $360,000,000 to $370,000,000 spend on CapEx for the year. Our actual spend will depend on how things evolve over the rest of this year as we still intend to capitalize on attractive opportunities that may arise. Cash flows from financing activities are primarily comprised of the new US$ $500,000,000 4.25 5 year notes we issued at the beginning of the quarter. Turning to Page 8. We have presented a summary of net leverage at the end of the quarter. As a reminder, although substantially all of our long term debt is denominated to U. S. Dollar and is hedged to Canadian at fixed rates, for financial reporting purposes, our U. S. Dollar denominated debt is revalued to Canadian dollars at the FX rate at the end of the period. During periods of foreign exchange volatility, we may realize noncash foreign foreign exchange adjustments on our balance sheet that are in excess of the foreign exchange fluctuations realized in our P and L. The foreign exchange rate was 1.36 atquarterend as compared to 1.3@yearend, a change that resulted in incremental $245,000,000 of long term debt recognized on our balance sheet. To facilitate a comparison of the net leverage announced that were presented as part of the IPO roadshow, we have presented our quarter end long term debt balances translated to U. S. Dollars using the 2019 year end foreign exchange rate, which you can see in the middle column on that page yields a net leverage amount of just over 4 at the end of the quarter. When you think about how cash flow and leverage should play out over the balance of the year, we should incur an additional $140,000,000 to $150,000,000 of CapEx and approximately $140,000,000 $145,000,000 of cash interest cost 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 our free cash flow number somewhere between $275,000,000 $300,000,000 for the back half of the year, depending on your views of where we end up in terms of EBITDA. Applying that free cash flow to the balance sheet would yield year end leverage levels in the low 4s of today's FX rate. The bridge I just walked through on free cash flow and leverage is excluding the impact of the WM ADS 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 0.5 turn over the numbers I just walked on a pro form a basis. We believe that the outcome is consistent with our stated goals around leverage and does not preclude us from continuing to execute on our M and A. That's the review of the quarterly results for the period. And with that, I'll now turn the call over to the operator to open the line for questions. My first question is just on pricing. I realize pricing was a bit weaker due to COVID. But how do you think about the sustainability of long term pricing? Is it closer to 4.5%, 5% or is it closer to 3%, 3.5%? As you look forward in a normalized environment, I realize historically you were building route density focused on M and A and integrating assets. And then there was this little bit of a pricing catch up and we saw Q1 pricing very strong. How do you think about just normalized pricing going forward when we come out of COVID eventually? Yes. So good morning Hamzah, it's Luke. I think what we have said for our plan and our model going forward, we were targeting sort of 3.5% to 4% pricing. We thought that was the right level and a sustainable level for us to be able to continue on our volume growth expectations as well as achieve the pricing we need to sort of cover our internal cost inflation and drive the margin. So what we said is in addition to that, we had this sort of late repricing opportunity that we But really living in that sort of 3.5 to 4 was where we wanted to but really living in that sort of 3.5% to 4% was where we wanted to play. So what you saw in Q1 was the rollover effect of last year's sort of latent catch up opportunities, a lot of which was done in April of last year. We started harvesting across our Canadian legacy book of business. See the benefit of that plus just regular way Q1 price increases for this year. Q2, as we mentioned, we paused a lot of those pricing initiatives in light of the sort of backdrop. And into Q3, we've continued to be very tempered. We have started implementing in certain situations, but still a more tempered approach. So I think what you're going to see, which is this is what we said in Q1, is throughout the year, the PIs would step down after the Q1 high of 4.9% and end the year somewhere in the 4s range. And again, going forward, when we look at our existing book, we think that's a sustainable level for the sort of mid term, again, that's sort of 3 point 5% to 4% on a recurring run rate basis. Got you. Very helpful. And my follow-up question, I'll turn it over is, I may have missed it, but could you talk about what you saw in July either from a revenue perspective? I know you mentioned sequential activity increases since the April bottom, but just any color what you're seeing in July in your markets, that'd be 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 this. As the shutdowns start as things started opening up, we saw a fairly large spike in revenue and then that sort of flatlined because there was sort of a bunch of pent up work that needed to get done. And then things sort of tapered off a little bit, but then you sort of look at the trend now. The last sort of 3 weeks post, I would say, the July long weekend, we've seen the business significantly uptick and is trending much closer to budget than we've been for the whole year. So all signs are pointing in the right direction. I mean, there's a lot of noise in media watching CNN and Fox News about what's actually happening in the world. But I can tell you on the street, I think people are going about their life and trying to get back to normal as quickly as possible. But we are seeing those trends trend much closer to budget. Similar to what we saw through April through June, we continue to see those uptick in closer to budget now for the last sort of 3 weeks from week 28 through 30. Great. Thanks so much guys. Thanks, Onset. Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Walter, your line is open. Yes. Thanks very much, operator. 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, there been have the incremental margins come in as expected? Or are you seeing the need for additional costs to come back a little bit quicker? Is traffic levels on the streets causing some pressure there? Any of the things that might have artificially benefited you during COVID-nineteen from a cost perspective? Is there anything unexpected coming back on creeping back in just because creeping back in just because of the fact things are getting busier. But we've made our route so much more efficient today and park so many trucks that that would be a sort of natural cadence that you'll start seeing some overtime creep back in. But other than that, listen, a lot of the costs we took out are it's our expectation that they will come back in a lot slower than the revenue comes back in. So I think this 3 months of sort of sitting and really looking at the businesses will benefit us. And 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 revenue is coming back much faster than some of those other costs. Makes sense. Okay. And then turning to your tuck in, you were indicating in your prepared remarks, you're reengaging your tuck in mean? Or are you more mindful? I think mean? Or are you more mindful? I think your results have demonstrated that you can certainly tolerate higher debt levels through a cycle. How do you look at your balance sheet capacity and square that off with the willingness for sellers out there today? Sure. So we got this question a lot when we marketed the IPO and investors always concerned with leverage. And I think people ask the question, what happens in a recession? And I think we set back and said nothing could be worse than September of 2,008. And I think what you've just seen is significantly worse than 2,008 in the quarter. And I think what you're able to see is what we've been able to demonstrate is that leverage didn't move in probably the biggest downturn that anyone's seen on this call. So I think when you look into leverage perspective, that is the sort of case study of that leverage is not an issue for us. Again, like we told investors, we'll maintain leverage in low to mid-4s, lever up as high as mid-4s for the right opportunity. We feel very comfortable with that. We continue to feel comfortable with that. The business, like we said, in the back half of the year is going to generate almost $275,000,000 to $300,000,000 of free cash flow. And I turn my attention to you look at our where our debt is trading today, I think the repricing opportunity will continue to be something that sort of leads the way for us. I mean, our capital structure today, our bonds and term loan are trading all sort of in the low 3s to just above 4. So I think as we continue to expand, it's a bit of a perfect storm for a company that has is a defensible growth story. Number 1, we can protect our base earnings and number 2, we can finance M and A at very attractive prices today because of where the cost of capital has gone. So all of that, put that all in a blender, which leads us to sort of, as Luke said, reengage on the M and A program. I will say equity will not be an impediment to us executing on our M and 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 certain leverage for the right opportunities. And when I look at our pipeline today, I'm going to get a little more granular than I have in the past because of where we are. I think we have it let's start with the ADS transaction that we all talked about and had a call on. I think from the ADS perspective, we are ready to hit the switch. From an integration perspective, we spent obviously, we have a constructive relationship with ADS and Wage Management. We spent a lot of time on planning to make sure that this goes smoothly. We have a full roadmap to actually get this done from an integration perspective and we're just truthfully waiting to get the final DOJ sign off. So Wage Management can close theirs and then we can close our transaction 5 days later with them. Offer letters are going out to all the employees this week and we're just going to sort of be in a bit of a holding pattern until the DOJ gives their final stamp and their blessing for us to proceed with that transaction. And then beyond that, listen, I bucketed into 3 different groups. We have the pipeline that diligence have largely completed. And I think when you look at that pipeline today, that's about $80,000,000 of revenue of opportunities that exist that were in later stage diligence moving towards closing. And other stuff that sort of we have under LOI and early stage diligence, that's another sort of couple of $100,000,000 of revenue that we're working through. And then as we talked about before, there was another large acquisition that continues to hang around that we continue to do diligence on and it may be an opportunity in the future. So the pipeline is as follows as ever been. I think with what we see today and the comfort we have from the base business through the Q2, we're going to continue focusing on doing what we've done for the last 14 years. We've done 143 acquisitions to date and we're going to do what this team has been set up to do, which is create shareholder value and deploying capital smartly to create shareholder value over the sort of long term. And I'm the biggest benefactor of that around this table. So I think from my perspective, we and the team feel very comfortable with where we are and everybody is back engaged and we're ready to continue moving forward. But that's what I sort of see today on the M and A program. Okay. I appreciate the color. Congrats on the great quarter. Thanks, Walter. Your next question comes from the line of Mark Neville with Scotiabank. Mark, your line is open. Hi, good morning guys. Good morning, Mark. Good morning, Mark. First, maybe just on the business itself. Maybe if you could just speak to some of these primary markets in Canada, sort of where they're at in terms of getting back to budget or getting back to close to normal, whatever you want to call it? And then within the U. S, again, we're seeing resurgence in certain states, maybe we have some footprint. If there's any sort of impact or if you see any noticeable change in trends in those parts or regions of your business? I mean outside of, I would say, really Montreal, Toronto and Vancouver, the markets were far less impacted. I still look at the large private markets in Toronto, Montreal. I mean Montreal is tracking actually 101% of budget through July. So again, they recovered. How much of that is sort of pent up and how much of that is pent up and are you going to see that little dip after the work gets done? I don't know, but it seems to be moving much better. I mean, Toronto, again, Toronto, it's again a bit of the revenue mix. We do a lot of work in the downtown core in Toronto. So again, office buildings, etcetera. So that's been, I think, slower to come back and I still think is off 10% plus and I think the same in Vancouver. We're still off sort of 10% plus but as we enter into these Phase III stages now and hopefully people start getting back out that those are going to recover quicker. And the secondary markets have largely been on plan for the last sort of 6 weeks. So I think we're moving in the right direction. Obviously, if there's incremental shutdowns that happen, we can't control that. But where we sit today, things are all trending right back to where we thought they would be. Okay. And the U. S, sorry, any impact or from sort of a resurgence in certain geographies of COVID cases? We're seeing a little I mean, we're seeing a little bit on the sort of on the roll off side of the business in the Southeast. The budget guys are still off sort of 5% to 6% on roll off pulls. Commercial seems pretty stable and well, but I think it's been fairly minimal in our U. S. Operations today. Okay. That's helpful. If I can just ask one more. Luke, you gave a few numbers and bridges, 1 on free cash flow for the second half and one on just the margin impact on sort of the puts and takes through the quarter. If you could go through those or at least the free cash walk would be helpful. Thanks. Yes. So Mark, in terms of the free cash flow, what I gave were the sort of components of the sort of costs. And we haven't come out and said EBITDA number, but I mean, I think during the year, pre WM, with the COVID reduction, people's numbers were sort of $10.40 to $10.50 of EBITDA for the year. So if you think about that as the number for the year, and then you've done $485,000,000 for the 1st 6 months, that's leaving you with the $555,000,000 to 5.65 dollars of EBITDA to do in the back half before considering incremental M and A. So from that, if you take off $150,000,000 for CapEx, take off $145,000,000 for interest, if you assume working capital gets back to flat, which I think there's a little bit of upside on, but assuming it gets back to flat for conservatism, that's in a you add $80,000,000 in the back half of the year. And then deduct $50,000,000 for all the sort of other sort of loose ends, odds and sods. That's basically getting you to a free cash adjusted free cash flow number for the back half of the year, somewhere between $275,000,000 $300,000,000 Okay. Okay. That helps. And so maybe just sort of to sneak in last. Patrick, you said $80,000,000 revenue offered late stage diligence. Yes. Yes. Maybe just remind us sort of what you'd consider late stage. Just sort of curious how close or how far away they may be versus a couple of 100,000,000 at early stage? Yes. I mean, from our perspective, that stuff that will close over the next sort of 2 to 3 months, Could be quicker. I'm just taking the conservative that and some of that other $200,000,000 will close this year for sure as well. So I think we're very sort of well positioned. And like we talked about previously, we talked about 2 larger opportunities. One has been done and there's potentially one other one. We continue to work through that as well. So I think we're set up very favorably here. When you sort of look at the numbers Luke just talked about and sort of look at some of the analyst consensus numbers for 2021, I'm sort of looking at what the consensus numbers are showing like $1,250,000,000 to $1,300,000,000 dollars of EBITDA for 2021. I think from our perspective that number is very reasonable. And I think if some of the stuff crosses like we're talking about, the number will be in excess of that. But it will be M and A dependent. But I think we're very comfortable with sort of the base business and where we are and there's upside to the base business as well as upside to the M and A case that we've discussed previously. We've been conservative previous to this, but I think there's no reason to sort of sugarcoat it. That's what we're expecting. That's what we're seeing. And I think that's where you're going to see us deliver over the balance of the year and sort of Q1 of next year. And I think we're just setting ourselves up very favorably for that. Okay. That's very helpful. And again, great job managing through this. Thanks, Mark. Thanks, Mark. Your next question comes from the line of Michael Hoffman with Stifel. Michael, your line is open. Hey, Patrick, Luke. Thanks for taking the questions. Good morning, Michael. Good morning, Michael. Good morning. Can we circle back to free cash just so I'm make sure I'm hearing everything correctly. The $270,000,000 to $300,000,000 is the second half generation. So as I add the first, then I'm ending up at a 3% to 3.25% or is it the full year, 275% to 300%. I just want to make sure I understood that correctly. Yes. So Michael, the numbers I was giving was the second half of the year. My issue is normalizing of Q1 with the debt levels and the pre delevering is just it's 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 $360,000,000 of CapEx, you have $250,000,000 of interest. I'm saying $250,000,000 there versus the $280,000,000 because really the $280,000,000 of interest is burdened by the new debt to finance WM ADS. 1050,000,000 excludes that. So like for like normalized, I would say, I have a $250,000,000 interest expense against the 1050,000,000 of EBITDA and then another $50,000,000 for the sort of other odds and ends. So if you do that on a normalized basis, that's a number I think that math gets you like $390,000,000 or 400,000,000 000,000 So Q1 is difficult to sort of normalize by itself. If you look at a normalized Q2, it's about a $45,000,000 number and then you're adding the back half at $275,000,000 to $300,000,000 and then you would add a normalized Q1, if that makes sense. Yes. That was I was trying to get at is you had talked about a $400,000,000 number coming out of the year pre any ADS or $80,000,000 or $200,000,000 incremental contribution. So we're still on that $400,000,000 run rate out of the year and there's upside from $100,000,000 of EBITDA from ADS and whatever you think you end up getting $20,000,000 from the other $80,000,000 another $50,000,000 from the $200,000,000 Yes. That's the right way to think about it. Correct. Okay. Correct. On the PIs, what was the budget for 2Q before the world changed? And therefore, is the difference between the budget and the 3.7 percent, how we think about what you did to be responsive to your customer? Yes. So the budget was low 4s. I think it's important to understand that 3.7 is really a blend of the Canadian really driven by Toronto and Montreal being low 3s number and the U. S. Business being mid-4s number. So the U. S. Business was largely on plan, a little bit off. The U. S. Business, the budget was a high mid-4s. So it was really the Canadian business that was off. So that 3.7% would compare to a budget number on the blend, like I think it was 4.2%. And so yes, I think you can think of that delta as what we didn't do in working with our customer base. And so that about 50 basis points, some of it's going to walk back through net normal sequential compression in the pricing anyway because of things like CPI and the like? Yes, correct. You'll have some of that. I mean part of it is driven yes, but yes, you're correct, Michael. Okay. And then last one for me. At over CAD30, are you at a price that the TSX would consider putting you into big NX? I mean, there's no guarantees. I think we'll in TSX 60 inclusion would if we were going to be indexed would come in December. That's the next available entrance point for us. So we would know, I think, I don't know. It's probably a guesstimate, but I think we're guessing that potentially we would get TSX-sixty inclusion in December, but we'll I'm I'm guessing with a $10,000,000,000 market cap in Canada that we probably will be included, but I don't know. And that's a $4,000,000 to $6,000,000 share of incremental buy to do that, right? Yes, roughly. I think, yes, that's about right today. Okay, cool. Thanks. Nice job. Thanks Michael. Thanks Michael. Your next question comes from the line of Rupert Merer with National Bank. Rupert, your line is open. Thank you. Good morning, guys. Good morning, Rupert. So Patrick, you gave us some color on the M and A pipeline. Wondering if you could give us an update on how COVID is changing the dynamic in M and A? How is it impacting your activity levels or pricing? And how are you managing how are you managing through the pandemic? I'm a people person, so I like to get in front of people and that's I find that always a more constructive way to get acquisitions done. We've never been one to sort of sit back and try and do it remotely. But that's been a I would 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 a valuation perspective, it's always trying to understand what the earnings were pre COVID, what the earnings were during COVID and what we think the earnings are going to be post COVID, right? And what that expectation is and coming up on an adjusted number that sort of makes sense, which is probably a hybrid of the 2. From a multiple perspective, I haven't really seen much change. Yes, there's been a few desperate sellers that our business model in specific regions that just aren't going to make it. So you buy that revenue, stick it on your back and those will be highly accretive to us. But there's been a few of those. But I think largely managing MA through the pandemic is just time. I just feel like everything takes more time today because you can't get people together and it's just it's harder to do things. I mean, we have been doing environmental diligence, site visits, etcetera. It just takes more time to move those people around. And that's been the sort of biggest impediment. I don't from integration perspective and from a diligence perspective, it's all the same work streams, just taking more time. So that's what I think is the biggest impediment in managing through the COVID dynamic. And is it causing you to look more at the U. S. Than Canada today? Are things easier there, much like it is with your activities in the solid waste business? I wouldn't say that. I mean, Canada I mean, listen, Canada is a great place to be today given the number of COVID cases. So I think 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've said before and I've said in the past, the number of acquisitions we do will probably still be more weighted to Canada, but they're significantly smaller than the I would say the revenue weighting to the U. S. So 60% of our deals will probably still get done in Canada, 40% in the U. S. But on a volume and a revenue basis, it will be significantly more weighted to the U. S. Just given the size of the opportunities in the U. S. Great. I'll leave it there. Thank you. Your next question comes from the line of Adam Wyden with ADW Capital. Adam, your line is open. Hey, guys. Congratulations on a great quarter. I just kind of wanted to sharpen your answer on the M and A pipeline. I guess the last few years, you guys have done very quickly, obviously, I guess, you went from 0 to whatever $1,300,000,000 in 13 years. The last couple of years you've been averaging about $150,000,000 to $200,000,000 EBITDA. Now obviously, the COVID has slowed down the M and A pipeline for all businesses, I guess, with the exception of the Internet. So obviously, the pipeline you have today is probably not necessarily reflective of kind of a pipeline in a normalized year. I mean, can you try and edify like if you think that it's possible that you could do $125,000,000 $150,000,000 $200,000,000 of U. S. Dollar EBITDA kind of for the intermediate term once things kind of normalize in terms of M and A? Yes. I mean, I don't know if I'd characterize this. I think we had a pause, but if you take into consideration the sort of Waste Management acquisition at $95,000,000 to $100,000,000 of EBITDA and then layer on the other opportunities I'm talking about, I think you get back to that number. And then so this year, I think will be another outside beer. Anything is possible. I think from our perspective, like I said, we've acquired between $100,000,000 $200,000,000 of EBITDA a year for the last as we've said on the last 3, 4 years. So impossible? No. Is it very possible? Yes. I mean, we haven't modeled that because we've taken the under promise and over deliver approach. But from our perspective, it's that's what we've done in the last 4 years. So no, I don't think that's a stretch. Okay. Let me follow-up with something else. So I just obviously a lot of the waste management companies have already reported. So I've had the benefit of being able to kind of read through the analyst reports. And I think obviously you have Casella and Waste Connections as kind of the closest comparables from kind of a business mix perspective. But I mean, I'm thinking of one analyst report in particular has a 35x2021 free cash flow estimate as a kind of a target price. If you look at the consensus numbers for this specific company, Casella, Casella is trading at roughly 40x levered free cash flow. So if I kind of back out kind of free cash flow in Canadian dollar of roughly $600,000,000 in 2021 and then obviously going to $700,000,000 plus in 2022. I put a 40 multiple on 600, that's CAD 24,000,000,000 and I own the Yankee stock, right. But if I put multiply that by CAD0.71 on the dollar that gets me to a $17,000,000,000 market cap divided by 314,000,000 shares. That's roughly a $55 stock. I think I'm doing my math right. And obviously, more going forward, as you kind of get the benefit of a full year of refinances into 2022. How do you think about that disconnect? I mean, Casella is taking them 30 years to get to $150,000,000 of EBITDA and you effectively gone in 13 years from 0 to $1,400,000,000 in Canadian and clearly you're not stopping, you did the advance disposal deal, you obviously are on the hunt for these $100 plus 1,000,000 EBITDA deals. I mean, what do you think is going on? I mean, what is it that the sell side thinks about Casella that they don't like about you? I mean, you're doing it, they're just kind of doing nothing. They're telling people they're going to stop doing it. Yes. I mean, I said this in the past, I can't control the stock price and I can't control what other people write about the company. What I can do is control how we operate the company and how we create significant amount of shareholder value over the sort of foreseeable future. I mean, this is a marathon, not a sprint. So from my perspective, where I sort of sit today, I think it's getting people comfortable with our business and with our business model. We're new to the public markets. I think over time as we continue doing what we say we're going to do, I think we will get it's taken them 30 years to trade at 18 times to 20 times EBITDA, right? And we all aspire to be Casella and Waste Connections. I'm sure everybody on this call wants it to be Casella Waste Connections and between you and I, I want to be Casella and Waste Connections. And I think we have that ability to do that. I think our business model, as we've shown, is resilient and we know how to do M and A. So you have a resilient growth file with a great sort of M and A backdrop. But I think I mean, just to touch on a couple of these 2021, I think $600,000,000 of free cash flow in 2021 would be aspirational. I think it's $500,000,000 plus. And then as you sort of work through the refinancings and you bring down interest costs, you pick up another $40,000,000 to $50,000,000 going into 2022. So I think there's significant upside to that by the end of 2022 and we can refinance out the entire capital structure. But I think relatively quickly you get to $700,000,000 plus So I think you're right. I think but we need to prove to the public markets that we can continue doing what we've done and we can continue demonstrating a free cash flow profile and resilience to the business and continued margin expansion and we will get there. I mean, I think if you look at it, yes, I think today is 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 where we're sort of trading call it 11.5x sort of 2021, 11.5x to 12x. And yes, there's a big gap between us between Casella and Waste Connections, but they've been around a long time and I think we aspire to be them. I think as the equity investors continue trusting us, we will. I mean, I think the one material thing I would point out again to you and others is that I have 100 of 1,000,000 of equity in this. So for me, this is a capital appreciation play. This isn't Patrick trying to make a salary and a bonus and keeping a job for the next 15, 20 years. I want my capital to appreciate alongside each and every one of yours. So everything we do is with that mindset and that backdrop that has been the last 14 years. And we've made a lot of investors over the years, a lot of money and we anticipate that we 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 have any specific views on what people write about or why it trades where it does. But over time, we will continue proving ourselves and that multiple will continue to expand. Well, look, I think you guys have done an excellent job. And I think if you look at the cadence of Casella's results over 30 years, clearly the results have improved materially over the last 4 to 5. But I mean, I think if you look at the kind of the compendium of the last 30 years, I think you guys have done a lot more 'fourteen than they've done in 'thirty. So maybe they should aspire to be you and you should trade at a higher multiple than them, but that's for everyone else for the side, not me. Well, maybe we're going to give you a job in IR because you're pretty good at them. All right. Take it easy, guys. Thank you. Your next question comes from the line of Keith Rosenblatt with Cruiser Capital. Keith, your line is open. Hi, guys. When you offer Adam Wyden that IR job, let me know. He's a very good analyst. Guys, I wanted to ask a question for those who aren't as familiar with the Canadian rules. In terms of what your growth path can be in terms of acquiring other businesses there. Are there Hart Scott Rodino issues in Canada in terms of what market share you can be that may limit your growth at all? And when you bump up against those? Yes. I don't we won't I mean, again, so think about the Canadian market, dollars 10,000,000 market, big 3 control 30%, 35%, 60%, 65% is fragmented. Our equivalent of the Hart Scott Rodino HSR filing is called the Competition Bureau in Canada. Competition Bureau in Canada only reviews transactions that are more than $95,000,000 of enterprise value today. So I would say 99% of what we do in Canada is less than $95,000,000 of enterprise value. So we won't or shouldn't bump into that issue moving forward. Also when you look in the Canadian versus the U. S, a lot of the U. S. Focus of HSR tends to be around landfill concentration and private ownership of landfills. In Canada, a lot of the M and A in the secondary markets, these are disposal neutral markets where the municipality or county or regional authority owns the landfill. So that's also just a very sort of different dynamic when you think about it. That's very helpful. That's very helpful. Guys, thank you. You just keep delivering on what you say you're going to do. Thanks a lot. Thank you. Gentlemen, your final question comes from the line of Brian Maguire with Goldman Sachs. Brian, your line is open. Hey, good morning. Thanks for squeezing me in. Just a couple of questions. Just wondering if you could comment on the churn rate you're seeing, if any whether it's bankruptcies or customers defecting, just sort of what trends you're seeing there? I know we saw one of the larger peers talk about kind of an all time low on that rate. Just wondering if you're seeing similar trends? And then sort of related to that, what are you seeing on DSOs and collections? I know you saw you took a little bit of a charge for bad debt, it doesn't sound like much, but are you seeing any change in trends there? Churn has been status quo, commercial and clearly residential, residential less. I mean, churn on the commercial has been still sitting at the sort of 6%, 7%, 8% range, been pretty low. I just don't think people have been active during COVID or too focused on switching service providers. So I think that's consistent with what we're seeing today. And from a working capital perspective in collections, I mean Q2 was we weren't sure what to expect, but it was again on plan with expectations. So yes, we did take a little bit of a charge and a provision for some incremental bad jets just to be prudent, but nothing sort of out of the ordinary today. And if Luke, you have you think differently. No, Brian, as Patrick said, obviously, concerns around collection. There's a little bit of softness in Toronto and Montreal, which is where the majority of that bad debt provision has been taken. But again, some of the friction is just driven by people not being in the office and just still the complexities of working remotely because we see what used to be big collections on June 30 coming in sort of early July. So I think where we sit right now, we don't anticipate a material drag on the sort of bad debt side, but obviously an area that we're actively monitoring. Okay. And then just one on some of the recent M and A that you were able to complete before the pandemic broke out, the county waste and the like. Can you just comment on how the integration of those has gone? Any surprises or are things generally just going along with your expectations there? I'd say along with the revised expectations associated with COVID and what I mean by that is we paused on bringing them on to some of our financial systems just because in doing so, we like to have our boots on the ground training with folks there. We feel that yields the best results since we've paused some of that and are just translating their results from their system into ours. But operationally in the plan and the integration from an operational perspective, I'd say, has gone completely as expected. Some certain outperformance, particularly when we start thinking about what the COVID related adjustments should have been for those businesses. So I think very pleased with how that's come together in the face of the COVID related disruptions. Okay. And Luke, I think I heard you say that lower diesel costs, I think you said they were 110 basis point benefit for margins year over year, is that right? And just remind me how long you get to keep that for? You get I think on the residential contracts, you keep it for some time, but commercially pass it through pretty quickly, is that right? Well, I mean, that's part of it. If you think about where some of our related pricing opportunity in Canada is around surcharges and customers we don't have surcharges with. So meaning you're not getting surcharge bills and not necessarily passing it back. So yes, it was 110 basis points for the year benefit On those residential contracts that reset at their anniversary date, yes, you'll give some of that back. But on balance, lower if you think about the residential book of business, if we have a $1,000,000,000 of residential revenue, you have a large subscription book of business in the U. S, you have a bunch of U. S. Contracts that have been decoupled from CPI. So you're left with, call it, $400,000,000 or so of revenue that really has a sort of true CPI type link. And so I think on balance, the lower diesel cost, I mean, today we're sort of 30% less on diesel year over year. On balance, it's still a net benefit. But yes, as you get the resets, you will give some of that back. This concludes our question and answer session. I will now turn the call back over to Patrick Davidge for 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 now disconnect.