Q1 2022 GFL Environmental Inc Earnings Call
Solid waste pricing accelerated to the mid sixes, the highest in our history and ahead of our own expectations.
Our ability to adjust our pricing strategy to reflect the changing operational landscape in real time is a testament to both the quality of our business model and the capabilities of our team.
We continue to see our opportunity for pricing surcharges as we optimize our book of business and we will be focused on that for the rest of the year with the strength of the first quarter and our expectations for the balance of the year, we feel confident in our ability to exceed the high end of the guidance for our base business that we previously provided.
Volume trends were also up across all of our geographies and business lines in the first quarter, excluding onetime more volumes from the prior year that we knew were not going to recur.
This increase in volume is impressive because we achieved it even with the acute impacts from Ali Khan at the start of the year and the severe winter weather conditions that we experienced in many of our Canadian and Northern U S markets.
Given that backdrop, we think that there is a positive read through of this trend for the rest of the year.
We have been anticipating the full recovery of our environmental services sector. We saw that we saw this quarter.
We saw our customers Reengage services that had been deferred or reduced during the pandemic with the result in revenues. In this segment were ahead of our own expectations by over 15%.
As a result, we think we're going to be able to prove out the thesis in this segment faster than previously expected.
Adjusted EBITDA margin was 25, 3% for the quarter. Our results were really proud of considering the inflationary factors at play.
Youll recall, our previous comments that a year over year margin comparison would be less relevant this quarter because of the uniqueness of the prior period.
Luke will unpack the puts and takes but when you Peel back the results demonstrate the exceptional foundation of our business model that allows us to leverage price.
More than cover the cost inflation, while driving operating leverage through our improved asset utilization.
The significant and sudden spike in fuel cost was a headwind for the quarter, but we think we shouldnt be able to recover most of that loss margin by the end of the year.
With Canada finally, moving on from it's Covid related restrictions by the end of Q1. We're also very optimistic about the positive impact that this lifting of restrictions will have on our Canadian business for the balance of the year.
Complementing our strong base business performance was the continued implementation of our portfolio rationalization.
In April we finalized the spinoff of GFS infrastructure.
Green infrastructure partners.
<unk> acquired the cocoa paving business to create a leading Canadian provider of vertically integrated infrastructure services.
As we said last quarter. This transaction demonstrates GFS commitment to rationalizing our balance sheet to maximize the value of our asset base.
We think that the brand recognition of <unk> together with a highly supportive macro backdrop of infrastructure projects over the near mid and longer terms from our compelling cream.
Create a compelling organic growth opportunity.
We also see consolidation opportunities in the fragmented Canadian infrastructure services market and we believe that our investment in VIP will result in meaningful value creation for our shareholders.
We also continued to execute on our M&A strategy, completing 21 acquisitions year to date, representing approximately $300 million of incremental annualized revenue.
As we announced earlier this week one of our acquisitions, we completed with sprint waste services sprint a vertically integrated regional solid waste business based in Texas with a footprint that strongly complements <unk> existing footprint sprint has achieved industry, leading margins for over 15 years under the ownership of Joseph Swedbank.
And his family and we're excited that Joseph and it sounds willing Regan are showing their support for the combined <unk> opportunity through they're continuing their investment as a shareholder of GSL and as consultants to the business.
In addition to sprint we closed two smaller tuck in acquisitions nine in the quarter and 11 subsequent to the quarter.
13 of those acquisitions were less than $5 million of enterprise value and.
And all contribute to further densify our footprint.
Our pipeline remains robust and with the strength of our start for the year, we see another year of continued outsized M&A opportunities.
On R&D, we continue to progress on the development opportunities that we highlighted earlier in the year.
The project is expected to start to come online in mid to late next year in Q1, we deployed around $12 million of capital into these projects and are encouraged by the pace of development.
We continue to expect that our share of incremental free cash flow from these sites to be in the range of $115 million to $125 million per year.
On the ESG front, we continue to focus on biodiversity with the with our new pollinated project in one of our landfills in Canada on Earth day, our employee engagement activities across GFS centered around increased awareness of local at risk species on the governance front, we appointed Jessica Mcdonald to our board.
In the quarter and are committed to increased female representation on our board to 30% by the time of our 2023 AGM.
I will now pass the call back over to Luke who will walk through the details of the financial results and then share some and I will share some closing perspectives before we wrap up thanks.
Thanks, Patrick.
Before I start to frame the discussion we have excluded the contribution of the nowadays at the <unk> infrastructure Division from the discussion analysis of our results.
Period over period comparisons that I referenced are on a like for like basis.
As Patrick said, we started the year exceptionally strong with solid waste organic revenue growth of 10, 3% driven by $6 six pricing surcharges, one 1% from commodity prices and two 6% from volume volumes were three 1% when excluding the non recurring Merck volumes that we anticipated in our original guidance the.
The broad based outperformance came from both price and volume with organic growth exceeding expectations in both of our geographies.
Our outperformance on price was a function of higher price increases better retention and a pull forward of price increases in certain markets compared to our guidance incremental fuel surcharges recovered approximately 20% of the increase we saw in fuel costs. During the quarter part of this is a timing lag that will be recovered but on balance. This is an area, where we see significant opera.
Unity within our existing customer book.
Many of our industry peers have done a great job at mitigating rising fuel costs, and we see meaningful upside as we migrate our practices in this area closer to the industry norm.
On volumes as I said, we were pleased to see growth in both geographies solid waste collection volumes were positive across all service lines with the strength of commercial impacted by headwinds on roll off pulls in certain of our northern markets that we're contending with acute wave of omicron at the beginning of the year and significantly more severe winter weather conditions compared to the first quarter of the prior year.
The post collection volumes were strong across most geographies, particularly in some of our newer market areas. While volumes may have started a little slower in the quarter momentum started accelerating as we exited March this was particularly true in the Canadian markets, where as Patrick mentioned, we've just recently emerged from Covid restrictions nowhere was this more apparent than in the phenomenal.
Results in our environmental services segment, where we realized nearly 20% organic revenue growth as our customer base begin to restart or increased service level intervals again, we think the impact of all these government mandated market openings and closings has been to rewrite the normal seasonality cadence for our Canadian business and with that we definitely think.
We had some pull forward of work into the first quarter, but nonetheless, the read through of these results form the highly favorable outlook for the balance of the year.
Contribution from M&A was 16, 2%. A result was ahead of plan and largely attributable to the ongoing strength in the performances of businesses acquired in the second half of 2021.
In terms of profitability adjusted EBITDA margins were 29, 9% for solid waste, 20% for environmental services and 25, 3% for the company as a whole. Although this is a decrease from the prior year as communicated when we provided our guidance for 2022 that quarter over quarter margin comparison was going to be less relevant this quarter based.
On the somewhat anomalous strength of the first quarter of 2021 to recall Q1, 2021 saw solid waste margins in Canada increase sequentially over Q4, 2020, and the highest solid waste margins of the year and our U S business, both of which were atypical outcomes and attributable to various impacts of organic and inorganic factors looking at.
Our guidance at the beginning of the year, we expect the solid waste margins. The decrease environmental services margins to increase and the company has a hold in the quarter in the high 25 <unk>.
Considering the impact of diesel costs and the change in segment mix alone combined to a 70 basis point headwind versus our guide we view the performance of Q1 ahead of our expectations, excluding the impact of these two items.
Low cost inflation was higher than anticipated, we responded with incremental price and see a path to continue to do so for the balance of the year the quarter over quarter margin comparisons are expected to moderate as we go through the year and we remain confident in our ability to drive margin expansion across both segments and for the company as a whole by the end of the year.
Adjusted free cash flow was $119 million compared to 117 million in the prior year period note that the comparable period was only burdened by $42 million of cash interest and outcome tied to refinancing activities around that time that skewed the cadence of cash interest payments during the individual quarters of 2021.
Included in adjusted free cash flow reconciliations approximately $90 million and proceeds received from additional asset disposals completed during the quarter as Youll recall our strategy with these disposals is to redeploy these proceeds into attractive organic investment opportunities within our core markets effectively managing towards the net capex number, but the inflows and outflows.
Don't happen in the same period, and therefore timing differences and the net number maybe elevated or lower in any given period.
We started this process last year and expect to be complete by the end of or the end of this year or early 2023, and we remain confident that we'll be in balance or in a net capex number by the end of the program.
We've also included our investments in joint ventures, which at this point effectively represent our capital contributions that R&D projects as a capex like item in our free cash flow reconciliation.
Appears our partners on the development of these projects may be able to deploy capital faster than originally anticipated and as such we may have a pull forward of $2023 into 2022, but this is an outcome. We're thrilled with and we will be able to cover any incremental investment with disposal proceeds we received during the first quarter.
As Patrick said, we deployed $67 million into nine tuck in acquisitions in the quarter after quarter end, we deployed incremental dollars into the 11 additional acquisitions, including the acquisition of sprint waste services.
Fortunate spring consideration was equity that serves the dual purpose of including this when banks and our shareholder base, while continuing to demonstrate our commitment to leverage levels.
The in year revenue contribution for 2022 is expected to be approximately $200 million of the total anticipated contribution of $300 million acquired on an annualized basis.
These amounts are before the impact of any divestitures at during the year.
As we guided GFS infrastructure was classified as held for sale at quarter end and was divested of at the end of April consideration received was comprised of $224 million in cash and approximately 45% equity interest in VIP as a result of the transaction structure in GFS historical approach to financing the acquisitions that constitute GFR infrastructure.
<unk> was taken to reduce the carrying amount of the net assets divested from <unk> balance sheet to equal the proceeds received from the spin off going forward <unk> interest in <unk> will be accounted for under the equity method of accounting.
Regarding the $224 million cash proceeds received from the spin off these proceeds have been reinvested into M&A and therefore will not be included within our adjusted free cash flow reconciliation as we go forward.
Net leverage at quarter end improved slightly over Q4, 2021 pro forma for the post quarter end M&A leveraged slightly increases.
We still expect the business to Delever by the end of the year, albeit at a temporary based on account of M&A.
Finally, before I turn the call back to Patrick for closing remarks, Youll see in our press release that we are raising our guidance for fiscal 2022 on this point I want to clarify that we are not providing any updates with respect to our base business the business for which we provided guidance at the beginning of the year, we're not seeing an increase on the base business isn't warranted, because we expect that there'll be one.
But we want the benefit of another quarter before we update our views there.
The strength of the M&A in the beginning of the year solidifies that we should do better than the guidance by at least the incremental M&A contribution. So we've updated revenue adjusted EBIT and free cash flow for only that impact. The updated amount is net impact of new M&A less the contribution or the loss contribution from the $90 million of divested assets with them.
I'll now turn the call back over to Patrick.
Again this quarter, our more than 18000 employees deserve all the credit for our exceptionally strong start to this year.
Dedication and capabilities of this team Couldnt makes me prouder than a big catalyst for our upcoming Investor day is to showcase to you the exceptional talent that drives GSO.
<unk> all heard me say before Luke and I may be the face of GSL for most of you.
But tier fronting a best in class management team that continued to deliver our industry leading results.
We're excited for you to see firsthand the quality of team Dream and hope to see you all in New York later this month I will now turn the call over the operator to open the line for Q&A.
Thank you if you would like to ask a question from Chris Scott followed by one on your telephone keypad now when preparing to ask your question. Please in Chile, you on mute.
If you change your mind, Please press star followed by <unk>.
Our first question is from Michael Hoffman of Stifel. Your line is now open. Please go ahead.
Thanks, very much good morning, Patrick Luke.
Good morning, Michael dig into growth and kind of walk through the pieces just feel like I understand where we are cadence so really good price I get it and maybe just comment here.
Grip.
What's the exit momentum if you did six three as an average what did you exit the quarter, how do I think about what I'm entering <unk>.
Yes, Michael a lot of our base Q1 surcharge pricing happens on Jan one right. So you really have a big January number that starting that and then if you looked at the guide on the normal cadence of what we were anticipating you would've been ratably stepping down through the year just by virtue of the math now as we call them.
<unk> and intend to do we think theres incremental pricing and surcharges that we need to go out and get actor and so if the normal cadence would have been a step down from the Q1 level to Q2 of sort of 50 to 70 basis points I think the incremental price and surcharge that we're now going after it has been a temper that stepping down still the XP.
Patient today absent material net new pricing is going to be a step down but at a lower cadence that we would have previously anticipated.
So it's got a six handle on it or very high fives low six.
I think thats exactly right with where we sit today, Mike Michael Okay.
Yes.
Okay.
Yes, they were both laughing.
Volume three one extra edmar, if I get that you alluded a little bit to regional.
Is there.
Is there a little bit of a lag to the pace of which solid waste Canada is recovering.
Not to be dismissive, but have slipped.
Look at Hey, harsh winter, it's almost summer.
Come back to the office in the fall and instead of.
Given that some are so short out there and therefore some of that leverage is still in front of us. So the three one is even more powerful.
Yes.
So, adding a bifurcated between the open market in the secondary market I think secondary markets are.
Getting back to sort of family.
Normalized levels I would say certainly in the.
Large urban markets when you sort of look across Canada.
Again primary markets, when you're thinking about Vancouver, Edmonton Calgary Winnipeg.
Toronto, Ottawa, Montreal, Halifax, those markets.
So I would say for the most part.
Still way off pre pandemic levels in a lot of that is driven by exactly what you said people are getting back offices getting back to normal work schedule. So.
Listen there's been.
Yes, I mean these results that we presented here are the face of a full January shutdown in Canada again with.
<unk> and I think that's up from time from February yourself come back online. Most restrictions came off at the end of March now you ask here backup fairly normal living for the most part in Canada.
Restaurants, sporting events et cetera, all happening, but I think you're 100% right as we fully get back over the summer into the fall assuming no other ways and assuming a Canadian government.
Sean.
Moves off of their Covid zero strategy, which I think they've done.
We're going to be we're going to have some upside here on the volume side for sure and you are seeing that a lot on the environmental services side. Obviously, we know who is going to come in with just a question of Landon.
It came with a vengeance in sort of late February and March.
Post beyond the cold shutdown in January so I think we're I think we're positioned really well here and we're pretty bullish about what that looks like obviously wed like to temper that expectation because we never know we've been I think we've said this five or six times Val.
But I think now we're on the other side of it.
We finally moved on Michael the other point on that that I'd highlight is if you think about Q1 over Q1 and Q1 'twenty one was negative three 2% volume and so here we are printing the three 1% positive X Mirth. If you think about Q2 of 2021, plus five plus five and change.
So arguably a much tougher comp there our original guide contemplate it being close to flat by virtue of that tougher comp I think for all the reasons. Patrick just said, we see upside to that number but because of the math on the comp I think it's going to be something less than what the print was in Q1.
Right back off from that side of it helpful. So if I could touch on the M&A.
21 deals you thought you'd do 25% to 30 I'm assuming of the 'twenty one.
<unk> Big so of the 300 million of revenues 200 with sprint.
And as the other 20.
And you even frame <unk> of them are really little so can you talk a little bit sort of about the sizes inside that portfolio that you've acquired.
And then where are we.
I'm imagining all the little ones are you fully integrated already in sprint maybe takes 90 days, but can you talk about the integration.
Yeah. So I think Thats a good question, it's certainly important to unpack via M&A.
If you look at the 21 deals like you said sprint large.
We will be integrated between now fully integrated between now and sort of August 1st fish.
That's the timeline, we have laid out.
Obviously certain parts of it accounting HR that perhaps moving over quicker, but fully integrated sort of by August one and then the F 15 deals that were smaller than $10 million of enterprise value right. So very small just little regional tuck ins Jeff.
Generally hauling only that tuck into our existing facility leverage our fixed cost base of transportation segment landfills.
And then the X five between 10 and 30.
But that group of 20 acquisitions will be fully integrated over the next 30 to 60 days. So it will be fully on our platform.
And just one in the normal course.
Out of the ordinary very simple spread through now nine provinces of Canada 2006 states in the U S.
So not a lot for the team to take on.
And what of the.
$300 million, how much of its U S versus Canada.
Oh I'm sorry.
I mean.
The total 300 here.
Yes.
140 of about 240 of it is in the U S.
Okay. So that.
Keeps the mix.
Shifting the mix all at all as well.
And then lastly on the RMG there are so many developers now playing in this game.
What are the chances since you've I think wisely are partnering.
But the chances you can negotiate where you put less capital up I get equal or better economics.
So.
That is certainly something thats available to us I mean as the developers are sitting on a lot of capital on the balance sheet.
So we're looking at finding ways to differentiate themselves and one way to differentiate differentiate themselves is by putting up capital.
Obviously, we have the asset which is the gas.
So they have to find a way other than just saying Hey, we know the development site to be able to move forward with that so I think youll see some of that.
We share more details over the next couple of quarters.
Reaffirming that.
$115 million to $125 million of gas in the base case, obviously, the incremental sites come on that number is going to go up.
We think internally the opportunity that it would probably go back to somewhere between $115 million to $100 million.
But we know what we're communicating today is sort of a 150 to a $1 25, which we assume you have in hand.
And that's using a fairly conservative numbers on the actual sale of the gas.
So all of that is well on track.
<unk> online and it is coming online in 2023 and 2024.
We feel very comfortable.
When we previously communicated.
There has been no changes.
Well progressed nicely over the course of the next sort of 12 to 18 months.
Okay and last one for me given the data you shared in the script.
Script.
Feels like there's about $8 million of real cost impact from fuel.
Well the fuel surcharge cover everything from this point forward and then the rest of the year you work at making up the $8 million.
Yes, so Mike.
That's right for Q1, and I think you do have a timing lag is when you look at the Spike in diesel March was the majority of it and then the pace at which you can sort of recover but when you Peel. It all back I mean, we're viewing fuel as a meaningful opportunity for GSL.
When you look at the industry the mechanisms that are in place and dry tested and true for recovering increased fuel cost they exist and we just have opportunity within our bulk to implement incremental quantum of that amongst our customer base today will probably recovering 40% to 50% and if you look at what best in class looks like it's a <unk>.
A higher number than that and then in addition to the actual fuel cost itself like managing the consumption. I mean, if you look our fuel costs I think in the P&L with sort of a mid 5% to 6% number I think we have some of our peers in the industry that that number is sub 3% and thats a function of CMG and other sort of measures that again, our opportunities available to us.
So we foresee the fuel in totality, while there may be some noise from sort of quarter to quarter. This year is ultimately to be a great tailwind for GSL as we look towards what the profitability of this business can become so yes. This year, there's a bit of a go get that we're chasing after and if prices were to stay where they are.
Today, you probably have a 25% to $35 million a hole that you would have to get through incremental open market pricing or incrementals surcharges that aren't there now we're confident in our ability to go out and execute that when we give our updated guide in Q2, we will have incremental perspective.
On what we think any holes would be but I think on the dollars per side. You are covered and then the question is how much of that margin impact can you overcome and we're feeling quite bullish about what our opportunity set looks like.
Okay. Thank you very much for taking the questions C. In Vegas next week.
Thanks, Mike.
Our next question is from Walter <unk> of RBC Capital. Your line is now please go ahead.
Thanks, very much morning, everyone. So I just wanted to come back on volume, but a little bit further.
The route.
And noted.
In the U S.
We're past the.
The reopening parts so to the point that you said, it's behind Us and Canada, It's way behind in the U S. But still volume has accelerated and I ask that to one of your peers. They mentioned that there was despite the view out there that volume for the industry is flat the larger players have an opportunity to gain share through investment in technology.
Just simply offer better service is that something you ascribed to as well can we see sustainably higher volume on a go forward basis longer term by virtue of of size in service compared to your smaller peers.
Yes.
I think youre seeing some uptake, particularly on the municipal side.
New tenders come out and municipalities have had.
Some interesting experience.
Some of the smaller player they probably haven't performed and have had labor challenges and equipment challenges. So we're seeing some opportunity certainly on that side, obviously on the C&I side Theres still recoveries to come in both Canada and the U S. I mean, I don't think were fully recovered. So yes, I think so there is some certainly some opportunity what that level is.
I don't think it really moved much.
In the models, whether that's 50 basis points. So thats, a 100 basis points I don't think it's a material needle mover, but yes, I think there is opportunity certainly for the short term here that we're going to see all.
Elevated levels on the volume side.
Okay and on the Green infrastructure partners, obviously thats.
A great opportunity for you.
Interest that your shareholders, having that partner in that venture.
How will we follow the progress of that roll up strategy is that something youll be.
Will you be updating on.
They started out of the gate now or is this something thats going to ramp toward more toward the end of the year, what would be the cadence of the progress of that rollout strategy and how will you how do you envision updating us on the success of that strategy.
Yes.
So I'd say, we'll give semiannual update on just what what's happening with the business.
Although we won't do it every quarter, but.
A brief update on a semiannual basis on an annual basis will give you the sort of full update.
Listen, there's a lot of opportunity.
And that business.
There was a lot of opportunity, where we owned it obviously, we chose to allocate capital to other.
Opportunities we have within <unk>.
Environmental services space and are solidly safety youre seeing and what the amount of dollars we're deploying.
But I think it's going to be a very favorable outcome for our shareholders.
Sure.
And.
We're starting right away.
<unk> is active we are in active dialogue.
Fixed opportunities.
And that will be and I think again all of those things that were in the pipe, we often not allocate capital to because of all the opportunities we had obviously being cognizant of leverage and other things.
<unk> dot to deploy those bonds, but now in the private vehicles will.
We will be deployed and obviously as a private company and there's different financing financing structures available to us through that.
And minimize the equity need.
Within that business, but eventually like we said we will take that business.
Our plan is to take that business and create another public company out of it so.
We put the wheels in motion already to start drafting perspective, there's a lot of things.
And.
We will go on in the normal course, Walter just to clarify a point that Patrick made while the company is private will be reported under the equity method accounting. So on a quarterly basis, there will be certain disclosure based on the materiality of that to <unk> as a whole is probably not going to give the color that folks might be looking forward to what we would contemplate what Patrick alluded to is on a semiannual basis.
<unk> provide a more robust update in one of our type investor decks. So individuals can get the information above and beyond the.
The financial statement disclosure, because well private that disclosure onto itself probably won't provide all the color that folks are looking for.
That's perfect and just a final one here for me.
You updated the guidance to reflect the kind of mark to market of the M&A activity to date.
But you didn't know what the net debt guidance for year end does that hold even with the updated M&A guidance in other words. The fact that you didn't change it is.
It does consider and contemplate the M&A pace, you've done or is that net debt also to be updated.
In the next quarter or the next or is it when you do your more formal update later on.
Also the net debt number the leverage will need to get updated to reflect the M&A recall. The guide I think said deleveraging of 50 basis points from $4 75 to four and a quarter with no incremental M&A and to the extent there was incremental M&A that would temper the pace of delevering, although the delevering.
Still capable because of the power of the free cash flow. So in light of the quantum of M&A that we've been able to achieve so early in the year I think this will be another outsized year of M&A, it looks like and so with that the <unk>.
Ending leverage level will be different than that guide that contemplated no M&A. Although we still are committed to the overall direction from delevering that we've communicated so again by the time, we get to Q2, when we speak we'll have better visibility on how the year as a whole plays out with some of those base business considerations and at that time, we will.
To refresh our views as to where we think year end leverage for them.
Got it okay. That's all my questions. Thanks very much.
Thanks.
Our next question is from Kevin Chiang with CIBC. Your line is now open. Please go ahead.
Alright. Thank you. Thank you for taking my question.
I just have a question on pricing and more specifically.
When you acquire you make 21 acquisitions, where we acquire these businesses.
What's the delta between the pricing, we're getting in the market versus maybe what you'd find acceptable.
Are you finding that the pricing similar to what you would be doing is there.
A negative delta there and its been if it is the ladder how quickly can you replace that book so that.
Margins are low return on invested capital because that's where you want it to be.
Sure.
Yes.
It's more the larger ones.
It's obviously bifurcated by customer base.
What the contract structure of the contracts they have but.
What history tells us that we felt malls, where the lion's share of the smaller ones, particularly.
These call. It 20 acquisitions that we did between $1 million and $30 million of enterprise value typically don't have.
<unk> fuel escalators that work properly typically arent don't have proper environmental surcharges, so theres definitely.
Good pricing opportunity within those books of business and with our.
Our model obviously.
Integrating means within 30 days to close and putting them on our platform that pricing will effectively take place within the first 60 days of the acquisition. So I mean, obviously, it's subject to the contract but generally.
That's what we're seeing today that there is a very large pricing opportunity within those books.
Just based on <unk>.
Charge levels to where they should be.
Okay.
My follow on question.
Talked about kind of the opportunity there.
And kind of we said some of the surcharge programs.
Where do you see the whole primarily from recent deals you've made.
To the extent that those small players.
Sure.
Proactively.
In making these surcharges is that when we went into the opportunity or the parts of your legacy book that you think we can also clean up here just given the inflationary environment.
Kevin it's across both of those buckets I mean, we were talking pre COVID-19 about the latent pricing opportunity in the legacy book and a big component of that was tied to surcharge program and then as Patrick just alluded to some of the recent M&A.
While the <unk> books may be priced well many don't have the surcharges at the levels to which is more sort of customary in the industry. So I mean, when you look at what the art of the possible is here I think there's some peers that are well established in this that covered dollar for dollar or maybe even more in certain respects and we're probably in a position today, where we.
We're covering $45.50 on the dollar and with the timing lag. So I think theres, a real opportunity as we move forward to not reinvent the wheel, but simply just to get to the place where a lot of our peers already are in.
I think thats a.
Consideration when you think about where the path for us as we go forward versus those that perhaps are already optimized.
<unk> ability in this regard.
Okay. That's helpful. And then just last one for me and I know you're not going to be.
Oh, you will update us on the second quarter, but can you remind us again when that took place.
The base outlook for 2022.
You are obviously talking about on pricing, but can you remind us what you had assumed in terms of where the underlying recovery would be I guess, maybe this is more of a Canadian question for more challenging times back in January and February .
Are we through that.
This level of recovery assumption would have been as we sit here today.
As a way to level set I guess, what you would've assumed in terms of I guess, what because it looks like wholesale homochrome global.
Global capabilities.
First off I could feel this will meaningfully we won't get that base business.
Yes, so Kevin I think.
Q1 played out better than anticipated from a volume perspective in Canada and that was most prevalent in environmental services segment, and we are delighted to see that recovery starting to materialize I think it was Michael often earlier, making the comment well Canada now. It's may is it summer should we therefore continue to sort of drag our feet until September and.
That's the sort of one unknown that we have because as much as we had this momentum and clearly last night of the hockey game people are out and enjoying the freedom. Once again is theyre going to continue to be just a delayed draw because we're finding the entering into some.
I think going back to my comment about desire to reserve our update timing when we speak in late July .
The next couple of months will tell do you think it is something better than what the guide was based on what we've seen thus far and with the next couple of months look like how much that upside may be.
Remains to be seen what I would say for Q2, specifically and I alluded to this earlier originally because of the strength of Q2 2021. We thought of this Q2 is sort of flattish. We're now I think there's a path for Q2 to be sort of plus 100 125 basis points on volume so.
That's the near term, but how it plays out for the year as a whole.
I think Joe we're asking to wait until we come back in July and we'll have better visibility at that time.
So feeling pretty bullish about what the rest of.
2022 looks like from all perspective.
Thank you.
A favorable outcome given the trends youre seeing today.
Obviously aggressively.
The up on our strong local.
Congrats on the.
Q1, then.
Yes.
Thank you Kevin.
Our next question.
And the crowd of Raymond James Your line is now open. Please go ahead.
Hey, good morning, guys.
Okay.
Hey.
Hey, just want to make sure that I've got it so number one look to be crystal clear only 40% of your book is a surcharge mechanism on it today.
Patrick alluded to this other than sometimes what happens when you have a new sort of customer that's coming on that is no surcharge at all we'll introduce a surcharge, but it starts at a fixed amount of low fixed amount of our cover and isn't doesn't properly have the flex mechanism. So earlier days and all through 2021.
Youll side, we were reporting pricing surcharges together as a number because much of that we were going out and getting that initial base level surcharge was effectively just like a base pie, but we now need to do and I give credit to Greg Thorsten and the team that are actively doing this is now pivoting those to the proper flex model that you recover incremental as the price moves so the starting point is getting.
Something in there and then you move from there. So when you look at it all today, we're probably we're covering 45 on the dollar by virtue of those in the solid waste business alone.
Rental services is a bit of a natural sort of hedge but.
That's where the opportunity set lies is to now take a bunch of those surcharges that exist and get them to the proper sort of.
Why does that pivot in response to market pricing.
Right.
Wildly oversimplify it means it's a pretty easy quick Nick when you. This is a very common practice.
<unk>.
Pretty quickly.
Yes.
Yes.
I think mildly oversimplify, but yes, thats why when I am talking about the opportunity here, it's not like we need to go out and do something as you said this is a common practice.
Let's take some coordination to get that all sort of in place and so that is what the other but I think the pace at which we'll be able to pivot and recover incremental dollars.
It will be impressive to boats and that's why let's see how we can.
Execute over the next couple of months and then hopefully come back with some good news when you speaker.
Next couple of months.
Okay.
And then.
I just want to make sure that I have it all here. So number one that transaction has only clinics that happened in April you got 225 million Canadian.
And confusion and you retain about a 45%.
Stake in the new entity and all that.
Correct.
Okay.
No.
Now did you guys see is fully funded.
The deal is closed what is the pro forma EBIT and more importantly, what is the pro forma leverage so that we can kind of ascribed value bank based on whatever multiple that we think is appropriate et cetera et cetera.
Yes sure.
So round numbers.
$190 million of EBITDA.
Pro forma basis for 2022.
Pro forma leverage on the business.
Hi.
Roughly.
Sure.
Okay.
Yes, I would say mid fours.
Okay.
Okay.
<unk> of EBITDA.
Leverage right.
Hello, roughly roughly.
850 $900 million of debt today, okay.
Okay, Okay, alright, that's extremely helpful.
And then can you just kind of give the high level.
Tyler if you look at it.
Look at the industry.
I think all those things trading anywhere between sort of.
10, and 14 times, depending on what the asset isn't where it is.
This business on a pro forma basis is will be the gold standard in terms of industry, leading margin profile industry, leading free cash flow profile for that business.
<unk>.
Mid to high teens margin business.
When the industry is like.
And the 13% margins.
And there is a significant round of M&A opportunity, it's going to come behind that.
Okay Alright.
We will be.
As time goes on so I'll ask me here.
You gave the high level pieces you.
The solid waste margin walks with 31% to 29 names is thinking about things like fuel M&A commodities et cetera.
Yes.
Our work this quarter.
As a literally unique just based on what I would call. The anomalous margin profile of the prior year period and for the reasons I articulated in the prepared notes 30, 31% was arguably 100 150 basis points higher than it ought to be when you think about the normal seasonality cadence and that was a whole confluence of factors that.
Benefited the margin profile of the Q1 2021. So if you think about it in the context that there is this sort of roughly 150 basis points of this anomaly component. You then walk through and you have a 100 105 basis point drag from fuel pricing.
Offsetting that by commodities to the tune of sort of roughly 85 basis points and you have sort of I think we were saying 30 basis point drag from acquisitions and so if you just look at those three pieces. You then are left with the Delta of what I'd call. The normal course underlying margin expansion from the overall operating leverage and pricing strategy.
Of the business.
Yes.
So at a core level margins.
Yes.
Sure.
Yes, and I think.
In this inflationary environment to be able to do that is a real Testament is a testament to the industry is again like I know everyone's reporting and there might be some slight sort of pressure, but overall I think the testament of the industry and the pricing available to more than cover the cost inflation driving margins. There may be a temporary timing difference in a quarter when fuel runs.
Up in the last 30 days to Sky high levels.
When you Peel it all back the operating model and the operating Leverages their driving underlying margin expansion by the strength and quality of pricing thats available.
Okay perfect.
Sure.
Thanks.
Our next question is from Jerry Revich of Goldman Sachs. Your line is now open. Please go ahead.
Yes, hi, good morning, everyone.
Hi, Jerry.
Thanks.
I'm wondering if you could just expand on your comments on the landfill gas investments being ahead of plan. That's nice to hear I think you had spoke about one plant starting up in the first quarter of 2003 and other one in the second quarter, what's the updated timeline how quickly do we get to the full earnings run rate.
In those operations once maybe commenced.
Yes, so Jay I think.
Our original guidance contemplated that we said the capital deployment would be mostly in 2023 and it looks like the pace at which these guys are moving there'll be more opportunity to deploy that capital earlier in 2022. So if there was originally to be 2000 $25 million that number could be upwards of 75 to 100 within this year now that <unk>.
Incremental capex with the incremental 90 million of proceeds of disposal. So covered from a net capex number for this year. So no change there, but would just be sort of accelerating that path. So your comment about the first projects coming online in the first half of 2023 that remains accurate where we sit today now.
Suggested that everyone just think about that as coming online late 2023, just so we build in a little bit of buffer, but I think where we sit there is a path for that to be earlier in the year and will therefore enjoy the benefit of that free cash flow within 2023 as opposed to it just being a 2024 number yes, what we're saying.
Commissioning our first few.
We obviously targeted the bedroom.
FM site today.
To come online for our civils.
And those sort of halted online.
April and then.
From that perspective, there was like a three month commissioning.
<unk> frame that gets them.
Fully sort of optimized in their models by sort of.
Mid to late June .
Okay.
And then can you update us with your thoughts on spot market versus contract rates spoke about having some European offtake agreements in the mid <unk>, which was nice to hear I'm wondering how the.
Take markets develop.
<unk>.
It's been a nice move in the spot market for both region Henry hub gas prices.
We're making investment decisions.
Thoughts to what you think versus terminal.
Yeah.
We're not an energy company. So we're still of the mindset that we are going to enter into some long term offtake agreement.
We're being a little bit patient at the moment, just given the material moves in the voluntary market and what I mean by the voluntary market is really just sort of large corporations that are focused on ESG type initiatives that are looking to significantly reduce their carbon footprint.
So.
We're in negotiations and talks with a lot of the voluntary market.
We will flow to serve them out.
So it will have some volatility with a range but.
Our model is still internally a $60 <unk>.
70% of the revenue stream coming out of those facilities. So we don't get it.
At quarter to quarter volatility have to explain to investors about why.
Uh huh.
Cash flow estimates et cetera changed based on sort of where the rigs are I mean, it's a material amount of money.
Like I said, we said once the initial ones theres, a $115 million to $125 million.
The incremental sort of free cash flow. The reality is when you look at all the sites combined that number could global easily 150 to 200, that's a material amount of money.
From our perspective, you buy this from the stability of the industry not us to be energy traders.
We plan on locking in a significant amount of that cash in terms of.
Long term contracts.
Patrick is that market.
Developing.
Thank you.
Okay.
The early stages.
Of ramping at least people's willingness to take long term deals.
Comment on how that market is developing.
Yes, the market.
And then change so much even in the last eight to nine months since we started talking about it right. So.
I think from our perspective, the rates have moved up which they shut off obviously as rents moved up when you look at what the range of forecast for next year that is forecast to come down a bit but that doesn't change much. It's really just again protecting yourself on the downside and sharing in some of the upside so the way the new EU longer term agreement.
We will have a floor price, but then we will share the upside beyond.
A certain price and thats whats being negotiated.
Today.
Super and then just to shift gears right now with your accounting system gives us really good visibility on inflation in real time basis I'm wondering if you can comment on that.
Inflation cadence.
Year to date.
Any differences between U S and Canada.
Any comments.
Potential.
Moderation based on what you're hearing from your purchases.
Outside of diesel.
Yes, I mean, obviously the diesel component Jerry is really skewed everyone in sort of Q1, but if you take that out of the mix I mean at the end of the day labor is really what's sort of driving and as we've said throughout last year and remains true today, we've seen it less in Canada versus U S. As much as the secondary market versus the primary market right in the dense urban edge.
Areas, we've seen greater wage inflation that we have in our sort of secondary markets and I think thats tempered the impact on our business versus what it otherwise may have been so as expected Q1 was a high number I think all in it was low sixes in terms of the wage inflation, but that is based on the.
<unk> comp of Q1, 2021, I think more telling is the rate of acceleration sequentially from the prior quarter, which was sub 50 basis points right. So if you look throughout 2021 quarter over quarter, you had two to 300 basis point increases as we were feeling the pinch and now we're starting to lap all of that so I think.
Q1 was the peak Q2 will still be elevated but as you get into Q3 and beyond I think at the current pace youre going to see those sequential decreases significantly reduce and therefore be on a path where we could end the year were probably a little bit higher if the original guide for the year were sort of four low fours.
We have a little bit higher than that but youre going to see the pricing respond to again more than cover.
I appreciate the discussion thanks.
Okay.
Sure.
Sure.
Our next question is from Hamzah <unk> of Jefferies. Your line is now open. Please go ahead.
Hi, this is <unk> filling in for Hamzah.
Could you just comment on specifically how much of your book of business, the CPI index and sort of how those contracts are structured and then what CPI book is running.
Versus open market.
Yes so.
About 1 billion, one 1 billion to of the book of business in terms of revenue is tied to CPI linked that spread across.
800, 900 contracts most of which are in residential collection, but you also have other post collection one linked to that.
The resets of that book of business happened, roughly 40%, 45% in Q1, 25%, 30% in Q3, and then the balance is sort of spread between Q2 and Q4.
The reset mechanisms can be based at point in time many of them are based on reading some time before the contract reset. So a January one pricing may actually be based on what the levels were at June 30 of the prior year for example, and that's often set up that way so municipalities have visibility into what their sort of.
Coming budgets look like do you think about that book normally running at a sort of blended with a 2% number youre seeing that book today more of that sort of 4% to 5% number certain contracts are now resetting that are tied to meaningful components on diesel at much higher rates than that but a lot of it is still lagging the curve.
Inflationary environment. So I think in reality the real benefit on that book of business will only be realized in earnest by 2023.
We're happy with where its going there is still a lag, but we just view that as opportunity and upside as we go forward from here.
Okay. That's helpful. And then could you just comment a bit on labor general, but like sort of what youre seeing there I guess.
Assumption on labor inflation for the year.
Yes, so the labor turnover in Q1, you got to remember that as meaningful seasonality component of what we're seeing in versus the comps of last year. There has been meaningful improvements for sure. So I think Q2 and Q3 is really where the story will be told I think the material friction that was being experienced in the.
The peak of last year has definitely subsided, we're going into the busy season with a much better turnover rate and a complement of drivers that we think.
Physicians, thus far better for success and what we experienced in the second half of last year.
But as we've said, it's really sort of made through July that will really sort of tell the tale. So we're feeling good but when we come back and speak to you at the end of Q2 sort of a better perspective on exactly how it's playing out on the labor inflation rate I think I just provided that color on the previous question.
Got it thank you.
Thank you.
Okay.
Yes.
Yes.
We have no further questions I'll hand back to our head so that closing remark.
Yes.
Yes.
Well. Thank you everyone for joining the call I'm looking forward to seeing everybody at Investor Day in New York and for those not attending.
Forward to speaking to you after our second quarter.
Thanks very much for joining.
This concludes today's call. Thank you for joining us.