Earnings Call
GFL Environmental Inc. (GFL)
Earnings Call Transcript - GFL Q4 2020
Operator, Operator
Good morning, and welcome to the GFL Environmental Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Patrick Dovigi, Founder and CEO. Please go ahead.
Patrick Dovigi, CEO
Thank you, and good morning. I would like to welcome everyone to today's call, and thank you for joining us. This morning we will be reviewing our results for the fourth quarter. We will also provide our outlook for 2021 as well as additional considerations through to 2023. I am joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.
Luke Pelosi, CFO
Thank you, Patrick, and good morning everyone. 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'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 back over to Patrick, who will start off on Page 3 of the presentation.
Patrick Dovigi, CEO
Thank you, Luke. I want to start this morning with a recap of 2020 as I believe it has been an extraordinary year on many fronts. On Page 3 of the presentation, we have a summary of the many ways in which we have delivered on the commitments, which we made at the time of our IPO. While the numbers speak for themselves, I want to acknowledge that none of these achievements could have been possible without the dedication, contribution, countless hours and love that each employee has for this company. From our frontline workers to our employees, who support our operations in the field and all of our corporate office employees, GFL is full of heroes. All of our employees did their part to help GFL navigate successfully through 2020, keeping each other safe and ensuring that we continue to meet our commitments to service all of our customers. There is no doubt that the most important part of any business is the people. If you have dedicated, loyal and hardworking employees, you will have a successful business. I have never been more proud of what our employees working together in the face of great uncertainty accomplished in 2020. It is truly inspirational. I have said many times over the years, never let a good crisis go to waste, but as we headed into Q2, we had no idea how much we would all be challenged by the impact of the COVID-19 pandemic, both personally and professionally, or that we would be able to achieve so much in the face of a global crisis. Even as we faced many obstacles, we're able to take advantage of market opportunities and deliver on the commitments we made to our stakeholders at the time of the IPO and more including we expanded our EBITDA margins by 100 basis points despite unprecedented COVID-related volume declines across much of the platform. We deployed nearly $4 billion on strategic accretive acquisitions. We have reduced our cost of debt by almost 200 basis points. We de-levered our balance sheet by over three turns and we accomplished all of this while delivering the best safety stats in GFL's history. To expand on the M&A comment, the majority of the $4 billion that was deployed was for two larger acquisitions in Q1 and the WCA WM-ADS acquisitions in Q4. The WCA and WM-ADS integrations remain on track and we are confident in the opportunities we previously outlined for these deals. The Q4 revenue contribution from both of these businesses exceeded our expectations and early indications from 2021 are also positive. During Q4, we also closed seven smaller tuck-in transactions and the pipeline is lined up such that 2021 could be another outsized year for M&A, something we will touch on more in the guidance portion of the call. During 2020, we were also able to make great progress on our sustainability initiatives. Sustainability has always been a core value of GFL. We recognized early on that providing customers with sustainable environmental solutions would be a key value proposition for all of our stakeholders. To name a few of our most notable achievements in 2020, we published our first sustainability report, which highlights the many ways in which sustainability is in our DNA, something for which we are very proud. Our Winnipeg MRF was named the 2020 Recycling Facilities of the Year by the National Waste and Recycling Association and our environmental innovation program was recognized with a 2020 SEAL Environmental Initiative Award. We will be issuing specific goals and targets with our 2021 sustainability report, so stay tuned for that. From my perspective, the most exciting part of 2020 is how it has set us up for 2021 and beyond. We have assembled the pieces of the puzzle to build what we believe is a rock-solid foundation that we can leverage for exceptional high-quality growth over the next several years. And this is where we want to spend the majority of our time this morning, talking about not only our 2021 guidance, but also our outlook for incremental opportunities that we see going out to 2023. We believe that we have a unique set of circumstances for industry-leading free cash flow growth over the mid-term, and we want to highlight the basic building blocks for our plan. However, before we get into 2021 and beyond, we will quickly summarize how the fourth quarter ended up. I'll pass it over to Luke, who will take you through the details, but at a high level, we exceeded our plans on nearly every level. Despite even greater than expected COVID-related headwinds in our Eastern Canadian business, revenue increased by 37% and the business as a whole returned to overall positive organic growth for the first time since the first quarter. Solid waste pricing ended the year strong, thanks to late Q3 pricing initiatives and volumes continued to show meaningful sequential improvements across all of our lines of business. Consistent with what we said before, our liquid and infrastructure business have been the most impacted by COVID-related volume declines, but we continue to believe that these volumes will return and the meaningful sequential improvements in the business during the quarter support that view. At the adjusted EBITDA margin line, the fourth quarter saw expansion of 190 basis points driven by continued margin expansion in our solid and liquid waste businesses, partially offset by the compression in our infrastructure line. Our solid waste business ended the year as a whole at a 30% margin, an outcome in excess of what we had guided to, an area where we think we can continue to build on. Lastly, we ended the year with nearly $360 million of adjusted free cash flow. While we are extremely happy with this outcome, we see a clear path to more than doubling free cash flow over the next few years and that will be our focus as we continue discussing guidance. I'll now pass the call over to Luke.
Luke Pelosi, CFO
Thanks, Patrick. I'll walk through the next couple of pages of the deck summarizing the fourth quarter results, and then I will pass it back to Patrick as we get into the outlook section. On Page 4, we have provided our usual summary of revenue growth by operating segment, revenue increased over 37% compared to the prior year period, driven by M&A contribution, strong solid waste pricing and continued sequential volume improvements. Overall organic revenue growth was 320 basis points greater than Q3 and was positive overall for the first time since Q1. For the quarter, we exceeded our expectations and realized 3.6% net price thanks to pricing activity in late Q3. Again, our overall pricing in the solid waste business in the current year continues to be impacted by suppressed IC&I volumes and by negative CPI adjustments on certain municipal contracts. With Q4 as a result, we ended the year with 3.9% net price, an outcome we're very happy with that emboldens our confidence in being able to continue to deliver on our stated pricing goals as we look forward. Consistent with the third quarter, we also realized an incremental 70 basis points tied to commodity prices, where we realized a blended basket price nearly 40% higher than that of the prior year, and up over 15% from the third quarter. As we continue moving our contracts towards a fixed price processing model, we will see less volatility in our results tied to movements in OCC and other commodities. Solid waste collection volumes were down 3%, a 60 basis point improvement over the third quarter driven by a 5% decrease in IC&I, offset by nearly flat volume in residential. IC&I volumes were 250 basis points better than in the third quarter as we continue to see sequential improvements across nearly all of our markets. Post collection volumes were positive 10.5%, a 200 basis point improvement over the third quarter and once again, largely on the strength of MRF processing volumes in Canada. Excluding MRF volumes, post-collection volumes were negative 7.4% for the quarter, which was slightly behind the 6.9% decline we saw in Q3, but largely attributable to a tough comp in our organics processing servicing line. As both transfer station and landfill volumes were meaningfully better than Q3. The volume story remains region-specific with our Eastern Canada solid waste business, where incremental COVID restrictions were implemented during Q4, continuing to lag other markets where reopening activities have progressed at a faster rate. As Patrick mentioned, the WM-ADS and WCA acquisitions contributed revenue just over USD 155 million on a same-store basis, which was USD 10 million more than our original guidance. This indicates that the seasonality profile of the assets is not as pronounced as we had thought, but it's also an early validation of our expectations for those two acquisitions. To recap the solid waste volume story for the year, Q2 was negative 8.3%. Q3 was negative 2%, and Q4 is basically flat. While the overall volume numbers were supported by the strength of our expanding MRF operations and the Canadian residential contracts, where we are paid by the ton and benefited from heavier curb weights, we nonetheless think these results are a true testament to the resilience of our overall platform. Our infrastructure and liquid waste businesses saw the greatest sequential improvements over Q3, and we remain encouraged by that trend line. We continue to believe that the combination of permit delays driven by COVID-related shutdowns and temporary capital spending deferral by our customers are yielding a slower volume recovery than we've seen in solid waste, but the volumes will return as reopening activities continue. The regional nuances we described in Q3 continue to be at play with soil volumes in the U.S. Northeast and liquid volumes in the U.S. Midwest lagging the recoveries we've seen in our Canadian markets. Used motor oil volumes continue to lag the prior year, but the gap continues to close from the low we saw in Q2. When we get to our outlook section, you will see we're taking a more conservative view on the expected timing of the recovery of these businesses. But again, we believe it's just the timing and when the volume returns, we will enjoy above-average growth as our customers catch up on previously deferred spending. On Page 5, we have presented margins by segment for the quarter and for the year as a whole. Once again, consistent with Q3, we expanded solid waste margins by 240 basis points in the fourth quarter, an achievement we believe once again demonstrates the success we were having with our multi-pronged strategy of leveraging the platforms to drive incremental profitability. The key components of the solid waste margin include 57 basis points lower diesel costs and 45 basis points from commodity pricing, partially offset by a 10 basis point headwind from incremental COVID-related costs. Acquisitions were slightly margin accretive at the segment level, as the recent M&A in the U.S., which contributed margins higher than our base business, offset the drag from tuck-ins in Canada that have yet to achieve what we believe is their full margin accretive potential. Excluding these items, our base solid waste business continued to realize organic margin expansion despite ongoing COVID-related volume headwinds. In infrastructure and soil, we continue to see margins impacted by the change in volume mix, whereby we are seeing a smaller proportion of total volumes coming from low volume high frequency customers. This change in mix, coupled with the relatively higher fixed cost structure of the segment, resulted in margin compression, despite our continued focus on cost control strategies. As we said last quarter, we fully expect that as volumes recover, we'll see significant margin expansion consistent with our view that this segment can achieve low 20s margins in the near to mid-term. Our liquid waste business showed the strongest relative recovery of all of our segments with a 910 sequential basis points improvement in organic revenue versus the third quarter. We continue to flex operating costs of the business, and this focus on cost containment, coupled with continued synergy realization, along with a nearly 28% increase in net used motor oil selling prices, drove the organic margin expansion as compared to the prior year. Similar to our commentary in Q3, when you consider the $9 million revenue decrease from lower liquid volumes on a year-over-year basis, the realized margin expansion highlights the underlying operating leverage we are realizing in this segment. We remain confident in our views that the liquid segment can be a better than mid-20s margin business in the near to mid-term. Turning to Page 6, adjusted cash flows from operating activities were USD 240 million for the quarter and USD 767 million for the year. Results exceeded our expectations and the guidance we previously provided. In the reconciliation, you will note that in calculating our adjusted free cash flow, we backed out the net working capital investments we made in Q4 on the two recent deals. As we highlighted in our Q3 call, the WM-ADS acquisition did not come with opening working capital, which is atypical for us on a transaction of that size, and that dynamic was factored into our evaluation. So we view the initial investment in working capital as a financing activity and backed the amount from operating activities on that basis. Turning to broader working capital management, our efforts around our order-to-cash cycle time are continuing to contribute to our success. Recall our guide was to end the year neutral in terms of working capital, and we ended up POSITIVE $5 million including the $16 million net drag from the recent M&A. On a like-for-like basis, we ended up POSITIVE $21 million on the working capital line, an outcome we are very happy with considering the backdrop. In terms of credit exposures, the quarter did not see any significant incremental bad debt. As we said before, we continue to actively monitor exposures in this uncertain landscape. When considering cash from operations in Q4 as compared to Q3, it's important to consider the timing of our cash interest payments. Q4 included USD 126 million of cash interest excluding the USD 35.5 million of debt prepayment penalties, which compared to USD 36 million of cash interest costs included in Q3. With our recent refinancing, we've been thoughtful about equalizing the cash interest payment cadence across the quarters. Although there will still be some volatility in 2021, the cadence by the end of the year will be closer to a straight-line pattern of interest payments. Net CapEx for the quarter was USD 117 million. Recall our guidance for Q4 was USD 90 million for the base business and an additional approximately USD 50 million for potential incremental organic growth and the Q4 acquisitions, both integration CapEx and regular CapEx for those businesses. Dissecting the USD 117 million, the organic number aligned with guidance and the cash spent on the recent M&A came in lower than expectations, largely due to timing issues. We remain confident in the ongoing CapEx needs for these two businesses as previously communicated. We deployed an incremental USD 80 million for seven tuck-ins during the quarter, over half of which was by December 31. We think these acquisitions will generate approximately USD 30 million of annualized revenue. Although it's worth clarifying that over half of this revenue was already included in the rollover guide we provided in Q3. The main cash flow financing activities are listed on Page 6, and as you've seen, we've continued our strategy of pursuing opportunistic refinancings. I believe the success of that strategy is evident; although there are costs associated with the refinancing such as the USD 35 million incurred in Q4, the interest rate differentials are so significant that the payback and returns analysis remain highly compelling. We are constantly evaluating opportunities to reduce our borrowing costs, and you will see us continue to access the debt markets as attractive opportunities present themselves. We've presented a full year adjusted free cash flow at the bottom of the page that highlights the number reflecting both our pre and post-IPO structure. Therefore, it's not necessarily representative of our true current run rate, and in the guidance section, we'll walk through where we think we can take adjusted free cash flow over the next couple of years. Quickly on Page 7, we've included the summary of net leverage consistent with how we previously presented it. I'll state here that we ended the year in line with our previous messaging, and we remain committed to the leverage philosophies we've discussed with each of you at length. We continue to have ample liquidity to support our growth goals while de-leveraging our balance sheet and reducing our cost of borrowing along the way. I'll now turn the call back over to Patrick who will pick up on Page 9 in the presentation.
Patrick Dovigi, CEO
Thanks, Luke. Before we get into guidance, I wanted to provide some context as we're going to do things a little bit differently than some of our peers. Although we are managers first and foremost, we are shareholders, and I believe we have some of the best incentive alignment in our industry. I started this company in 2007 with $250,000, which was all the money I had at the time. Since then, through a lot of blood, sweat and tears, both mine and our employees, the support of our various partners and a little bit of luck, we have grown the business into the fourth-largest environmental services waste management company in North America. I’m personally one of the largest single shareholders and I would argue no one is more incentivized to see GFL continue to succeed over the long term. When you look at the broader management team, both the other NEOs and the other field-level leaders, you’ll also see best-in-class shareholder alignment, as the broader management team has a material amount of equity in this business. As I said before, this is a management team that knows how to create equity value. We’ve been doing it for over the past 13 years and we see a very clear path to creating material incremental equity value in the near to mid-term. This is why in addition to providing our 2021 guidance; we are also going to provide our outlook through to 2023. We see a clear opportunity to significantly grow our free cash flow, and we want to make sure everyone has the same building blocks that we’re thinking about. So turning to Page 10, we’ve laid out how we plan to do it. We’ve summarized on this page the same four pillars of our strategy that we’ve been speaking of since our IPO. We will continue to speak to these over the next several years. We believe they are the cornerstones of our path to creating long-term shareholder value. First, organic growth. As we’ve said, we think our market and asset positioning, together with where we are at in optimizing the pricing of our existing portfolio positions us for outsized organic growth compared to the industry as a whole. Continuing to leverage our leadership position in many sustainable service offerings should add to our growth opportunities as regulations and sentiment continue to evolve on ESG-related matters. Lastly, we see opportunities for capital redeployment, where we would look to divest certain non-core assets around the edges of our platform and reinvest those proceeds into organic growth initiatives in our core markets. This is a fourth lever we believe can add incremental organic growth, particularly on the free cash flow line. Second, margin expansion. We’ve continuously said that we have a path to raise margins across all of our segments and bring the blended business to a high 27%, low 28% margin over the next few years. I think we’ve proved our strategies work in 2020, increasing margins by 100 basis points during a period where many others were going in the other direction. What we did, despite the compression in our infrastructure business, as Luke explained, we think we can expand margins in our base business another 80 to 90 basis points in 2021, even with our conservative views on volume growth in reopening, which Luke will outline in a moment. When volume growth returns to what I would call more normal levels, we expect high incremental contributions, which can drive higher margins expansion even further. The third pillar is reducing our cost of debt. We have decreased our average interest costs on long-term debt by almost 200 basis points since 2019. Although we are very proud of that achievement, we still have an average cost of interest around 4.5%, which is a number we think can significantly improve. We will outline what we think is possible in this area, but we think there’s easily another $50 million of incremental free cash flow we can generate over the next several years from this lever alone. The final pillar is M&A. I will dive into this area in more detail in a moment, but suffice to say, we believe there’s significant opportunity to deploy capital at attractive multiples for assets that will be very accretive to our business in the long run. These four pillars are areas you’ll hear us talk about a lot as we execute the strategy over the next few years. I’m now going to pass the call over to Luke, who will walk through the 2021 guide for our base business. I will then identify some incremental opportunities that allow we are not including in our base guidance, but that we believe can meaningfully impact our launch off point going into 2022.
Luke Pelosi, CFO
Okay. So on Page 11, we’ve shown the building blocks of our guidance. What I’d say is that outlook is based on the environment and market conditions we see today. We’ve not factored material easing of COVID-related restrictions nor the anticipated volume increases that we expect to see with reopening activities. While we, like I’m sure many of you, are extremely hopeful that we can get to the other side of this pandemic as soon as possible, we perceive too much uncertainty, particularly in our Canadian markets to make a call as to whether that will be three, six or nine months from now. So we’ve provided the guidance based on what we see today. Looking at the waterfall, we’re assuming solid waste price in the 3.5% to 4% range consistent with our past messaging. We’ve continued restrictions in many of our Canadian markets and suppressed IC&I volumes across the entire platform. We’re now expecting to materially outperform this range in 2021. However, we continue to see outsized pricing opportunities within our portfolio that we intend to target once normal operations return. Inflationary expectations should offset some of the negative CPI adjustments we experienced in 2020, and ongoing discipline around ensuring any enterprise residential contracts are renewed at rates that meet our return thresholds should serve to support our pricing goals. On solid waste volumes, we’re seeing approximately 0.5 to 1 percentage point of growth. Now we know some of the expectations were higher growth numbers here, but I remind everyone of the following two points. One is we had lower volume declines relative to much of the industry. So we’re coming off of a higher low, if you will. Secondly, we have a bigger proportion of our revenues coming from Canada, much of which is still under some of the most restrictive lockdowns. On average, we expect Canada to be about a quarter or two behind the U.S. in terms of reopening timelines. From a cadence perspective, we anticipate Q1 will have low single-digit negative volume, inclusive of the drag from the extra day in February 2020. Q2 should be low to mid-single digits positive on an easy comp, and Q3 and Q4 will be flat to modestly positive. Again, should reopening activities accelerate and we see a rebound in IC&I volumes from where we are today, that would be upside for the guide. Note that regarding commodity pricing, as we continue to shift more of our contracts to a fixed processing model, we’re seeing less variability in our results from movements in commodities. Our guidance assumes 2021 will mirror the pricing we observed at the end of 2020, which equates to approximately $9 million or $10 million of incremental revenue that flows through at a high incremental margin. On liquid and infrastructure, we’re taking a more tempered view in terms of when volumes return, despite the significant sequential increases we’ve seen in the recovery of these segments. The tough comp over Q1 2020, along with the concentration of revenue in some of the harder-hit regions of the Northeast and Canada, as well as a lag in when customers' capital spending programs gear back up, leads us to think 2021 will yield more conservative growth terms. We’ve shown the two segments together, but when you unpack it, we’re thinking of liquid in the mid-single digits and infrastructure basically flat. Regarding the M&A rollover, this reflects the approximately $900 million we previously communicated, plus the late December M&A, reduced slightly in response to revised views on seasonality and the current winter situation in the South, which we then grossed up to the 1.34 FX rate to be presented on a constant currency basis with 2020. We’re providing our guidance, assuming a 1.27 FX rate, which means that the last stepping stone on the page brings the Canadian equivalent of our roughly $2.4 billion denominated revenue down from the average 2020 exchange rate of 1.34 to 1.27. That 4% for FX equates to around $170 million, roughly split between $50 million related to the rollover M&A and a $120 million on the base business. For every point move, FX revenue changes by approximately $24 million and we’ll provide details of the impact from FX as we report during the year. That’s the revenue bridge. Regarding modeling considerations, remember we still have relative seasonality in our business, mostly driven by our more Northern geographies. The cadence of the annual revenue is expected to be approximately 22% to 23% in Q1, 24% to 25% in Q2, 26% to 27% in Q3, and the balance in Q4. In terms of the M&A rollover, we expect $250 million to $260 million in Q1, around $270 million in Q2, approximately $280 million in Q3, and the balance in Q4. If you look at Page 12, we have shown how that revenue translates to adjusted EBITDA, free cash flow and leverage. Remember, none of this guidance includes any incremental M&A or refinancing activities. For adjusted EBITDA, we forecast to drive an incremental 90 basis points of margin expansion, and we’re expecting that improvement quite consistently across each of the segments. When you consider the EBITDA walk, using the middle of our guidance range after adjusting for the 1.27 FX, we expect around $240 million incremental EBITDA from acquisition rollovers. Recall, that the majority of the rollover M&A is at a blended 28% margin, thus the 2020 M&A is expected to be slightly decreative to the solid waste margin and slightly accretive to the overall margin. The EBITDA impact of the $120 million of FX on the base business is a headwind of about $37 million. Additionally, we anticipate around $15 million of incremental public company and risk costs on a year-over-year basis. The balance of just under $100 million is organic growth. At the margin line, if you think about the 90 basis points of expansion, M&A adds just under 30 basis points and commodity prices contribute another 10 basis points. The $15 million of incremental public and risk costs represent a negative 30 basis points, and FX is a negative 10 basis points. So all four of those items are basically a wash, and you're left with organic growth expansion from the same levers that we've been pulling and expect to continue to pull going forward. From that adjusted EBITDA, we're guiding towards an adjusted free cash flow number of $465 million to $495 million based on expected net capital expenditures around $510 million, cash taxes of $10 million, a modest improvement in working capital offset by repayment of CARES deferred dollars and some incremental M&A-related investment. The ARO spend is about $60 million, and cash interest is $300 million, which again excludes any impact from refinancing activity. If you're thinking about an adjusted free cash flow walk again, using the midpoint of the guidance, take the $360 million from 2020, add the 2021 incremental EBITDA, add just over $15 million for changes in working capital, then deduct $100 million for incremental CapEx, $34 million for the swing from CARES deferrals, $5 million for incremental cash interest and about $40 million for incremental ARO and cash taxes. At the bottom of the page, if you do the math between where we went from 2020, tied to the projected 2021 numbers, you'll see the business will be elaborate down to the mid-four range.
Patrick Dovigi, CEO
Thanks, Luke. What Luke just walked through is our base guidance. With our current platform, capital structure, and macro operating environment, we are confident we can deliver on that plan. However, on Pages 12 and 13, we have highlighted opportunities over which we have a degree of conviction that would be incremental to our plan. The first opportunity is incremental M&A. The integration of the recent transactions is well on track, and we remain confident in realizing the synergies we have underwritten. The business performed well in Q4, and early indications for 2021 are also looking very positive. Although we are still assessing potentially minor impacts from recent severe weather in the South, I believe the success we were able to achieve during 2020 clearly demonstrates our ability to continue to deliver even in the most challenging environments. 2021 is shaping up for what could be another active year for M&A. We have a robust pipeline of actual opportunities that fit our model, and we could envision deploying upwards of $500 million of capital across 25 to 30 tuck-in transactions throughout our existing geographies. These smaller tuck-in acquisitions can be entirely self-financed, primarily with our own free cash flow, which will enable de-leveraging as we grow. We are also evaluating one larger opportunity, a business that we've known for years, but was never actionable. It is entirely within our existing footprint and we believe would be highly complementary. The timing of that acquisition signing could be in the next few weeks with closing potentially in the second half of the year, and we would not need any equity to finance this potential transaction. Any impact from this acquisition would be additive to what I said about the tuck-in acquisitions. In addition to M&A, on Page 14, we have laid out two other areas of opportunity for 2021. The first is refinancing, which we believe is a real opportunity to replace our 8.5% notes with much cheaper paper and reprise our term loan. We conservatively estimate those initiatives could result in $20 million to $30 million of annual savings. As always, we will be opportunistic depending on market windows, and there could be a path to even more savings here, but we think $20 million to $30 million is an achievable outcome. The other item is capital redeployment, and we predict 2021 could be a year where we clean up our portfolio around the edges; realizing proceeds of $100 million to $125 million and redeploying those dollars into attractive organic growth initiatives in some of our key growth markets. The potential divested assets we are considering are ones that are under-utilized in our portfolio, and as a result, suboptimal free cash flow generators. While the top-line impact and adjusted EBITDA would likely be somewhat muted, we think we'd be able to drive an incremental $10 million to $15 million of adjusted free cash flow from the redeployment. If you turn to Page 15, we've shown a bridge of what the launch-off point for 2022 could be for adjusted free cash flow. Now we intentionally have not incorporated the upside from these opportunities in our 2021 guidance, as the timing and quantum of the impact remains uncertain at this point. However, we're very confident in our ability to realize the upside by the end of the year. Therefore, we're projecting an adjusted free cash flow launch-off point for 2022 at around $550 million, representing over 10% of revenue and approaching 40% conversion from adjusted EBITDA. To take it a step further, we've presented a similar exercise for 2022 and 2023. Of course, 2023 is a few years away, and the world may look a little different by then, but all we're aiming to show on Page 16 is the inflection point we've reached and the power of the model we've built. The top of the page lays out the organic growth impact based on the same revenue growth drivers we've been discussing. The assumptions can be characterized as highly conservative for 2022 when you consider the potential for strong growth as we emerge from this pandemic. The middle of the page has annual assumptions for acquiring $160 million to $240 million of revenue per year, which we believe is also quite conservative. The highlight regarding M&A is that these deals become more free cash flow accretive as they truly integrate into our largely finance-free cash flow model. Lastly, at the bottom of the page, we have refinancing. As the legacy debt becomes callable, we believe we can replace it with cheaper options and generate another $20 million to $30 million of adjusted free cash flow through lower interest rates. On Page 17, we’ve laid out the waterfall showing what's needed. In our view, you don't need to believe much to see a clear path to a 2024 adjusted free cash flow launch-off point of around $800 million. We understand that this approach is unconventional, as we've said in the opening remarks, but our goal is for everyone to update their models when opportunities present themselves. We can see very clear building blocks for how we can more than double our 2020 free cash flow over the next few years and wanted to lay those out on a piece of paper for everyone to see. I’m sure there are some questions, so I’ll turn it over to the operator to open up the line for Q&A.
Operator, Operator
The first question comes from Hamzah Mazari from Jefferies. Please go ahead.
Hamzah Mazari, Analyst
Hey, good morning. Thank you for all the details. Just on the free cash flow, the long-term targets that you laid out with M&A refinancing, etc. Could you maybe talk about how achievable you think these metrics are? I know investors don't have a lot of public history with you guys. So just talk about, do you view these targets as conservative? Maybe just unpack the free cash flow growth a little bit for us?
Luke Pelosi, CFO
Yes. Hey, Hamzah, it's Luke. What I would say is that the components are all laid on the page, right? Between organic growth, M&A, and refinancing, you're right, we have a short history in the public market, and I think the one thing we've picked up is the under-promise and over-deliver strategy. When we look at each of those levers, we think the opportunity to outperform what we've laid out on the page is there across all three buckets. The organic piece is still conditional on the timing of when things reopen. You've heard from others, and I think the industry as a whole thinks things will take off like a rocket ship; it's just a matter of when that hits. When it does, the volume component of that incremental free cash flow could far exceed what's laid out on the page. But the pricing strategy is sound and that's working. The volume story will come, and will be exciting when it does. We're uncertain as to when, but when you think about the incremental that will come from that volume, it could outperform the modest organic free cash flow growth listed. Patrick, I’m not sure if there were any other points?
Patrick Dovigi, CEO
Yes. Hamzah, from my perspective, this isn’t about a six to nine month horizon. I know it's been a significant focus on volume, but what you've seen over the last year is that this business has been incredibly resilient, and it’s the entire sector, not just GFL. We've been subject to basic regional reopening, and I believe all operators have performed exceptionally well. What this proves is, like most businesses, even with some volume declines, all of us maintained price, which isn't a common occurrence across industries. When you layer that on and look at the significant volume increases projected for late 2021 and 2022 and 2023 with sporting events, hotels, restaurants, schools, and office buildings reopening — there’s going to be a large influx of volume. I think we've taken a conservative approach regarding what we think organic can be, but we're very well positioned.
Hamzah Mazari, Analyst
Got it. That's very helpful. Just on the volume piece, you mentioned you're kind of extrapolating what you're seeing today. So the 2021 guide on volume growth doesn't include any vaccine expectations or what's your underlying economic assumptions for the volume guide? Just looking to see what potential upside there would be?
Patrick Dovigi, CEO
We've modeled according to what we saw in Q4 and what we saw in Q1. The U.S. is likely moving quicker than Canada. Remember, currently 40% of our revenue comes from Canada, which has had much more conservative reopening processes. Now, I think that's going to ramp-up significantly over the next few months with vaccines. We model a very modest improvement based on current trends, and that's why we've circled back to what we believe is a conservative approach, leading to potential upside to our numbers as things come back on-stream quickly.
Hamzah Mazari, Analyst
Yes, got it. And then you referenced the near-term pipeline of M&A over the next two years. Could you talk about the long-term — is there something larger you can do, Patrick? What are your long-term plans considering overlaps with other larger players?
Patrick Dovigi, CEO
What I'll say is I'm a shareholder too, and my primary responsibility is to create shareholder value. That means I’m here to win, and everyone on this call stands to win as well. The pipeline for M&A is robust; we currently have almost 13 transactions under LOI; we've discussed a larger opportunity that we've looked at for the last seven years, but never managed to close. We are actively working on it, and it’s potential will be assessed in the coming weeks, with a possible signing and closing in Q3. In terms of larger transactions, we'll need to consider cultural alignment and financial feasibility, so it remains to be seen.
Hamzah Mazari, Analyst
You're a young guy. You've got a long road ahead of you. That's great. Thank you. I'll turn it over.
Patrick Dovigi, CEO
Thanks, Hamzah.
Operator, Operator
Our next question comes from Mark Neville from Scotiabank. Please go ahead.
Mark Neville, Analyst
Alright. Good morning, guys. Appreciate all the detail here, there's a lot to unpack. Maybe just starting on the M&A; can you clarify that all M&A discussed, the tuck-ins, under the plan, require no incremental debt, but no equity, correct?
Patrick Dovigi, CEO
Correct. For the small tuck-in M&A and larger transactions, we would not need any incremental equity; we can self-fund through borrowing and the free cash flow to offset any leverage-related issues while maintaining our target leverage in the mid-fours.
Mark Neville, Analyst
Right? So these larger deals you've referenced wouldn't change that equation?
Patrick Dovigi, CEO
No, no equity would be required. That gives us conviction regarding the multiple we're considering and the synergy opportunity.
Mark Neville, Analyst
The target margins, I think you mentioned for 2021 were not pegged toward much upside in volume, but there's a little bit anticipated for volume recovery in 2022 and 2023, correct?
Luke Pelosi, CFO
Yes, Mark, this is Luke. That's right. We're looking at 90 bps of organic expansion in 2021, which includes some positive volume contributions. While there's more upside potential, we are maintaining conservative volume growth for 2022 and 2023.
Mark Neville, Analyst
All right, I appreciate the good color guys. Thanks.
Luke Pelosi, CFO
Thanks, Mark.
Operator, Operator
Our next question comes from Michael Hoffman from Stifel. Please go ahead.
Michael Hoffman, Analyst
Hi, Patrick, Luke. I hope you're having a good day up there. Just to be clear, your 2021 to 2023 plan doesn't factor in the $210 million of pandemic loss business because you're only showing half a point to point of volume growth over your current view. So...
Luke Pelosi, CFO
Correct, Michael.
Michael Hoffman, Analyst
Right, okay. So there's a double whammy here of doing your job every day plus the upside of the reopening trade?
Patrick Dovigi, CEO
Correct.
Michael Hoffman, Analyst
Okay. I’m going to ask some short-term questions. The $105 million to $135 million of year-over-year free cash flow growth, if you broke it into three buckets — cash interest, operating leverage, and M&A, how does that break down?
Luke Pelosi, CFO
So looking at the cash interest, 2020's cash interest was around $295 million, and for next year, we're expecting around $300 million. So there's a minus $5 million from cash interest; CapEx is going up by $100 million. The operational leverage is determined by the M&A adding — the EBITDA arriving from M&A is sort of in the high 230s.
Michael Hoffman, Analyst
Okay.
Luke Pelosi, CFO
If you take 2020's number of $360 million, normalize that for FX. So you get some wins on interest and CapEx. The net FX would show around a $20 million drag. Walk through that a little — you would get around $60 million to $65 million of organic free cash flow on that level, which is sort of 17%, 18%. That's what you're essentially left with born out of operational leverage.
Michael Hoffman, Analyst
Okay. And then you mentioned in the fourth quarter and other virtual settings, Patrick, that while the liquids business is a good growth vehicle, it's not necessarily core to the long-term strategies. Do you still maintain that thesis?
Patrick Dovigi, CEO
I think the liquids business is recovering remarkably well. By the end of 2020, our Canadian business ran above mid-20s margins, and it is positioned well for 2021. I'm inclined to keep it for now; it’s a good growth vehicle and a good free cash flow generator.
Michael Hoffman, Analyst
Would you entertain the possibility of divesting it if offered the right value?
Patrick Dovigi, CEO
Sure. Like anything in any line of business, if value is presented and assessed, we would consider it.
Michael Hoffman, Analyst
What is the timing for the portfolio cleanup to show proceeds?
Patrick Dovigi, CEO
We're looking for the first half of 2021. So we have a line of sight to complete it in that time frame.
Michael Hoffman, Analyst
Is there anything you can do to help reduce volatility in infrastructure margins?
Patrick Dovigi, CEO
Prior to COVID, infrastructure margins were steady. The amount of infrastructure dollars currently being announced in Canada and the Northeast that we've bid on is significant. By late Q3, beginning of Q4, I expect to see improvements in that business.
Michael Hoffman, Analyst
Okay. Thank you.
Luke Pelosi, CFO
Thanks, Michael.
Operator, Operator
Our next speaker is Walter Spracklin from RBC Capital Markets. Please go ahead.
Walter Spracklin, Analyst
Thanks very much operator. Good morning, everyone.
Patrick Dovigi, CEO
You're welcome.
Walter Spracklin, Analyst
I'd like to come back on your thoughts on leverage and clarify a couple things. You ended the year at 4.6. You stated you could deploy all capital in the $350 million to $500 million range in a self-financing way, but then there's the larger acquisition on top of that. Am I right in assessing that you could do both without the need for equity, therefore possibly going above five by year-end, but with a plan to get back down to mid to low fours one year later?
Patrick Dovigi, CEO
You're directionally correct, but leverage would maintain similar ranges as today despite executing larger acquisitions.
Luke Pelosi, CFO
Walter, the key thing to consider is that we start the year at 4.6, and that's likely to naturally delever even while executing small tuck-in acquisitions as we progress through the year. By the time we reach the back half, if a significant acquisition is being pursued, our leverage will have reduced.
Walter Spracklin, Analyst
Got it. Perfect. Just a small point here, regarding your free cash flow guide, you’ve mentioned refinancing as an opportunity for $20 to $30 million. Why is this considered an opportunity and not embedded in your free cash flow guide? What could prevent you from acting on this in 2021?
Patrick Dovigi, CEO
From our perspective, we modeled it based on analyst assumptions and execution timing. It could happen any time, so it's better to inform people when it's secured. We expect sooner rather than later.
Luke Pelosi, CFO
We see refinancing and volume recovery as potential events likely to occur this year, but we don’t know exactly when. Thus, we prefer to outline the potential impact without tying them to our current base business guide.
Walter Spracklin, Analyst
Okay, that makes sense. Regarding your strategic focus, can you provide insights into your solid waste business? What segments do you like and see opportunities, and which areas might be too small for your organization that you’d consider divesting?
Patrick Dovigi, CEO
From previous statements, there are markets we've acquired that are good assets but are more strategically valuable to other players. We don’t want to deploy capital in segments with better opportunities elsewhere. Our 2021 capital is focused on our existing markets across Canada and the U.S. It could be a favorable time for acquisitions in Canada, given the historical downward trends. We can access good terms with low-interest rates in a recovering market.
Walter Spracklin, Analyst
That makes sense. Thank you for your time.
Operator, Operator
Our next question comes from Adam Jonathan from ADW Capital. Please go ahead.
Adam Wyden, Analyst
Hey Patrick, this is Adam Wyden. I have Jonathan here in our analysis. You guys have done a great job of discussing numbers and strategy, but I want to step back. You’re essentially one year into your IPO, and you still trade at about 3.5 turns cheaper than Waste Connections. Your shareholder value initiatives are significantly more ambitious. How do you plan to narrow this valuation gap?
Patrick Dovigi, CEO
From my perspective, it’s about executing our strategy consistently. Mainly, we need to continue to grow free cash flow at double-digit rates and execute M&A effectively. Over time, the value will accrue and help close the gap. We've started significantly behind, but that gap has gradually closed. Our consistent execution will establish trust within the investor base.
Adam Wyden, Analyst
Let me ask, as you know, we've done significant primary research on your sector. It's our understanding you’ve taken a different approach by focusing on buying platforms and then doing tuck-ins, achieving efficiency, and rolling those into existing assets, driving margins — It's the level of integration that seems unprecedented. Can you comment on that?
Patrick Dovigi, CEO
It's straightforward. You acquire a platform, then optimize those post-collection operations, leveraging consolidations and routing to generate incremental margin. Operational synergies exhibit significant cost elimination, enabling you to deleverage while integrating. The model stands out as we've cultivated an excellent integration team that has executed this successfully in the past and will continue to do so.
Adam Wyden, Analyst
It sounds like you guys are doing it much better than most others in your industry. Thank you for that clarity.
Patrick Dovigi, CEO
Thank you, Adam.
Luke Pelosi, CFO
Thanks, Adam.
Operator, Operator
Our next question comes from Tyler Brown from Raymond James. Please go ahead.
Tyler Brown, Analyst
Hey guys. Good morning.
Luke Pelosi, CFO
Good morning, Tyler.
Tyler Brown, Analyst
Luke, you might have mentioned this in the prepared remarks, but what’s the expectation for closure and post-closure costs annually based on the landfill fleet today?
Luke Pelosi, CFO
$55 million to $60 million.
Tyler Brown, Analyst
Okay. And how much annual airspace do you consume based on the fleet? If you can split that between Canada and the U.S.?
Luke Pelosi, CFO
I’m going to have to check on that and get back to you.
Tyler Brown, Analyst
No problem, thank you. Just to wrap up at a high level, how much revenue is tied to CPI? If you can break that into U.S. and Canada?
Luke Pelosi, CFO
If you think about CPI contractually, we have about $1.2 billion in residential revenue for next year, with about $300 million in Canada virtually all aligning with CPI escalators. The remaining $900 million in the U.S. has about $300 million from subscription and about $600 million tied to CPI escalators, with some additional revenue in MRF and post-collection from municipalities utilizing our landfills.
Tyler Brown, Analyst
Okay. Thank you for a thorough discussion.
Luke Pelosi, CFO
Thanks, Tyler.
Operator, Operator
Our next question comes from Kevin Chiang from CIBC. Please go ahead.
Kevin Chiang, Analyst
Just wondering how this might change your cash tax profile over the next few years.
Luke Pelosi, CFO
We have a meaningful tax shield that's going to push any substantial cash taxes to beyond 2024. Major cash taxes won't hit us in Canada until at least 2025, though cash liability will increase based on some M&A activity.
Kevin Chiang, Analyst
Thank you very much.
Luke Pelosi, CFO
Thanks, Kevin.
Operator, Operator
Our next question comes from Tim James from TD Securities. Please go ahead.
Tim James, Analyst
Thanks. Good morning. I was just wondering if you could talk about how you’re seeing the resilience of the Canadian markets, particularly around liquid waste and soil/infrastructure in comparison to the U.S. — are there differences in how these factors impact your business?
Patrick Dovigi, CEO
On the infrastructure side, it’s been largely about delays. There is significant work that has to be done in Canada, and even in the Northeast, though a bit lagged compared to the Sunbelt, that’s seeing a quicker recovery. The liquid waste business has largely remained stable as it’s essential for manufacturing and industrial uses despite an initial shutdown.
Tim James, Analyst
Okay. Thanks. And can you provide an integration update on your two big acquisitions? The fourth quarter results were excellent relative to your expectations.
Luke Pelosi, CFO
The ADS and WM deal, though its integration process was extended, was executed nearly seamlessly, transitioning efficiently to our platforms. WCA requires a staggered integration but is on track for mid Q2. We are presently focused on operational overlaps where we can drive cost savings, and all things considered, the integration is going well.
Tim James, Analyst
Okay, that’s very helpful.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Patrick Dovigi for closing remarks.
Patrick Dovigi, CEO
Thank you very much, everyone. We look forward to speaking to you after Q1.
Operator, Operator
This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.