Q2 2022 GFL Environmental Inc Earnings Call
Second quarter in a row with double digit growth in both our solid waste and environmental services segments. The six 4% solid waste price in the first quarter accelerated to seven 3% in the second quarter as we continue to flex our pricing strategies in response to the record breaking cost inflation environment.
We also recognized one 9% solid waste revenue growth from our surcharges.
Our efforts in this area have begun to drive meaningful contribution.
We've said before that we see a lot of opportunity to increase the dollar as we recover from surcharges and we are confident in our ability to continue to optimize the book of business using this lever.
With the substantial price performance in the first half of the year, we expect to significantly exceed the high end of our revenue guidance for the year and Luke will speak to our revised guidance. It is important to remember that this year's price is being achieved even with the delayed impact of the meaningful price increases in our CPI linked book of business.
The recovery of our current cost inflation from those contracts will be realized for the most part only in 2023 and 2024.
We believe this creates a highly compelling backdrop for our financial performance in 2023 and beyond.
Volume growth was two 8% in Q2, excluding onetime Merck volumes from the prior year that we knew were nonrecurring.
Volume growth in the second quarter of 2021, excluding <unk> volumes was five 1%, making this quarter's performance more impressive when considering the tough comparison.
As we expected volumes in our Canadian business saw the benefit from the continued reopening activities.
Our environmental services segment realized over 20% organic growth in Q2, reflecting the continued re engagement of our customer base that started in Q1.
The increase was well ahead of expectations was driven by our strategic network dedicated team and overall expanded service capabilities from the integration of the <unk> acquisition.
Higher price for our collective used motor oil that acts as a natural hedge against a rising energy prices also contributed to the revenue growth during the quarter.
Adjusted EBITDA margin was 26, 5% for the quarter, and we think Thats a fantastic outcome, considering the cost headwinds at play.
We knew there would be margin pressure in the first half of the year, resulting from labor and other cost increases we saw in the back half of 2021, we also knew that the ramping up of travel and other costs post pandemic would put pressure on margins.
But we had not anticipated the extent of the rising fuel costs and how the labor shortages and supply chain disruptions would continue.
This quarter saw all time high unit rates for fuel and labor, but also the flow through effect to more overtime hours and reliance on higher cost third party repairs and maintenance higher third party transportation costs and increased truck rental costs from delays in delivery of spare parts of new trucks.
We responded to those unprecedented cost pressures with nearly 10% pricing and surcharges the highest in our history.
We also grew adjusted EBITDA by 34% over the comparable prior period.
While the magnitude of this cost recovery drove margin compression in the quarter.
Impacts are essentially all from fuel prices, which we see as temporary and strongly believe that our performance in the quarter. Once again demonstrates the resilience of our business model history suggests that the unit rate cost inflation will eventually moderate and higher costs, driven by labor shortages and supply chain disruptions will eventually subside.
Finally, our ability to recover our energy costs will continue to improve when that happens, we see significant opportunities for accelerated margin expansion through pricing and improved asset utilization.
We also continued to execute on our M&A strategy, completing 28 acquisitions year to date, representing approximately $360 million of incremental annualized revenue. The acquisitions. We completed in Q2 other than sprint ways were all small tuck ins that continue to densify our footprint the M&A environment remains attractive in our <unk>.
Pipeline is deep and continues to grow through accretive opportunities.
Our RMG, we now have five projects in active development.
Seven projects under negotiation and we have issued an RFP for an additional mine sites.
We deployed approximately $30 million of capital into these projects in the first half of the year and expect to invest the same in the second half.
We remain highly confident that we will see these projects begin to generate cash flow in 2023 and continue to ramp up through 2024 and beyond.
As we said when we first told you about the LNG opportunity in December of 2021, we modeled our expected return on these investments at significant discount to the prevailing RIN values as a result, our quantification of the opportunity is still conservative and despite the recent softening in the RIN pricing.
On ESG, we took delivery of our first fully electric side loader. This month that we will use to service our residential contract in Squamish British Columbia.
As highlighted at our Investor day in May we will deploy 30 to 40 electric vehicles by 2025 to service the reasonably award city of Gainesville contract.
These vehicle deployments are part of the plan to increase our annual fleet replacements with CMG or electric vehicles with an overall share short term goal of 50% conversion.
We are also on track to issue our full set of sustainability related goals in Q4 of this year.
This will include our goals to reduce greenhouse gas emissions from our fleet and our landfills and to increase the resource recovery services, we offer to our customers I will now pass the call back over to Luke who will walk us through the details of the financial results and then I'll share some closing perspectives before we wrap up.
Thanks, Patrick before I start I once again want to remind everyone that we've excluded the contribution of the now divested GFS infrastructure division from our results in all period over period comparisons that I referenced on a like for like basis, unless I say otherwise.
<unk> organic revenue growth accelerated nearly 210 basis points from Q1 to 12, 4% in Q2, driven by seven 3% price, one 9% surcharges <unk>, 8% from commodity prices and two 4% from volume or two 8% volume when excluding the nonrecurring work volumes from the prior period.
While volume was broadly in line with our original guide price and surcharges significantly exceeded our base guide as we revisit our pricing strategies in order to recover the unprecedented levels of fuel prices and cost inflation in the business.
You will note that we broke out surcharges for the first time this quarter and are reporting now that we have a substantial amount of recovery happening each month previously the relatively immaterial amount of fuel costs recovered are being presented in price and volume going forward, we'll be disclosing the amount separately as we have done this quarter.
Variable fuel surcharges recovered just under 50% of the direct fuel price increases we saw this quarter as mentioned the industry has demonstrated with an effective fuel cost recovery program looks like and we see a clear path over the near term to harmonize our practices with industry norms.
To mitigate our current fuel and other cost recovery gap, we can pursue incremental open market pricing and realized seven 3% price in the quarter, a 90 basis point sequential increase over Q1, and approximately 175 basis points better than the original plan.
Two 8% volume growth was a continuation of the positive start that we saw in Q1 as with a strong post collection volumes across most geographies volte.
Volume growth was the strongest in Canada as expected and particularly in our environmental services segment, where we grew revenue over 20% organically on strong volume and higher used motor oil selling prices. The momentum we saw in this segment in the first quarter carried on into the second quarter reinforcing our positive outlook for this segment for not only 2020.
Two but also the years that follow.
Contribution from M&A was 24% also ahead of plan and largely the result of the outperformance of the tariff your business.
Adjusted EBIT margins were 29, 4% for solid waste, 22% for environmental services and 26, 5% for the company as a whole.
As Patrick mentioned, the unexpected severity and duration of rising fuel prices, coupled with additional costs associated with labor shortages and supply chain disruptions more than offset our pricing strategies and yielded margin 50 to 75 basis points lower than our original plan of low 20 sevens or 130 basis points lower than the prior year keep in.
As Patrick noted our pricing to date has been achieved largely in the open market and not in our CPI linked book of business, which we expect to see the benefits of in 2023.
Fuel price was the single biggest impact increasing direct energy costs by nearly $45 million and reducing margin by over 250 basis points on a gross basis, partially offsetting this decrease was just over $20 million from fuel surcharges and just over $10 million from the combined impact of higher selling prices for used motor oil.
Oil and the benefit of financial fuel hedges, resulting in a net margin impact of 100, approximately 100 basis points from direct fuel alone impacts of indirect fuel costs realized through higher third party transportation costs further impacted margins.
Labor related costs also had a significant impact in the quarter, while the approximately 6% labor unit rate increase over the prior period was broadly in line with expectations persisting tightness in labor markets drove overtime costs and reliance on third party technicians for R&M higher than anticipated.
Supply chain delays, which impacted spare part in new truck deliveries also resulted in higher operating costs and higher third party truck rental costs.
We also saw increases in the rates charged by our third party transportation suppliers, which is essentially an indirect impact from higher fuel and labor prices.
We responded to this perfect storm of cost headwinds through incremental pricing surcharges until we ramp up our fuel surcharge programs, we need to use a portion of our core pricing to build the fuel recovery shortfall limiting the pricing available to cover the multitude of other atypical cost increases we are currently facing.
While this strategy has allowed us to recover the majority of our EBIT dollars. There is margin pressure from the pass through nature of the cost recovery as we saw this quarter and we now expect for the year as a whole. However, we view the current cost inflation dynamic is temporary.
Annual unit rate increases may not go back to previous lows, we expect them to moderate from current levels and the labor market supply chain related costs will likely subside.
Anticipated cost inflation relief together with our continued focus and discipline on our pricing strategies sets us up to continue with our organic margin expansion goals as we move into 2023.
Adjusted free cash flow was $102 million compared to $162 million in the prior year period. The current period included nearly $150 million of Capex included a $20 million Capex for investment in LNG joint ventures, compared to a net $75 million of Capex in the comparable period, which included the benefit of $65 million proceeds in.
Net sales.
While we are treating our capital contributions the RMG projects as a capex like item in free cash flow, we've separately broken them out so that results can be compared on a like for like basis also as we said on our last call the $224 million in cash proceeds received from the spin off of our infrastructure business have been reinvested into M&A and are therefore not in.
Who did within adjusted free cash flow as an offset to capex.
In addition to the incremental Capex realized in the current quarter. The current period included an $85 million investment in net working capital substantially all of which was tied to the revenue growth within the period and should normalize by year and the prior year comparable period included a $4 million adjusted.
Adjusted investment in net working capital.
The variability in adjusted free cash flow that can result from Capex timing and working capital movements are why we do not guide to a free cash flow number on a quarterly basis, but rather focus on the target for the year as a whole.
In terms of M&A year to date, we've deployed approximately $965 million.
To acquire approximately $365 million in annualized revenue. The 2022 in your revenue contribution of which is estimated at about $215 million net of divestitures.
Net leverage at quarter end was high for us in line with what we had communicated on our last call. We still expect to de lever by at the end of the year, although at a more temporary basis on account of M&A in the cost inflation headwinds we're seeing.
In terms of our outlook, we are increasing our guidance for fiscal 2022 for the second time. This year at the high end of the ranges revenue is expected to be $6 $4 75 billion. Adjusted EBIT is expected to be $1 73 billion and adjusted free cash flow is expected to be $680 million at.
At the revenue line the increased revenue and guidance includes $215 million from net new M&A $55 million from FX rates $100 million outperformance for our environmental services segment in 2021, rollover M&A at $180 million from incremental price increases and surcharges.
This represents a $550 million or nearly 1000 basis point increase over our original guidance.
Offsetting these increases are approximately $220 million of incremental costs, roughly 50% of which is direct fuel pricing and thats really the summary fuel and other cost increases are increasing $220 million, we'll recover the majority of the dollars, but in doing so we will see temporary margin pressure.
We are using this period to accelerate our pricing and surcharge strategies, which we strongly believe will position us for accelerated margin expansion once the broad based cost inflation subsides.
In terms of adjusted free cash flow included in the guidance is now $400 million of cash interest, which is $60 million increase over our original guidance $40 million of which is attributable to higher interest rates on our floating rate debt.
The fact that we're able to raise our guidance despite the unprecedented pace of interest rate increases.
As a testament to the opportunity for free cash flow operating leverage in our business.
Included in adjusted free cash flow reconciliations approximately $650 million of net capex, which is inclusive of our anticipated investments in R&D joint ventures, and proceeds on dispositions as well as the normalizing timing difference adjustment carried forward from 2021 as always the current guidance assumes no further M&A in the current year and any.
<unk> from transactions that are completed will be incremental to what we've laid out currently.
With that I will turn the call back over to Patrick.
Thanks Luke.
When we went public in March of 2020, none of US knew that we were at the start of an unprecedented personal and economic disruptions brought on by the global pandemic and.
In hindsight that period represented the first great data point for us to demonstrate the capabilities of our business to respond to those disruption and the resilience of our growth profile.
To me the current environment is no different we hope this represents the final exit from the pandemic and this quarter's results demonstrate that our business continues to flex and respond to the challenges we face as we always have.
System with historical trends the current noise around temporary margin impact will fade.
I have every confidence that we will emerge from these challenging times, even stronger and further demonstrates the quality and resilience of our business and the commitment of our amazing employees that come to work every day and find ways to make our business even better.
As we continue to pull all levers that we have at our disposal to drive the growth of this great business that we built together I have never been more optimistic about our future I will now turn the call over to the operator to open the line for Q&A.
Thank you we will now start the Q&A session.
The next to ask a question. Please press star one on your kind of thank you Pat.
Your question. Please press touchy when asking your question. Please ensure that your line is on mute.
Yes.
And our first question comes from Bakken at RBC Capital markets. Please go ahead. Your line is open.
Hi. This is Walter May also may be muted.
Hello, I'm, sorry can you hear me.
Hey, this is Luke.
No.
Okay. So our question is hi Lewis.
Hi, Patrick.
On your pace for acquisitions.
At your Investor Day, you indicated a starting point for 2022 leverage.
Four five times and then it would come down to around three two by 2025.
Leverage ticked up to just under five five turns at the end of this quarter, but given the pace of acquisitions in your pipeline for the year.
Do you expect your starting point at the end of this year to be above five times or do you see leverage ending the year closer to four five times as you were contemplating at the Investor day.
Hey, Louis this is Luke closely responding thanks for the question Yeah. So the Investor day, we laid out multiple scenarios of what it could look like depending on varying levels of M&A as you think about how our leverage cadence goes through the year Q2 is the natural peak just because of the way role.
Run rate adjustments roll off and so even at the time when we did that investor presentation. It was expected that the Q2 number would peak in the high fours as it's done.
Ultimately, where we end the end of the year will be digitally how much more M&A what happens in the back half performance of the business and FX right. So that the bridge. We had given there was the cause of that original guide as you see in this guide now we're talking about incremental 130 $140 million of fuel costs that we're contending with so I think you've heard our.
Get into Delevering, and you've seen the math demonstrating the businesses capabilities to Delever I think with the pace of continued M&A in the current environment the pace might be a little bit slower I think directionally, what youre going to see is that continued trajectory and then the power the deleveraging accelerating as the business moves forward through 2023 and beyond.
So the short answer there is no path that we're going to be levered in the fives.
No.
It steps down from here I mean, I think that was your.
The question is this.
This is the peak and it will step down from here, obviously that will move a little bit depending on what M&A is but the M&A contribution doesn't move leverage that much at this point given the relative contribution size of the M&A we're contemplating.
Makes sense thanks, guys.
Okay.
Thank you for your question will Lewis.
Our next question comes from Michael.
I'm, Michael Hoffman of Stifel. Please go ahead.
Hey, Patrick Luke.
I've got a couple first one on price.
I think it's really important to draw out the power of what.
The forward price could look like and I'm not asking for guidance.
But for year, one and then seven and this quarter I was just presume youre going to be somewhere between 657% in the second half of the year.
So you're starting next year 657 is the way to think about it.
Okay.
And Thats clearly an up in an internal cost inflation can be down.
I mean, even if it's only down marginally it's still down so it's creating operating leverage I think can we can you frame the power of that for everybody. So they just appreciate it's not in models right now.
And again youre not guiding for 'twenty, three but nobody is factored in.
This price is going.
Yes, Michael its Luc speaking I think thats exactly right.
At or above seven level today, the back half of the year is going to be strong and I think the numbers you cited a directionally correct, where things were going to end up and really what youre seeing is that recovering the cost inflation today right because of that because of these peaks, we've had but that does moderate and as you move into 2023, if you retain.
That level of price alone.
Compared to a more moderate so the comps on the cost side, there is meaningful expansion opportunity that Additionally, what youre doing today as before the CPI related book of business really.
Receives its full price increase which is really going to happen in 2023 and into 2024, So if youre achieving 7% number today with your CPI linked still in the sort of low single digits better than historical but still not where it needs to be you think about what could happen is that starts ramping up sort of five six or better.
There is a meaningful price tailwind as well, so I think youre thinking about it exactly right in.
Our accurate that the current forward forecasts don't contemplate a power of that price.
Okay, and then just to follow through in your revised guidance. There is $40 million of real cost because of inflation on fuel offset all the other cost for price.
Will you be at a run rate of covering that $40 million by the close of the year, so that going into 'twenty three fuel stay flat.
You'll you'll make that up through the surcharge.
So two things in there Michael first of all the $40 million of whole I just want to articulate and highlight is our direct fuel costs alone. As you are aware a bunch of our third party cost increases that we're seeing are actually indirect fuel. So if you were to contemplate that as well our fuel related.
Got is greater than 40, so just wanted to sort of clarify that but to your point look Greg and mark and the team.
Actively at work and getting the fuel surcharge programs to where they're supposed to be and I think the results in the quarter a phenomenon right. If you look at the rate of change and how quickly they're ramping that we said it was going to take originally 18 months to get that fully baked.
I think there's a path to doing that faster than that and the guys are aware of the urgency now but we also have in addition, as excess open market pricing, that's helping to cover that sort of if you look at so while we're going to need the second half of the year to play out before we can actually articulate what 2023 will look like exactly I think theres a real path that.
By that point, when we talked about 2023, we have all that covered and then some and therefore have the opportunity for returning to our margin expansion path from price in excess of cost.
Okay.
I'm not trying to belabor. This I just want to make sure I and everyone else here clearly you shared with US $2 20 of headwinds 180 is offset with price if I break the $221 30 as direct fuel 90 of surcharge. So theres. The 40 <unk> 90 of other which includes the third party.
And everything else and it's offset by 90%, so you're making up the indirect already it's the direct I've got to catch up on.
Correct.
Okay, Alright, I just wanted to make sure that everybody else understands.
Covered through open market pricing everything else thats related to inflation, except direct fuel cost at this point okay.
Yes.
<unk> now holds contextualized, but it's not just the unit rate inflation alright.
The actual unit rate inflation today.
Is being more than covered it's all of these ancillary costs as well that you are feeling from the labor shortage in the supply chain disruptions those on top of this peak unit rate inflation together are what create.
Creating incremental cost headwind and I think that's an important piece because we strongly believe those subside.
Also don't forget a lot of the pain were wearing on the non recovery on the fuel stuff is coming from the residential book of business right. So.
Again, as Luc said, the lion's share of those big increases we get come in 2023 and into early 2024. So.
As you can all be recovered and more and as the as.
Those inflationary costs are.
When you sort of horizontal instead of picking up there's going to be a meaningful margin expansion that come when you get those significant CPI adjustments on those revenue contracts.
No.
We're very confident in what that looks like in 2023 and 2024.
Got it.
You made the comment I was going to ask you.
You are seeing all of these things, peaking and starting to settle or.
Trend slightly lower already.
So you're you're in a position to be able to now catch and exceeded.
Posed to chase it.
Yes.
On the call that this is the peak.
Or repeat it.
Certainly.
We thought Q3, and Q4 of 2021, where we put through meaningful.
Wage increases et cetera.
No one forecasted the supply chain disruptions that came from the war with Russia, Ukraine, and just what that did to a whole bunch of.
Different parts of our business and then obviously what it into fuel.
But I think it's remarkable what the industry is that forget GSL for a second I mean, the industry has done and how fast the industry has reacted.
It was a testament to the industry and the discipline of the industry. Today. So this is a different business.
And industry than it was sort of 10 years ago, and I think everyone's sort of reacting in the way they work and how long we're getting rich from it we're just covering our cost.
And.
Again, given the ticket size for our customer this represents sub 1% of their sort of P&L as well so.
Generally it's a half a percent so I think they understand what it is in this environment. They want to ensure that their waste is being picked up.
And this is what we need to happen so.
I think yes.
If you look on the wage inflation side, yes that subside now it's finding the right driver putting them in the right.
Obviously steel prices et cetera are pretty volatile equipment.
Supply chain issues continue to slowly resolve themselves.
Any major bumps, we were going to get from our third party.
Providers, whether that long haul trucking out of our transfers et cetera.
Again more on that on the chain in the first half of this year. So again.
All of those are.
It started to go sideways not continuing to escalate upward so.
All of those point to very good signs for what.
2023, and 2024 looks like.
Okay last one for me.
On the leverage.
Based on what December 31, 2021 leverage was will your leverage on December 31, 2020 to be less regardless of what the number is.
It will be less than the year end 'twenty one.
Yes.
Okay.
Thanks.
Thanks, Michael.
Thank you for your question Michael.
Next question comes from Kevin Chiang CIBC. Please go ahead.
Alright.
Good morning, everybody.
Maybe just ask the question Michael.
Going through with some of the math.
If we see a little bit of.
Deflation hopefully replacing people now.
Some of the catch upon CPL prices coal prices all give us.
Program.
R&D picking a little bit into next year, which should be.
Margin accretive if I kind of roll back six months I think.
Unfortunately, what.
When we thought about this year, maybe being about a 28% margin business.
Okay.
The divestitures.
You made.
You can even get close to that in 2023.
No.
There's still a lot of uncertainty with where the economy is let's say things kind of broadly, but where we hope.
Is that kind of stuff all possible, what youre guiding to in 2022 from a margin perspective.
Yeah, Kevin It's look I don't want to get into the 2023 Guy, but the short answer is yes, I mean I think.
I think it's important to step back and contextualize, what the business is done.
Public now 2019, it was a mid <unk> margin business, we're still talking about this year. Despite this unprecedented inflation being sort of mid 26 days.
200 basis point increase over this very uncertain time now a portion of that is the mix and the result of our sort of portfolio rationalization program. So short if you take that out but then if we just look at solid individually I mean solid in 2019 with a mid <unk> margin business. That's now going to go to this year I think we're saying that the guide here.
Sort of low <unk> mid <unk>, another 200 basis point increase in there. So I highlight that because I think our strategies are working our pricing is working and our opportunity for outsized margin expansion is a combination of price plus improved asset utilization and just sort of self help is clearly there what we have this year.
As solely a fuel related temporary impact so I don't think.
The rails our longer term plans I think it is a temporary impact that for all the reasons, we were saying about improving the surcharge recovery. In addition to CPI catching up you have a path to <unk>.
Get back onto that track, so I'm not going to sit today and say exactly what 2023 looks like but I don't think anything has changed in our long term outlook and in fact, I think emerging from this period our opportunity for annual margin expansion will be even greater than it was before because of how this has accelerated some of the program.
That we were previously planning on undertaking.
That's good.
Second one for me.
Just wondering.
We will look at M&A changed at all given the current environment.
Whether it's.
The impact of inflation on the businesses Youre buying how they've been price thing maybe that's been a little more challenge in terms of they believe that corporate costs are going to want to go out and get it.
<unk> may not be.
Something you want to get into.
Global sources is just.
Wondering as you sit here today versus maybe how you looked at some of the pipeline six months ago 12 months ago not.
Materially change, how you're evaluating companies.
I think from our perspective.
It's been a question of where are we actually acquire businesses right depending on <unk>.
Labor markets et cetera.
Driver pool availability et cetera has been a big driver and sort of where we're looking at things I think from an economic perspective again from our perspective not much has changed.
I mean.
Some businesses performed better some have reacted quicker to.
You're getting some of these getting in front of a bunch of these inflationary pressure.
Pressures, but I don't think its really changed much.
We'll see how a bunch of that flows through the company's P&L as we go through but I mean again lion's share of what we've acquired this year.
Outside of sprint has been largely just tuck ins that identify in our existing footprint, where we can leverage our fixed cost base of facilities. So.
Yes, not much has changed from that front and the business units. We are operating continue to perform well and I think that's going to provide a pretty good opportunity because if you look at some of these businesses that want to exit because they're frustrated about some of these inflationary pressures are experiencing.
Potentially you're going to be buying that off a lower base number.
And then you may be what are sort of a year or two ago. So.
I think by and large we're still looking at things the same.
But obviously you have significantly more data points today to two.
To use to evaluate these different businesses in the different regions just given the experience we have of our existing business today.
Excellent I'll leave it there congrats on the strong pricing points in the quarter.
Thanks, Kevin.
Thank you very much for your question Kevin.
Next question comes from Tim James at TD Securities. Please go ahead.
Okay. Thanks, very much good morning.
We've talked in detail here about the moving parts in cost completion, and how pricing is recovering though not entirely yet.
Could I oversimplify things for a minute.
Think about your EBITDA guidance, you're increasing your EBITDA guidance.
In dollar terms for the second time this year from the original amount and that.
Basically suggests that that all of the incremental costs are being recovered or there were other factors beyond price that are actually better than expected.
And therefore driving.
<unk> of EBITDA guidance higher despite the drag of the negative impact of inflation relative to price recovery could you sort of help me understand that what are these other factors that are coming through better than expected and allowing you to raise that your dollars of EBITDA guidance. Despite this sort of drag.
Pricing versus inflation.
Hey, Devin look I think I think that's exactly right I mean, there's a lot of focus on the cost recovery, but there's obviously, that's front and center, but it is overshadowing.
Part of the core strategy of just the improved asset utilization and bringing together and optimizing the businesses that we have sort of assess.
Assembled over the past few years and that is exactly happening in an example, like the tariff year book of business and bringing that together with our with our existing environmental services business I mean, thats gone exceedingly well the opportunity is the efficiency, the rerouting and and the costs working on improving our now expanded network.
It was ahead of expectations and Thats, helping sort of drive margin in that the same story. It goes throughout much of our U S sort of solid waste market and the pieces. We brought together there there is great.
Since is of our thesis proving out exactly as anticipated by leveraging the existing infrastructure to drive improved asset utilization and youre seeing that come through in the numbers. Unfortunately with fuel escalating at the rate does the quantum of impact of that is overshadowing, but at the end of the day. If you look for the <unk>.
<unk> as a whole the new guidance, we're putting out.
Direct fuel costs alone are suggesting our solid waste business 100 basis point margin drag.
If you factor in the indirect that comes through my third party transfer et cetera, that's probably closer to 150 basis points. So I'm contemplating a 60 65 basis point decrease year over year in solid waste, a 150 being driven by solid.
It's actually speaking of 150 being driven by fuel that's actually speaking to a lot of otherwise underlying margin expansion is coming from one core price covering the cost inflation into the improved asset utilization that youre speaking to.
Okay. That's really helpful. My second question kind of on the same theme a little bit I am just wondering Luke if you could update us from time to time, you kind of talk about long term margin potential EBITDA margin potential by segment and I'm wondering if we should change the way we think about that at all today.
The second quarter shows that looking at percentages can be misleading because they don't reflect your ability to offset higher costs with pricing initiatives, which actually keep dollars, where you expect them to be in dollars being the more important part here.
But that obviously hurts the percentages.
We think about the long term percentage margin potential for each of these segments any differently.
Because just we shift.
Shift up in the cost structure or is it not going to be significant enough long term to really change that that opportunity on a percentage basis.
No I think I'd, rather than responding the cabin I think we view this as a sort of temporary horizontal stat and or otherwise upward trajectory of margins.
I mean your comment of a $1 is absolutely right and we think about that and Meanwhile, we want the margin <unk>.
Retaining the dollars is sort of first and foremost and then ensuring that you can sort of drive the margin on top of that as a sort of secondary if you think about it though where we've taken the business and where we're going I don't think anything has changed we have a solid waste business and a footprint that we think is best in class and we think we're going to drive that to a solid waste margin that's best in class.
While this year, maybe sort of a slower step in that direction nothing sort of changes and you have to remember we're achieving our results.
Excluding a lot of the high margin accretive aspects of businesses that are a lot of our peer group sort of already asked when you think about perfect fuel surcharge recovery. When you think about RMG, you think about the CMG conversion and all of the self help we've spoken to that's all accretive to our margin profile of where it is today and we still intend on sort of realizing that and bringing that.
Add to the margins that we've previously suggested our environmental services segment.
I think it is already significantly exceeding the industry group in terms of margin profile and we see a lot more upside from there and taking that to sort of from the mid <unk> to the high <unk> as we particularly as it continues to be a plan. We're highly confident in our ability to achieve and then you put those two together when we left is yes, that's all.
The corporate cost bucket that you got to remember I mean, when we divested of infrastructure for $500 million of revenue and not a lot came out of that corporate cost bucket.
Costs were there to support everyone. So.
Now pushing forward with growth that's going to help sort of further leverage that offline as well, which will add incremental margin. So I would I.
I would agree that focusing on the dollars is the priority, but I do want to caveat that we don't think anything changes at our upward trajectory that we previously articulated we remain highly optimistic in our ability to meet and exceed that.
Look at it I mean, you have 40 year high inflation.
Basically as long as I've been alive.
And we certainly didn't see that.
In our lifetime and when we sort of look at what happened and we came.
Very very quickly and I think <unk>.
CFL along with the industry responded sort of appropriately and I think if you can look at the business and yes, there might be 100 basis points of margin contraction for a short period of time, but at the end of the day, we recovered 100% of the dollars and I think that's sort of a feat in its own right and it's a 10.
Estimates.
Our ability to resiliency of the business and the industry. So.
I think it's a great data point that we've all sort of lived through the last.
Three four months here and I think that's just going to provide a great outcome as we move into 2023 and 2024 as we get back to more normalized states.
From my perspective, I do think the driver issue is real I think yes.
We are significantly.
Lower unemployment rates than historical averages, but the driver pool that retention of drivers and keeping them. Its industries is going to be a challenge for the entire industry.
We continue to look at different ways, and with technology, and automation et cetera to expand that driver pool.
To ensure that we can continue driving sort of the business forward, but outside of that I think we're going to normalize pretty quickly we're going to get back onto that original margin expansion opportunity that we talked about.
Prior to these to this large inflationary spike.
Okay. Thanks, those are great answers. Thank you very much.
Thank you for your question Chen.
Next question comes from Jerry Revich Goldman Sachs. Please go ahead. Your line is open.
Hi, This is Adam on for Gary today.
I know youre focused on the initial landfill gas projects in the pipeline right now.
Could you frame for us the development opportunity set beyond the initial sites how many of your landfills today have gas producing potential.
Yes.
Yes.
We updated the RMG opportunities.
In in sort of our prepared remarks. So if you look at where we are sort of sit today you basically half.
Five sites that are on track sort of under construction is going to come online.
Between.
Q2 of 2023 in Q2 of 2024 and then.
Represent well site represent.
Approximately 6 million <unk> of fuel so apply whatever.
So you wont have that.
On that today's market pricing is probably in the 3700 $38 U S per <unk>.
Which we sort of are.
Over half of that plus the royalty.
And then you have the.
Other sites that we talked about.
Which represent that were literally just in the final throes of negotiation.
And those sites are another eight.
Which represents probably about $4 5 million F&B to use.
So again.
That same sort of math.
It spits out the outcome and then you have we have we have enough. We have a further we have another site in Canada, which we are finalizing which is a large site.
Which is approximately $1 five to $1 7 million <unk>.
And then we have a whole subset of other projects that we've now gone out and we've gone out done the work.
Pipelines are accessible.
And we've gone out where in the RFP stage for those which are another approximately 90 sites.
So those mine sites would represent sort of another four to $4 5 million F&B to use.
They would be a little bit.
I would say from an operating cost perspective, so a little bit less profitable but.
Still well within an acceptable sort of IRR hurdle.
So I think when you start a couple of those altogether the five plus the eight that were and definitive documentation on that 13, plus another nine.
The opportunity subset has now moved up to sort of 'twenty two sites from.
From the original guide that we've given around sort of around the 10 to 12.
Got it that's Super helpful and my last question acquired annualized revenue is around $360 million year to date based on M&A dialogue. Today can you just help us think about where that could track towards the end of the year.
Yes, Adam it's Luke.
<unk>.
We don't like to give an M&A target per se by quarter for the year as a whole and what we said at the beginning of the year with I think $400 million to $500 million of revenue could be acquired.
So if we were at $3 60 today I think that sets you up to be on track or to exceed that amount.
I don't think Youll see any more sprint size acquisitions for the balance of the year as similar to Q2 will be focusing on those densify tuck ins, but I think achieving our targeted stated goal for the year.
Well within reach with the success, we've had in the first quarter to the first half.
Great. Thanks, a lot.
Thank you for your question Jerry.
And our final question comes from Chris Alright at ABC capital markets. Please go ahead.
Yes, thanks hopes.
We spent a lot of time talking about margins and growth in solid waste can we just maybe talk about environmental services for Alphatec.
Organic growth was really significant about 20 over 20% and I guess just the <unk>.
Organic growth, that's masked a little bit because of the the acquisition growth.
Can you talk a little bit about how much of that 20% organic is tied to just the price of used motor oil.
And any impacts that we should be thinking about going forward.
And as well.
Talk a little bit about wanting to move the margin profile from the low 20 still high <unk> what are the key levers we should be thinking about in terms of that margin profile going forward.
Hey, Chris is Luc so on the first question.
Performance in environmental services, you have about $8 million to $9 million you are picking up an incremental used motor oil pricing.
Which we factored into our broader fuel cost impact because we think of that as a natural hedge to the rising fuel prices, but thats. The quantum at this sort of top line this year.
If you think about the second part of the question you got to remember the margin profile given by.
In that segment for this quarter is inclusive of about 60 to 70 basis point drag from M&A that tariff care business came on at a lower margin than our business and youre seeing that mix impact as a sort of drag right.
Peel that back.
And you're actually getting organic margin expansion in that business from the same levers and strategies that we've been talking about and our solid waste business. We've assembled what we think is a best in class.
Infrastructure or network that we are now scaling with densify tuck ins as well as organic growth to leverage that relatively fixed cost Bakken and drive operating margin and that's the that's the plan I think we're seeing it play out in spades much earlier on than we had anticipated with.
Tara pure integration and we think the opportunity set as we go forward to leverage this new expanded network and our capabilities has never been greater so it's.
Continue to do small tuck ins to densify as well as just drive incremental price and volume into that relatively fixed cost is the path that we're going to.
Rundown for the next couple of years and take that from the mid <unk> to the high <unk>.
Anticipating additional come back I mean, we call. This last year, we didn't know the exact timing but.
There was clearly a lot of.
People that are sidelined a lot of work just because of the stopping and starting again can this business was sold levered to Canada.
In the Covid restrictions that would come in and out and I think that was part of the attractive part of the opportunity when we bought the business we were using.
Covid impacted numbers, when we bought the business and we need it was a massive synergy opportunity from our business from East Coast West Coast and all of that is playing out as Luke said exactly how we anticipated.
I think even from a synergy perspective, we exceeded our original synergy expectation in.
In the first six months of this year, so thats can all prove out to be.
All additive as we move into the back half of the year.
And obviously with the Covid recovery continuing to happen and the removal of restrictions.
All played out as anticipated, albeit the timing was a little bit off.
But certainly the thesis that we had going into it.
<unk> continues to prove out.
All on plan.
Okay. That's great. My next question just at the Investor Day, you talked a little bit about you call yourself help type.
Items things like like <unk> like automated side loader is just kind of curious how are you guys seeing equipment supply these days.
Starting to free up and going to give you some opportunities to add additional equipment and accelerate the delivery of equipment as we go into the second half.
Yes, correct.
Luke.
I think things are tight out there you heard it.
The prepared remarks that the impacts of delayed truck delivery is driving incremental sort of R&M truck rentals et cetera.
I think there's a perspective that things should sort of loosen up as we go forward, but I don't think anyone is anticipating the next sort of couple of quarters to be opportunity for accelerated deployment, I think where it will be happy to get what we hope to originally received.
And go forward from there I think the opportunity set for accelerated capital deployment into those self help things really sort of plays out as you get into sort of latter half of 'twenty. Three 'twenty four we can start thinking about those sort of strategies as the free cash flow profile ramps provides the opportunity to more than cover any M&A opportunities and you really start looking.
At excess free cash flow. So I think we have a soda is still a bit of runway before we contemplating accelerating those programs as we've said, we're using normal course replacement capex dollars to advance the initiatives in those areas, but the opportunity to apply capital above and beyond the normal course replacement <unk>.
Opex is probably still a couple of years out.
Okay, Okay, alright, thanks folks.
Okay.
Thank you so much.
Well, thank you everyone.
Okay.
Okay. Thank you everyone.
Any other questions operator.
And there are no further questions I'll pass back over to you Patrick.
Thank you so much. Thank you everyone for taking the time to join US. This morning, and we look forward to speaking to you after our Q3 results.
Thank you everyone for joining today's conference call you may now disconnect.