GFL Environmental Inc. (GFL) CEO Patrick Dovigi on Q2 2020 Results - Earnings Call Transcript

GFL Environmental Inc. (NYSE:GFL) Q2 2020 Earnings Conference Call August 6, 2020 8:00 AM ET

Company Participants

Luke Pelosi - EVP and CFO

Patrick Dovigi - Founder, Chairman, President and CEO

Conference Call Participants

Hamzah Mazari - Jefferies

Walter Spracklin - RBC Capital Markets

Mark Neville - Scotiabank

Michael Hoffman - Stifel, Nicolaus & Company

Rupert Merer - National Bank Financial

Adam Wyden - ADW Capital Management

Keith Rosenbloom - Cruiser Capital

Brian Maguire - Goldman Sachs Group

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. [Operator Instructions]. I would now like to turn the call over to your speaker today, Patrick Dovigi, CEO of GFL. Please go ahead.

Patrick Dovigi

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

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

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, that 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 divesture package resulting from the Waste Management and Advanced Disposal transaction. As we said in our announcement, we view this acquisition as a unique opportunity to significantly expand our U.S. footprint through acquisition of a 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 stats have also improved and our absenteeism is at all-time lows. We did incur incremental costs in the quarter for the enhanced safety and hygiene protocol that I described earlier, but those costs were more than offset by the enhanced productivity. All of these factors, together with correspondingly lower disposal, R&M 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, 180 basis points 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 UMO 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

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 priced 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 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 a 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 AP balance at the end of the quarter.

When thinking about the back half of the year, the original plan was to recover in excess of the first half investment and see working capital contribute positive $10 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 remaining flat for working capital for the year as a whole. We continue to see real upside opportunity in the area of working capital. We're just recalibrating expectations as to when those dollars will be realized.

In terms of the cadence, the anticipated Q3 revenue 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 in growth capital within the original 2020 plan that could be eliminated this year if we need to. Since that time, we have identified an incremental $20 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. dollar and is hedged to Canadian at fixed rates, for financial reporting purposes our U.S. dollar-denominated debt is revalued to Canadian dollars at the FX rate at the end of the period. During periods of foreign exchange volatility, we may realize noncash foreign 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, $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.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Hamzah Mazari with Jefferies. Hamzah, your line is open.

Hamzah Mazari

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

Yes. So good morning Hamzah, its 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 PIs would step down after the Q1 high of 4.9% and end the year somewhere in the 4s range. And again, going forward, when we look at our existing book, we think that's a sustainable level for the sort of midterm, again that sort of 3.5% to 4% on a recurring run rate basis.

Hamzah Mazari

Got you. Very helpful. And my follow-up question, I'll turn it over, is -- I may have missed it, but could you talk about what you saw in July, either from a revenue perspective? I know you mentioned sequential activity increases since the April bottom. But just any color on what you're seeing in July in your markets, that would be helpful.

Patrick Dovigi

Yes. I mean from our perspective, there was -- it's been an interesting chart to watch as we sort of have gone through this. As the shutdowns -- as things started opening up, we saw a fairly large spike in revenue, and then that sort of flat lined because there was sort of a bunch of pent-up work that needed to get done and then things sort of tapered off a little bit. But then you sort of look at the trend now, the last sort of three weeks post, I would say, the July long weekend, we've seen the business significantly uptick and is trending much closer to budget than we've been for the whole year. So all signs are pointing in the right direction. I mean there's a lot of noise in media, watching CNN and FOX News, about what's actually happening in the world. But I can tell you, on the street, I think people are going about their life and trying to get back to normal as quickly as possible. But we are seeing those trends trend much closer to budget. Similar to what we saw through April through June, we continue to see those upticking closer to the budget now for the last sort of three weeks, from week 28 through 30.

Hamzah Mazari

Great, thanks so much guys.

Operator

Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Walter, your line is open.

Walter Spracklin

Yeah, thanks very much operator. Good morning everyone. I just wanted to focus a little bit on as volumes start to rebound. I mean you've seen that since April. Incremental -- I mean has there been -- have the incremental margins come in as expected or are you seeing the need for additional costs to come back a little bit quicker, is traffic levels on the streets causing some pressure there, any of the things that might have artificially benefited you during COVID-19 from a cost perspective, is there anything unexpected coming back on that cost view here as volumes return?

Patrick Dovigi

No. I mean, I think you'll see, over time, a little bit start creeping back in just because of the fact things are getting bigger. But we've made our routes so much more efficient today and parked so many trucks, and that would be sort of natural cadence so you'll start seeing some overtime creep back in. But other than that, listen, a lot of the costs we took out are winning [ph]. It's our expectation they will come back a lot slower than the revenue comes back in. So I think this three months of sort of sitting and really looking at the business will benefit us. And like I said previously, I think we come out of this stronger than we went into it. So there'll be some costs, but I think the revenue is coming back much faster than some of those -- some of the costs.

Walter Spracklin

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 or are you more mindful I think your results has 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

Sure. So we got this question a lot when we marketed the IPO, and investors are always concerned with leverage. I think people ask the question what happens in a recession. And I think we sat back and said, well, nothing could be worse than September of 2008. And I think what you've just seen is significantly worse than 2008 in the quarter. And I think what you're able to see and what we've been able to demonstrate is that leverage didn't move in probably the biggest downturn that anyone's seen on this call. So I think when you look at the leverage perspective, that is the sort of case study of the -- that leverage is not an issue for us. Again, like we've told investors, we will maintain leverage in low to mid-4s, lever up as high mid-4s for the right opportunity. We feel very comfortable with that. We continue to feel comfortable with that. The business, like we said, in the back half of the year, is going to generate almost $275 million to $300 million of free cash flow. And I turn my attention to -- you look at what our debt is trading today. I think the repricing opportunity will continue to be something that sort of leads the way for us. And our capital structure today, our bonds and term loan are trading all sort of in the low 3s to just above 4.

So I think as we continue to expand, it's a bit of a perfect storm for a company that has -- it's a defensible growth story. Number one, we can protect our base earnings. And number two, we can finance M&A at very attractive prices today because of where the cost of capital has gone. So all of that -- put that all in a blender, which leads us to sort of, as Luke said, reengage on the M&A program. I will say equity will not be an impediment to us executing on our M&A program. As I said on the call previously, there's lots of people around the table that are interested in putting in equity for us to maintain certain leverage for the right opportunities. And when I look at our pipeline today, I'm going to get a little more granular than I have in the past because of where we are.

I think we have -- let's start with the ADS transaction that we all talked about and had a call on. I think from the ADS perspective, we are ready to hit the switch. From an integration perspective, we spent -- obviously, we're in a constructive relationship with ADS and Waste Management. We spend a lot of time on planning to make sure that this goes smoothly. We have a full road map to actually get this done from an integration perspective, and we're just truthfully waiting to get the final DOJ sign-off so Waste Management can close theirs and then we can close our transaction 5 days later with them. Offer letters are going out to all the employees this week, and we're just going to sort of be in a bit of a holding pattern until the DOJ gives their final stamp and their blessing for us to proceed with that transaction. And then beyond that, listen, I bucket it into three different groups. We have the pipeline that diligence has largely completed. And I think when we look at that pipeline today, that's about $80 million of revenue, of opportunities that exist that were in later-stage diligence, moving towards closing. And other stuff that sort of we have under LOI, in early-stage diligence, that's another sort of couple hundred million dollars of revenue that we're working through. And then as we talked about before, there was another large acquisition that continues to hang around that we continue to do diligence on and may be an opportunity in the future.

So the pipeline is as full as it's ever been. I think with what we see today and the comfort we have from the base business through the second quarter, we're going to continue focusing on doing what we've done for the last 14 years. And we've done 143 acquisitions to date. And we're going to do what this team has been set up to do, which is create shareholder value and deploy capital smartly to create shareholder value over the sort of long term. I'm the biggest benefactor of that around this table. So I think from my perspective, we and the team feel very comfortable with where we are. And everybody is back engaged, and we're ready to continue moving forward. But that's what I sort of see today on the M&A program.

Walter Spracklin

Okay. Appreciate the color, and congrats on the great quarter.

Luke Pelosi

Thanks, Walter.

Operator

Your next question comes from the line of Mark Neville with Scotiabank. Mark, your line is open.

Mark Neville

Hi, good morning guys. Great quarter. First, maybe just on the business itself, maybe you can just speak to some of these primary markets in Canada, sort of where they're at in terms of sort of getting back to budget or getting back to close to normal, whatever you want to call it. And then within the U.S., again, we're seeing resurgence in certain states. Maybe we have some -- if there's any sort of impact or if you've seen any noticeable change in trends in those parts or regions of your business?

Patrick Dovigi

I mean outside of I would say really Montreal, Toronto and Vancouver, the markets were far less impacted. I was -- I still look at the large primary markets of Toronto, Montreal. I mean Montreal is tracking actually 101% of budget through July. So again, they recovered. How much of that is sort of pent up and -- how much of that is pent up and are you going to see that little dip after the work gets done, I don't know, but it seems to be really much, much better. I mean Toronto -- again, Toronto, it's again a bit of the revenue mix. We do a lot of work in downtown core in Toronto, so again, the office buildings, etcetera. So that's been, I think, slower to come back, and I still think it's off 10% plus. And I think the same in Vancouver, we're still off sort of 10-plus percent. But as we enter into these phase 3 stages now and hopefully, people start getting back out, that those are going to recover quicker. And the secondary markets have largely been on plan for the last sort of six weeks. So I think we're moving in the right direction. Obviously, if there's incremental shutdowns that happen, we can't control that. But where we sit today, things are all trending right back to where we thought they would be.

Mark Neville

Okay. And the U.S, sorry, any impact from sort of a resurgence in certain geographies of COVID cases?

Patrick Dovigi

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

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 walk, it would be helpful.

Luke Pelosi

Yes. So Mark, in terms of the free cash flow, what I gave were the sort of components of the sort of costs. And we haven't come out and said an EBITDA number, but I mean, I think during the year, pre WM, with the COVID reduction, people's numbers were sort of $1,040 million to $1,050 million of EBITDA for the year. So if you think about that as the number for the year and that you've done $485 million for the first six months, that's leaving you with $555 million to $565 million of EBITDA due in the back half before considering incremental M&A. So from that, if you take off $150 million for CAPEX, take off $145 million for interest, if you assume working capital gets back to flat, which I think there's a little bit of upside on but assuming it gets back to flat for conservatism, that's -- you add $80 million in the back half of the year and then deduct $50 million for all the sort of other sort of loose ends, odds and sorts, that's basically getting you to a free cash -- adjusted free cash flow number for the back half of the year somewhere between $275 million and $300 million.

Mark Neville

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

Yes.

Mark Neville

Okay. Yes. Maybe just remind us sort of what it -- instead of late stage, just sort of curious how close or how far away they may be in versus a couple of hundred million at early stage?

Patrick Dovigi

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

Okay. That's very helpful. And again, great job managing through this.

Luke Pelosi

Thanks, Mark.

Patrick Dovigi

Thanks, Mark.

Operator

Your next question comes from the line of Michael Hoffman with Stifel. Michael, your line is open.

Michael Hoffman

Hey Patrick, Luke. Thanks for taking the questions.

Patrick Dovigi

Good morning Michael.

Michael Hoffman

Good morning. Can we circle back to free cash just so I'm -- to make sure I'm hearing everything correctly, the $270 million to $300 million is the second half generation, so if I add the first, then I'm ending up in the 300 million to 325 million or is it the full year $275 million to $300 million, I just want to make sure I understood that correctly?

Luke Pelosi

Yes. So Michael, the numbers I was giving was the second half of the year. My issue is normalizing of Q1 with the debt levels and the pre delevering is just -- it's a little bit difficult for me to sort of normalize that. So the way I would think about a full year is if you take -- let's just use the $1,050 million number of EBITDA. You have $360 million of CAPEX. You have $250 million of interest. And I'm saying $250 million there versus the $280 million because really, the $280 million of interest is burdened by the new debt to finance WM/ADS. The $1,050 million excludes that. So like-for-like normalized, I would say, you have $250 million of interest expense against the $1,050 million of EBITDA and then another $50 million for the sort of other odds and ends. So if you do that on a normalized basis, that's a number -- I think that math gives you like $390 million or $400 million. So Q1 is difficult to sort of normalize by itself. If you look at a normalized Q2, it's about a $45 million number. And then you're adding in the back half $275 million to $300 million, and then you would add a normalized Q1, if that makes sense.

Michael Hoffman

Yes. That was -- what I was trying to get at is you had talked about a $400 million number coming out of the year pre any ADS or the $80 million or $200 million incremental contribution, so we're still on that $400 million run rate out of the year. And there's upside from $100 million EBITDA from ADS and whatever you think you end up getting, $20 million from the other $80 million, another $50 million from the $200 million. Is that the right way to think about it?

Luke Pelosi

Yes. Correct.

Michael Hoffman

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

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

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

Yes, correct. You'll have some of that. I mean part of it is driven -- yes, you're correct, Michael.

Michael Hoffman

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

I think there's no guarantees. I think TSX 60 inclusion if we were going to be indexed, it would come in December. That's the next available entrance point for us. So we would know, I think -- I don't know. It's probably a guesstimate, but I think we're guessing that potentially we would get TSX 60 inclusion in December, but it's not really a decision for us to make, it's someone else's to make. But I'm guessing with a $10 billion market cap in Canada that we probably will be included, but I don't know.

Michael Hoffman

And that's a 4 million to 6 million share of incremental buy to do that, right?

Patrick Dovigi

Yes, roughly, I think. Yes, that's about right today.

Michael Hoffman

Okay, cool. Thanks, nice job.

Luke Pelosi

Thanks Michael.

Operator

Your next question comes from the line of Rupert Merer with National Bank. Rupert, your line is open.

Rupert Merer

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

I'm a people person so I like to get in front of people, and that's -- I find that always a more constructive way to get acquisitions done. We've never been ones to sort of sit back and try and do it remotely, but that's been a -- I would say that's been the biggest impediment truthfully, is just getting people mobile and trying to get people in the same room. So I would say from a valuation perspective, it's always trying to understand what the earnings were pre-COVID, what the earnings were during COVID, and what we think the earnings are going to be post-COVID, right and what that expectation is and coming up with an adjusted number that sort of makes sense, which is probably a hybrid of the two. From a multiple perspective, I haven't really seen much change now. There's been a few desperate sellers that have business models in specific regions that just aren't going to make it, so you buy that revenue, stick it on your back. And those will be highly accretive to us, but there's been a few of those. But I think largely, managing M&A through the pandemic is just time. I just feel like everything takes more time today because you can't get people together and it's harder to do things. I mean we have been doing environmental diligence, site visits, etcetera. It just takes more time to move those people around, and that's been the sort of biggest impediment. I don't -- from an integration perspective and from a diligence perspective, it's all the same work streams, just taking more time. So that's what I think is the biggest impediment of managing through the COVID dynamic.

Rupert Merer

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

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

Great, I will leave it there. Thank you.

Operator

Your next question comes from the line of Adam Wyden with ADW Capital. Adam, your line is open.

Adam Wyden

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

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

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

Yes. I mean I said this in the past. I can't control the stock price, and I can't control what other people write about the company. What I can do is control how we operate the company and how we create significant amount of shareholder value over the sort of foreseeable future. I mean it's a marathon, not a sprint. So from my perspective, where I sort of sit today, I think it's getting people comfortable with our business and with our business model. We're new to the public market. I think over time, as we continue doing what we say we're going to do, I think we will get -- take another 30 years to trade at 18 to 20 times EBITDA, right? And we all aspire to be Casella and Waste Connections. I'm sure everybody on this call wants us to be Casella and Waste Connections. And between you and I, I want to be Casella and Waste Connections. And I think we have that ability to do that. I think our business model, as we've shown, is resilient, and we know how to do M&A. So you have a resilient profile with a great sort of M&A backdrop. And I think -- I mean just to touch on a couple of these. 2021, I think $600 million of free cash flow in 2021 would be aspirational. I think its $500 million plus. And then as you sort of work through the refinancing and you bring down interest cost, you pick up another $40 million to $50 million going into 2022. So I think there's significant upside to that by the end of 2022, and we can refinance out the entire capital structure. But I think relatively quickly, you get to $700-plus million.

So I think you're right. I think we need to prove to the public markets that we can continue building what we've done and we could continue demonstrating the free cash flow profile and the resilience of the business and continue margin expansion, and we will get there. I mean, I think if you look at it, yes, I think -- today, is the stock very well priced? I would say probably yes. I mean it's trading at -- I mean I'm looking at a sheet here where we're sort of trading, call it, 11.5 times sort of 2021, 11.5 to 12 times. And yes, there's a big gap between us -- between Casella and Waste Connections, but they've been around a long time. And I think we aspire to be them. I think as the equity investors continue trusting us, we will. And I think the one material thing I will point out again to you and others is that I have hundreds of millions of equity in this. So for me, this is a capital appreciation plan. This isn't Patrick trying to make a salary and a bonus and keeping a job for the next 15, 20 years. I want my capital to appreciate alongside each and every one of yours. So everything we do is with that mindset and that backdrop as it had been the last 14 years. And we've made a lot of investors, over the years, a lot of money, and we anticipate that we'll do the same for each one of you guys. So that's where -- that's all I can really say. I don't really have any specific views on what people write about or why trades were done but it will over time, we will continue proving ourselves and that multiple will continue to expand.

Adam Wyden

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

Well, maybe we're going to give you a job in IR because you're pretty good, Adam.

Adam Wyden

Alright, take it easy guys.

Operator

Your next question comes from the line of Keith Rosenbloom with Cruiser Capital. Keith, your line is open.

Keith Rosenbloom

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

Yes. I don't -- we won't -- I mean again, so think about the Canadian market, $10 million market. Big three control 30%, 35%; 60%, 65% is fragmented. Our equivalent of the Hart-Scott-Rodino, HSR filing is called the Competition Bureau in Canada. Competition Bureau of Canada only reviews transactions that are more than $95 million of enterprise value today. So I would say 99% of what we do in Canada is less than $95 million of enterprise value. So we won't -- shouldn't bump into that issue moving forward.

Luke Pelosi

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

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

Thank you.

Operator

Gentlemen, your final question comes from the line of Brian Maguire with Goldman Sachs. Brian, your line is open.

Brian Maguire

Hey, good morning. Thanks for squeezing me in. Just a couple of questions. Just wondering if you could comment on the churn rate you're seeing, any -- whether it's bankruptcies or customers defecting, just sort of what trends you're seeing there. I know we saw one of the larger peers talk about kind of an all-time low on that rate. Just wondering if you're seeing similar trends? And then sort of related to that, what are you seeing on DSOs and collections, I know you saw -- said you took a little bit of a charge for bad debt, it didn't sound like much but are you seeing any change in trends there?

Patrick Dovigi

Churn has been status quo in commercial and clearly, residential, residential less. I mean churn on the commercial has been still sitting at this sort of 6%, 7%, 8% range, it has been pretty low. I just don't think people have been active during COVID or too focused on switching service providers. So I think that's consistent with what we're seeing today. And from a working capital perspective in collections, I mean, Q2 was -- we weren't sure what to expect, but it was, again, on plan with expectations. So yes, we did take a little bit of a charge and a provision for some incremental bad debt just to be prudent, but nothing sort of out of the ordinary today. But Luke do you have anything differently.

Luke Pelosi

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

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

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

Okay. And look, I think I heard you say that the lower diesel costs, I think you said they were 110 basis point benefit for margins year-over-year is that right? And just remind me how long do you get to keep that forward, do you get -- I think on the residential contracts, you keep them for some time, but commercially, you pass it through pretty quickly, is that right?

Luke Pelosi

Well, I mean, that's part of it. If you think about where some of our latent pricing opportunity in Canada is around surcharges and customers we don't have surcharges with. So meaning you're not getting such a delta now, so that's why you're passing it back. So yes, it was 110 basis points for the year benefit on those residential contracts that reset at their anniversary date. Yes, we'll give some of that back. But on balance, lower -- if you think about the residential book of business, if we have $1 billion of residential revenue, you have a large subscription book of business in the U.S., you have a bunch of U.S. contracts that have been decoupled from CPI. So you're left with, call it $400 million or so of revenue that really has a sort of true CPI-type link. And so I think on balance, the lower diesel cost, I mean today, we're sort of 30% less on diesel year-over-year. On balance, it's still a net benefit. But yes, as you get the resets, you will give some of that back.

Brian Maguire

Okay. Good luck closing the deal and good luck in the quarter.

Luke Pelosi

Thank you, Brian.

Operator

This concludes our question-and-answer session. I will now turn the call back over to Patrick Dovigi for closing remarks.

Patrick Dovigi

Thank you, everyone. Look forward to speaking with you in the near future. Thanks.

Luke Pelosi

Thanks, everyone.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.