Thank you, everybody. We're going to continue our panels. I want to encourage you to continue eating. I do want to continue with the program. I want to thank Patrick Dovigi and Luke Pelosi, CEO and CFO of GFL Environmental. Thank you very much for being here.
Thank you.
I'm going to ask some basic questions of the industry, your outlook on things, then get into some specific questions about the company. We'll, I guess, take it from there and see where the conversation leads us.
Just to start, I've asked this of some of the other large companies here, just your view on the current state of solid waste. What are you seeing in the client base? Are you seeing things in terms of the macro perspective? What signs are you seeing? I think you noted temporary roll-offs turned positive in April. Have you seen that continue? Just in general, what's your outlook and what are you seeing from the ground up?
Yeah, obviously, I think it's very regionally focused today, from our perspective. We have the Canadian market. The Canadian market is really divided in two. You have Western Canada and you have Eastern Canada. Canada has been in a bit of an interesting situation just around tariffs and some of the stuff that's happened. Parts of the Canadian market have been affected more than others. Obviously, Western Canada has been extremely strong, just on the backdrop of creating another energy superpower in Canada. That part of the market's been very strong. From our perspective, we really believe that the roll-off side of things have bottomed out, particularly in Canada, and that continues to rebound sort of month after month. We're seeing some strength come out of the Eastern Canadian part of the business. That's been strong.
In the U.S., from our perspective, again, very regional specific. We have different parts of the market that are reacting differently. We echo the same sentiments that from our perspective, we feel like things have bottomed for the most part, the macroeconomic cycle that we're in, with a lot of capital going towards data centers and other things. The housing market, with higher interest rates, have been softer. We do see special waste volumes slowly returning, C&D volumes starting to return, and hopefully, if we can get a settlement closer to the Iran war, that'll hopefully drive down some rates, and as long as we don't get some incremental inflation. No, we're feeling good about the business.
That's the beauty of the solid waste business is there's not a lot that it can affect it sort of one way or the other, and we're feeling very good and comfortable about our business. We've had a great Q1. Q2 is trending the same. We've positioned the business very well to sort of outperform for the rest of the year.
Okay, great. GFL is an interesting company, of an interesting position within the industry, that you're a large enough company, that you really are a very large company, but you're small enough to still be able to drive more top-line growth percentage-wise with acquisitions. You're also a little bit earlier on in terms of some of the things you could do to optimize the business. I thought, you could talk about, a little bit, what you think GFL will look like in three to five years from now.
Yeah. We typically build models in three-year increments. I think from where we sit today, the business, sort of on a pro forma basis, going into next year, be three-ish billion of EBITDA on sort of, CAD 9 billion-CAD 9.5 billion of revenue as we sort of look out into 2027. Predominantly, the majority of that revenue stream is coming from the solid waste business. We recently acquired a very sort of large post-collection business in Western Canada, which was the SECURE infrastructure assets. By and large, I think we'll just keep doing a lot of what we're doing. Typically, what we're doing is 40- 45 acquisitions a year. The majority of those are sort of CAD 1 million-CAD 10 million of EBITDA. We'll do sometimes one to two larger ones a year.
We'll continue deploying anywhere between sort of CAD 1 billion and CAD 2 billion a year in capital on sort of M&A. Organically grow the business sort of high single digits. That's a combination of sort of inorganic and organic opportunities that we find within the existing business. That'll range from the last couple of years have been largely around extended producer responsibility in Canada, as well as building RNG facilities at the landfill. That's been the lion's share of our growth CapEx, of where those CAD dollars have gone into the last sort of two to three years. I think when I sort of put that in a blender, there's no reason why we can't responsibly grow the business to 2x the size it is today over the next six to seven years.
I think when I look at the opportunity, combination of organic, inorganic growth opportunities coupled together with sort of M&A, I think, that's where when we build the six and seven-year plan, we think we can easily double the size of the business over the next six to seven years.
Okay, cool. You and I were at a dinner with investors. A lot of the discussion was about the SECURE acquisition. I know we probably have not talked about it that much, right, in the last few weeks. I thought maybe you could just talk to the audience about the assets you're buying, why they're attractive, and as you go out to the public investors and a lot of the markets, do you think there's something that investors don't appreciate about that acquisition, or what are you seeing in terms of your discussions with them?
The first couple of days were obviously rough because I think Canadians and Europeans generally knew what the asset was. They were the largest investors in that. Americans thought we were buying an oilfield services business. At the end of the day, couldn't be more the opposite. This is effectively just a post-collection type landfill business and deep wells. Basically just taking waste streams, internalizing waste streams into post-collection assets that we're buying in Alberta, which has effectively 75% market share, with WCN having 25% market share that they bought from the divestitures when Tervita and SECURE merged back in 2022. Again, it's a very high-margin business, very good from a CapEx perspective. That business on maintenance CapEx side is running at 6%-7% CapEx. Free cash flow conversion is very high.
We bought it at a very attractive multiple because it was an orphan Canadian public company. Very rarely do you get the opportunity to buy CAD 500 million+ EBITDA businesses for 10.5x 2027 with high 30s% margins converting to free cash flow at 55%+. On every financial metric, it was good. The durability of the waste stream is very good. This is a production-based disposal capacity receiver. From our perspective, there's very little volatility. Any little incremental volatility we have, we have a natural hedge internally with our own fuel. Today, we're buying 55 million gallons of fuel. If you think about buying 55 million gallons of fuel, if WTI was to drop to CAD 45+, we all know in this room that our diesel pricing is going to drop CAD 1.50-CAD 2/ gal.
You think about that, picking up probably CAD 110 million on one side and maybe giving back CAD 25 million on the other side was a very good and highly compelling trade for us. We have a lot of conviction in Western Canada. Canada is where we started. We've been operating in Western Canada for almost 16 years now. We have high conviction in that market. It's been a great market for us over a long period of time. We know the market well. We understand the market really well. We know the assets very well. We like the competitive dynamic with sort of Waste Connections. It's always good to be in a market where you're with a like-minded competitor that thinks about returns on invested capital the same way, thinks about pricing the same way, thinks about volume the same way.
We think that over time, that'll yield a great result, not only for us, but for them as well, which creates a very well-balanced market. I think people are going to look back in 12 months from now and say, "That was a really smart thing that GFL did." Understand there's some sort of lumps in the middle, at the end of the day, you can't make everybody happy. We have a lot of conviction. We've done 335 acquisitions over 22 years. By this point, I think there's some credibility in terms of what we do and the returns we can generate out of those assets. We feel great about it.
What are you expecting the growth in that area to be over the next, say, 5-10 years? Obviously, you were talking about a very growth-y area.
Yeah. If you see the amount of CAD that are going into that, whether that's you have the largest institutional investors in the world making massive bets on that, whether that's Blackstone, whether that's Apollo. You saw the recent Shell transaction that's going to happen in Western Canada. We finally have a government that is pro-business, with a leader that, whether he's liberal or conservative, he understands big business. He was at Brookfield for a long period of time, so he really understands what needs to be done to bring Canada back and use the resources that Canada has available to itself to become an energy superpower and a resource superpower. For the first time, there's going to be East-West pipelines being constructed.
You have North-South pipelines going to be constructed to tie into Keystone, coupled together with three to four very large-scale LNG facilities for British Columbia and Alberta. Which is, again, I think that is just incremental tailwinds that aren't really even built into any of the assumptions that we had put forward. I think you're going to have a very good run in Canada for the next 15-20 years, particularly in Western Canada.
Shlomo, on that point, the underwriting of our investment thesis was predicated on just normal course growth, the GDP-like growth that they've experienced. For all the reasons Patrick's articulating, I think while there's been a lot of focus on potential downside scenarios, I think an upside scenario is probably the more likely outcome, and that would all be incremental opportunity for us above and beyond what we've underwritten. If you think about our combined platform in that region now between the SECURE post-collection assets and our collection assets on both the solid waste side and on the environmental services side through our ES business, we're just going to be phenomenally well-positioned to participate in whatever that incremental growth may be. I think there's an opportunity that could be quite significant, but all of that would be upside to the business today.
I think when you think about SECURE, Patrick was alluding to this, the pro forma combined business. We just did a little investor deck update last week that's available on our website. We showed how the majority of the revenue that they generate actually fits into our existing service lines that we report, right? If you think about it, they have CAD 1.5 billion revenue. Most of that's coming from landfills and transfer stations and waste processing, all of the activities we do. We're going to have a small little slice of this incremental revenue pool that's more the midstream terminalling business that they have. It's going to represent 6% or 7% of our pro forma revenue as we go forward.
To Patrick's point, I think perhaps there was initially a misconception that we were somehow changing our revenue profile from what it was. I think the reality is it remains sort of status quo. As we go forward over that three-year model, as you were alluding to, with the enhanced scale and free cash flow generation of the pro forma combined business, we're now able to execute on that growth model, doing CAD 1 billion-CAD 2 billion a year of M&A that Patrick articulated and deleveraging concurrently.
You open your comments with that GFL is at this interesting inflection point from a sizing perspective, and you're absolutely right, whereby our inorganic growth can effectively double up our organic growth, which I think is a unique attribute just for our sort of sizing. To be able to do that growth strategy over the next three to five years and de-levering will be a new chapter for GFL because historically, that hasn't been the case.
I think it's interesting because, given what could be on the upside, you might find that the same investors who are not interested because of SECURE might end up buying the stock because of SECURE come in 12-24 months if you start to see some more of that.
It was an interesting deal, right? Because initially, you had two shareholders that were both upset. You had SECURE shareholders that said we weren't paying enough, and they loved SECURE for what it was. Then you had GFL shareholders saying, "Why are you buying SECURE?" Until the two of them came together and talked, and you had a pretty strong investor that had his own perspectives on SECURE that was out in the market trying to keep SECURE on a sort of standalone. We're through it. Shareholder vote passed. Our expectation is we'll close the acquisition somewhere between September 1st and October 1st, as we just wrap up the regulatory review process.
It'll be a thing of the past and behind us, and again, to Luke's point, now we're going to have, if I think about the next sort of three and a half to four years, we're going to have an incremental CAD 2 billion-CAD 2.5 billion of capital for us to go and deploy into solid waste M&A opportunities in the rest of the footprint in Canada and in the U.S. That's on top of the CAD 1 billion+ spending that we were anticipating a year over the next three to four years. We'll have an incremental CAD 2 billion-CAD 2.5 billion in totality, somewhere between CAD 500 million-CAD 1 billion a year that we could conservatively spend somewhere between CAD 1.5 billion-CAD 2 billion a year on incremental M&A or share buybacks over the next sort of three to four years.
From a financial balance sheet strength perspective, the company's never been in a better position with-- The irony is in sort of the low end. This is funny. There's private equity investors in here, and there's public investors in here, but from a private equity investor's perspective, we're woefully under-levered today. From the public investor's perspective, we're sort of right down the middle of the fairway now. We're at this very unique inflection point where we get to sort of de-lever and deploy a significant amount of capital into incremental M&A over the next three to four years.
Okay. Maybe you could shine a little bit of light on the ES business, where you sold the majority stake of that, in terms of comparing the assets over there just with SECURE so people understand. What were you doing before, and is there interest in potentially buying back? You have an option to buy back that business, and is there interest to do that down the line?
Yeah. It's interesting. When I think where we sort of sit today, they're two totally different businesses. They have very little overlap. Again, the SECURE business is basically disposal receiving facilities focused. Our ES business was built with very low volatility, to collect commercial waste streams from commercial businesses, commercial wastewaters, lab packs, et cetera, in very urban markets. A completely different business. That being said, we started that business with nothing, have grown it to almost CAD 600 million of EBITDA now, high 20s margins. Again, started that business, started a mid-teens margin business, and just with scale, incremental post-collection assets from wastewater treatment facilities, solidification pads, all forms of different disposal facilities. We've been able to move that business to a high 20s margin business today. That business today is roughly a CAD 600 million EBITDA business. We have the option to buy it back.
The beauty is we don't have to make that decision until 2029. Late 2029. When I look at it from my perspective, that business will grow over the next probably three to four years to closer to CAD 1 billion of EBITDA. We're running that business today as a private company, with 5.5x- 6x of leverage, so much different than the public company. When you run the model, basically grow that business to almost CAD 1 billion of EBITDA over the next sort of three to four years. Again, high 20s margin business. Maintenance CapEx sort of in the 8.5%-9% range. From a free cash flow conversion perspective, very similar to the public company. If you look at the deal we structured, we have the ability to buy that back, and we have the ability to buy it back.
If you ran that, just again, simple numbers, you'll have approximately CAD 3 billion of debt on that when you roll out four years. The equity investors, we basically negotiated a fixed MOIC for them on exit, which is basically 1.8x their money after five years. Effectively, they wrote a check for around CAD 3 billion. You'd owe them roughly CAD 6 billion, plus you'd have CAD 3 billion of debt. From an enterprise value perspective, about CAD 9 billion. We think conservatively, those businesses trade somewhere between 15-16 times. Even though all our business today is trading at 10 times in this weird AI trade. If you look at we recapitalized the liquid-based business at around 15 times, as well as our GIP business.
Private equity with leverage can obviously pay more than what the public markets are valuing these things at today, but that's just a moment in time. That would yield basically, if we sold the business, roughly a CAD 6 billion equity check for us, and then we could take that money and either buy back stock or deploy it into other sort of incremental larger scale M&A opportunities in the solid waste business, or we could buy it back effectively for nine times. We have a lot of flexibility with that, and I think we'll just judge at the time as to what's happening in the market and what the opportunity is.
Obviously, if GFL continues to trade at an artificially low number, you would definitely sell that asset at a higher number and then take back t hat capital and buy back as much of your stock as you could. We've been through this cycle before. As fast as the stocks move down, they move back up the other way just as quickly. Our anticipation is that it'll trade back up to the multiple that we all believe that the business is worth.
Shlomo, just on the option, to Patrick's point, we'll have the optionality to buy it back or turn around and sell it. Our commitment to leverage and de-leveraging is here, as we've sort of demonstrated. Even if there was, as we got closer to that intent to buy back, we'd make sure that you do some planning in advance or think about the structuring of it to preserve our sort of leverage profile. Obviously, with the enhanced scale and size of the business, it makes it that much easier to do because the relative impact of it becomes reduced. We'll certainly continue to maintain our sort of perspectives on leverage, even if we were at a point where we're contemplating buying that back.
I'm going to pivot a little bit now just to, I've asked all the companies so far, what are you doing with AI? I want to ask you guys the same thing. What are you doing with them right now in your operations? Where are you and what do you anticipate doing from it? What kind of benefits do you anticipate? Was it retention, routing, pricing? Take it however you're thinking about it.
I think four different areas that we're focused on. Corporate SG&A, routing efficiencies sort of within the existing business. Pricing is going to be a big one. And then on the employee retention side. I think we're looking at using sort of those tools for that. Now, the challenge has been every month there's a new shiny object. It's really getting people focused, to where we think we can get the biggest bang for our buck. Ultimately, the beauty is, nothing we've seen on the AI side is going to disrupt our business. We do have the ability, we think, to take out costs and make our business better for our operators. Two areas. We spoke to our operators, and there's some that are really, I would say, curious and have great ideas.
You have some individuals that just will take what the others are going to build with this. We're looking at it. We deployed the technology into, I'll use this example. In the city of Toronto, we have a very large hauling yard where we have 200 residential routes running out of one facility. We asked our operator in that yard, "What would you need to see in order to be able to run this yard more efficiently?" He basically said, "Listen, I need to know how many homes a day each truck is collecting. I need to know how much idle time each truck has in a day. I need to know their working hours, and I need to know how much volume is collected, and can you get me that data?
If I can get that data on a daily basis, I can effectively rebalance my routes." Over the last basically three months, we put that tool in. Over the last three months, we've taken up margins almost 300 basis points in that yard from, like, a 35% margin market to, or hard to a 38% margin yard. Again, we had trucks that were doing 850 homes a day with trucks that had idle time of an hour and seven minutes to an hour and 20 minutes, where you had guys doing 1,000+ homes a day that had 30 minutes of idle time. He was able to rebalance the routes really quickly.
Guys were spending too much time at Tim Hortons eating lunch and doing other things that were getting their routes done significantly quicker than the others, but they still wanted to get their 12 hours of work in a day because they were working a four-day workweek, and they wanted to make sure that they were getting their 48 hours at work. That was one thing. Another thing was when we talked to our operators about how do we continue to get customer retention, or, sorry, employee retention, what are the big drivers of that?
Big drivers of that were a lot of them are saying, "Hey, we moved to biweekly pay in a lot of the markets because that's just more efficient, and from a cost perspective was better." We were getting a lot of turnover because a lot of our hourly workforce is living paycheck to paycheck. In some of these larger markets, they were going to payday loan companies, or they were going to companies that they could effectively get paid quicker. That was very expensive. We looked at technologies in order to what could we do to make pay advances for earned wages. Again, if you go back years to build that software and integrate into our existing platform, that would take months with multiple developers.
Through Claude, basically came up within 48 hours with a full business plan, market by market, what you could charge, what is legal, what's not legal, then came up with an actual software that would integrate into our Workday platform that is going to allow us now to pay earned wages to employees two times pre-cycle. Again, you could never do that pre sort of the AI world. I think from a retention perspective, if you can retain 25% more of that hourly workforce that's turning over, that's going to be a big win for us. You can't really quantify the exact cost of turnover, but we all know it's a big number. Bringing on new drivers those first 90 days, et cetera. We're training people, putting them in the seat. How many things are they hitting? How inefficient are they?
If we can just keep more of that hourly workforce engaged and working. Again, those are two big things. Then leveraging the corporate cost bucket. Again, I think the AI tools are just making very good employees that much better, and giving them the ability to just be able to do a lot more, a lot quicker. I think we'll be able to lever the corporate cost structure, bring in a significant amount more revenue into our book of business without actually increasing that SG&A bucket that much more, because we're going to have the tools to have each employee be able to do more.
On that point, we have a CAD 300 million corporate cost bucket that supports the organization, the historical model has been EBITDA has grown organically and inorganically at low double digit, that corporate cost bucket grow at mid to high single digit, you've got operating leverage coming out of that. To Patrick's point, I think there's an opportunity now through AI being a force multiplier for those existing shared services roles to reduce that growth rate. Obviously, there's employees in there that are going to get appropriate cost of wage increases.
If you can take the growth rate of that corporate cost bucket from 6% or 7% down to 4% or 5%, that's going to be that much more operating leverage you're going to be able to grow as you grow that sort of revenue and EBITDA base and double it over the next six or seven years, as Patrick described. I think it's going to be a meaningful incremental contributor in addition to the revenue and obviously cost optimization opportunities that Patrick spoke to.
Okay, great. One, just in terms of your regional expansion strategy, could you talk a little bit, are you still looking for new greenfield stuff? Are you more mainly focused on your acquisitions in terms of densifying what you've got right now?
Yeah. First and foremost, we want to go wherever we can make money.
Simple.
Simple formula. That being said, I think where we sit today, operating in 26 states in the U.S. and the 10 provinces in Canada, big focus around investing around assets where we have post-collection assets that have incremental capacity to grow and leverage that fixed cost base of facilities. That's, I would say, at the top of the pile. That's where we're going to see our highest returns on invested capital. As always, if there's an incremental opportunity to move outside that geography, we're always happy to look, and if we can build a thesis around it where over time we can make money or we believe we can make money in a market and a market backdrop that we like, as most in this room know, we've never been shy to look at those and build a conviction around a thesis in a specific market.
The lion's share is going to be around, again, just densifying those existing markets, as always, we always keep our eyes open, and if there's a good opportunity that fits within our core strategy, we'll continue to do it.
Shlomo, where we take a lot of comfort in the financial models, the CAD 1 billion- CAD 2 billion that Patrick alluded to being deploying on an annual basis in M&A, we think we can do the majority of that within our existing geographic borders. While we'll look at new opportunities, as Patrick spoke to, it's not a requirement for us to be able to do that level of capital deployment. I think he could do the lion's share of that and not change the geographic border of the footprint that we have today.
Got it. Last we talked, you were very bullish about the acquisition pipeline. It seemed like you're trying to pace it because you have certain leverage commitments and things like that. Is there a time period right now that things seem to be more fruitful in terms of your acquisition pipeline, more companies that are looking to sell? Is it, "Hey, we've gotten really good at it, and we feel we can handle a lot at one time, we've just got a lot going on"? Maybe just talk about where we're at.
No. I don't think it's changed much. We're typically doing 40- 45 deals a year. To be honest with you, people like to look at the gross spends, at the end of the day, the larger acquisitions are actually the easier ones to do. They come with a management team, they come with a proper finance team, they come with an IT team, they come with great operating metrics, proper monthly financials. Environmental diligence is much simpler versus the smaller businesses where there's a lot more work in creating that. I think we've done a very good job internally of setting up teams to be able to manage and do that. Again, where we sit today, the 40- 45 deals is the sweet spot.
Might sound like a lot. When you look at the actual size of the deals and you think about today, we have 350+ operating districts today. There's a lot of districts that aren't even seeing a deal in a year, right? We could do more. As that free cash flow continues to ramp, that number will probably most likely continue to expand, because to be honest with you, there's more opportunities than we have capital to deploy today. When we're sitting at the table, we have to look at our highest and best use of capital, where we're getting our highest returns on invested capital, and where are the markets we actually want to deploy that capital to.
Internally, giving it to our best operators and our best managers that are running our best districts that we know consistently deliver quarter after quarter, year after year, and do M&A well. It's not only from the outside, it's also from the inside about giving our resources to the management teams across the countries that do the best job of integrating and delivering the returns on these assets. I think we're in the best position we've ever been as a company on every single operating metric and financial metric, and we're really excited about what the next three to five years look like here.
Sounds great. Thank you so much.
Thank you, Shlomo.
Thanks, Shlomo