Earnings Call Transcript
GFL Environmental Inc. (GFL)
Earnings Call Transcript - GFL Q2 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to the GFL Environmental Q2 Earnings Call. At this time all participants lines are on mute. Please be advised that today's conference is being recorded. After the speaker’s presentation there will be a question-and-answer session. Please follow the operator's instructions. I would now like to turn the call over to your speaker today, Patrick Dovigi, CEO of GFL. Please go ahead.
Patrick Dovigi, CEO
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 second quarter 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 we get started, I'll pass the call over to Luke who will provide some disclaimers.
Luke Pelosi, CFO
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'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-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.
Patrick Dovigi, CEO
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-19, we delivered the highest revenue, adjusted EBITDA, and adjusted EBITDA margins in GFL's history. We attribute our success in the quarter to three key factors; first, 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. Second, we generate almost two-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. Third 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 of 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 first-quarter 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 sincerest gratitude to them. In addition to the strong performance of our base business during the quarter, we were also able to get back onto the M&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 the acquisition of a high-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&A activity, closing two small transactions in the quarter. We continue to maintain a robust M&A pipeline and will remain disciplined in our approach towards capital allocation. We have sufficient liquidity on hand to self-fund our M&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 we achieved in the quarter. At the bottom left of the page we have represented the last April numbers we provided in Q1, and at the top left of the page are the figures for the entire second quarter. As we said in the first quarter, 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 transportations 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 on pricing as the right thing to do. We also experienced a negative CPI adjustment on one of our large 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, where, as I said earlier, we generated almost two-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 and 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 the degree of uncertainty that still exists around how the reopening of the markets will take place and whether a new round of partial or full shutdowns will be required in the fall and in the 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. First 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 relative to improved asset utilization and productivity. Parking trucks and reorganizing our workforce across our service offerings and business lines have saved dollars while minimizing the disruption to our employees. Our safety statistics 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, repairs and maintenance, and fuel costs that naturally flexed out of 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&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 re-openings. 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 20% above the prior year. Diesel costs continue to be at historical lows, which can negatively impact fuel surcharge revenues in 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, a 180 basis point increase over the comparable quarter last year and a result far in excess of our expectations. Looking at soil 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 this segment. While the substantial majority of our larger activity projects were deemed essential and, therefore, were able to continue during the quarter we saw lower volume for many of the small-volume, high-frequency soil remediation customers that we typically service, resulting from a temporary suspension of those customers' soil remediation activities in response to COVID. With the market re-openings 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 first quarter, our liquid waste business was our most impacted segment during Q2. On the used motor 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 the 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 used motor oil 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 nonessential and had temporarily shut down. While we have seen an increased level of customer engagement over the past two months, we expect that some of the customers will reduce spending on certain of our services as a part of their 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 continued sequential 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.
Luke Pelosi, CFO
Thanks, Patrick. Turning to Page 5, we have provided a summary of results by operating segment. In solid waste, core price and surcharges drove 3.7% revenue growth as compared to 4.9% in the first quarter of this year and 4.4% in the prior year comparable period. As we've 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 temporary 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 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 the 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&I collection, and the decline in IC&I collection in Canada was twice what we saw in the U.S. Again, recall that for the first 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% for the quarter, the highest margin we've ever reported and a 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 third quarter, we expect the margin profile of the business will return to the historical trajectory in subsequent quarters. Our liquid waste business was the most impacted segment during the quarter. Patrick spoke about the changes to the top line, driven by a combination of lower sales volumes of UMO and reduced activity in our core industrial services business. UMO 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 nil 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 nonessential 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 flexed nearly $9 million of operating costs out of the base business on a like-for-like basis, mostly around direct labor and vehicle cost, 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&E and 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 have presented our income statement highlights, but I'm going to skip over that page and point you to the MD&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 our operating activities were $132.2 million in the quarter as compared to $56 million 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 million. Looking at the bridge presented on that page from $160 million at the top of the table to $132.2 million as the cash flows from operating activities, those are basically our adjustments to arrive at a free cash flow number. So if you deduct $116 million net CAPEX for the quarter from that $160.2 million at the top of the table, you get an adjusted free cash flow of approximately $44 million. 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 million. However, the coupon payments on the bonds are concentrated in the second and fourth quarters of the year with just under 40% of the annual costs 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 a 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 million, 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 million 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 accounts payable 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 million to $20 million 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 remain 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 increase 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 the material benefit in the quarter from the various government relief programs that have been made available, although we have deferred current payroll taxes until 2021 in some of our U.S. businesses, which helped working capital by approximately $5 million. In terms of investing activities, as Patrick mentioned, in addition to announcing the pending acquisition of WM/ADS divestiture package, we closed two small tuck-in acquisitions in the quarter that although were individually insignificant, were important in marking the return of our M&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 million 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 million of discretionary replacement and 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 million to $30 million of growth opportunities that we think makes sense for this year and as a result, currently sit with a view of $360 million to $370 million 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 U.S. dollar $500 million 4.25% five-year notes we issued at the beginning of the quarter. Turning to Page 8, we've 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 in U.S. dollars 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 exchange adjustments on our balance sheet that are in excess of the foreign exchange fluctuations realized in our P&L. The foreign exchange rate was $1.36 at quarter end as compared to $1.3 at year-end, a change that resulted in incremental $245 million of long-term debt recognized on our balance sheet. To facilitate a comparison with net leverage announced that were presented as part of the IPO road show, we have presented our quarter-end long-term debt balances translated to U.S. dollars using the 2019 year-end foreign exchange rate, which, as 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 million to $150 million of CAPEX and approximately $140 million to $145 million of cash interest costs 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 a free cash flow number of somewhere between $275 million and $300 million 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 at 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 half a turn over the numbers I just walked through on a pro forma 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&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.
Operator, Operator
Your first question comes from Hamzah Mazari with Jefferies. Hamzah, your line is open.
Hamzah Mazari, Analyst
Hey, good morning. Thank you. 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&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?
Luke Pelosi, CFO
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 have the sort of latent pricing opportunity that we'd be harvesting over the sort of 12 to 18 months, which would drive, on the short-term basis, pricing in excess of those levels, but really living in the 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. So 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, what we said in Q1, is throughout the year, the pricing increases would step down after the Q1 high of 4.9% and end the year somewhere in the 4% range. And again, going forward, when we look at our existing book, we think that's a sustainable level for the midterm, again that sort of 3.5% to 4% on a recurring run rate basis.
Hamzah Mazari, Analyst
Got you. Very helpful. For my follow-up question, could you discuss what you observed in July, particularly from a revenue perspective? I know you mentioned increases in activity since the April low. Any insights on what you are seeing in July in your markets would be appreciated.
Patrick Dovigi, CEO
From our perspective, it's been interesting to observe the trends as we've navigated through this period. Initially, when shutdowns eased, we experienced a significant spike in revenue, which then leveled off as we worked through the backlog. However, we have noticed a positive trend in the past three weeks, particularly after the July long weekend, with the business showing substantial growth and aligning much closer to our budget for the year. All indications suggest that we're heading in the right direction. Despite the noise from the media about current world events, I've noticed that people in the community are trying to resume normalcy as quickly as possible. The recent trends have been approaching our budget similar to what we witnessed from April to June, with continued upward movement over the past three weeks.
Hamzah Mazari, Analyst
Great, thanks so much guys.
Operator, Operator
Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Walter, your line is open.
Walter Spracklin, Analyst
Thanks very much, operator. Good morning everyone. I wanted to focus on the rebound in volumes. You've seen that since April. Have the incremental margins aligned with expectations or are you encountering the need for additional costs to return more quickly? Is the traffic on the streets putting some pressure on that, or are there any factors that may have provided a temporary cost benefit during COVID-19? Is anything unexpected emerging in terms of costs as volumes come back?
Patrick Dovigi, CEO
No. I think you'll see some overtime gradually returning as things expand. We have made our routes significantly more efficient and have reduced the number of trucks in operation, so some overtime will naturally come back. However, most of the costs we've eliminated are likely to remain down. We expect those costs to come back at a much slower pace compared to the revenue recovery. I believe that taking these three months to closely evaluate the business will work to our advantage. As I mentioned earlier, I think we will emerge from this situation stronger than before. There will be some costs, but I anticipate that revenue will recover much faster than some of those costs.
Walter Spracklin, Analyst
Makes sense. Okay. And then turning to your tuck-in. You were indicating in the prepared remarks that you're reengaging your tuck-in program. What do you think is the limiter here, is there a lot of interest out there, has that picked up selling interest? I mean, are you more mindful? I think your results have demonstrated that you can certainly tolerate higher debt levels through the cycle. How do you look at your balance sheet capacity and square that off with the willingness for sellers out there today?
Patrick Dovigi, CEO
Sure. We received this question frequently during our IPO marketing, as investors are often concerned about leverage. They asked about the potential impact during a recession. We reflected on the fact that nothing could be worse than September 2008, and what we've experienced recently is significantly worse than that quarter. What we've demonstrated is that our leverage remained stable during this considerable downturn. From a leverage standpoint, this serves as a clear case study indicating it's not a concern for us. As we've communicated to investors, we plan to maintain our leverage in the low to mid-4s, potentially increasing to the mid-4s for attractive opportunities, and we're comfortable with this approach. In the latter half of the year, we expect to generate nearly $275 million to $300 million in free cash flow. Regarding our current debt trading, we see some promising re-pricing opportunities. Our capital structure, including bonds and term loans, is currently trading in the low 3s to just above 4. This positions us favorably as a company with a defensible growth story. We can protect our core earnings while financing mergers and acquisitions at very appealing rates due to the current cost of capital. This favorable environment has led us to re-engage in our M&A program. Equity will not hinder our ability to execute this strategy, as numerous interested parties are willing to invest equity for the right opportunities while maintaining our target leverage. Currently, we have several prospects in our pipeline. Starting with the ADS transaction that we discussed previously, we're prepared to move forward. We've maintained a constructive partnership with ADS and Waste Management, dedicating considerable planning efforts to ensure a smooth integration. We're awaiting the final DOJ approval for Waste Management to close their transaction, after which we can proceed shortly thereafter. Offer letters will be sent to all employees this week, and we are essentially in a holding pattern while waiting for the DOJ's final approval. In total, I categorize our pipeline into three groups. The first consists of opportunities for which due diligence is largely complete, representing about $80 million in revenue. The second includes prospects currently under letter of intent and in early-stage diligence, which represents several hundred million dollars in revenue that we are evaluating. There's also a significant acquisition under consideration that we are continuing to investigate. Our pipeline is as robust as ever. Given our comfort with the core business performance through the second quarter, we will persist in our strategy that has proven effective over the past 14 years. With 143 acquisitions completed to date, this team is focused on creating and preserving shareholder value through strategic capital deployment over the long term. I am personally invested in this mission, and I believe the team feels confident about our position moving forward; everyone is engaged and ready to advance our goals. That's my perspective on the M&A program today.
Walter Spracklin, Analyst
Okay. Appreciate the color, and congrats on the great quarter.
Luke Pelosi, CFO
Thanks, Walter.
Operator, Operator
Your next question comes from the line of Mark Neville with Scotiabank. Mark, your line is open.
Mark Neville, Analyst
Good morning everyone. It was a great quarter. Could you talk about the primary markets in Canada and their progress toward getting back to budget or normal operations? In the U.S., we are seeing a resurgence in certain states. Have you noticed any impact or changes in trends in those regions of your business?
Patrick Dovigi, CEO
Outside of Montreal, Toronto, and Vancouver, the markets were not as affected. I'm still focused on the major markets of Toronto and Montreal. Montreal is actually performing at 101% of budget through July, showing signs of recovery. It's hard to determine how much of this is due to pent-up demand and whether there will be a slight dip after the initial surge. However, the situation seems much improved. In Toronto, the revenue mix plays a role; we do significant work in the downtown core, particularly in office buildings, which have been slower to bounce back, and I believe it's still down over 10%. Vancouver is in a similar position, also down more than 10%. As we progress into phase three, I hope people will start to return, which should lead to a quicker recovery. Secondary markets have been mostly on track for the past six weeks, indicating we're heading in the right direction. Of course, any unexpected shutdowns could affect this, but currently, things are aligning with our expectations.
Mark Neville, Analyst
Okay. And the U.S., sorry, any impact from sort of a resurgence in certain geographies of COVID cases?
Patrick Dovigi, CEO
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, we're guiding still off sort of 5% to 6% on roll-off pulls. Commercial seems pretty stable meanwhile, but I think it's been fairly minimal in our U.S. operations today.
Mark Neville, Analyst
Okay. That's helpful. Can I just ask one more? Luke, you gave a few numbers and bridges, one on free cash flow for the second half and one on just the margin impact and sort of the puts and takes through the quarter. If you can go through those or at least the free cash flow walk, it would be helpful.
Luke Pelosi, CFO
Yes. So Mark, regarding free cash flow, I outlined the components of the costs. We haven’t specified an EBITDA figure, but I believe that prior to the impact of COVID, the EBITDA for the year was estimated to be around $1,040 million to $1,050 million. If we consider that as the annual figure and note that we achieved $485 million in the first half, this leaves us with $555 million to $565 million of EBITDA expected in the second half, excluding any additional M&A activity. From that estimate, if we deduct $150 million for capital expenditures and $145 million for interest, while assuming working capital returns to a flat state—there could be some positive movement on that, but we're being conservative by assuming flat—this adds $80 million in the second half and after accounting for about $50 million in miscellaneous expenses, we arrive at an adjusted free cash flow estimate for the second half that falls between $275 million and $300 million.
Mark Neville, Analyst
Okay. That helps. And so maybe just to sort of sneak one last, Patrick, you said $80 million revenue offer late-stage diligence?
Patrick Dovigi, CEO
Yes.
Mark Neville, Analyst
Okay. Yes. Maybe just remind us how close or how far away they may be in comparison to a couple of hundred million at the early stage?
Patrick Dovigi, CEO
Yeah, I mean from our perspective, that's stuff that will close over the next sort of two to three months could be quicker. I'm just taking the conservative bet and some of that other $200 million will close this year, for sure as well. So I think we're very sort of well positioned. And like we talked about previously, and we talked about two 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 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 with $1.250 billion to $1.30 billion 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 would be M&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&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 what you're going to see us deliver over the balance of the year and into sort of Q1 of next year. And I think we're just setting ourselves up very favorably for that.
Mark Neville, Analyst
Okay. That's very helpful. And again, great job managing through this.
Luke Pelosi, CFO
Thanks, Mark.
Patrick Dovigi, CEO
Thanks, Mark.
Operator, Operator
Your next question comes from the line of Michael Hoffman with Stifel. Michael, your line is open.
Michael Hoffman, Analyst
Hey Patrick, Luke. Thanks for taking the questions.
Patrick Dovigi, CEO
Good morning, Michael.
Michael Hoffman, Analyst
Good morning. Can we revisit the free cash flow to clarify? The $270 million to $300 million refers to the generation in the second half of the year. If I include the first half, does that total $300 million to $325 million, or is it that the full year is $275 million to $300 million? I want to make sure I have that right.
Luke Pelosi, CFO
Yes. The numbers I provided were for the second half of the year. My challenge is normalizing Q1 with the debt levels and the pre-deleveraging situation, which makes it a bit difficult to normalize. To think about a full year, if we use the $1,050 million EBITDA figure, we have $360 million in CAPEX and $250 million in interest. I'm using $250 million instead of $280 million because the $280 million includes the new debt incurred to finance WM/ADS, while the $1,050 million excludes that. On a like-for-like normalized basis, I would say that we have $250 million in interest expense against the $1,050 million EBITDA, plus another $50 million for other miscellaneous items. Thus, normalized, that gives us around $390 million to $400 million. Normalizing Q1 on its own is challenging, but a normalized Q2 is around $45 million. Then we add $275 million to $300 million for the second half, along with a normalized Q1, if that makes sense.
Michael Hoffman, Analyst
Yes. What I was trying to convey is that you mentioned a $400 million figure for the year, excluding any ADS, or the additional contributions of $80 million and $200 million. So we are still considering that $400 million run rate for the year. There is potential for an additional $100 million EBITDA from ADS, along with whatever you anticipate from the other $80 million which could add $20 million, and another $50 million from the $200 million. Is that the correct way to approach this?
Luke Pelosi, CFO
Yes. Correct.
Michael Hoffman, Analyst
Okay. 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% how we think about what you did to be responsive to your customer?
Luke Pelosi, CFO
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 a low 3s number and the U.S. business being a mid-4s number. So the U.S. business was largely on plan, a little bit off. The U.S. business budget was a high mid-4s. And 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 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.
Michael Hoffman, Analyst
And so that is 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?
Luke Pelosi, CFO
Yes, you are right. There will be some of that. Part of it is driven by the issue you mentioned.
Michael Hoffman, Analyst
Okay. And then last one for me at over $30 Canadian, are you at a price that the TSX would consider putting you in the big index?
Patrick Dovigi, CEO
I think there are no guarantees. If we were to be included in the TSX 60 index, it would likely happen in December, which is the next available opportunity for us. So we anticipate that we might receive TSX 60 inclusion in December, but that decision is ultimately out of our hands. Given our $10 billion market cap in Canada, I believe we have a good chance of being included, but I can't say for certain.
Michael Hoffman, Analyst
And that's a 4 million to 6 million share of incremental buy to do that, right?
Patrick Dovigi, CEO
Yes, roughly, I think. Yes, that's about right today.
Michael Hoffman, Analyst
Okay, cool. Thanks, nice job.
Luke Pelosi, CFO
Thanks Michael.
Patrick Dovigi, CEO
Thanks, Michael.
Operator, Operator
Your next question comes from the line of Rupert Merer with National Bank. Rupert, your line is open.
Rupert Merer, Analyst
Thank you, good morning guys. So Patrick, you gave us some color on the M&A pipeline. Wondering if you could give us an update on how COVID is changing the dynamic in M&A, how is it impacting your activity levels or pricing, and how are you managing through the pandemic?
Patrick Dovigi, CEO
I'm someone who enjoys interacting with people directly, as I believe it's a more effective way to carry out acquisitions. We typically don't operate from a distance, and that's been a significant challenge—getting people moving and together in the same space. From a valuation standpoint, we focus on understanding earnings before, during, and after COVID, aiming to arrive at an adjusted number that reflects a blend of these periods. In terms of multiples, I haven't observed much change recently. There are some sellers with struggling business models in certain areas, and acquiring that revenue can be beneficial for us, but those opportunities are limited. Overall, navigating M&A during the pandemic requires more time. It's become more challenging to gather people and conduct necessary activities, such as environmental due diligence and site visits. While the tasks remain the same, they simply take longer to execute, and that's the biggest challenge we're facing in managing through this COVID situation.
Rupert Merer, Analyst
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?
Patrick Dovigi, CEO
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, 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.
Rupert Merer, Analyst
Great, I will leave it there. Thank you.
Operator, Operator
Your next question comes from the line of Adam Wyden with ADW Capital. Adam, your line is open.
Adam Wyden, Analyst
Hey guys, congratulations on a great quarter. I just kind of wanted to sharpen your answer on the M&A pipeline. I guess the last few years, you guys have gone very quickly. Obviously, I guess, went from 0 to whatever $1.3 billion in 13 years. The last couple of years, you've been averaging about U.S. $150 million to $200 million EBITDA. Now obviously, the COVID has slowed down the M&A pipeline for all businesses, I guess, with the exception of the Internet. So obviously, the pipeline we have today is probably not necessarily reflective of kind of the pipeline in a normalized year. I mean can you try and edify like if you think that it's possible that you could do U.S. $125 million, $150 million, $200 million EBITDA kind of for the intermediate term once things kind of normalize in terms of M&A?
Patrick Dovigi, CEO
I mean I don't know if I'd characterize it as this. I think we had a pause but if you take into consideration the sort of Waste Management acquisition at, call it, $95 million to $100 million of EBITDA and then layer on the other opportunities I'm talking about, I think you get back to that number. And so this year, I think, will be another outsized year. Anything is possible. I think from our perspective, like I said we've acquired between $100 million and $200 million of EBITDA a year for the last as we've said, the last three to four years. So is it 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, that's what we've done in the last four years. So no, I don't think that's a stretch.
Adam Wyden, Analyst
Okay. Let me follow up with something else. So I guess 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 35x 2021 free cash flow estimate as a kind of a target price. If you look at the consensus number for this specific company, Casella, Casella's 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 million in 2021 and then obviously going to $700 million plus in 2022, I put a 40 multiple on $600 million, that's $24 billion Canadian and I own Yankee stock, right but if I multiplied that by $0.71 on the dollar, that gets me to a U.S. $17 billion market cap divided by 314 million 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, it's taken them 30 years to get to $150 million in EBITDA, and you've effectively gone in 13 years from 0 to $1.4 billion Canadian and clearly, you're not stopping, you did the Advanced Disposal deal, and you obviously are on the hunt for these $100-plus million EBITDA deals. I mean what do you think is going on, I mean what is it that the sell-side likes 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 to stop doing anything?
Patrick Dovigi, CEO
I can't control the stock price or what others say about the company. What I can control is our operations and how we generate shareholder value in the coming years. It's a long-term journey rather than a quick race. I believe it's important to familiarize people with our business and our model since we are new to the public market. Over time, if we keep fulfilling our commitments, I believe it will take us about 30 years to reach a valuation of 18 to 20 times EBITDA, which is an aspiration shared by everyone here, including myself. Our business model has proven to be resilient, and we have expertise in mergers and acquisitions. In 2021, reaching $600 million in free cash flow would be ambitious, but I believe it's achievable at $500 million or more. As we refinance and reduce interest costs, we can gain an additional $40 million to $50 million going into 2022, which suggests significant growth potential by the end of that year, potentially exceeding $700 million. It's crucial to demonstrate to public markets that we can maintain our performance, show consistent free cash flow, and achieve margin expansion, allowing us to reach our goals. Currently, it seems the stock is fairly priced, trading around 11.5 to 12 times 2021 earnings. Although there is a considerable difference between us and established companies like Casella and Waste Connections, we've also shown substantial growth. Trust from equity investors will be essential for our continued progress. I want to emphasize that I have substantial personal equity invested in this company, and my goal is long-term capital appreciation, not just receiving a salary or bonus. Everything we do aligns with this perspective, as it has for the past 14 years. We have successfully returned value to investors, and we intend to do so for each of you as well. While I may not have specific insights on others' opinions or trading actions, I am confident that over time, we will prove ourselves and see our valuation grow.
Adam Wyden, Analyst
Good. 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 four to five. But I mean, I think if you look at the kind of the compendium over the last 30 years, I think you guys have done a lot more in 14 than they've done in 30. So maybe they should aspire to be you and you should trade at a higher multiple than them. But that's for everyone else to decide, not me.
Patrick Dovigi, CEO
Well, maybe we're going to give you a job in IR because you're pretty good, Adam.
Operator, Operator
Your final question comes from the line of Keith Rosenbloom with Cruiser Capital. Keith, your line is open.
Keith Rosenbloom, Analyst
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 do you bump up against those?
Patrick Dovigi, CEO
Yes. In the Canadian market, which is about a $10 million market, the three major players control approximately 30% to 35%, while the remaining share is quite fragmented. In Canada, the Competition Bureau oversees transactions, but they only review deals exceeding $95 million in enterprise value. Therefore, 99% of our activities in Canada fall below that threshold. Consequently, we shouldn't encounter any issues regarding this moving forward.
Luke Pelosi, CFO
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&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.
Keith Rosenbloom, Analyst
That's very helpful. Guys, thank you. You just keep delivering on what you say you're going to do. Thanks a lot.
Luke Pelosi, CFO
Thank you.
Operator, Operator
Gentlemen, your final question comes from the line of Brian Maguire with Goldman Sachs. Brian, your line is open.
Brian Maguire, Analyst
Good morning. I appreciate you taking my questions. I’d like to get your thoughts on the churn rate, specifically any impacts from bankruptcies or customer departures. What trends are you observing? I noticed one of your larger competitors reported an all-time low in this area, so I'm curious if you're experiencing similar results. Additionally, what are you seeing regarding Days Sales Outstanding and collections? I know you mentioned a minor charge for bad debt, but are you noticing any shifts in that trend?
Patrick Dovigi, CEO
Churn rates have remained relatively stable in the commercial sector, while they are noticeably lower in the residential area. The churn for commercial has still been around 6% to 8%, which is quite low. It seems that during COVID, people were not very active or focused on changing service providers. This aligns with our current observations. Regarding working capital and collections, Q2 went according to our expectations, although we did take a minor charge and set aside some provisions for potential bad debt as a precaution. However, nothing seems out of the ordinary. Luke, do you have any additional insights?
Luke Pelosi, CFO
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 30th 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 the bad debt side, but obviously, an area that we're actively monitoring.
Brian Maguire, Analyst
Great. And I guess one on some of the recent M&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?
Luke Pelosi, CFO
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'd 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, the plan and the integration from an operational perspective, I'd say, has gone completely as expected. Some certain outperformance, particularly when we started 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.
Brian Maguire, Analyst
Okay. I think I heard you mention that the lower diesel costs provided a 110 basis point benefit for margins year-over-year, is that correct? Can you remind me how long you retain that forward? I believe with the residential contracts, you maintain them for some time, but for commercial contracts, you pass it through relatively quickly, is that accurate?
Luke Pelosi, CFO
That's correct. If you consider our pricing opportunities in Canada, particularly regarding surcharges with certain customers, it explains the current situation of passing back some benefits. Yes, there was a 110 basis point benefit this year from those residential contracts that reset at their anniversary date. While we will return some of that, overall, when we look at our residential business—which generates about $1 billion in revenue—there's a significant subscription base in the U.S. and several contracts decoupled from CPI. This leaves us with roughly $400 million in revenue directly tied to CPI. Generally, lower diesel costs, which are currently about 30% lower year-over-year, still represent a net benefit. However, as we go through the resets, we will return some of those benefits.
Brian Maguire, Analyst
Okay. Good luck closing the deal and good luck in the quarter.
Luke Pelosi, CFO
Thank you, Brian.
Operator, Operator
This concludes our question-and-answer session. I will now turn the call back over to Patrick Dovigi for closing remarks.
Patrick Dovigi, CEO
Thank you, everyone. Look forward to speaking with you in the near future. Thanks.
Luke Pelosi, CFO
Thanks, everyone.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.