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GFL Environmental (GFL) Stock | NYSE: GFL | TSX: GFL.TO

Death, Taxes and Garbage

Patrick Dovigi, founder and CEO of GFL Environmental Inc. (“GFL”), has coined his company the “Big Green Machine”.

There are three things we do know for certain:

1. GFL is Big today compared its humble beginnings – it owned only a single solid waste transfer station in 2007.

2. You certainly cannot miss the bright lime Green Machines near warehouses, industrial lots, and alleyways.

3. Death, taxes, and garbage.

GFL is an environmental services company. Its primarily engages in non-hazardous solid waste management, infrastructure, soil remediation, and liquid waste management services.

Growth

93

Valuation

33

Quality

63
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Where Are We Now

Updated on: 11/7/2021

Conviction Score

8

The “Big Green Machine” has only been getting bigger as of late. GFL has a different strategy to capture higher growth in the slow-growing North American waste business – win large city and corporate contracts by being relentlessly competitive on price and then let pricing power do the work after. If you have no issue with a company taking on debt to grow, GFL is the name to consider today.

  • The North American waste business is highly fragmented with many small waste collection and disposal services. GFL’s aggressive acquisition strategy is the one we like best today. Without speed, GFL would risk losing to larger competitors who buy those smaller businesses first.

  • Excluding the revenue boost from acquisitions, GFL is growing around 7% per year. This is truly impressive as the North American waste market is growing much slower than that.

Investment Thesis

  1. The founder-led business run by Patrick Dovigi has won impressive long-term contracts penetrating a mature market with high barriers to entry.

  2. Waste collection, infrastructure, and environmental services provide reliable and growing cash flows.

  3. GFL's verticals are highly fragmented and ripe for continued meaningful consolidation opportunities. The business has demonstrated a strong ability to acquire and integrate.

  4. GFL has excellent optionality in the growing environmental services sector both organically and through acquisitions.

The Basics

GFL is an environmental services company based in Vaughan, Ontario with a mission to encourage greater environmental responsibility. After all, GFL stands for “Green for Life”.

The business offers infrastructure, soil remediation, and liquid waste services on top of its core waste management solutions.

GFL operates across different parts of North America with over 15,000 employees, 135,000 customers, and 10,000 solid and liquid waste trucks. This scale makes GFL the fourth-largest environmental services company in North America.

Despite making it to the public markets rather late with an IPO in 2020, GFL has been a powerhouse in the industry with rapid growth for over a decade.

GFL mainly provides services related to waste management, such as garbage collection and waste disposal, to municipalities and other businesses. Additionally, it has divisions in shoring and sewage maintenance.

The company breaks down its revenue into three segments:

  • Solid Waste (Canada and the US)

  • Infrastructure & Soil Remediation

  • Liquid Waste

GFL Revenue by Segment (Q3 2021)

Source: GFL Investor Relations

A Founder-Led Growth Story

GFL founder and CEO, Patrick Dovigi, is a top-class successful Canadian entrepreneur with an unconventional background.

Originally, Patrick was a goaltender in the Ontario Hockey League. Later, Patrick was drafted into the NHL by the Edmonton Oilers in 1997 as the 41st overall pick.

Dovigi got drafted to "the show", but his passion as a businessman kept shining through. He started working in the solid waste business through a gig at Brovi Investments. At Brovi, Dovigi was put in charge of managing a transfer station that needed to be supervised and cleaned up. It’s not every day that a corporate finance job has one managing a transfer station. Dovigi applied himself, saw an opportunity, and eventually started operating his own transfer station in 2004.

In 2007, Dovigi founded GFL with this single transfer station operation. Much like the rest of the large waste businesses, they are consolidators. GFL, with private investments, established a merger with Direct Line Environmental, National Waste Services, and Enviro West. GFL went public in March of 2020 in the midst of the COVID-19 stock market crash.

Today, GFL is a multi-billion-dollar public company providing important waste solutions. The company is rapidly growing in North America organically and through acquisitions.

The business operates hundreds of collection operations, transfer stations, landfills, and other environmental service facilities with the help of several thousands of employees.

GFLCompany Structure graphicSource: GFL Official Website

Solid Waste

Overview

GFL's solid waste sector is the definition of a simple "boring" and easy-to-understand business.

Just like the municipal garbage trucks that pick garbage up on a weekly basis, GFL sends out its own bright green trucks that collect garbage and recyclable materials from municipal regions and contracted businesses. Afterwards, these trucks dispose of the waste either in a GFL disposal facility or that of a third party depending on the market.

Generally, GFL scores long-term mid- to large-sized contracts for:

  • municipal collection services;

  • one or more residential areas of a municipality; and

  • commercial waste services.

The Strategy

Waste production is North America is steadily increasing and GFL is using this trend to its full advantage. As the total addressable expands, albeit slowly, GFL is focusing on building out a broad network of solid waste facilities and densifying its routes with more service contracts and territorial coverage.

In contrast to well-established waste collection businesses like Waste Management, Culligan, and Waste Connections, GFL is relatively young. Despite this, GFL is a fierce force in the industry - following a recent agreement with Waste Connections to purchase a select group of processing centres and landfills, GFL now owns almost 90 landfills, 150 transfer stations, 195 collection operations, nearly 30 material recovery facilities, and 15 organic facilities.

GFL’s level of vertical integration in a region or market depends on the level of landfill capacity. In “disposal-neutral” markets that have excess landfill capacity, GFL seeks to be a competitive option versus peers. It indeed wins customers by negotiating attractive disposal and pricing terms with third-party disposal facilities. Outside of these regions, GFL creates and maintains vertically integrated operations, controlling the entire waste stream from collection to transfer to disposal. With vertical integration, GFL can maximize cost efficiencies and provide customers with speedy, yet effective, waste services.

Projected Generation of Municipal Solid Waste in North America (in millions of metric tons)

Source: The World Bank

Infrastructure and Soil Remediation

Overview

This segment of GFL's business is relatively new, but one with substantial future growth opportunities.

GFL's infrastructure services include:

  • Soil Remediation

  • Excavation

  • Shoring & Foundation

  • Demolition

  • Civil Division Projects

Soil remediation is a process by which contaminated soil is purified into its original state by extracting any harmful chemicals found inside it.

The infrastructure business mainly engages in large project-based, multi-year infrastructure projects. GFL is typically engaged by construction contractors for these services. For example, subway or transit expansion projects may produce a ton of waste that must be disposed of away from the construction site.

Positive Tailwinds

GFL's infrastructure division could benefit from a long runway for growth.

Luckily for GFL, the infrastructure industry is constantly growing. Where there is new infrastructure being built, there is a need for soil testing, remediation, and other disposal services.

These services synergize well together and provide good cross-selling opportunities.

As consumer spending increases and companies and governments inject more cash into new infrastructure, the demand for GFL's services will increase. Today, the company manages 11 Soil Remediation Facilities.

By 2023, the Infrastructure and Soil Remediation Industry is set to reach $56 billion in North America.

Liquid Waste

Overview

The Liquid Waste segment focuses on liquid management related to household waste, commercial projects, and municipal water safety.

GFL's liquid waste services consist of the collection, management, transportation, processing, and disposal of industrial and commercial liquid wastes.

Such wastes include contaminated waste water, used motor oil, oil filters, antifreeze, lubricants, dry cleaning fluids, and many others.

Customers of the Liquid Waste segment mainly include:

  • municipalities

  • commercial businesses, sites, and institutions

  • transportation companies

  • residential customers

GFL not only collects these liquids for disposal but it also contributes to the recycling and reuse of these materials by reselling them to other users.

The Liquid Waste segment is still rather small, but it allows GFL to cross-sell solid waste services to its liquid waste customers.

Growth Drivers

Just like the Infrastructure segment, the Liquid Waste industry is continually growing by the year, projecting to hit $42 billion by 2023.

GFL owns 75 liquid waste collection, processing, and storage facilities. We expect this number to grow along with the industry trend, as well as GFL's growth-through-acquisitions and business reinvestment strategy.

Competitive Advantages

Capital Intensity

GFL’s widespread reach across North America and its fleet of 10,000 trucks is the result of over 140 acquisitions since 2007. Between the 2016 – 2020 fiscal years, GFL deployed nearly $15 billion on business acquisitions and capital expenditures combined. This is no easy feat for any regional operator to compete against.

The waste industry is still highly fragmented in North America with thousands of small regional players and few large incumbents. GFL, as a large waste company, can use its access to public investor capital to swallow up hundreds of these smaller companies. Its diversified business lines across many regions are also a major advantage – GFL can source acquisitions from a wide pool of targets and increase the odds of integrating smaller businesses in an accretive manner.

Decentralization

Although the overarching operations, administration, and execution and integration of acquisitions are managed by a centralized senior management team, GFL’s decentralized management teams take care of operations at the regional level. Additionally, these teams “own” their regional portfolios in that they maintain relationships with local vendors and seek out acquisition targets within their region.

A decentralized operating structure is imperative in a fragmented industry. Applying a “blanket approach” to all regions when each region has unique needs and desires when it comes to waste collection and other services is a poor strategic move. GFL recognizes this – it understands that local leaders know their region best and can manage their trusted multi-decade relationships better than corporate can.

In turn, customers can rest assured they have GFL representatives working for them that understand them better than anyone else can, and corporate will not take that privilege away.

Contracting a Moat

GFL typically undercuts other bidders for its collection services contracts. As part of its “land-and-expand” strategy, GFL obtains exclusive rights for garbage collection in each designated region in the municipalities in which they operate. Once GFL wins a contract with exclusive rights over a certain area, barriers to entry skyrocket for any local or national player, especially considering how low many of GFL's bids for these contracts are.

By bidding low, GFL has been able to win major contracts after which it sets out to build its empire. Although counterintuitive at first, the strategy is brilliant. The market is mature and growing slowly, so GFL is using a different strategy from other incumbents – landing in solid markets to expand its local visibility and regional know-how to increase its chances of pinpointing great acquisition targets and sell other cost-efficient services to cities and businesses in surrounding areas. Over time, this may prove a winning strategy that takes share away from incumbents as cost efficiencies from route density and network infrastructure kick into full gear.

These contracts also “guarantee” stable, recurring revenues for many years. Municipal contracts are typically 3-10 years in length often with one- or two-year renewal terms. Similarly, commercial contracts are signed for long periods of time, generally between 3-5 years. That is not all – GFL also includes price escalators, demonstrating the pricing power inherent in its offerings and value proposition.

Prolific Acquirers

GFL’s vision for growth in environmental services has brought them to an impressive North American presence across a variety of verticals. The waste business has been largely a consolidation play across the industry. GFL plays this game, but slightly differently. Its ability to integrate any acquired business into the GFL network at the rapid pace it has approached its acquisition strategy is astonishing.

After the initial merger to form GFL’s roots in 2007, GFL began the acquisition strategy that is still in place today. Its acquisitions include, but are not limited to, the following:

  • Turtle Island Recycling - 2012

  • Anchor Shoring Group - 2016

  • Envirotec Services - 2016

  • Rizzo Environmental Services - 2016

  • Deep Foundations Contractors - 2018

  • Carney’s Waste Systems - 2018

  • Smithrite Disposal - 2018

  • Waste Industries - 2018

  • Canada Fibers - 2019

  • Robert Cooke Trucking - 2019

  • WasteAway Recycling Environmental - 2019

  • Ground Force Environmental - 2019

  • County Waste - 2019

  • American Waste - 2020

  • WCA Waste Corporation - 2020

  • Terrapure - 2021

Map of GFL OperationsSource: GFL Annual Report 2020

The Strategy in Action

Among all its segments, GFL has a common strategy to bid low on contracts.

At first it may not seem like a great strategy on paper, but it sets the company up for a long term defensible position.

Just recently, GFL signed a deal with the the city of Novi, Michigan.

GFL Truck in Novi, MichiganGFL Truck in Novi, Michigan

The terms of the deal include an 8-year contract for GFL to collect garbage, recycling, and yard waste. Each resident is required to pay $138 in the first year. However, by the end of the contract in 2029, the cost will be approximately $149 per resident.

Over this 8-year period, a mere $10 increase is trivial, hardly a dent in the wallet for the average resident.

This is how GFL is able to capitalize on municipal region contracts and win in a mature and established market time and time again. GFL bids low and allows its pricing power to do its thing while seeking acquisition targets and cross-selling opportunities.

Getting under the skin of competitors like Waste Management, a larger company with broad North American operations, at a price that they cannot compete at is the way GFL wins. Land, learn the regional market, and expand (organically and through acquisitions).

Death, Taxes and Garbage

There is an inherent risk when investing in public companies - uncertainty.

However, death, taxes, and garbage production are as close to certainties as we can get, despite our collective pursuit towards a low-carbon and low-waste society.

GFL has demonstrated it is able to win key contracts and penetrate a low-growth market organically while also growing its footprint through acquisitions.

GFL states its key priorities are the following:

  1. Drive organic growth

  2. Expand margins

  3. Reduce cost of debt

  4. Continued mergers and acquisitions

In its merger and acquisition ("M&A") strategy, new verticals within its circle of competence could be very interesting as the ESG (i.e., environmental, social, and governance) secular trend picks up steam. Through its growth strategy, GFL hopes to be spinning off $800M in free cash flow in 2023.

GFL Objectives GraphicSource: GFL Investor Review Presentation

GFL Revenue ($M) (Q3 2021)

GFL EBITDA ($M) (Q3 2021)

Risks

The Elephant in The Room

When GFL went public in 2020, its heavy debt load scared most investors away while markets were crashing.

In an attempt to build out its scale as rapidly and as large as possible, GFL finances many acquisitions with (cheap) debt. The debt load to fuel acquisitions is real and GFL definitely recognizes they need to de-lever the balance sheet.

Although GFL's recent IPO was a brilliant way to perform large M&A expansion in the US and reduce the company's debt, it still has a net leverage ratio (i.e., long-term debt and leases net of cash and short-term investments divided by EBITDA) of over 4x.

GFL's net leverage ratio of over 4x is high by any standard and carries a few risks. If its acquisitions and expansion plans do not work out as initially planned, or competitors respond to GFL by opening their M&A floodgates, GFL may be left "holding the bag".

We believe GFL should seek to continue improving its credit quality by improving cash flows and refinance debt when possible to reduce its cost of capital.

Speed Kills (Maybe)

The waste management industry is a slow-growing one, and that means lots of GFL's growth will come through acquisitions.

In addition to its large debt load, GFL is also at risk of targeting and integrating acquisition prospects effectively.

If competitors change their strategies to compete with GFL on the acquisition front, GFL may be out-bid by larger waste management incumbents.

As every incremental business is acquired, the risks around recognizing great business with ample synergies that could be integrated well with GFL slowly diminish.

The lack of solid acquisition opportunities could eat away at GFL's financial standing over the long run, especially if coupled with high debt.

It is key that GFL maintains stringent acquisition criteria and does not grossly overpay for assets, no matter how attractive they may seem.

Revenue Cyclicality

Believe it or not, waste production can also fluctuate with the economy. As individual and business consumption and investment drops, so does waste production.

Slowing population growth and weak or unstable growth in North America or smaller regions within could hinder GFL's ability to generate strong, recurring cash flows.

Bottom Line

GFL Environmental is a founder-led business with an impressive growth increasingly penetrating mature waste management markets.

The business will continue to make acquisitions to grow its footprint and look for new vertical opportunities in environmental services.

The company will need to maintain its focus on organic growth opportunities, de-levering the balance sheet, reducing cost of capital, and uphold a disciplined accretive acquisition strategy as it continues to grow.

If you want to learn more about another powerhouse in the waste management industry, check out our report on Waste Connections: Recycling Capital to Fund Growth.

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