GFL Environmental Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 2/5

GFL Environmental Inc. is a North American diversified environmental services company providing non-hazardous solid waste management, infrastructure, and soil remediation services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

GFL Environmental operates across North America, primarily in Canada and the U.S., offering a range of environmental services.

  • Solid Waste Management: This is GFL’s core business, involving the collection, transportation, processing, and disposal of non-hazardous solid waste. It includes:

    • Collection: GFL collects waste from residential, commercial, and industrial customers.
    • Transfer and Processing: GFL operates transfer stations and material recovery facilities (MRFs) to process and sort recyclable materials.
    • Disposal: GFL owns and operates landfills where it disposes of non-recyclable waste.
  • Infrastructure Services: This segment provides services related to infrastructure development and maintenance. It includes:
    • Site Services: GFL provides a variety of services like excavating, demolition, and earthworks for construction sites.
    • Road Maintenance: GFL provides road maintenance, repair, and paving services.
  • Environmental Services: This segment provides services like soil remediation, industrial clean-up, and other specialized solutions.

Competitive Landscape

GFL operates in a highly competitive industry.

Key competitors are national waste management companies like Waste Management and Republic Services, as well as regional and local players. The market can be fragmented and influenced by local regulations and contracts.

  • Intense Competition: The waste management sector is known for fierce competition, as a relatively small number of large players fight for market share. Price competition is a constant threat.
  • Regional Concentration: GFL’s profitability is heavily tied to local regulatory frameworks and the pricing it’s able to achieve in its specific operating areas.
  • High Barrier to Entry: While large players make it challenging for new entrants, high capital costs, regulatory hurdles, and the need for large networks make it very hard for small players to compete with larger, established competitors.

What Makes GFL Different?

  • Geographic Focus: GFL has a strong presence in Canada and the northeast of the US and are expanding their footprint.
  • Vertical Integration: GFL has integrated many waste-related activities, including collection, transfer, and disposal, increasing profitability as it allows GFL to capture revenue across the value chain.
  • Service Diversity: GFL has diversified into infrastructure and environmental services. In recent years has also been investing more into the waste-to-energy market.
  • Acquisition Strategy: GFL has historically used acquisitions to grow rapidly, but seems like they are slowing down on acquisitions, focusing more on integration and margin improvements.
  • Customer stickiness contracts with customers who are mostly businesses and municipalities, make their revenue stable and the switching costs are high.

Financial Analysis

Income Statement

  • Revenue: GFL has seen substantial revenue growth over the past decade. Revenue for 2023 was $7.9B CAD an increase of 18% compared to 2022. This growth is attributed to both acquisitions and organic growth, particularly through price increases.
  • EBITDA: Adjusted EBITDA was $2.1B CAD in 2023 representing an increase of 15% vs 2022. The EBITDA margin was 27% but the business continues to focus on margin improvement as it has been struggling.
  • Profitability: While GFL’s revenue growth has been significant, its profits have not grown at the same pace due to high expenses. High operating expenses and interest costs have suppressed profits. In 2023 they reported a net loss of $1.26 billion.

Balance Sheet

  • Assets: The company’s main assets are goodwill, intangibles and PP&E.
  • Debt: GFL carries a significant amount of debt, which has increased due to its acquisition strategy. Debt was around $9.8 billion by the end of 2023. This high debt creates an issue of leverage and makes the company vulnerable to interest rate hikes.
  • Equity: The company has been consistently raising money, equity has increased drastically in recent years. At the end of 2023, equity stood at $6.2 billion.

Cash Flow

  • Operating Cash Flow GFL produced $1.8 billion of cash from operations in 2023, a increase vs 2022.
  • Capital Spending in 2023, capital spending remained high at $1.1 billion.
  • Free Cash Flow Free cash flow was $840 million and is expected to grow higher going forward.

Moat Assessment

GFL’s moat is moderate, receiving a 3 out of 5 rating.

  • Scale: GFL benefits from economies of scale in its established markets due to its large asset base and dense routes that make its operations more efficient.
  • Switching Costs: Switching costs within the solid waste management business are high for business and municipal clients, since contracts have a lot of administrative processes and are often difficult to replicate or replace.
  • Economies of Scale: By owning and operating many disposal facilities, GFL enjoys economies of scale that limit smaller competitors in their ability to bid effectively.
  • Barriers to Entry: Building out a network of waste and recycling facilities is difficult, particularly when there are already established players. Local regulation also adds to entry barriers. These are long term structural advantages that make it harder for competitors to compete with them. However, these moats aren’t impenetrable as they can be eroded through aggressive price competition and market consolidation.

Risks to the Moat and Business Resilience

  • Economic Downturn: A recession may lower the volume of waste generated, hurting GFL.
  • Acquisition Risk: GFL has been using acquisitions as a growth strategy and overpaying, mismanaging integrations or paying too much debt can hurt future prospects.
  • Competition: Strong competition from other large players can pressure its margins.
  • Regulatory Risk: Changes in environmental laws and regulations could result in higher compliance costs.
  • Debt Burden: GFL has a high debt level, which increases the risk of financial distress. This is particularly a problem with rising interest rates.
  • Pricing Power: GFL does not really have pricing power, since it is not differentiated compared to the competition, so it must stay competitive, which can be a problem for higher margins.
  • Environmental Concerns: Public awareness and increased focus on recycling, waste reduction, and environmental responsibility could reduce the demand for traditional waste disposal.

GFL has several long-term advantages, which give it an edge to adapt to the market and industry trends, and the business has shown resilience in terms of revenue, however, the high debt will be a large burden going forward, and needs to be fixed.

Understandability: 3 / 5

While the basic waste management business model is easy to grasp, GFL’s operations are somewhat more complicated due to vertical integration, diverse businesses (infrastructure, and remediation) and numerous acquisitions, giving a 3 out of 5 rating. Its international operations can also confuse some investors.

Balance Sheet Health: 2 / 5

GFL’s balance sheet is weak, receiving a 2 out of 5 rating.

  • High Debt Levels: The company has a massive amount of debt compared to its revenues, earnings, and equity.
  • Low Profitability: Net losses are a result of the high amount of interest payments and the company will need to work on margins to be able to generate actual profit.
  • Cash flow cash flow, while still growing needs to be improved upon, in order to help GFL decrease the debt load.

Recent Concerns & Controversies

  • Debt: High debt is a major concern for investors, especially if interest rates rise. Management has stated that deleveraging is a top priority.
  • Profitability: While GFL is growing revenues at a rapid rate, the increase in expenses and debt are creating an issue to generate proper earnings.
  • Integration: Integrating acquired companies has been difficult. Some acquisitions are not profitable and might need restructuring. Management is focusing on creating a more streamlined approach.
  • Accounting: As highlighted by analysts, the “adjusted EBITDA” is misleading and is quite different from the underlying cash flow, or what one might think that is. This makes valuation and analysis of financial statements harder for potential investors.
  • Lawsuits and investigations: GFL is facing several lawsuits from competitors, and has a few ongoing environmental law breaches under investigation. This can create instability. However, management seems proactive and has mentioned plans to deal with the concerns in earnings call and investor presentations.
  • Growth: growth is slower than competitors but GFL management claims it was purposeful, in order to fix operational issues that were resulting in low margins.

Important note: A company’s moat can also be eroded from their own actions. GFL is a very interesting company that is adapting to the times and will most likely be a dominant player in the waste management industry in the coming years, however the high debt will need to be addressed and kept at manageable levels.