Q3 2021 GFL Environmental Inc Earnings Call
Yeah.
Hello, everyone and they will welcome to the G. F L. Environmental third quarter earnings Cool My name is <unk> and I'll be coordinating yokel today, if you would like to register a question. During the presentation. You may do so by pressing staff followed by one on your telephone keypad.
With that I have the pleasure of handing over to your host founder and C. I a G F L. Environmental Patrick defeat G. Please go ahead Patrick.
Thank you and good morning, I would like to welcome everyone to Jade.
And thank you for joining us this morning, we will be reviewing or.
The results for the third quarter.
For the remainder of the year.
I'm joined this morning by people who.
Who will take us through a forward looking disclaimer before we get into details.
Good morning, everyone and thank you for joining we have filed their earnings press release, which includes important information. The press releases available on our website. We have prepared a presentation to accompany this golf. It is also available on our website. During this call will be making some forward looking statements within the meaning of applicable Canadian and U S securities laws, including statements.
[noise] 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 Iowa for US measures. A reconciliation of these non IRS measures can be found in our <unk>.
Fillings with the Canadian and U S Securities regulators.
I'll now turn the call back over to Patrick who will start off on page three of the presentation.
Thank you Luke.
Again, a tremendous strength of our business and the effectiveness of our growth strategy drove performance in excess of expectations.
The capabilities of the leading asset base, we've assembled coupled with a rigorous discipline around capital deployment continue to drive exceptional high quality growth that we believe will lead to industry, leading free cash flow generation and equity value creation.
The headline numbers for the quarter or revenue was up 43% adjusted EBITDA up 48% solid waste adjusted EBITDA margins up 110 basis points.
Even more impressive than the headline numbers on their own or the underlying driving factors.
Solid waste pricing continued to accelerate and was 4.3% for the quarter 20 basis points ahead of plan.
As we said in queue to our proactive approach to pricing earlier in the year has allowed us to stay ahead of the broad based concentration we're seeing in the business.
I know, there's a lot of talk about labour pressures in the market and while that's clearly real and happening.
Your job is to manage through that a couple of things that we think have helped us do our job. The majority of our operations are in secondary markets and our experiences that the labour pressures in those markets have not seen as acute as they have in urban areas and wage inflation in those markets, especially.
Especially in Canada that is really just one of a what was one large secondary market except for a few pockets.
Which has been lower also our brand we cannot underestimate in today's climate that the employees want to be part of a company like GFS out. So we find that we are able to attract a strong pool of talent to our brand.
At the same time operating in the current labor market is more expensive.
And that's where pricing has come in.
We proactively used pricing to cover the incremental cost pressures and while our results to date have been exceptional we're even more encouraged by the pricing opportunities we see on the horizon, particularly as it relates to CPI linked revenue resets and the return of pricing unattractive commercial volume and many of our slower to reopened Canadian markets.
Solid waste volume growth was also had a plan of 2.4% U S volumes were high twos with particular strength in our Midwest markets can.
Canadian volume saw a 2% increase despite ongoing restrictions in many markets through most of Q3.
We think there's delayed Canadian dynamics, it setup with a tailwind in 2022.
As the remaining restrictions are lifted we anticipate realizing volume recovery to Canada like we saw in the us throughout 2021.
Commodity values once again provided a tailwind and the overall strength of a recycling business coupled with changing regulatory landscape continues to support our favorable outlook on the opportunity set within this line of business.
Solid waste adjusted EBITDA margins were 31.7% 110 basis points increase over the prior period, despite a drag from recent M&A.
Global walk through the components of the margin walk, but substantially all the margin expansion as organic.
Realizing pricing and access of our internal cost inflation focus on cost controls productivity and the real operating leverage from our tuck in M&A program continues to drive margin and we remain optimistic on the speed, which will be able to realize I've stated margin targets.
Finally, liquid and infrastructure continue to show recovery during the quarter, despite the slower than anticipated reopening activity in Canada, where the bulk of this revenue is derived.
Both segments at significant sequential margin expansion over the second quarter as we saw operating leverage associated with the volume recovery.
The earlier than anticipated closing of tear appears signet significantly increased liquid lease revenue during the quarter, but as expected was realized that a dilutive adjusted EBIT margin offsetting the substantial organic margin expansion and the base business.
The third quarter also saw continue to pursue others strategic strategies for value creation year to date, we deployed approximately $2.2 billion to 37 acquisitions to acquire approximately $735 million an annualized revenues.
More than two five times the amount we suggested at the beginning of the year.
Our pipeline continues to be robust and incremental transactions will likely be completed prior to year and.
We think our approach to emanate continues to establish us as and acquire a choice in certain markets and when coupled with a rigorous focus on returns on invested capital. This will lead to outsize value creation opportunities as we move into the future.
We also continued our capital redeployment strategy, realizing an incremental $95 million proceeds from the disposal of non-core low contribution solid waste assets in the Midwest.
Bringing total process.
Proceeds realized for the year to approximately 155 million nearer.
Nearly twice are stated target at the beginning of the year, we've identified a whole host of high return opportunities to replace this capital and anticipate being able to reinvest more than half of these proceeds before year end.
Our strategy for deploying this capital includes investments that support our sustainability strategy.
Like advanced sorting technologies that we're installing at our mercy that drive operating efficiencies and improve material recovery rates.
Our continuing investments an automated side loaders and on board safe driving technologies support our strategies to attract and retain drivers.
These are early days or many of these investments and we expect to see them paying off longer term in achieving our targeted margin expansion.
And finally, we continue to work on our balance sheet are highly successful notes offering and 50 basis point right improvement on our credit facility during the quarter demonstrates the continued support we have on our institutional that investors a group was trust we built over many years of successful execution.
We will continue to leverage our ever improving credit quality to reduce our cost of capital drive incremental free cash flow and create equity value.
When you put it all together the quality of the results for the quarter combined with our favorable outlook support us raising our guidance for the second time this year.
I will pass it to Luke will walk through the details, but our guidance our revenue adjusted EBITDA and adjusted free cash flow are all being raised.
And although we're going to wait until February before providing 2022 guidance effectively the launch off point for 2022 also increases and set us up for revenue growth of better than 15% and adjusted free cash flow growth well in excess of 20%.
I will now pass the call over to Luke will walk you through the details of the financial results and then I'll share some closing perspectives before we wrap up and turn it over back to the operator for questions.
Thanks, Patrick I will pick up on page four of the presentation revenue increased over 43% compared to the prior year period. This was ahead of our July guidance and driven by outperformance across solid waste pricing volume commodity prices and contribution from M&A infrastructure organic growth turn positive for the first time since the second quarter.
2020, and liquid waste benefited from the tariff through acquisition effectively closing two months earlier than anticipated similar.
Similar to our comments on the recovery of solid waste volumes in Canada, we expect improving strength in the recovery of both of these segments as restrictions in Canada continued to ease.
On page five you'll see adjusted EBITDA for Q3 or $415.8 million at a margin of 28% an increase of 90 basis points over the prior period and up 110 basis points sequentially over Q2, we're particularly pleased with this result, when considering the backdrop of rising labor and input cost inflation as well as the <unk>.
Production of certain discretionary costs, such as travel entertainment incentive compensation and certain professional fees that were all the headwind into a margin.
Solid waste margins of 31.7% or 110 basis points ahead of the prior comparable period, and 80 basis points up sequentially over Q2.
100 basis points of the margin expansion was organic and driven by our pricing programs and operating leverage on volume recovery commodity pricing was a 90 basis points tailwind, but this was substantially offset by 70 basis point drag from fuel prices and a 10 basis points headwind from emanate.
Liquid waste margins increased 50 basis points sequentially over Q2, and nearly 300 basis points of organically over the prior year period before considering the margin dilutive impact of the contribution from tear up here in the quarter.
Over 85% of Terror pure revenue is currently reported or liquid waste segment with allocations between the segments to be revised in 2022.
There appears liquid waste revenue keeping just below mid twenties margin, but we continue to see a path to bring that up to the segment average.
Infrastructure and soil margins improved 190 basis points sequentially from Q2, and 90 basis points period over a period as volumes turn positive and we're able to leverage the relatively fixed cost structure of the segment.
On page six you can see adjusted cash flow from operating activities of $250 million inclusive of $95 million proceeds from our asset sale. Once again, we're including these excess proceeds that are adjusted free cash flow wreck as we intend to redeploy most of these dollars before the end of the year and therefore, these proceeds or a portion thereof will be used.
To offset the over and above growth capital, we expect to deploy before year end.
While there will be some lumpiness from quarter to quarter that annual free cash flow reconciliation will include a normalised level of capital expenditures for the business.
During the quarter, we've normalized for $35 million of working capital related to recent M&A, which we believe is better characterize as part of the purchase price.
Nope that an inaugural holiday in Canada on September 30th impacted working capital by approximately $15 million as compared to the prior year.
Turning to page seven as previously announced where once again successful in accessing the debt capital markets to raise capital at attractive coupons and amended our credit facility to among other things tightened the borrowing right by 50 basis points, all consistent with our strategy of levering leveraging our ever improving credit quality to drive the lower costs of the debt during.
The quarter, we deployed approximately $1.1 billion into 14 acquisitions and post quarter, and we deployed and incremental $900 million for another eight acquisitions net of the contribution of one business sold as part of a divesture, we expect to generate annualized revenues approximately $735 million from these acquisitions, we anticipate approximately $450 million of this.
Pulling over into 2022, and this amount would further increase to the extent there is any incremental M&A completed before the end of the year.
As anticipated net leverage a quarter and modestly stepped up with the acquisition of terror appear the cash on hand, a quarter and was largely used to fund the M&A out in October and we continue to have ample liquidity to support our growth goals. Additionally, during the quarter, we enter the definitive agreement, which gives us the right to issue up to an aggregate amount of $300 million.
The us of preferred shares before the end of the year, we will draw on this equity commitment as needed to allow us to continue executing our growth strategy, while maintaining our previously stated leverage targets.
On page eight we're showing the drivers of our updated guidance for the year, where now expecting revenue of five $4 billion $150 million increase over the guidance. We provided in July when measuring midpoint midpoint.
The components are laid out on the page, but the growth comes from price volume and M&A contribution all exceeding our previously communicated expectations for.
For the year, we are now expecting pricing at four and a quarter and volume in the mid choose both of about 25 basis points higher than our July guidance and encouraging launch off point for 2022.
From this revenue we expect adjusted EBITDA of 14, $40 to 14, 50, or 37 $5 million increase over july's guidance again measured mid point the midpoint.
In terms of Capex.
Recall the guide at the beginning of the year was a base capex a $510 million with the first half growth of the business, we increased to $525 million in July and they are now increasing to 540 in line with the outsize growth of the business on top of this number we guided on the opportunity to redeploy proceeds from asset disposals into attract.
<unk> of growth opportunities.
Original guidance for this opportunity was $50 million to $100 million of incremental spend as.
As of today, we think will be at the high end or more of this range of terrific outcome of this investment will drive high quality incremental growth in 2022 now.
Now all of this incremental spend was being covered by the proceeds from asset disposals. So although there would be a gross capex number of $645 40, plus 100, the net capex would remain at 540.
We've been extremely successful in our portfolio rationalization program, realizing $170 million proceeds to date from asset disposals, an asset divestures with the possibility to realize more before the year is done including 100% of these proceeds in our year and adjusted free cash flow reconciliation would yield a net capex number of 470.
And effectively overstate, our free cash flow for the year. So at yearend will include an adjustment to exclude access proceeds from disposal and normalize the net capex number to somewhere around 540.
While working capital the New guide is this going to a use of approximately 35 to 40 million as compared to nil in the original July guide this is over and above the M&A related working capital investment and all of this yields and adjusted free cash flow of $525 to $530 million or 10% to $15 million increase over July.
Guide, despite the incremental $50 million investment in Capex and working capital.
We're not going to specifically walk through Q4, but you can do the math and see the implied results at the midpoint. It's approximately 141 $5 billion of revenue at 26.1% adjusted EBITDA margin and 90 basis point increase over the prior year. This is based on pricing of low fours and volume of half a point to a point both above.
Our July guidance from a modeling perspective, I think many continue to underestimate the extent of seasonality in the business and therefore, there is a recalibration of dollars between Q3 and Q4 for.
For Q4 implied free cash flow the normalized Capex dynamic I just spoke to complicates the simple full year last year to date map. The Q3 year to date adjusted free cash flow member of 512 is inclusive of excess proceeds from disposal, excluding $70 million of these proceeds from the 512 and then bridging to the full your number.
Give a better picture of Q4 on a standalone basis.
And lastly, while not going well, we're not going to provide our guidance for 2022 until we meet again in February where were already sitting with nearly 85% top line growth from rollover and we anticipate the constructive macro backdrop to support organic price and volume of better than six so as Patrick mentioned, there's a clear path to 15% plus <unk>.
Offline growth before considering anything incremental to what we have today.
With that I will turn the call back over to Patrick.
Thanks, Luke as we continue to deliver on the roadmap we've laid out for the business since the IPO. We're also focused on advancing our sustainability initiatives.
Consistent with the commitment that we made in Q1 last year to improve the diversity of our board, we announced today that our second female director director Jessica Mcdonald will be joining the board is our seven independent director of February of next year, Jessica his appointment to our board is part of our broader commitment to promote greater participation of women across our organization through our women and wait.
Program.
With the cost 26 summit this week, focusing the world attention on the need to move to a lower carbon future. We have never been better positioned to provide the services that will help us achieve that goal, including through our recycling initiatives and the development of renewable natural gas projects in a landfill.
On our last call. We told you that we had setup GFR renewables as our vehicle to unlock significant value in landfill gas to energy projects and to accelerate the conversion of our fleet to CMG. We continue to make significant process progress on this initiative and in the quarter expect to announce projects at a number of our landfills prior to year.
And.
Demonstrating are growing resignation as a leader and sustainability next week GFS will be participating in vision 2045 to share our vision for greener future with 50 other business leaders from around the world.
All of <unk> achievements that Luke and I have talked about today are a reflection of the incredible hard work and dedication of all of our employees.
It is our employees dedication and passion to achieve our vision to be green for life that allows us to continue to deliver a quarter over quarter on our commitment to build long term value for all of our stakeholders.
I will now turn the call over to the operator to open up the line for questions.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind you can print stuff on it I can cancel your craft when preparing to ask you. A question. Please ensure you'll find unneeded lately.
Our first question comes from pilot Brown as Raymond James.
Tyler Your line is open. Please go ahead.
Yeah, Hey, good morning, guys.
Good morning, you guys hear me sorry.
I'm sorry, he just real quick can you guys just reset us on how much of your new five 4 billion revenue basis tied to CPI and just any color on how that breaks down between the us and Canada.
Yes, so around numbers Tyler if you think today.
Was about $1 billion now that all the recent m&a's with a rolling into base that sort of CPI linked and that's roughly 990 80, 590% is in your residential line and the rest is on post collection.
Roughly $1 billion.
That about 40% of which will reset in Q1.
Then Q2 is pretty low you've got sort of 10% and then Q3 is another big <unk>.
Reset so from a cadence through the year. So you think about the timing in which that heads and then when you look that's about roughly.
I'd say, 75% in the U S and balance again, maybe 70 30.
Okay. Okay, Yeah very helpful. And then I know, it's a little early pricing has been strong I think it accelerated sequentially.
But when you think about that 22, 6% price plus volume organic revenue expectation, how do you kind of envision that being composed does it just 4% price, 2% volume or does it feel that the price could be a bigger part of that mix.
I mean pre pre Covid as you know, we were saying where it is or the 3.5% to 4% price and we're going to migrate to the top end of the range I think when you look at the backdrop today with CPI.
I mean, if you're moving that billion dollars from the typical sort of 2% and you're moving that up to three four somewhere higher.
With a little bit of incremental support on the commercial and post collection lines. I think he can add 100 basis points to that pricing number pretty easy. So maybe you know and that sort of four or five to five range going into next year. So I think as the as the quarter and year plays out and we see those resets and the overall continued acceleration of pricing will.
A a better view in February, but I think it's something better than four and just how much better.
You'll have to give us a couple of months before I come back to you.
Okay, Alright, I can do that and then just my last one here. So Patrick I mean, obviously acquiring revenues has been a big part of the story, but it is interesting to see all the divestitures. Obviously it happens time to time for everybody, but how should we think about your divestiture program is this something.
That's a bit more one off or do you have a process, where we're going to see this kind of year in and year out and just kind of turning the assets I'm just kind of curious.
Big picture there.
No I mean, I think we identified when we've acquired some of these businesses.
Markets that I think we are not overly strategic to watch them. These assets were of a higher and better use for some local players that could do something better with the asset I think effectively we could I mean from our perspective.
If it doesn't work strategically and we're not going to go into specific market to sort of build it.
And I am more focused on if you look at where we've divested assets has been largely sort of around urban markets.
Where there's a lot of competition.
And some of these markets I don't think the market needs. Another it needs a fifth player frankly, if you got three and a large strategic plus a big regional player I mean, what's tfl going to add to that so I think it just makes sense for a bag and focused those dollars and redeploy them into a certain market I think by and large I think over the course of the.
The next 12 months you should have the entire book rationalize to a point, where we feel comfortable with the base that we have.
Okay. Okay. That's very helpful. Okay. Thank you so much thanks guys.
Thank you Carla.
Our next question comes from work is Franklin F. R. B C. Two market. Please go ahead and.
Thank you very much operator, good morning, everyone.
Perhaps we could start.
I think it was it was Luke maybe it was your Patrick mentioned Terry pure.
On the margins of 20%.
Certainly lower than what you've done before but you indicated that you hope to get it up to the average can you give us some indication as to.
What type of what type of initiatives are you going to do to get to.
To get that up to the average and how quickly that would occur do you think it'll it'll be front end loaded or whether it's a little longer duration.
Yeah, So Walter it's Lou speaking with the comment I made with specifically talking with a liquid waste walk. So recall Tara pure is parked liquid waste part solid the solid components are extremely high margin and so the underwritten pro forma for therapy, I think was about a 28% margin when you break that out.
Had a liquid business large landfill that was with a high thirties, pushing 40, and then the liquid waste component was sort of lower twenties. So the common in the prepared remarks was that the liquid waste revenue came in at this with a low.
Just below mid twenties, which is right in line with the expectation and the solid ways, which is in the other 15% of revenues are solid segment that came in at the sort of high thirties, and I was actually accretive to Canadian solid waste margins. So character is right in line with where we anticipated being.
I think the liquid waste component of the business as we rationalize those facilities and.
Harvest the synergies and opportunities we expected, you'll see the territory or liquid component become.
Neutral to accretive to our existing liquid waste segment and the solid component is already accretive.
Okay, that's great and.
In terms of your capital plan, obviously, you've done a lot of acquisition so far and.
And you're getting a better sense of of the condition of some of the assets you're buying.
Can you give us a bit of a peek into next year's capital program is there any reason based on now that you've had.
Had a chance to review.
That we would see any major change in cadence four capex in 2022 or would you consider to kind of consistent with the growth in your business and the growth in the acquisitions that you've seen historically.
I think we can Walter nobody consistent with what you've seen this year I mean, we will look opportunistically as we talked about the question with Tyler if there's some proceeds different continues from rationalization take those dollars and redeploy them into markets, where we see opportunities to.
Developed post collection operations or conversion to see Angie are redeployments capitals into.
New municipal contracts throughout the Midwest.
Some of these business units, where we only acquired sort of.
Commercial front-load businesses.
In landfill so.
Nothing out of the normal ordinary and I think very consistent with what you saw this year.
Okay, perfect and just last question here, when we looked at free cash flow.
And the cadence there we kind of looked at high six hundreds into next year.
Anything that would would would change that now that we're a little closer to 2022 or is that the kind of ballpark that you'd indicated before is that the kind of poet ballpark that we should be considering for next year.
Yes, I think that that's the right ZIP code I mean, I think from our expectation that's today.
Most likely I think from our perspective will be working on making that number better, but I think from where we sit today that that's the right Zip code.
Okay. Congrats on a great quarter guys. Thank you very much.
Thanks Walter.
Our next question today comes from home Cemetery at Jefferies something your line of sight and can you spell it out.
Hey, good good morning.
My first question is just on the renewables in line cause the gas strategy.
Just remind us how big that could be again, I think to quantify Jake.
Previously, but but maybe some more detail.
Equity Stakes, you're gonna take it you're gonna are you gonna on the whole thing hardwood the projects ramp has it all been exposure or a fixed price offtakes.
Maybe it's too early there too.
But just Dr.
<unk>, just a little more detail around that strategy.
Yeah. So I think we've mentioned previously homes, we have about 18 landfills that will form part of this program. Our initial focus is on the first five to six.
Our expectation is that we will.
Signed definitive agreements on five of the prior year and and then on the sixth one.
Sometime in in.
Early Q1.
When you look at the number of report initially.
Initially was sort of Emma $75 million to $100 million, a free cash flow that I'll get generated from the 18 project I think that number is.
Conservative from what we're seeing today.
We'll stick by that but I think from our perspective. It is I think we expected admirals, probably shine right around this time and you have taken a little bit longer I mean, these are 20 year agreement that we're committing too and I think we're just taking the time to make sure we effectively get them right.
I think to your question.
On what happens with the fuel.
Everyone knows this is an evolving market and I think all of us as landfill operators.
Have a form of gold at the moment this is Ah.
A fuel that everybody wants.
Historically, a big focus on the transportation market to sell the gas into which is where the Ravens played.
A big part of it but I also think there's another large part of the market, that's growing which is supplying permanent and sort of industrial commercial manufacturing facilities right and a lot of these factories et cetera that are looking for their own ESG type.
<unk> are looking for long term supply agreements and.
The delay and also just finding the happy medium of the supply agreements and making sure that we locked him in and locked him in at the right price.
Because we're going to be respectful was stuck with them for 20 years, but I think I think there is upside to the number we've given you in the past.
I think we've structured them very simply we're going to get a normal royalty off the top like any other gas provider, but we also are sharing.
We're doing 50 50 joint venture projects and we're going to share in the off co op. These entities, so, we'll making a royalty off the top of it and sharing and the profitability of the entities below.
Great and my my my follow up question is is really around.
Operating leverage you talked about labour inflation.
Managed crew that pretty.
Pretty well with the price adjustments, but but maybe if you could talk about labour availability, there's been a lot of service businesses, where.
Labour availability has been an issue to capture the married or it's hurt operating leverage so as you look forward.
You know.
How are you going to manage through labor availability issues and someone your markets.
Maybe some of these secondary markets, it's less of a concern, but just talk through that and then.
Can you continue to adjust pricing as inflation ramps.
Yeah. So a lot of questions in there I think where we sit today.
I think.
Yes, labor issues and challenges are definitely real.
I think when you're talking about pricing and labor I think it's all sort of part of the same conversation because at the end of the day. Our business is very simple we're paid to pick up waste if we don't pick it up.
We can pick up we can put the price increases or we're going to get a lot of charm and that book of business right. So I think they're all sort of tied together.
But if you pick up the ways to can generally charged for every walk in or if you think about subscription residential or commercial customer doesn't really care, whether they're paying 17 or $18. A month are they are paying $25 a month at the end of the day. They just wanted to pick it up when you say you're going to pick it up and then I will forward you the ability to charge, where you want yes labor is is tight but at the end of the day. This is what.
Paid to do when I tell our guide that all the time and I generally say people go leave the companies. They work for the actually leave the boss that they work for right. So it's on our guys in the regional management to be accountable and keep our guys engaged in retained and retained.
Who we have working for us today so.
Right and you've gotta be selective about new business.
Because it's not a robust labor market today, where you can drive from different pools, and so when you are winning new business and you're winning new municipal contracts you better make sure you're getting the right price because you know there's going to be some some wage inflation that goes into it.
We don't need to practice so.
A for profit organization and that's what we're sort of focused on now.
Last question I'll I'll turn it over yeah, Patrick where where do you see the business much longer term.
I know you've given free cashflow numbers out there I don't expect you grew up update those here, but.
But just you know where do you see the business longer term, there's been a ton of emanate Europe growing organically mid single digits.
Plus delevering the balance you you're integrating those assets.
Are you going to grow at the same pace.
How should we think about this business longer term.
Just you know how I answered that however, you want.
<unk>.
Yeah, I mean, I think what you're going to see as much of the same going in the future I don't think anything is going to change I mean, I think when you we love when we did the ico in March of 2020. Our plan was very simple that we believe we could take EBITDA from roughly 1 billion to $2 billion over a five year period.
Think we thought we could take free cash flow from 300 to sort of $700 million to $800 million over that period.
And continue to drive margin expansion in the tune of sort of 200 to 250 basis points from where we were in 2020.
I think from our perspective, we've exceed we will exceed all of those targets and I think our new goal is getting free cash flow to closer to $1 billion and I think when you lay around this RMG opportunity that starts rolling in in 2023, plus all of the recent move that we've made over the last 18 months I think you get we've reset or both.
These internally and the new bogey is to get to that billion dollars of free cash flow and I think we can do that over the next two and a half to two years fairly conservatively.
And I think M&A when you look at the organic opportunities the industry has never been healthier from a price and a volume perspective M&A opportunities continue to be.
Barry exciting and I think when you look at our footprint now in the U S and Canada.
We used to do sort of 15, 20th year over year, we're doing 2025 year over year, this year, where I'll paste. It probably do 40 plus deals a year. So I think you can sort of couple about altogether and then later on all of the.
Good refinancing and the balance sheet that just drives incremental free cash flow out of the business I think we're very well positioned so I think we're just going to keep doing a lot of what we've done.
That's great. Thank you.
Thanks, Thank you have one.
Our next question comes from Mark methods Scotiabank. Please proceed.
Hey, good morning, guys.
Quarter here move.
<unk>, maybe just to wrap up the conversation on free cash flow.
You regarding the 525 30, but if we were to fully sort of.
Account for the divestitures, you, you're probably gonna have a printing something close closer to 600 is is my math correct.
Yes, that's exactly right Mark as I said in the prepared remarks look the rash.
Rationalization program has been extremely successful in those excess proceeds so if you take where we end of the year.
The net capex number could be as low as 450 460 with all the proceeds.
So I am normalizing by excluding abortion those those sort of 542 would include all the proceeds to your point you would be at a number 661.
Okay.
Okay.
Another G F L renewable opportunity I'm just.
Curious when I'm thinking about Capex for next year is there a big capital requirement extra for these first five six project.
No.
No I think the way I mean, it sort of goes back into the structure that were filing shouldn't be a large capex spin I think.
If we do some of these off take agreements that were thinking that will require very little equity to fund the bill go to the project.
Okay. Okay, and then maybe just on price for next year.
Canada finally, starting to reopen.
Presumably there are some good opportunity to go after some pricing commercial just given the resets what may happen next year.
The idea should be that should pricing sort of accelerate through the year versus where you're entering here.
Yeah, I think that's what we've seen throughout 2021, which I think is a typical I think the normal industry would be Q1 being the peak and then stepped fail, but if mark I think thats right with the dynamic of these CPI resets coupled with recovery.
You are attractive.
Price Sentra commercial volumes, I think that up and the typical cadence and so certainly I think the first couple of quarters, and then again with our sort of roughly 30% of the book resetting in Q3 that will provide support to Q3 pricing as well. So I do think similar to 2021 2022 has the opportune.
<unk> for continued acceleration of pricing as opposed to the Q1 peak that you might normally see.
Right.
Sorry, just in terms of the queue poor guide, while we're talking about Canada I guess the does that it's.
Soon so I.
Better than a volume acceleration in Canada.
So just given everything certain reopen again commercial stadiums and I'm like.
It was really based on the exiting of Q3, so I mean, if we'd go further but I mean, we're there, but I'd like to Toronto I mean, I went to all have game like things are coming back and there was a lot in the offices, but.
As you know it's resembling normality again, so it's reflective of today I mean, if all of a sudden everyone went back to the offices tomorrow that would be upside the chance of that happening before 2022 seem pretty remote to me.
Yeah, Great alright, Thanks, a lot I appreciate the time, okay. Good Carter.
Thanks Mark.
We have a question from Michael Hofmann at Stifel, Michael <unk> teeth, perhaps.
Thank you very much warning, Luke and Patrick Uhm.
It's five nine is the run rate at year end based on what you have in hand, sure that you're going to be 6% or better organic.
Even that we're in the business of modeling and we can't wait till February.
Several as us without any M&A 625 kind of a 1 billion seven I needed.
Which would be flat margins year over year. So that's not assuming any margin expansion in about 700 million in free cash such as that.
Those rights places to start and then we'll see what you can do.
Yes, Michael I would say five four so put the 6% on that plus add the eight and a half or nine a rollover. So that gets you directionally does sort of $6 two number and then everything else. He said look that math.
Is.
Is a bit in the math is accurate so yes, I think reality.
Push margin expansion beyond where we are.
Free cash flow conversion story that I know.
<unk> keep saying, it's real and maybe look last year free cash flow conversion is EBIT was low thirties. This year, we're guiding the high thirties next year, then that you just described and the gift you're 40 and then later on the continued M&A another sort of self help Patrick was saying you go north of that.
So that's where the math is going to shake out I think they are actually you are sort of top line is and the rights with a ZIP code, but again you can do your temporary model now and I'll refine it for you in February.
Great and then given all the changes in the next can you walk us through how to think about seasonality now and what we should be doing.
And our models sleep.
What's the what's the way to think about a step down seasonality and <unk> and then in the one in queue.
Yeah. That's a good question made on again, we're doing all of our finalizing all of our budgets with extra inclusive all recent M&A.
Recalibrating that because obviously as we continued AD revenues and this sort of more southern regions that tempers the previously existing seasonality curve, but the growth in the Midwest is certainly adding to it as well and terror pure.
Is it.
Wicked seasonality curve, just because the nature of that business as such so historically I'd say at the top line, yet sort of roughly 20% in Q1 jump up this would've mid twenties and Q2 Q3 by far the peak at 26 27.
Even 28, if you look at this this year's path and then queue for US then down to that sort of low twenties.
Historical curve I think modeling that is probably in the right ZIP code and again I can then give you the refinement in February.
Okay.
That's fair enough and then.
In liquids were you a net beneficiary of what's going on in the oil market that help from that but.
Performance on the format homorganic.
No I mean I think.
We all we always seem to pick the wrong index I think historically, where we were tightened motiva and then.
When was always.
There was all the ammo 2020 staff and then there was all the volatility of motive.
The street, not really understanding motiva, we switched to <unk>.
<unk> index, probably two not three years ago. So when you look at our Spradley, we haven't got really any we haven't got any material.
Spread expansion over the course of the last couple of years I mean, it's been relatively flat on a year over year basis.
Okay. So the important to that is then this is you did it the old fashioned way lots of little customers, sending increase little bits of business.
Yes.
Yeah Okay.
Okay.
Partnering with the whole team.
Multimodal went from Ah.
A dollar to $2 in the lows.
Today's multi was $4 to $4.25. So the street.
The rebate, though street really haven't changed all that much and I think the refiners are capturing all of that margin, which is great for them, but we've never been in that Guy and we've been just this has been a service offering that augment the rest of our environmental services. So I think we're.
We're just happy maintaining that existing spread that we had previously.
Right right and that and my point was the 4% reflects that.
Lots of small non oil customers showed some incremental improvement that's that's the positive message didn't get carried on the backs correct right right. Okay.
Okay.
Alright cool thank you.
Thanks, Michael Thank you Michael.
Our next question comes from Jerry Rapid Shackelton Fox, Please gotta have Terry.
Hi, Good morning, I'm wondering if you folks who wouldn't mind just talking about the opportunity that you see in recycling either from a greenfield or M&A standpoint can ya.
Talk about what your pipeline it looks like there. Thanks.
Yeah, I think from our perspective or English and we're not we're looking to build new facilities around markets, where we have a significant amount of all right. So.
When you think about a bunch of our.
A bunch of our operations in the in the Southeast and then you look to the Midwest and up into Michigan.
Real opportunity for us to Greenfield some sites I think obviously with extended producing responsibility trickling into Canada.
That over the next 16 months to 18 months is going to play out in terms of capital investments will need to make in new recycling facilities outside of the ones, we already own in specific markets in Ontario. So.
I think the model continues to be attractive.
And the revenue sharing agreements continue to work with producers and Mr. <unk> and customers and there'll be a continued focus of ours to deploy dollars into those type of opportunities, but when I look at greenfield opportunities probably in the we have four to five facilities that we want to build over the next 18 months and then Jerry I would just add retrofitting existing facilities in another era.
Yeah, and by retrofitting, adding latest technology, whether it's robots or more and more optical eyes.
The ability to improve recovery and what that does the rates, particularly today's levels, coupled with the labour efficiencies.
There's very attractive returns from those type of investments in so that's also another area that we're actively pursuing across our existing.
Silly base in addition to refill opportunities that Patrick reference.
Terrific and then separately I'm wondering can you just.
<unk> out for us here I'm a pipeline.
It a little bit more detail, what's the pipeline looked like today, what's that makes them assets that you're looking at within that pipeline and your level of optimism about getting enough activity in the fourth quarter to essentially issue. The preferred shares that you gave yourself a option to do thanks.
Yeah, So pipeline continues to be robust.
Between Canada, and the U S. I mean, I think from our perspective and the base case, we probably acquire another sort of 50 ish million dollars revenue could be upwards of up to $100 million of revenue.
It's sort of rollover you'd see rolling into sort of next year, an annualized basis.
So a lot of conviction around still continued emanated through the back half of the year.
Okay, and lastly, Patrick you mentioned, the various mechanisms to monetize landfill gas.
It looks at least optically that the economics are most attractive.
Pipeline that gas somewhere I'm wondering if you could just comment on what the returns looked like for the other.
Monetization options that you folks laid out and the.
Option too.
Not connected to the pipeline I guess suggest.
Limited pipeline infrastructure in those areas I would guess, but maybe you could flesh that out for us.
Yeah, perhaps I mean.
Wait the pipeline and obviously, whether we put into the transportation market and when we put it into the industrial manufacturing facilities that are sort of looking to buy this or in the pipelines that are looking to put a portion of gas and in a fight that's green gas.
I think what you'll see is there will be a hybrid of of all of those different agreement.
Agreements I think when you look at it very simply.
Obviously extremely attractive returns on invested capital profile I mean, I think when you look at them today at today's pricing you're probably in the two the two and accurate paybacks.
Those facilities on 20 year agreements.
So.
They will be very accretive to the sort of overall structure that we currently have a day.
I appreciate the discussion thanks.
Thanks.
Our next question comes from Kevin Chang CIBC. Please go ahead Kevin.
Hi, good morning. Thanks.
Thanks for taking my question.
I was on the 20th 22, the six plus percent organic number you provided.
You do highlight some of your market will have lagged into recovery.
We're sitting in one of them.
Does that does that organic numbers you that that's what about volume spread between markets that have recovered more fully that's closed or.
You're assuming that they're still kind of a log into 2022, and if and if we were to see if that is the assumption that we would assume there's a convergence any sensible upcycle volume could be if all your markets kind of got back to normal next year.
Yeah, so Kevin and flu.
I want to reiterate that we're not giving this sort of guidance.
Today.
Saying is I think the backdrop support something better than six so I'm trying to say that we are very optimistic about what 22 is going to look like we don't know.
The what it's going to be as of yet every sort of lumped up as as well so a better perspective. So when we come in February will give you a number it's going to be better than sex.
How much better soda remains to be seen.
The intent was to say hey is looking positive and we're very optimistic I think it was more even if you only use six with what we were already at 15% number for next year. So that was more the intent as opposed to trying to anchor us to sort of says it's going to be a number of better than sex.
That's good to leave a little meat on the bone under promise and over deliver.
Obligate salt.
Yeah kind of and I think the simple math is a pricing if we're pricing is almost three NAFTA for for us with the backdrop cannot go to four and a half to five and then it's volume if all that volume comes back you could have a couple of points of volume on top and you put that together you can get to a number of seven or seven or better, but we're going to we're going to.
Get back to you with exactly what would be the way, we think that's going to be shaking out at that time.
That's fine that's actually very helpful color.
And then my second question.
So I can get you a solid waste.
Margin, so up sequentially up yoga and sequentially and you saw and elevate the level of M&A and.
And I think he's coming at a lower margin. So I'm just wondering what's your legacy U S. Like if I were to take out the acquisition.
Hold it in in the third quarter.
Get a sense of what your runway face you a solid waste margins would be they seem to be a lot higher than maybe we will double slot a year ago and and maybe if I extend that further does that kind of change how you think about your multi a consolidated margin expectations, even when your account for mix.
Yeah. So a lot a lot in the cabin look if you think about R. U S margin business R. U S business. The M&A was a drag to the base.
Do you think about a day I mean, they're all pretty close if you think about a base in the low thirties.
32% thing you got to remember Q3 is the peak.
It's just not reflective of the year as a whole, but I think we have rerated and you have that business in north of 30% margin.
And I think as we go forward and leverage the asset base that we have just organically there's going to be rail operating leverage index Gotta remember, we have underutilized post collection assets that is very high flow through as we go into to build out the collection networks and densify that so you put it all together we came out of Patrick meant.
Send it in his prior response that we came out of the gate at Ikea or at a 24% margin business day, we add 200 250 basis points for bringing that up to a blended margin business and sort of $2727.
I think now that bulky has gotten higher and we can take this business is sort of high twenties and I think the solid waste leverage operating leverage is going to be a point of it bring that blended solid waste segment into that low thirties, and then liquid and infra are going to get to those stated targets as well. So it's not just I think solid waste.
I think it's always use started as a high relative margin business. It's also bringing up the Canadian segment as well as the.
The liquid and infra is all going to contribute to getting to that new level high twenties, which is where we think we're going to take this.
Yeah.
That's very helpful colors. Thank you that's all for me and congrats on good quarter there.
Thank you Kevin.
Our next question comes from Tim James S. T D Securities. Please proceed <unk>.
Thanks, very much good morning, I'm, just wondering if you could comment or update us a little bit on on plans and the opportunity around the the tier appeared the Stoney Creek landfill facility in particular, no that was that was kind of a kind of an exciting opportunity to get your hands on that uhm, just just talk about.
Where that stands and what the opportunity is there as you look at it today.
Yeah, I think from our perspective.
GTA being sort of slower recovery I think there's real opportunities as a bunch of the industrial.
Manufacturers generators of this waste come back on line not to mention a pretty large internalization opportunity for us to be able to internalize.
Certain ways and soils that historically have been going to landfills other than that that we've been using other third parties.
So that process is started but I think.
We roll into 2022, we think there's material upside coming from from that site for us.
Okay. That's helpful. My second question I mean, it just you know your execution. It seems like it's going so well here overall, you're securing M&A opportunities.
You've now got this Orangey initiative under way I mean things.
Things look look very promising obviously as you've identified I mean, if you were forced to see where the grease challenges are in the business today, what what would you or could you point too.
We've been doing this for 15 years right I know it may seem like a lot for people is sitting on the outside of it now.
Now is on the company as as a public company, but this is sort of in the DNA I mean, I think where it always is at the bottleneck is always around integration trade in sort of pacing that old Bowl.
From a regional perspective, just a function perspective, so that's always.
That's always where you're sort of bottleneck is in terms of.
Continuing to ramp on the M&A front, the beauty of where we are as we have nine provinces in Canada 27 states in the US today and we have regional management teams there that no GFS systems et cetera, which is far different than what we had 10 years ago. As we were building all of those out so now that those are built.
The M&A program really is pretty seamless because we're talking these businesses into existing markets, where we hope we already owned businesses.
So I continued to tell people the biggest threat and all of our businesses is cyber security.
We were cyber attack a 2016 cyber attack on a daily basis, all of US and I think just continuing to stay on top of those risks around that part of the business will will be prevalent for us, but as far as I'm concerned I feel very good about where we are obviously on the.
The inflation front, keeping an eye on the labor.
In the supply chain stuff, just ensuring that we get the parts we need.
To run our business and get the equipment that we need to run our business. So far we've got a very good spot and I would say our procurement department has done an excellent job of of staying on top of that ensuring we get what we need and ensuring that we have the parts to maintain our trunks.
But.
By and large I think.
Ourselves of the company and the industry as a whole.
As in a very good position today.
Okay, great. Thanks for the insights Patrick Thank you Luke.
Thanks.
Our next question comes from Michael Faneca. Thanks America, Michael Please go ahead.
Yep. Thanks, guys for taking my question just on that.
Last comment Patrick I'm, just curious on the labor side and supply constraints clearly you guys managed it well I'm just curious as you've moved into Q4 have you seen any signs of that easing or is it just not getting incrementally worse at least when you think about some of those labor and supply constraints.
Yeah Labor is definitely he's devastating on a peak was spring summer and I think just a natural cave into the businesses right like people just need less people over the.
Winter and coming into the spring. So I think that's definitely he's but there's a lot of the government program just starting to come off we've definitely seen it we definitely communities.
Our focus now is in ensuring that we get all come back in spring of 2022 that were staffed appropriately we have the right bodies in the right people in the right seats.
Supply constraints listen it's lead time driving.
Again, our guys got in front of it.
<unk> to them, they're a lot smarter than me on a lot of pockets and you know I think with our relationships with a lot of the Oems suppliers.
We're very forthcoming just given the size of customer we are to them and letting us know the appropriate lead times, whether it's brake pads, whether it's hoses et cetera, like all of our all of the things we need to run our business on a daily day to day basis.
Come to wasn't that hey, what do you need because you know we're experiencing six to 10 week delays on this sort of stuff. So.
But you could get that stuff in 24 hours, but I think our guys were proactive went out.
Bulk purchase what we need to purchase for the existing business and been able to manage through it so far.
In terms of aware, that's going with them.
First of all I can tell you I have no idea I don't know how the world's gone.
Guidance, such a mess over the last.
But I mean.
Hopefully, we're coming out the other end of it that she.
Shifting stars and other things start and we get back on the sort of right program here in the next six months.
Makes sense it makes sense, Patrick and then on just the pricing you you laid out the CPI research.
I'm just curious in terms of Big picture for you guys as we enter 2022 on the price front. If if you put a price increase your running a commercial customers, let's say.
March April may.
Are you willing to go back to complete implement another price increase or is this strategy could let those CPI resets happen.
You're managing a business and you'll you'll wait to your normal annual price increase I'm. Just curious how you think about that as you move into 2022 with the yeah well.
Yeah, So big difference between open market and.
Contractual CPI annual adjustments like you'd see on municipal contracts, Fortunately or unfortunately on the municipal ones you have to wait a year anyway. So there's no there's no choice.
But listen on the on the Oprah book of business, if things materially change I think.
And you are providing great service any customers are no-one understand you'll have to pay more obviously, we'd like to work with our customers as much as we can but at the end of the day. These are real reso real cost pressures that we're all experiencing so I think we we wouldn't be shy to go back out.
Put through a P. I, if we saw the real need to in order to sort of maintain some extraordinary inflation measures that we had predicted when we put through the first price increase earlier in the year.
That's great and just lastly can you just remind us of sensitivity to your earnings.
From recycling and those commodity prices I believe contracts are different than your peers or maybe it's a bit different when it when it when you say Kennedy and you ask you just flesh that out that'd be great.
Yeah, Michael to look we have roughly 800000 tons that we have some volatility on in terms of the backend now more and more the change in the dollar's, we're getting we're rebating back to the customer, but if you think about it today a.
Good Matt.
60 cents on the dollar we're keeping all those 800000 tonnes. If the blended basket is going up a dollar I am getting 60 to that that's the rough math, although I would say it continues to migrate and when we talk on February we'll give you the latest that sort of view as to where we are at that time.
Perfect. Thanks, guys.
Okay.
All final question today comes from repeats in Iraq as National Bank financial.
Please go ahead.
Hi, Good morning, everyone and then just a couple of quick follow ups on RMG to start Patrick you mentioned, the first five or six orangey assets, you're looking at 75 to 100 million free cash can you can you confirm that you're 50% share and and when you talk about the the time frame for needs to come online in 2023.
Quickly he should we expect this does that get staggered through the year or so earlier.
Yes.
75 to 100 is the right number I think the lion's share of that will come in through various parts of the year of 2023, and you'll have a full run rate I think the number will be higher by the time I get out of 2024.
Because we will bring on those incremental landfills over the course of 2022 beyond the five to six that I just spoke about.
But your.
A little probably $8 million to $10 million come in 2022.
A good chunk of numbers in 2023, and then full run rate in 2024 for probably the lion's share of the projects.
Okay, Great and and I mentioned, the first five or six of the best projects to opportunities you have one of the the next five or six look like after that as far as I am not sure in terms of that they are the simple list to execute okay. Because some of these these have electoral contracts would have to come out of some require incremental infrastructure some requests.
Liar expanded pipelines being able to get to the site.
But if you have your thinking about the first five years since we're talking about the roughly call at 25000 CFM of gas a day.
I think <unk>.
<unk> the other ones with some to the same.
So the opportunity could be double the size, if we're able to execute on the mall.
And then the following opportunities of those 2024 story and you bring them on that quickly.
I think we will sign up some of the others for sure over the course of 2022 right. So they would they would also come online sometime in 2023 with a full run rate in 2024.
Alright, very good and then quickly Luke can can you talk about the sensitivity you have to fuel prices right now and how he should be modeling that going forward.
I mean look we have roughly $50 million leaders a quarter of fuel that were one right now in our recovery.
We are not nearly as advanced on a recovery of fuel costs. So that we could be so as we continue to progress on that strategy, we're covering more and more offsetting.
But today.
I have a high degree of exposure, probably mitigating sort of 20% of the price volatility in the rest of the sort of falling through.
Now Incrementals TNG conversion as we continue to do that is also going to drive improvement.
That's sort of where we sit today.
Excellent. Thank you very much only but they're.
Thank you.
Thank you for your pet.
This concludes today's.
Q&A session and that concludes today's cool. Thank you for joining we hope you have a great rest of your day you may now disconnect your lines.
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