GFL Environmental Inc. (WM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the GFL Environmental Incorporated Investor Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrick Dovigi. Please go ahead, sir.

Hi. Good morning, everyone, and thank you for joining us to walk through a little bit on the GFL and Waste Management-Advanced Disposal divestiture asset package. Before I get started, I'll turn it over to Luke quickly who's going to go through the forward-looking statements caution, and then we'll jump in through here.

Thank you, Patrick. Good morning, everyone, and thank you for joining. Before we get started, please note, we have filed a press release, which includes important information. The press release is available on our website. Also, we've prepared a presentation to accompany this call, and that's 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 and 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. A reconciliation of these non-GAAP measures can be found in our filings with the Canadian and U.S. security regulators. With that, I will now turn the call back over to Patrick.

Thanks, Luke. So I won't flip the deck. I mean everybody has it. It's a pretty short deck. I think we'll keep this sort of more interactive and sort of high level. As most of you know, on the IPO road show, these assets were out in the market, and people were trying to understand if we were potentially a bidder. And I think as we worked through that process post-IPO, as we said during the IPO road show, there was a couple of chunkier-type acquisitions, this being one of them, that we thought could come available to GFL. And sort of fast forward to today, sort of delivering on 1 of those 2 opportunities on the chunkier side. So when we look at this today, I mean, this is an asset that, again, without the Advanced Disposal and Waste Management merger, these types of assets would never have come available. We're acquiring 36 transfer stations, 18 landfills and almost 300 collection vehicles and approximately 900 employees through 10 states in the U.S. And I sort of break them down into 3 different regions, the Midwest region, which the majority of what we're acquiring in that market is in Michigan, Wisconsin and Illinois, and there's a small piece in Minnesota. You have the East region, which is largely focused really around Pennsylvania and Indiana. And then you have the South region, which is generally focused around Georgia, Alabama and Florida. And then you have a little piece sort of up in Maryland that will be part of the East region. So I'll talk a little bit about the Midwest region and clearly, why that -- that is the largest piece of what we're acquiring. Obviously, the Michigan portion of that business that we will be acquiring is a complete tuck-in to our existing business in Michigan. As most of you know, we've had a focus on growing our Great Lakes region, operating our business on the Canadian side from Windsor, Ontario all the way up to Sault Ste. Marie, Ontario and Sault Ste. Marie in Michigan. And recently, with -- we've acquired a business in the Upper Peninsula, being American Waste. And with our large build-out of the -- with our Rizzo acquisition that we did in 2016, have a huge presence in Southeast Michigan, so acquiring these assets in Southeast Michigan and getting our hands on a landfill in that specific market makes a lot of strategic sense for us. If you look at Wisconsin, which is almost 60% to 65% of the overall EBITDA that's coming out of the divested assets, that is a very good sort of secondary market. It's a market where you need to be vertically integrated to compete successfully. And between Waste Management and Advanced Disposal, [ it made ] a significant amount of market share in that market, which led to this opportunity. And I call that a once in a lifetime opportunity to acquire those assets in that region. As well as Illinois, getting our hands on some transfer stations and landfill assets in Illinois will give us the ability to compete successfully on our -- what will soon to be a new hauling business in the Illinois market as well as Minnesota. When we move to the sort of East region, I mean, we have Canadian operations in Pennsylvania, Virginia and Maryland. So those will put us into some markets that we're already in but will also expand our footprint in both Maryland as well as Pennsylvania, so giving us a new landfill asset to be able to go and build hauling businesses around. And as well as moving us into the Fort Wayne, Indiana market where we believe there's a large opportunity there. What's being contemplated now is acquiring a large landfill in that market. And then you look at the South region, largely a tuck-in to our existing footprint in the South. We are -- we have a large presence in the Georgia market as well as Alabama, touching on a couple of the smaller Florida markets. But again, it's always been a focus of ours to start moving into Florida. And I think with this acquisition, that will allow us to do that. So from our perspective, to acquire -- similar to what we did with Matrec back in 2015, carving that business out from a public company called TransForce as well as carving out the Eastern Canadian assets from Waste Management back in 2014, this is a very similar type program. I think the quality of assets we're getting are second to none. I think when you look at some of the opportunities that this will allow us to do in the future, which we'll talk a little bit about, but I want to talk a little bit about the integration plan first. I think the majority of what we're getting is stuff that is coming off of the ADS platform. ADS operates on the same operating platform as us being an operating platform called TRUX. And given our experience with TRUX and the integration team we have, we [ are ] -- believe we're very well positioned to integrate these assets very easily. Our integration team has been up to speed with Waste Management's IT team as well as ADS's team. We have a very good, well-defined plan. And between our Detroit, Michigan hub and between our Raleigh, North Carolina hub, the bulk of the back-office functions are going to go into those 2 hubs, and we're sort of very well positioned to do that. And we'll be -- the delay in timing actually helps us a bit because it gives us a little bit more time from a planning perspective. When you look at the valuation, lots of people have focused on the valuation. Valuation, obviously, out of the gate is a key metric. Some will say we're acquiring these for 8x. Some will say we're acquiring these for 9x. What I can tell you is let's focus on today, but let's also focus on what these set of assets do for us over the next 12, 24, 36 months and what the opportunity is. If you look at what we're acquiring, we're largely acquiring landfill assets as well as, basically, 350 collection -- front-end collection routes, which is arguably the most profitable line of business any one of us have in our overall sort of revenue mix. On the backs of these front-end collection routes, we now have the ability to go and expand our municipal collection operations and expand our roll-off collection operations in each one of these markets. And we can do that all organically on the backs of these existing facilities. If you look at the collection of assets, obviously, Wisconsin, we know, a very high-margin market. Again, so the overall blended margins coming into us, we believe, are going to be accretive. And it just sets us up very well. These assets, if you look historically, what we paid for assets of similar nature, I mean, Matrec was one that we did, again, almost 5 years ago, paid 9.5 to 10x for that. If you look at the sort of headline number for Waste Industries when we acquired that business, it was roughly 11x. So acquiring these in the 8 to 9x range, we feel we've been -- it's a very favorable purchase price multiple. But not only is it a favorable purchase price multiple, we think it leads us to an exciting opportunity over the next sort of 12, 24 to 36 months. Obviously, as a part of the deal, as what we heard, our model was a little bit different in Canada and some markets in the U.S. where we were more disposal-light. And as part of this transaction, we basically -- I think we've absolved that fear with everybody, as people were concerned that our landfill percentage is -- of our overall business was lower than some of our competitors. And I think if you look at that, we've entered into an extension of our existing disposal deal for probably another 5.5-plus years. So again, solidifying the disposal arrangement that we've had with Waste Management both into our facilities as well as theirs. When you look at sort of how this works, and we'll get into it a little later on sort of future M&A, I mean, if you think about Waste Industries and what Scott has done, I mean, this is a puzzle we're building. We continue adding pieces to the puzzle. If we would have never acquired Waste Industries in 2018, this acquisition today wouldn't be possible, because just having the ability to tuck these assets into a lot of our existing platform and having the back-office support to be able to support these markets has really positioned us very favorably. So with that, I'll turn it over to Luke to talk a little bit about the financing, and then we'll get into the Q&A and spend the bulk of our time on Q&A.

Thanks, Patrick. If you look at Page 6 of the presentation, there's some outlining on financing considerations. As you're all well aware, in -- early in Q2, we tapped the market on an opportunistic financing, brought on a USD 500 million bond, which brought us north of $1 billion of liquidity that we've been sitting on, truthfully in anticipation of the closing of this transaction. So we are well positioned to fund the transaction with the liquidity we have today. We still have basically all that cash, and we could draw on the revolver. However, we continue to always be looking at opportunistic financing opportunities. And that is something that we'll continue to evaluate as such opportunities present themselves. When you think about -- if you were to finance it 100% today just with cash on hand, from a leverage perspective, before considering this acquisition, if you looked at the model and you look at the analyst consensus, I mean, the business was expected to end the year with leverage in the sort of low 4s area. Funding the acquisition 100% debt financed would increase that leverage by about 0.5 turn. So you'd end up ending the year sort of the high end of mid-4s. Now as we told everyone from the IPO, out the gate, our philosophy around leverage was that we think, naturally, the growth prospects of the business are going to see a natural delevering year-over-year, even with our growth goals. But we would, on a temporary basis, bring leverage up to that level of sort of mid- to the high end of mid-4s to effect the right transaction. For all the reasons Patrick just said, we think this is the right transaction. And so we are doing exactly what we said we would do in that regard. If you look at what that means going forward, the regular way M&A program and the organic growth of the business, you'd still see, even if executing at the levels of M&A that we've previously discussed, the business still naturally delevers about 0.5 turn a year. So you still would continue on that deleveraging profile to getting to that low, mid-3s that we've spoken about. I think this just delays that process by either half a year or a year, absent any other sort of financing considerations. I think it's important that, some people were asking yesterday, about what does this mean for our broader M&A. I do think it's important to emphasize that there's no limitations from a leverage perspective given our normal course tuck-in program. For the most part, those businesses end up in very short order being accretive to the overall profile and certainly don't move it in any material way.

Yes. And on that theme, we've had a lot of reverse inquiry over the last month about investors asking to put equity and then take equity as part of some form of sort of private placement. What I will say on M&A, leverage is clearly the governing factor, and what we need to determine about how much equity needs to go in the business. What I will say is we're not contemplating doing any equity offerings today. We feel more than comfortable sort of with this leverage profile. And if some of the other opportunities that we had in our pipeline that we discussed as part of the IPO come, we have multiple equity solutions available to us that will sort of get that leverage profile into the low 4s as part of our commitment to each one of the investors that participated and continue to participate. So this is not -- by no way are we going to continue if there's something, again, a little bit chunkier that comes along, in no way are we going to take leverage up into the 5 to 6 range. That's what we committed to you, and that's what we'll continue to do. But again, lots of opportunities in various sorts of structures around the equity with various sort of large investors that have been with us previously and continue to be with us, so that opportunity exists. But I don't think you'll see us coming doing a broader syndicated equity deal today or sort of anytime soon. So I know that question came up a lot over yesterday, but I just want to make sure that we sort of hit on that today.

And just to round out the conversation, I mean, all these conversations about leverage highly predicated on what sort of underlying EBITDA number you're using. If you think about this asset package, as Patrick articulated, primarily comprised of landfills and front-end hauling businesses and the majority of which in a great sort of market in the Midwest. I mean on the face of it, this package was a low-30s margin EBITDA business. Now being a carve-out, we've taken a look at it, and we've underwritten ours on a true stand-alone basis, what would this look like if you carved it out and had to burden it with all its sort of stand-alone costs. And we've also included a certain level of conservatism in the numbers in consideration of the current sort of dynamic, specifically like COVID-related impacts to the historical numbers. But all of that, bringing the business down, we're thinking out the gate at something with a sort of high 20s, about 27%, 28% margin profile. We think that is a conservative number. And there, as Patrick said, for all the go-forward, there's opportunities above and beyond that. There's a very near-term synergy opportunity in terms of just thinking about how much we burden the stand-alone business but actually being able to leverage our existing infrastructure in the back office from Raleigh to Michigan. As well as just a more operational synergy going forward as we use this new footprint and network of assets, particularly on disposal side, where we now have our own disposal assets in certain of these markets, they're going to lead to internalization opportunities, route consolidation, facility consolidation and the like. So do want to just add the color that all this leverage discussion is predicated on an EBITDA number that we think there's some pretty meaningful upside to. The last point I'd just say, to echo some of the things that Patrick said on integration, near and dear to my heart, our team has been deep in the weeds in relation to that. I tip my hat to the Waste Management-ADS folks who have been very prepared and very helpful in ensuring that collectively, we get to a place where there's a smooth transition. As Patrick said, the fact that the majority of the assets are on our current operating system, I can't overestimate -- I can't express how efficient that is for us from an integration perspective. And again, with the potential -- well, the delay of potentially a month or so, adding the extra time to allow us to be prepared. This is going to be a very efficient integration from our perspective, particularly if you think, although it's a big asset package, the majority of the businesses in the East region and the South region truly are tuck-ins to existing networks and infrastructure that we have. So it's really effectively setting up this new Midwest region but again, it will all be administered through an existing back office. So just wanted to really articulate how well advanced we are in that plan and how both the vendor and us are marching towards an efficient transaction in that regard.

Yes. I mean our belief it's a great transaction for us clearly, and it's a great transaction for Waste Management and Advanced Disposal. And just given the relationship we've had with Waste Management over the years and the ability to work collaboratively with them multiple times over the last sort of 13, 14 years, the teams know each other. They've worked well together in the past in various asset sales, and now it's the same team working on those. So we feel extremely comfortable and very confident. And from the highest levels down at Waste Management to the people that are actually doing the work, I mean, I think there's a complete agreement. So we're really excited. So I think with that, we'll turn it over to the operator for questions. And that should bring us some interesting sort of dialogue.

[Operator Instructions] Our first question comes from Tyler Brown with Raymond James.

Congrats on the deal. But Patrick, just real quick, I think the deal is slated to add, I think, you said 18 landfills to the fleet. That's great. I agree it helps with some of the post-collection concerns. But are any of those landfills particularly short live? I know ADS has had some landfill issues in the past. So is there any landfill protection as a part of the deal?

Yes. So there's 3, I would say, nonstrategic assets that are sort of dwindling down, sort of 2 to 5 years of life left. Those are not core to the transaction from a value perspective. I would say they were kept open as a going concern, but there was no real value attributed to them. Actually, negative value when you factor in ARO and closure liability. So it's really a host of 15 core group of landfills that have -- that are -- have a long life expectancy left in front of them.

Yes. Tyler, I would just -- just to articulate that even more. If you think about our underlying EBITDA number and the revenue number, those are basically in at 0s. So -- and the ARO liability, as Patrick said, all factored into our valuation project. So we went in with our eyes wide open, so essentially that was part of the package that had to be taken, but we just factored that into the math.

Okay. Great. And then maybe just to level set it, obviously, these assets are landfill-centric. How should we think about the CapEx burden on these assets, maybe as a percentage of sales? I'm assuming they're a little bit higher than your base business.

Yes. That's right, Tyler. So I think when you look at the package today being so landfill-heavy, despite the GFL blended number today being 9%, we're viewing this as sort of high 11%, 12% CapEx burden. Now as we build out our -- and as we execute on our plans to build out a broader, more comprehensive collection network on the back of these assets, and the landfill concentration as a piece of the overall mix reduces, I think you'll see that sort of come down. But out of the gate, we're viewing this effectively as sort of, call it, a 12% CapEx burden.

Okay. Perfect. And my last one here, just in a broad stroke, how is the deal structured? And how does it affect your cash tax paying status off into the future?

So the deal will be a combination of assets and shares, primarily an asset-based acquisition. And effectively, when you put it all together, if you look at the current run rate -- runway that we had of being a noncash taxpayer, you're going to add about 1 year, 1.5 years of that noncash payer status. So the incremental tax shield coming out of that will basically give us another 18 months, all other things being created equal.

Our next question comes from Adam Wyden with ADW Capital.

So I just want to say congratulations on the deal. It's a great feeling to partner with a management team that has significant skin in the game and obviously, a huge track record of creating enormous value for shareholders, albeit in the private markets. So Patrick, obviously, you built this business from scratch. 13 years ago, you had 1 truck. Now you're the fourth largest waste management company with nearly $1.3 billion of EBITDA. You've compounded capital for you and your investors at an extraordinary rate and have shown that you're obviously the most capable exec in the space today. So when I look at the closest public market comparables, Waste Connections and Casella, they trade at 18 to 20x EBITDA, respectively, or less than 3% free cash flow yields. GFL today is a capital-light share gainer with a better mix growth and management team, yet today, you trade at only 10x EBITDA. And obviously, on a free cash flow basis, if we traded at the same valuation, this would be a $60-plus stock today. How do you think about narrowing the valuation gap, especially if you want to continue doing large transactions? I mean in my mind, you should be trading at a premium to Casella and Waste Connections because this business is a toll road, route-based business. So I guess, my question is, I mean, the sell side is completely out to lunch. I don't know if they're recovering from COVID. But like how do you plan on narrowing the valuation gap and getting the credit for the value creation that you've done and the value creation in the future? A lot there.

Well, anyway, thank you for the compliment. I appreciate it. But listen, I think it's really simple, right? When you're -- as a public company, as a new public company, I think at the end of the day, it takes some time to build trust with the public equity investors. I think from my perspective, listen, I'm 40 years old. I have $100s of millions of equity in this company. I can't control the stock price, but what I can control is how we operate the business and how we deploy capital to create shareholder value. And I think if we do those 2 things properly, I'm going to make a lot of money for myself, and I'm going to make a lot of money for each and every one of the shareholders that are on this call. So I think as we [ can we venture ] through sort of 1 quarter, obviously, bumpy quarter with COVID and everything else, I think as we continue delivering on our plan on the Q1, we delivered Q1, now we have Q2, Q3. I think similar to other Canadian champions, when you look at it, you look at the likes of sort of Waste Connections, you look at the likes of like a [ Hoy ] Group, you look at the likes of [ a Kushtar ]. These are all great Canadian champions that have delivered superior results for their shareholders over the years, and that took time. And I think as we continue to build trust and as we continue delivering on our plan and as we continue increasing our free cash flow margins, I think what you'll see from us, we will get sort of margin expansion and I -- and margin expansion as well as multiple expansion. And that's how I'm thinking about it. This is a long game for me. This is not a sort of quarter-to-quarter match. I think this is a substantial amount of my net worth in this. And over the next 10 to 15 years, we'll continue doing what I've done for investors over the previous 10 to 15 years. All of them have made a lot of money with us in this management team, and this management team knows how to deliver, and I think we'll continue to deliver. So that's really what we're focused on. I mean you and the rest of the investor base will have to determine what the appropriate price is for the stock, but we do believe that we will get multiple expansion as we continue delivering and executing on our plan.

Yes. Just following up on that. I mean look, obviously, I think Canadian investors, I don't know if it's a different landscape, I mean, obviously, you have a huge business in the U.S. now. And obviously, I think as we've spoken about being a route-based business, you can run with significant leverage. I mean when we look at American champions like [ Charter ], I mean, these companies run with 6 turns of leverage. I mean I'd argue that you need your garbage truck before you need your cable bill. So I mean, I guess my question is, I mean, do you think that there's an opportunity as you grow your U.S.-based business to engage U.S. investors that perhaps can better understand the quality of this business? I mean in our mind, this is like owning a highway or a toll road or a bond. And so with rates of 0, it totally makes sense to us that these things trade at 2% free cash flow yields.

Yes. I mean listen, don't -- I think people have always asked us over the last in a while is, like a lot of investors are all focused on what happens in a recession, right? And I think what all investors are going to see is they're going to see, from all of the waste companies, not just us, that these are very resilient businesses. And when you have extreme downturns like we've had that I don't think anyone's seen in forever, certainly, not as long as I've been in business or maybe probably even others. I think when you look at it from that perspective and people get to actually see Q2, but they also then get to see that these businesses actually have the ability to grow through acquisition in a highly fragmented market, I think that's a recipe for success. Everyone will get to sort of view what the downside case is, and I think everybody can agree on this call that Q2 will be the downside case for the host. And then you still have the upside of the continued organic growth, the continued diversification of service offerings as well as sort of the growth by M&A. Listen, I think -- I love the business. That's why I'm still here. If I didn't love the business, I would have sold to private equity or sold to a strategic and I would have -- we would have moved on. And I think we're in the company of few that have done this. I mean if you look over the years, you had sort of the Laidlaw days, which was founded by the DeGrootes. You had the Huizenga days, then you had Ron Mittelstaedt that founded sort of Waste Connections. I mean there's been very few that have done it. I think we, to a certain small extent, are in that group today and the underdogs. But I think over time, we're the underdog today, but we'll continue proving that our model is solid and sustainable, and we'll continue growing like everybody else. So I think we're very well positioned with where we are with our size and our scale. We're not a huge company. We're not a small company. But we have all the resources of larger companies, which I think puts us on a very good footing to continue driving the goals of this business forward, similar to what we communicated when we actually did the IPO. But you've got to put your money where your mouth is, and you've got to deliver on what we said we're going to do. And that's what our plan is. So that hasn't changed.

Well, Patrick, this will be the last for me. I can just tell you that in terms of leverage and all the rest, I mean, I think this is an incredibly robust and stable and resilient business. And I think given where rates are, I think you probably couldn't be in a more safe asset class. So I think the fact that you're a large shareholder and you're aligned with equity value appreciation and you recognize -- I mean, a lot -- I think as you spoke about, a lot of these sell-side guys, specifically Canadians, are talking about, oh, there's a capital raise this and that, well, come on, 4x leverage for a business like this? I mean you ran it with 6 or 7 in the last downturn. So I think you appreciate the public markets like less [ leverage ], and at the same time, your equity is incredibly precious, and you're a large shareholder, and I look forward to being a shareholder for a long time. So I personally appreciate the alignment and the fact that you know that your equity is undervalued.

Our next question comes from Mark Neville with Scotiabank.

I think you mentioned 60%, 65% of the EBITDA roughly coming from Wisconsin. So can you maybe just give us a bit more sort of color on the lay of the land of that market, sort of where you'll fit in after, sort of what your mix of business in that market looks like, and maybe how quickly you think you can sort of roll load or grow the roll-off in the municipal business in that market?

Yes. I mean I think we'll be very well positioned with the commercial front-load business, which is the most profitable. And I think we will start pursuing municipal bids as well as continue to build up the roll-off business in that market. So I think, again, Rome wasn't built in a day. But again, over the -- like I said, let's not -- we can focus on what the acquisitions and the multiple and EBITDA we're going to get out of this. But like in anything we're doing, as we continue to build the puzzle and the pieces of the puzzle, this is just one of the pieces of the puzzle and gives us another opportunity to grow organically at an outsized pace. And I think over the next 12, 24 or 36 months, we're going to build a very good market presence, particularly in that market.

You've talked about sort of just being a low 30s margin business, but underwriting it sort of at sort of 27%-ish. Just sort of curious, when you think about densification in the East and the South, sort of the opportunities for synergies and I guess, alternatively, with it being a commercial-heavy business, just your thoughts around, or what you sort of baked in for what kind of impact COVID could have, sort of maybe more than just 1 quarter or medium term on that market? Yes.

You're specifically talking about the East region? Or in general?

Well, both for the synergies, and then just general about sort of it being more commercial-heavy business, and -- so I guess it's a two-part question. The commercial -- more commercial-heavy sort of holistically.

Yes. So again, like all of our businesses, different regions have different perspectives on shutdowns, et cetera. I think if we have the benefit of seeing our business perform really through Q2 as we're almost at the end of Q2 here, I think as originally predicted in late March, no one was really sure how bad it was going to get. I think obviously, April sort of being the worst and then a recovery in May, and then businesses continue to perform better in June. And those businesses have trended exactly the same way. So from that perspective, I think it's very well-positioned, trending exactly the same way as the rest of our businesses. And I think they are fortunate from that perspective that, today, not many of those business units are in states that have been in sort of full shutdown, lockdown like certain markets in the extreme Northeast. So -- but obviously, that could change. I mean I'm not certain that any of the political, the governments of both Canada and U.S., what they're going to do and how they're going to do it. But I think we're through the worst of it, and I think we have a pretty good handle on what the trough is. And I think we've taken the sort of under-promise and over-deliver approach by modeling it the way we have. We could have clearly modeled this higher if we wanted to, to communicate to everyone. But I think taking the under-promise and over-deliver approach was the right thing to do around the presentation of these numbers.

Okay. So I guess, in that 27% you spoke to, there is something built in for whatever the commercial impact might be.

Yes. For sure.

Okay. I guess just one -- okay, maybe just one last question and sort of just on leverage in M&A. Again, I can sort of understand the 4.5 nonissue there. You talked about equity solutions, if something were to come along chunky. Maybe just curious, just from -- internally from an integration perspective, if something were to come along soon or quickly, is there any -- would this hold you back to doing anything? Obviously, the tuck-in you spoke to, you can do that. But something of size, I mean, if something comes along in the next 3, 6 months, do you think this would be preventative?

No. I think from our perspective, where -- it's always where, how and what. I think -- we have a team that knows that to do this, and I mean it's really the preparation for the integration, and that is where all the work is. And I think over the last, call it 1.5 months, 2 months here, there's been a lot of preparation. There's going to be a lot of preparation for the actual flipping of the switch in whenever that may be, sort of mid-August, end of August, is what the hope is for all of us. So we will be very well prepared with a very definitive plan. All the people are in place. I mean Wisconsin is generally, again, 65% plug-and-play. Both systems will come right in. I mean, we have the individuals that we want to keep sort of plugged into all the various networks. So from an integration standpoint, it'll be flipping the switch on the day we close, but all of the planning and preplanning has been sort of done over the previous sort of 3 months. And then really, the last 6 weeks, and we'll continue over the next 4 to 6 weeks in order to get this done.

So Mark, was your question about whether the pro forma leverage profile precludes us from being able to interact with something larger, should that come available?

No. So the question was the one that Patrick answered. It's just sort of internal capability. Because I sort of understand the leverage and you talked about equity solutions. No, it was more a [ factors ] question. But...

I mean and then touching on [ loops ], I mean, at the end of the day, there's a lot of money in the world today, as there's been a lot of money since I started. And I would say there's lots of money for good deals. And again, if we can deliver the return full value on a specific acquisition, and again, historically we were focused on leverage at 6 to 6.5, today we need to make the numbers work and the IRRs work using leverage sort of around 4. There's lots of good equity out there. There's lots of investors that want to support it. So from our perspective, that will not be an impediment to growth because of leverage sort of in the mid-4s. We will raise the amount of appropriate equity that we need to maintain our commitment to the shareholder base, which is maintain leverage in the low 4s. So it's not going to be -- you're not going to see us take leverage up materially to take on a larger acquisition. If it makes sense, it will make sense for my equity, it will make sense for your equity, and it will be another piece of the puzzle that fits in, and it'll be another sort of geographic expansion that gives us the ability to continue growing the business in the future.

And Mark, just back to the original question that Patrick answered. From an integration perspective, I do just want everyone to appreciate the sort of nuance of having not only are we preparing to integrate them on our side, but we also have, again, these great teams at ADS and WM that are equally preparing to divest of the stuff. And effectively, almost sort of doubles up the horsepower that I have in a preparation perspective in terms of the sort of IT considerations. Because, I mean, it's in their best interest for me to be able to run right away because then they don't need to support sort of post-closing. And so we feel really fortunate that we have the folks at the ADS side and WM side -- again, who have been fantastic -- helping us get ready to be able to take this en bloc. And all of that focus with -- over the next sort of 6 weeks, I think, is going to, I don't want to say, be plug-and-play but leads to a very efficient sort of integration process, when you think about otherwise if you were just buying a business like this.

Our next question comes from Walter Spracklin with RBC Capital Markets.

So a lot of the questions I had yesterday were coming in around the -- what the basis was for the revenue and EBITDA that you were acquiring. Obviously, with COVID-19 happening, there were a lot of shifts in revenue. Did you -- perhaps you could walk us through how you came up with a kind of run rate normalized revenue and EBITDA. Did you start with 2019 and adjust it? Or just a little bit along your thought process on how you valued these assets.

Yes. So Walter, if you think about what the asset package actually represents, in many instances, it is a portion of a previous business that existed largely for ADS. There's a little bit of WM in there as well. And so really, if you think about a hauling company that we're buying, in most instances what we're getting is a fraction or a portion of the prior hauling company that existed. And if you think about a landfill that they used to use and they would bring all their internal tons, et cetera. What we're at most, by and large, getting now is the landfill, but ex all of the previously internal volume, under the thesis that WM-ADS post close will now take that to one of their existing landfills. So you started with 2019 P&Ls actual, but then there was a significant level of rigor in trying to carve that out to see what we would actually be sort of leaving with. And in doing that, in addition to being considerate about, "Wow, that volume is not going to any longer be there because WM is retaining that," we also used certain discounts in certain markets to reflect, "Well, maybe that was a peaky year. And in light of COVID, we should be having something different." So that's how the revenue buildup was. However, what I would put forth is the majority of our cushion per se is at the margin level. Because again, as I've said, we've taken quite a -- the thesis in the process was, what does this business contribute on a stand-alone basis. And so again, when you think about that contract of taking full hauling yards, and then I'm going to take 10 routes of what was a 40-route hauling yard, how do you now burden that location with all the appropriate overhead costs, all the insurance costs, all the admin cost. And it was through that process that I think we've actually built in the incremental conservatism, although at the margin level, effectively providing you sort of, from our perspective, the cushion and what will ultimately be a tailwind overcoming any sort of COVID-related dynamic.

And then layer on synergies on top of it. Like in the South market and through Michigan, so real opportunities, real internalization opportunities. So I think, again, a further cushion that we're not modeling here, and that's all sort of upside in 12, 24 or 36 months. So I think very -- sort of a very conservative approach to the actual way we're going about this.

And again, while this is another sort of consideration, where you look at where the majority of the hauling revenue is coming from, by and large this is in sort of very secondary-type markets as opposed to in the dense urban centers. And I just highlight that because our experience, and I think consistent with the industry as a whole, is the impact in the secondary markets have been a little bit more muted than some of those more urban areas.

Makes sense. Turning now to the synergies. How do these synergies, if at all, differ from the type of synergies that you would capture in a typical acquisition? And given COVID-19 and some of the government focus on restarting the economy and ensuring jobs and that kind of thing, is there any risk in the current environment that you see to achieving those synergies, that might not have been a risk factor in past deals?

Yes. I'd write the synergies up into sort of 3 buckets. The first one is tied back to this manner in which we burden the business. So again, viewing it as a stand-alone business. Now when I actually integrate it, I'm going to add synergies to that stand-alone business on the basis that I'm going to get insurance savings, I'm going to get administrative savings, et cetera, as I sort of tuck it in. So I view that as very normal and consistent with past deals, and I see minimal risk to the achievement of those. The next bucket is what I call the sort of operational synergies, from now utilizing this incremental asset base I didn't have before to improve my preexisting business. So you think about now, if I have a landfill in Michigan, where I can now internalize volume that I previously couldn't. I have an incremental landfill in Georgia that now allows me for better route optimization because I have an expanded footprint. And synergies of that nature, again, I think those are consistent with past deals where we have geographic overlap, and I don't foresee the current sort of backdrop as being a risk to the realization of those. The other incremental level of synergies is what really is sort of a revenue synergy. And going back to how I described the methodology of how we carved up the business. The idea is that any volumes that were internal volumes before are no longer going to be there, and a very sort of negative view as to how much special waste volumes would continue to the extent there was intercompany-related special waste volumes in the historical numbers. Whereas I think in actuality, post close, there'll probably be opportunities for volume at the landfills in excess of what we've included in that underwritten number. Now that is the component that I think is subject to the current backdrop. Obviously, if things remain muted and more depressed economic activity, you'll see less of that. However, if infrastructure spending and other tools of the like to restart the economy start happening on that, I think that could represent a meaningful tailwind to what we've [ presitioned ] today.

Our next question comes from Michael Hoffman with Stifel.

Patrick, Luke, can you help us a little bit? You've got a step-up from Waste Management. So I know it's early days, you've still got a lot of work to do on this. But could you parse a little bit of the $835 million and how we ought to allocate it to PP&E, goodwill and intangibles, so we think about our integration of this into our models?

Mike, it's early days. We've been running -- I mean, there's a meaningful dollars there, but I'm going to humbly request you give me 'til the next time we talk to lay that out for you, as we're deep in the weeds on that at the moment. And there's a meaningful component of -- thinking about all the landfills we're getting in. There's a meaningful component that's going to go to PP&E, but it's early days, Mike, so I would prefer to get back to you with a sharper number.

Okay. Fair enough. but I think one of the points I was trying to get to is, there's more likely to be PP&E, therefore deductible, less goodwill not deductible. All that works in your favor from all this returns analysis.

Yes. I mean I'm looking, but our preliminary on which part of the thesis was that I'm effectively going to get another year's worth of tax shield coming out of this. Now ultimately, I think that's a conservative number, the 12 to 18 months, when you look at how many of the dollars are going to come into deductible classes, but yes, 100%. The fact that a big component of these dollars are going to go into deductible classes is going to provide meaningful incremental shield for us. And where I was saying, I'm probably at a minimum in your model, wherever you had me being -- becoming a cash taxpayer, push that out a year at a minimum, I think is a safe assumption.

Okay. This is a little bit of a tangent. When does the lockup expire from the IPO?

It was 6 months from March 5. September 2? September 2.

September 2. Okay. And then this is maybe the benefit of having been in this business over a long time. So this is as much a statement as a question. Bill Dietrich built an amazing business in Superior Waste Company that is what is Wisconsin for ADSW. I mean it's just an exceptional business. It was a public company at one time, BOA buys it. It was really, very well run. And you're getting, if I'm not misunderstanding, everything but the residential collection and the roll-off, including all the employees. You're getting a stand-alone company.

Correct. Plug-and-play.

Yes. And an exceptional asset. So if nothing else, if that's all you got, and you paid this, it's just a phenomenal addition, like once in a lifetime chance to buy something like that.

Yes. We agree. We can -- yes. So like what I said, like in any acquisition, Mike, so you got -- you have gold, silver, bronze, and then you got a couple of pieces of lead, right? It's what you do with the couple pieces of lead, how do you make the bronze silver and silver gold? We got -- the bulk of what we're getting is gold. There's some silver and bronze, and then there's a couple of pieces of lead. We've got to figure out what to do with the lead, but that's -- you've got to take the good with the bad. I don't think any one of us ever has done an acquisition where we haven't bought something with a little bit of lead. So I mean, that's just the way it goes.

Right. And then listening to the Q&A, clearly, there's this [ meandering ] about how can you do future deals and all the leverage. But to be honest, there's nothing really super big to buy out there at this point. There's going to be a lot of little stuff. And there really aren't that many big chunks left that are really likely to be on sale. So this is going to be a lot of filling in around the gaps and maybe chunky [ big to ] $10 million or $20 million of revenues, but there's not a lot of $100 million, $150 million, $200 million revenue chunks to buy.

No. Like I said at the time of the IPO, there's one other asset out there that has been floating around that people I think know what it is on this call, and I think that will transact sometime. But outside of that, no, it's going to be the normal steady Eddie, run-of-the-mill acquisition program, acquiring 25 to 30 deals throughout the network. Now we've got some incremental states that we can continue growing on the backs of a good core group of assets because historically, we've gone in collection-only first, built a collection business and then bought post-collection. This, I think, is much easier, buying post-collection in the front end, which I think for all intents and purposes, are the 2 most highly profitable businesses within all of our revenue mixes and now holding on sort of the lower margin services onto those existing footprints. So I think again, well positioned with the assets we're getting to execute the future growth program.

Okay. Luke, you and Patrick participated in a fireside chat with us a couple of weeks ago. And one of the questions in that session was, what's the way to think about a target EBITDA cash conversion? You want to talk about it as a percent of revenue. Where kind of 10% today goes to 14% in, call it, 24 months. How does this transaction speed that up or confirm you'll get there?

Yes. So Mike, we're really -- despite the higher EBITDA margin, if you think about financing this all with debt today, that's sort of basically a wash. So what I think on the base of this pro forma, it doesn't change the trajectory in the percentage-wise that's [ come ] from the incremental leverage. On an unlevered basis, this is accretive, obviously. But what it does, I think, and where we see the real opportunity, is as we realize the synergies and now with this great incremental platform to continue to execute on our growth strategy, it just provides opportunity for incremental dollars of growth. So I don't think it meaningfully changes the ultimate getting to the 14%, as you and I were previously speaking in the fireside chat. But I think the opportunity set of how we get there with a broader sort of U.S. platform is just that much greater.

Last question for me. How did May close, particularly in the solid waste business?

I mean without giving any forward-looking statements of the business, it had 2 less days than May of 2019, but for all intents and purposes, everything is trending the right way, and I -- we'll make the statement that it's not as bad as what people had anticipated the impacts from COVID would be. So I think similar to what you've heard from the other strategics out there is that everything is trending in the right direction. But I think when people see the Q2 results from the industry itself, I think they're going to appreciate why they're invested in this sector.

Our next question comes from Kevin Chiang with CIBC.

And congratulations on the deals here, Patrick and Luke. Maybe just 2 for me. Maybe if I could ask M&A question more broadly speaking. You talked about opportunities within solid waste, but just wondering how this -- how the asset package you've acquired maybe provides opportunities for your liquid waste or infrastructure business. Is that something that you see as being also additive to revenue synergies over time? Or is that something that has not been contemplated?

We haven't modeled anything on the synergy side for that, but I think as you can see, again, we have a very large liquid waste presence in -- just outside Chicago in Mokena, Illinois. So again, expanding into Minnesota and expanding into Wisconsin was a big focus of that. So that will be all additive. We haven't modeled [ all the ] dollar for that. But yes, we see a big opportunity there to continue expanding that. But that's really the only market we've looked at today versus sort of the Pennsylvania market as well as in stuff in the South.

Okay. And just the last one from me. When you look at your capital structure, you have a couple of high-yield notes out that I think are due in about a handful of years. Just wondering how you think about refinancing those to further lower your effective interest rate and improve free cash flow. Is that a priority for you, Luke? Or is that lower down the totem pole?

No, that's a very high priority. It's -- those are from the days past, and we'd love to get rid of them. Today, [ marginally], they're not callable, and the payback to do so today just doesn't work. But if you look, the first one you can take out in June of -- in May of 2021, and you could refi that. I don't know what you want to use as your assumption, but if you use a sort of 4 to 5 number, it's materially accretive to the free cash flow profile. And then the other one you can take out in June of 2022. So when you roll that forward, I mean, today, if you think about improving the overall blended cost of debt even 100 basis points, which I think is a very conservative ambition, I mean, that's all pure free cash flow, that is a meaningful contributor. So that's definitely part of the plan. Again, there was thoughts that the IPO would just bite the bullet and do it, but it's real dollars, and the payback just doesn't work. So we'll be patient.

Yes. But in simple terms, there's $1 billion of those high-yield notes that are out. Average cost of capital for those is up 7.5%. So if you take 300 basis points off of that, refi those mid-4s, but we think we could probably do it tighter, but just take 300 basis points on $1 billion, that's an extra $30 million a year of free cash flow that's just going to hit the bottom line for doing nothing other than refi-ing that debt.

Okay. So the time line we were thinking about kind of 2021, 2022 to take out those 2, those -- that's still a good time line to kind of think of when we're modeling this out?

Yes. The first one, you take them out 2021, and you take the second one that was 2022. That's correct.

Our next question comes from Rupert Merer with the National Bank.

Congratulations.

Rupert, thank you.

As a follow-up, you mentioned there may be a couple of pieces of lead in the portfolio. Can you give us a sense of how much of the portfolio is lead, maybe as a percentage of the revenue? And what are the options to either sell those down or maybe look at asset swaps in the future?

Yes. When I talk about the lead, that's really the 3 landfill assets that we're going to sort of wind down over the next 2 to 5 years. The truth is, we put no earnings on where we deduct to. So those are -- that's really what I was referring to.

Okay. So you'd be comfortable operating in all of the regions where you've acquired assets?

Yes.

Great. And then secondly, looking at the organic growth with the acquired assets, can you give us a little more color on the excess capacity that you have in the infrastructure that you're acquiring? And how capital-efficient is the organic growth in those areas, maybe in Wisconsin with municipal and roll-off markets? And how would that compare to capital efficiency we may see in other opportunities you have at your [ home ]?

Yes, Rupert, I think it's a good point and one that needs to be articulated because in many instances, as I was saying before, what I've now acquired is, say, what was previously a fully functioning hauling company in a great market that had a commercial fleet, a roll-off fleet and residential fleet operating out of a facility. And now I'm getting that facility, which is just a portion of the previous commercial hauling business. So leveraging that infrastructure to start growing, one, a broader commercial hauling business because, say, I only got a portion of the overall routes that used to be there, but then immediately starting to offer the roll-off residential as a full suite of collection services. So I think, as Patrick articulated, normally we sort of bought an all-in company that's relatively mature in its market, it offered the services that it offered, and we tried to build from there. Here, we're really just starting, in many instances, with the foundation of what could be a fully comprehensive service offering. So we think the opportunity for outsized organic growth in many of these, as we ramp up this foundation to a full-fledged business, represents a very material sort of growth opportunity and it's part of the reason that we're excited beyond just the headline numbers of the deal itself.

Can we anticipate increased guidance for organic growth CapEx in the future?

I think what you heard from Tyler's first question, how we're thinking about that. I mean, we're putting a full 12% on this, and I think that is reflective of the fact that there will be a heavier spend as we're building that out. Now again, once that more normalizes and you have a full comprehensive hauling business in each of these markets, you'll probably see that come down. But I think, thinking pro forma of the new business running at a 12% intensity is the right way to think about capturing those dollars for that ramp-up.

Our last question comes from Brian Maguire with Goldman Sachs.

Congratulations on the deal.

Thanks, Brian.

Just a 2-part question on valuation. I think most people on the call would agree, you're getting these at a pretty attractive multiple, certainly versus what you paid for some of the other strategic platform deals in the past. And so it's kind of a 2-part question. Just wondering if you could comment on the specific process that happened here. Obviously, it was a very well-known asset that was for sale and an auction of sorts. But if you could comment on just the dynamics of others you were bidding on. Was the COVID impact kind of keeping people away? Was the asset quality and the markets they were in just kind of not really kind of suitable for some folks? And then just sort of the other part of the 2-part question is just, in general, how are you kind of seeing assets for transactions these days? Have we seen multiples start to come down some as a result of the recession and concerns around what future growth in the industry could be?

Yes. So I mean, this process specifically, I mean, there was a lot of stopping and starting. I'm sure there were other players that were around it. I think what we have going for us was, number one, we have a long relationship with Waste Management. We've worked extremely well together over the years. We've had growing disposal agreements with Waste Management over the years that have always formed part of previous acquisitions that we've done with them. And I think what we brought to the table was certainty for them that we actually had the ability to take down the lion's share of the asset package without any divestiture risk, which gave them certainty on their bigger transaction -- I'm not speaking for them. That's what I think. And versus trying to negotiate with multiple parties, and I think given what the DOJ is -- the approach they've taken here is that the divestiture package and the purchase agreement needs to be agreed to with the party previous to them closing a transaction. I think just dealing with one party made it much simpler, particularly with the parties that know each other very well and have worked well together in the past. So I think that's what gave us the leg up. And I think maybe Waste Management -- they, for sure, probably could have got more money if they sold all the -- some of the parts individually, but I think this was a good consolation prize and got them the certainty that they needed to do what really was the golden goose for them, which was the bigger deal. So I think we got it for a very fair value. Obviously, it's less than we've historically paid for vertically integrated businesses like this. From a valuation perspective, what we're seeing in asset [ was in ]. Gold is always gold, sizable, vertically integrated businesses and sizable market position, disposal-neutral markets in Canada. Those acquisitions continue to be -- we haven't seen a real retreat in valuations yet. I mean I think when you're looking at those, the comps are always the public companies. And I think that the public companies have held in there pretty well over the downturn. So I think from a multiple contraction perspective, we're not seeing much of that. But we are getting -- the phone is ringing with people that maybe don't want to live through the COVID pandemic for a lot of time. So people ask for multiples, but it's always a multiple of what, right? So when you look at that, is there an adjusted number from an EBITDA perspective and a free cash flow perspective that you can now pay, where historically [ we ] were paying more with a multiple that's comparable.

Okay. And just last one for me. Just back to the 3 landfills you'll be winding down. Just to understand, I mean, they're generating some revenue and a little bit amount of earnings today. You're not anticipating that to continue, so it didn't factor into the value you're paying for the assets. But you will see a little bit today. And then you will have to pay some capping and closing fees, so there'll be some cash outflow for that. Or is that coming from WM or somebody else to indemnify you down the road?

Yes. So we got -- Waste Management sort of took on all pre-closing environmental liabilities. We will have some closure costs for those but very minimal, which was sort of factored into the bid. But from a revenue perspective, again, we're modeling very little for those. And truthfully, they were largely open just as a going concern anyways, so they weren't taking a significant amount of volume. So I don't think you'll see a meaningful impact from any of those.

Yes, Brian, I mean, the sites in question are on the much smaller end of landfills. As Patrick said, over the last few years, they've been taking de minimis volume just to keep the permit open. These aren't massive site closures. But yes, there will be regular course closure costs, but again, that was all sort of just factored into the overall model.

Okay. And so just to think about the negative value, something tens of millions of dollars, but nothing more than that in the kind of closing and capping in a 2- to 3-year time frame?

Yes, that's right, Brian.

So thank you very much, and we'll look forward to speaking to you after -- we're always available any time. But if not, we'll speak to you after Q2 results.

Thank you. Ladies and gentlemen, that concludes the GFL Environmental Incorporated Investor Call. You may disconnect your phone lines, and thank you for joining us today.