All financial information in Canadian dollars

Q2 Earnings

GFL Environmental reported better-than-expected second quarter earnings, even as Canada's pandemic reopening has lagged U.S. trends, and outlined a path toward substantial free cash flow growth over the coming years.

"The irony of this is last year at this time we were defending against a short seller who said the business had no free cash flow," said CEO Patrick Dovigi during a Thursday earnings call. The company now projects double-digit growth in that area, with at least $510 million in adjusted free cash flow this year and the potential for more than $800 million heading into 2023.  

Key updates

• The Canada-based company raised annual guidance based in part on a 5.1% increase in solid waste volumes (when excluding one-time effects from certain MRF contracts), 4.1% increase in pricing, and higher performance from prior acquisitions than was anticipated. 
• GFL also reported more positive recovery trends in its liquid waste division, an area that was especially affected by the pandemic, but reduced 2021 expectations for its infrastructure and soil remediation segment. Dovigi said this is largely because construction projects were the slowest area to ramp down when the pandemic hit, and will be the slowest to ramp up, but he believes the division is on track for a "very, very good year" in 2022.
• GFL closed nine acquisitions during the second quarter – one landfill and multiple collection tuck-ins – bringing its estimated first half spend to around $200 million. Chief Financial Officer Luke Pelosi said the company has closed five more deals during the third quarter and is well on its way to hit upward of $140 million in annual revenue contribution from deals this year, including the larger Terrapure Environmental acquisition.

GFL is seeing its solid waste volumes near or equal to pre-pandemic amounts in many markets, particularly in the United States, in line with trends from some competitors' earnings reports this week. Similar to what Dovigi told Waste Dive earlier this month, the potential reopening of sporting venues, offices and schools in more parts of the Canada this fall is expected to be an upside heading into 2022. Unlike other big competitors, the company did not call out labor shortage concerns as a major issue during its call.

In an update on previously announced plans to sell off non-core assets, GFL reported an estimated $60 million in new proceeds. The company recently sold multiple collection and disposal sites to Noble Environmental in the Pennsylvania region. Pelosi said that deal represented about half of what the company originally called out for likely divestitures earlier in the year, with Dovigi previewing more sales to come.

After completing multiple major acquisitions in recent years, and going public right as the pandemic began, GFL's leadership repeatedly touted these developments as signs of a maturing company with a clear growth trajectory in the years ahead.

ESG updates

• The company also announced the formation of GFL Renewables, a new platform that will focus on creating renewable natural gas (RNG) from at least 18 landfills to start. Based on current RIN pricing, GFL believes there may be $175 million worth of gas to be sold from new or upgraded projects at these sites.
• Dovigi said GFL is currently in talks with two outside companies it could partner with to develop these projects faster, likely in an agreement that would see it share the gas revenue and hedge out the RIN value over 20 years to reduce volatility. In this scenario, GFL could still see over $100 million in new free cash flow generated over the next couple of years.
• The move was also described as a way to accelerate the company's investment in compressed natural gas trucks, which could be fueled by the output from the projects. Dovigi said he is not currently interested in pursuing RNG opportunities by building anaerobic digesters.
• In a move that has been controversial among some circles, Dovigi also touted the recent formation of the Resource Recovery Alliance in Canada – including a surprise product stewardship group acquisition – and outlined hopes to capitalize on Ontario's shift to a full producer responsibility model in the coming years.

Looking ahead

• GFL's updated annual guidance projects revenue between $5.225 billion and $5.275 billion, assuming the Terrapure deal closes. Pelosi expressed a "high degree of conviction" this would happen by Oct. 1, adding it could contribute upward of $90 million in revenue for the fourth quarter.
• When asked about the company's future plans, Dovigi said he believes excess free cash flow should continue going toward targeted acquisitions because there's "a lot of great M&A that can still be done." A regular shareholder dividend program or stock buybacks could be possible, but are not imminent, he said.
• Over the next 12 to 16 months, Dovigi sees the potential to acquire another $500 million to $1 billion worth of private company revenue "relatively seamlessly." He added GFL may also be a more attractive buyer because it could attract less antitrust scrutiny than its larger competitors in certain markets and offer a faster regulatory process.