Q4 2022 GFL Environmental Inc Earnings Call
Thank you for your patience. This morning as COO will begin shortly please stay on the launch.
[music].
Good morning, and good afternoon I'm.
I'm looking to the GSO environmental fourth quarter 2022 earnings call. My name is Adam and I'll be erupts that sit today, if you'd like to ask the question in the Q&A portion of today's call you Richie said by pressing star one on your telephone keypad.
Ill hand, the floor on that and see.
Patrick the vesey to begin so Patrick Please go ahead when you're ready.
Thank you and good morning, I would like to welcome everyone to today's call and thank you for joining US. This morning, we will be reviewing our results for the fourth quarter and providing our guidance for 2023.
I'm joined this morning by look closely our CFO , who will take us through our forward looking disclaimer before we get into the details.
Thank you Patrick good morning, everyone and thank you for joining we filed our earnings press release, which includes important information. The press release is available on our website. We've prepared a presentation to accompany this call is also available on our website.
During this call we will be making some forward looking statements within the meaning of the applicable Canadian and U S securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U S Securities regulators.
Any forward looking statement is not a guarantee of future performance and actual results may differ materially from those expressed or implied in forward looking statements.
These forward looking statements speak only as of today's date and we do not assume any obligation to update these statements whether as a result of new information future events and developments or otherwise.
Call will include a discussion of certain non <unk> measures. A reconciliation of these non <unk> measures can be found in our filings with the Canadian and U S Securities regulators.
I will now turn the call back over to Patrick.
Thank you Luke 22 was yet another exceptional year for GSO, we once again achieved double digit industry, leading growth had a COO.
Complishments, even more impressive considering the economic uncertainty and cost headwinds that we experienced for most of the year.
We believe that with the resilience of our growth. Despite the challenges of the last few years demonstrates the effectiveness of our strategies the quality of our asset base and our team's exceptional focus on value creation.
Organic revenue growth was nearly 14% in Q4 topping a year of double digit revenue growth in the prior three quarters in both our solid waste and environmental services segment.
Solid waste pricing was 11, 5% in Q2, including fuel surcharges with core price of nine 9% the highest in GFS history.
Core price accelerated 130 basis points over the record pricing, we achieved in the third quarter and was eight 2% for the year as a whole.
Over 300 basis points better than our original guidance for the year.
This outcome sets us up for an even more attractive launch off point for 2023 than we previously anticipated.
We also realized solid waste volume growth during the quarter and the year, which we believe is a testament to the quality of both our market selection and our customer service.
Environmental services continue to materially outperform our internal expectations and substantially defied the seasonality, we typically see in the fourth quarter for this segment.
Our thesis underlying the tear up your acquisition has clearly proven and we shouldn't tuck in M&A further bolsters, our competitive asset positioning.
We believe our environmental services platform is already best in class with margins in the mid 20 range materially ahead of the industry peers.
Longer term, we see potential for the environmental services segment to get to high 20% margin levels based on our significant scale in Canada, and greater focus on pricing and quality of customers.
As we continue to focus on quality of revenue and asset utilization, we remain extremely optimistic about this segment's growth prospects and operating leverage opportunities.
We grew adjusted EBIT of 17% for the fourth quarter.
Our relentless focus on optimizing our pricing strategies and cost efficiencies are yielding the expected outcome.
And you can see this in the margin results.
Luke will walk through the margin bridge in detail, but the improvement over Q3 is significant.
Our record setting price growth drove a 125 basis points of organic solid waste margin expansion in the quarter, when excluding the impact of fuel and commodity prices.
Our fuel cost for recovery program, which is still ongoing and development continues to mitigate the margin impact of higher energy costs and allows our price increases to drive operating leverage.
We are highly encouraged by the improving trends that we're seeing in our labor costs going into 2023.
And although cost inflation still remains exceedingly high.
Repair and maintenance cost headwinds continue to linger, we believe that the worst is now behind us.
Going into 2023 and beyond we have high visibility that the impact of our pricing and surcharge strategies together with the expected moderation of cost inflation will result in significant opportunities for outsized margin expansion and Luke will speak to this in more detail.
Because of a greater visibility into 2023, we are excited to be able to increase the preliminary outlook that we provided just a couple of months ago. We now expect to generate adjusted EBITDA between 2 billion and $2 5 billion in 2023, and almost 20% increase over our 2022 results.
Adjusted EBITDA margins are anticipated to expand over 100 basis points a level, we expect to be industry, leading inclusive of headwinds from commodity pricing.
Our guidance assumes approximately 8% solid waste price.
Flat solid waste volumes, given some macroeconomic uncertainty going into 2023.
And mid single digit top line growth for our environmental services segment.
Our guidance assumes commodity and RIN price base at current levels.
With any improvement over today's levels, providing incremental upside to our guidance.
The guidance also does not factor in the impact of any additional M&A in 2023.
We acquired approximately $480 million of revenue in 2022, and another $100 million in January primarily consisting of a highly strategic asset for our environmental services segment in the U S. Midwest.
We've included the expected contribution from this asset in our guide since the acquisition occurred so early in the year.
Our M&A pipeline remains robust and we expect that we will continue to have opportunities to deploy capital into value, creating acquisitions, although we expect our total M&A spend in 2020 three to be more tempered than the last few years, which I'll discuss more in detail later in the call.
And he contribution of M&A in 2023 will be upside to our base guidance.
December 2022 marked the 15th anniversary of the founding of G. F. L. I could not have imagined when I started this business that would be we would have achieved so much in the last 15 years.
I believe that we have the best employees in the waste industry. It's their hard work and dedication that has allowed <unk> to grow into the solid sustainable platform that produce industry, leading results in 2022 and still have so much more room to grow in the coming years I'll now pass the call to Luc who will walk through the particulars of Q4, and 2023 guide and then I'll share some key.
<unk> comments before we open it up for Q&A.
Thanks, Patrick.
System with prior quarters, our accompanying investor presentation provide supplemental analysis to summarize performance in the quarter and lays out the building blocks of our 2023 guidance.
Provide more color on the fourth quarter page five identifies the drivers of the $100 million of revenue outperformance versus our guidance, but the substantial majority derived from ongoing strength in our environmental services business, where we saw activity levels far in excess of seasonal norms.
Quality of the environmental services platform. We have built is clearly demonstrated by our customers' demand for our services and we remain highly optimistic about our opportunities for high quality organic growth in this segment.
Rounding out the revenue bridge continued outperformance of core price and recent M&A also contributed to the over $1 $8 billion of revenue recognized in the quarter as Patrick said horror solid waste price accelerated 130 basis points from Q3 to nine 9% in the quarter and as a result provides us significant confidence that 2020.
Three pricing will be at least 8%.
The bottom of page five shows the adjusted EBIT walk for the quarter, which is inclusive of incremental cost to support our shift to the cloud and ongoing higher costs related to repair and maintenance expenses.
Page six bridges solid waste adjusted EBIT margins year over year.
As anticipated fuel and commodity prices remained a margin headwind as compared to the prior year, we were able to achieve a 45 basis points sequential reduction to the net impact from fuel prices as the effectiveness of our fuel cost recovery strategies continues to improve.
Excluding commodities and fuel organic solid waste margins expanded 125 basis points on a same store basis, and 85 basis point improvement over Q3, and an indication of the strong operating leverage occurring in the base business.
Page seven summarizes the ongoing improvements we've made in our fuel surcharge initiatives during the year.
We are tremendously proud of the pace with which we've been able to ramp up this program with.
With the success we've had to date, we are confident in our ability to conclude the first phase of this initiative in early 2023, two quarters earlier than initially planned.
As we see significant opportunity beyond the first phase and opportunity we will continue to pursue throughout 2023 and beyond.
As we've said on our previous calls the industry has demonstrated the effectiveness of immature fuel surcharge program.
Our initiatives in this area are not breaking new ground, we're simply catching up to the industry standard in Q4, we estimate the net impact of fuel was a 70 basis point tailwind to some of our industry peers margins a result.
The result, 200 basis points better than the 130 basis point headwind, we had in the quarter.
We expect that the stability and quality of our margins will continue to improve as we close this gap.
Adjusted free cash flow for the year was $691 million.
More than the high end of our updated guidance range and more than 8% above our original guidance. Despite the significant headwinds from fuel prices and interest rates that arose subsequent to the beginning of the year.
As anticipated the $150 million invested in working capital during the first nine months of the year largely reversed during Q4.
Partially offsetting this recovery was incremental working capital investment to support the revenue outperformance and recent M&A.
On Capex recall, our guide plan about $750 million to $800 million of net capex, excluding the $150 million normalization adjustment.
At the low end or at 750 that assumed about $880 million of gross spend across both our base business and R&D offset by $130 million in asset sale proceeds in the end gross spend was $830 million is $50 million of planned capex was unintentionally shifted into 2012.
Three.
Reported net leverage was five <unk> at the end of the year the increase over where we ended the prior year was mostly the result of the translational impact of FX on page eight we have provided a simplified constant currency presentation of net leverage.
This slide shows the year ending one point below the prior year again, an illustration of our growth driven delevering capabilities. Despite significant unprecedented headwinds and continued execution of our M&A strategy in the year as.
As we've said before we are committed to deleveraging as part of our 2023 outlook, we will lay out a path to ending the year with Leverages. It starts with a three achievement of which would further improve our financial strength and provide the basis for accelerated free cash flow growth.
On page nine we have summarized our current debt profile to provide additional context when thinking about leverage subsequent to year end, we amended our $1 7 billion term loan b extending the maturity of our nearest term debt by two years.
As a result, we've materially reduced the amount of debt maturity occurring in the next four years, we remain highly confident in the likelihood of receiving material credit rating upgrades prior to the maturity of most of our existing debt providing opportunity for lower borrowing costs and improve free cash flow conversion.
Looking ahead to 2023 page 11 outlines of the revenue bridge. Thanks.
Thanks to the strength of our finish to 2022, we're expecting at least 12% topline growth inclusive of an expected 100 basis point headwind from commodity prices.
Anchoring the double digit increases, 8% solid waste price and surcharge growth, coupled with 3.5% to 4% rollover of already completed M&A.
Given where we land at the end of 2022 we have great visibility and realizing double digit price in the first quarter and are highly confident in the path to achieve 8% for price for the year as a whole at a minimum.
The guide assumes relatively flat volumes across both segments given the potential for some macroeconomic uncertainty and the tough comp for environmental services. In 2022 also assumes no recovery of commodity prices and no incremental M&A.
With the quality of our anticipated topline growth, we're expecting over 100 basis points of EBIT margin expansion in 2023 over 200 basis points of organic expansion when factoring in the headwinds from commodity prices and the impact of acquisition rollover.
With our significantly improved ability to manage the margin impact of any changes in fuel prices through our fuel recovery program. We expect the substantial underlying operating leverage within our platform to shine through.
Our guide does not assume that cost inflation reverses, but moderated on a year over year basis by virtue of lap lapping tough comps, particularly in the second half of 2023.
The margin expansion is anticipated in both of our segments, partially offset by a 50 basis point increase in corporate cost margin primarily related to incremental it investments to support the migration of our systems to the cloud and provide added security and support the growth of the business.
All of this translates to mid to high teens, EBIT growth or $2.0 billion to $5 billion at the midpoint of the guide.
The guidance assumes an FX rate of 1342 basis points lower than the 1.36 that was used for our initial 2023 thoughts provided last November .
Recall that every penny of FX impacts revenue by $36 million.
At the free cash flow line the biggest piece of the story, it's one two or three years cash interest, which increases of $100 million to just over $510 million for the year, representing a 15% headwind year over year at the free cash flow line.
Patrick will speak in a moment about how we expect to materially reduce our annual cash interest, which we expect will support over 20% growth in free cash flow in 2024, but 2023 is a recalibration year at this line item as the full impact of the 2022 rate increases is realized.
We also have the $50 million of delayed capex shifting from 2022 to 2023, excluding this capex amount the net free cash flow growth would've been 17% inclusive of the 15% interest headwind.
Net capex included in the guide is approximately $810 million to $815 million inclusive of approximately $40 million in incremental equity investment into our LNG projects our.
Our current expectation is that the availability of project level financing combined with available investment tax credits under inflation reduction Act will significantly reduce the equity we need to contribute to these projects.
Projects further improving the return profile.
The net result of the planned growth in adjusted EBIT and free cash flow was for net leverage to reduce to low fours before considering the potential acceleration of deleveraging through asset sales that Patrick will speak to.
That's the math of the 2023 guide when you think about the quarterly cadence, we typically realize 22% to 23% of planned annual solid waste revenues in Q1, an 18% to 20% of the plan for environmental services, which translates to just under $1 $7 billion in total revenue in Q1.
In terms of margin, we expect the first quarter will be the toughest comp.
<unk>, a similar consolidated margin profiles Q4 around 24%.
Representing a 130 basis point compression to Q1 2022.
At the segment level solid waste margins are expected to sequentially improve up over 100 basis points versus Q4, and es margins or environmental services margin is expected to be in the high teens with corporate cost, it's sort of 3% to 3% to 5% of revenue.
Subsequent to Q1, we expect margin expansion over the prior year growing sequentially from Q2 through Q4.
I will now pass the call back to Patrick who will provide some additional perspective on our priorities for 2023 and beyond.
Thanks Luke.
On page 13, it summarizes our priorities for 2023.
Driving operating leverage through our continued focus on pricing.
Improved asset utilization and cost optimization is first and foremost.
Look to walk you through how we see a clear path to over 100 basis points of margin expansion as a result of our ongoing efforts in these areas and we think the longer term opportunity is significantly greater than that.
When you consider the amount of M&A, we've success successfully undertaken over the past two years.
There's a built in next leg up that can be realized as all of these pieces gelled together.
All of the assets have been integrated into our systems and processes.
But we know from experience is over the years that theres still another layer of opportunity as the platform continues to solidify.
We see 2023 of the year to allow all of the businesses, we've absorbed into our platform to mature and to ensure that we are capturing all of the opportunities that present, including implementing our pricing strategies in.
In addition to the other self help levers available to us.
We therefore anticipate a more tempered level of M&A compared to prior years deploying somewhere between 300 and $500 million into true tuck in acquisitions that will continue to densify, our platform and leverage our relatively fixed cost post collection assets.
We have a pipeline as robust as ever and would anticipate 2020 for returning to more historical levels of M&A, but in 2023, we expect a more moderate level of M&A activity, while we focus on our other value creation initiatives it.
It is important to remember that we like the industry are coming off a number of banner M&A years with Covid also pulling the timing of some of those deals forward.
Bringing our first large scale LNG plant online is one of our main priorities and initiatives in page 14 illustrates the expected cadence of the 20 plus projects. We are actively working on while the in year contribution to revenue and EBITDA for 2023 is relatively immaterial you can see the significant.
Can ramp through 2024 and 2025.
These projections have been updated to reflect todays pricing environment of approximately $2 rent and $2 50 natural gas and the improvements from these levels would be additive to the amounts shown on the page even using these historic low levels. This opportunity would increase our consolidated margins by approximately 140 basis.
Points. In addition, the evolving financing structures and tax incentives that are available for these projects have made the economic returns even more compelling than originally estimated.
Another key initiative is the potential for further rationalization of our portfolio as we focus on maximizing our return on invested capital.
Though some of the larger acquisitions completed in the past few years, we've acquired assets and operations in markets given their specific market dynamics and geographic positioning that we're never going to represent key growth opportunities for us.
We've identified three distinct markets and since our Q3 call. We have ran a process and have now signed LOI to divest these businesses for at least $1 5 billion in gross proceeds.
We expect to have definitive agreements for each of these three businesses signed by Q2.
With the sales to be completed by the end of Q3.
We believe that selling these assets and using the proceeds to pay down our floating rate debt that positions us for sustainable industry, leading free cash flow growth over the midterm.
Additionally, as shown on page 15, the proceeds of these asset sales.
Delever the balance sheet to below four times be immediately free cash flow accretive and materially accelerate the improvement in our free cash flow conversion and overall credit quality.
As Luke mentioned, we expect these improvements will be reflected in improved credit ratings and lower cost of borrowing we will provide updates on these asset sales as we progressed on ESG as most of you know we issued our 2021 sustainability report in late November that includes our full set of sustainability goals and targets for the first time.
R&D is a big part of our achieving our near term ghd reduction targets and as I've already highlighted how we are well on our way to implementing that as part of our plan.
We've been saying since we went public in 2020 that we were going to fall a certain fundamental priorities to continue to successfully grow our business and that the impact. Following these priorities would be to get us to industry leading metrics.
That's where we are today on the back of our outperformance in 2022.
Business is set up for what we think is a once in a generation opportunity for outsized organic operating leverage supported by momentum in our pricing initiatives.
And then the upside potential for additional contribution for our demonstrated ability to do highly accretive densify tuck in M&A, bringing our R&D projects online in 2024, and 2025 and the impact of these asset divestitures I. Just described we think there's a clear path to achieving our best in class EBIT margins and draw.
Living materially higher free cash flow.
And generate free cash flow of over $1 1 billion by 2025.
I want to again recognize and thank our close to 20000 employees for their exceptional commitment to G. F. L. It is their focus on building a sustainable company on providing these services for our customers.
With strong market pricing and above all value creation for all of our stakeholders that has gotten us to where we are today I want to thank each and every one of them for their efforts.
I will now turn the call over to our operator to open the line for Q&A.
Thank you as a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now when preparing to ask a question. Please ensure you had said it's fully plugged in it on muted locally.
I wanted to ask a question.
And our first question today comes from Walter <unk> from RBC Capital markets. Please go ahead. Your line is open.
Thanks, very much operator, good morning, everyone.
Just on the on the pricing you've got some good trends.
Can you hear me okay.
Yeah, we can hear you.
Excellent. Okay. So just on the pricing just a just looking at your book going into 2023, I know a lot of the contracts are tied to <unk>.
The rates that reset at certain times can you talk to us a little bit about how much of your current and projected 8% pricing is locked in for 2023 to give an indication of the certainty around that.
Yeah, Hey, Walter Good morning, It's Luke I think you know, we're really excited about our probability of achieving that when you think about 2022 and the abnormality of the pricing that happened throughout that year and what I mean by that as you think a normal annual pricing happens at beginning of the year and Ratably steps down will 2022 in response to that it means that we're seeing.
You saw continued pricing activities throughout the back half of the year and what that does is set us up for an unusual amount of pricing rollover that you have you know virtual certainty on it. So we're entering 2023 with about 55% of that price already big purely from rollover and then you have about another 30% of your plan.
Pricing that happens in January so you basically where you sit today.
Great line of sight to $85 90 per cent of what that total price number is gonna be in 'twenty to 'twenty, three and I think that further bolsters our confidence that we're setting that as a minimum level.
No that's fantastic okay.
Moving over to M&A and I know you know.
In past years, you've kind of given a target I think last year was around $500 million you actually deployed $1 2 billion. So so well above what you were targeting at the beginning of the year, but Patrick you sounded you sounded just on that you know you yeah, you're you're you're you're looking for $300 million to $500 million, but you do indeed believe that this is going to be a more tempered your can you talk.
A bit about the rationale there rationale there I mean is this an intentional effort to de lever or is it just a function of the availability of acquisitions out there maybe it's a bit of both perhaps give us a little little color on on on the basis for why do you think it'll be a much more tempered your on the M&A side.
Sure I think it's consistent with what we've done historically Walter I mean, if you look back you know whats sort of the growth of G. F. L. Over 15 years there'd be significant ramps over two to two and a half years and then we would spend a year digesting.
And then ramp it back sort of up and I think you know going public and sort of March of 2020, we went public because we knew there was a lot of M&A opportunity, particularly large scale that we were well positioned for it and we needed to delever in order to.
Achieve that goal.
When you look at what we've done are playing back then was to double the size of the business over five years to six years. The reality is we've doubled the size of the business over two and a half years. So significant growth from 1 billion of EBITDA to over 2 billion of EBITDA and you know less than three years.
All of that to be said, we're reacting to sort of what's happened in the market and you've had this crazy inflationary environment, yet at a real ramp up.
And you know and sort of interest costs and I think from our perspective driving the organic growth.
Layering in these pricing initiatives into the sort of base business letting the business would have time to sort of just sees them a little bit get our procurement programs, making sure they're all rationalized and spending the year to do that is going to lead to outsized organic growth.
And we can have a moderate moderate it's been a sort of three to 500 million. This year, and then really ramp that back up in 2024, So and I think all of that put together will position this business to be like looks at to grow at more than 20 plus percent free cash flow growth over the next sort of three years to four years on an annual basis by putting in place all of those pieces of the puzzle.
We're very confident in that listen if there's a if there's.
An exceptional opportunity that comes before we're not going to obviously miss it for for no reason just to say.
For this but I think where we sit today, our focus is going to be on keeping that spend in the $3 million to $500 million barring something that comes up that we really really want to do.
Excellent that makes a lot of sense and just a last quick one the divestitures of three Loi's does that cover the entire one five you are projecting or are you expecting more agreements to get up to the one five.
No. So that so as we've highlighted in the past, it's three market areas I can even update a little bit one of the deal one of the transactions actually got signed last night.
So we're down to two LOI is one we have one definitive agreement.
One definitive agreement represents almost 50% of the proceeds.
So the other two agreements will will represent the other 50% I would say the 1.5 is you know a conservative number I think as you know we've always been conservative that number will probably be in excess of the one five.
But we've just taken a conservative view, but I think from our perspective, one agreement is now signed.
It presents over 50%.
We expect the proceeds to be more than one point in time.
Yes.
That's great progress there I appreciate the time.
Thank you.
Yeah.
The next question comes from Michael Hoffman from Stifel. Michael. Please go ahead. Your line is open.
Thank you very much Luke.
Writing and it didn't get the numbers I'm sure. If I what is the Capex number you said, you're going to guide to and how does that compare to the 780 I just wanted to make sure I understand this capex right.
<unk> in your 2022 cash flow statement, what's going to be on the cash flow statement in 2023.
780 in the 2000 Twenty's Capex is excluding RMG, Michael we've been talking about you know the numbers together. So we have 830 in the 2022 statement included R&D.
The spend on that what we're saying for this year is that number will be comparable and that 830 range, you're expecting about $20 million of proceeds from asset small little asset sales. So you would have a net capex number of 810 and the comment about 830 in both years being comparable recall.
At 2022 had outsized spend because of the $150 million. We received in late 2021 that we employed in the beginning of 2022.
And cash flow from ops is forecast at what for 2022.
While with a 10 day 15 of net Capex that would imply cash flow from ops about $1 $5 billion before any adjustments.
Okay. So your so there are no adjustments than in the 2023 free cash flow of that.
Well, we don't forecast, which is a huge and higher transaction cost that roughly what's been running $60 million to $70 million of transaction costs. A year. We never include the forecast due to the uncertainty of the timing and quantum of those amounts.
As Patrick said with a $300 million to $500 million spend there would be a certain degree of that but none of that is included in our forecast. So that would be a reduction to that financial statement presented cash flow from ops, the extent and magnitude of any transaction costs that we have.
Okay. So so it's a powerful statement, though that you've got a.
Your simple free cash flow in 2022 was about $350 million, you're doubling the simple free cash classic cash flow from ops less all capital spending no adjustment, that's that's a pretty powerful statement.
I would agree and I think when you consider being achieved in the construct of the inflation of the interest rate environment. I mean, you have $100 million interest rate headwind not.
It's a very meaningful headwind and that cash flow number and you still that you can those are resolved. So yes. We're we're very excited about watching the free cash flows when it come through as we articulate.
Particularly with.
Okay.
And just to be clear and I don't want to belabor. This if you had been able to spend everything you wanted to spend you would've been done $6 40, but this year would have been 750, that's the bet. It's as simple as that it's not any more complicated right.
Yes, correct I think there may have been a different opportunity on working capital. If you were going to come in that light than maybe you would've been a little bit more aggressive and been able to make that 640, something a little bit better.
In 2022, but you're thinking about that exactly right Michael.
Okay, and then bridging to the 700 is working capital or a source or use in 'twenty three.
A simplifying assumption our working capital was a modest source that offsets the modest use for cash taxes and landfill closure post closure.
Okay, and then interest we know recycling as a headwind.
Recycling is a material headwind in 2023, we have assumed right and then.
Fuel is sorry, I'm, saying I'm, probably didn't even talk about what were you saying.
No yes recycling, we've just we've assumed no improvement in the current levels and so that that represents a material headwind going into 2023.
And fuel is because you've got a real fuel cost drag not just a pass through drag in 'twenty two.
So that's that should be a tailwind in 'twenty, three because you're making up for that.
Yeah, so fuel if you're using the end of 2022 rates I think the price was roughly 8% below what your average fuel cost was in 2022, so that will be a modest tailwind at the cost line.
And then price and organic growth makes up the difference to get flat. So I mean, I've got a couple of hundred million dollars of a headwind is getting offset by come behind many dollars' worth of positive most of which is organic growth.
Correct.
Right that's the other okay and then.
<unk>.
On your cash interest Patrick you're at six 7% of revenues to that of your peers are two and a half to three youre going to take $100 million of that out going into 'twenty four based on these asset sales.
Basically if I'm getting in line with the peers on a revenue percentage basis, I've got 250 million I'm, playing with it what's the thoughts about when the next 115 comes out.
Yeah, I don't know if it's going to come out I think its because youre going to sort of grow into it as EBITDA grows youre going to grow into the sort of delevering.
But I think you know what.
What we said is where we.
Were committed to exiting 2023 with a three.
In front of our leverage number I think when you look at what the opportunity is now and what we're positioning ourselves to do is take this.
Beautiful platform and mature into what you would see sort of normal course, other public companies and I think you sort of said it right. In your note is we are going to move to investment grade right. So this squarely puts us on the path to do that on an expedited basis. It may take a couple of years.
Delevering because the rating agencies like to look on a trailing basis, but we're going to get there we pushed out it looks at our term loan refinancing into 2027, which people seem concerned about earlier because of the maturity or the 2025 maturity, we renewed that at a lower rate than we currently had.
And then as that all comes out you know, we think listen I mean, you can look at what waste connections refined their term loan that you know there are investment grade to refine their term loan at.
Software plus 70, 585 bps R R.
Term loans that software plus 300, so you know theres material savings that are going to come from the capital structure over the next two to three years as we get to refinance the capital structure and lower leverage closer to three.
Three to three and a half turns from the high threes, We're gonna energy right. So I think over the next couple of years Youre going to see that just.
Beautifully gravitate towards ever where everyone else is at this point and that.
Youre going to see a transfer of value from the debt holders to equity holders right and you know that's kind of a coverage can be very sort of powerful.
From an equity value creation standpoint.
Right. So from a modeling standpoint, if you hit the investment grade just to follow this point.
As you do the Refis and twenty-seven beyond the cash interest number theoretically is coming down on the same level of debt because youre going to have a better borrowing costs and there is the the leverage in the financial leverage into your free cash flow, let alone the operating leverage.
Correct correct yeah.
Okay, Alright, that's all I needed. Thank you.
Thanks, Michael.
The next question comes from Kevin Chiang from CIBC, Kevin. Your line is open. Please go ahead.
Good morning, Thanks for thanks for taking my question, maybe just a clarification on Walter's earlier question. So if I look at the $1 5 billion of gross proceeds.
And the adjusted EBIT that that Oh, I thought we'd be removed from our consolidated results.
It sounds like you're transacting, there's about 12 to 15 times.
1.5.
It includes the full Oh, I guess divestiture.
Amount that you've laid out on slide 15 year.
Sure.
Yeah, Kevin It's Luc so I think that's everything we're saying $100 million to $110 million of EBIT potentially so if you take the midpoint of that range.
They've got a $5 billion, that's a 14 times forward number.
Because that's our 'twenty guidance.
Our guidance is probably a turn in the right buyer on a trailing number and as Patrick said, there's probably an opportunity for proceeds slightly in excess of this which would yield a multiple right in the middle of that mid teens fairway.
Articulated you out of the possible.
Okay that's excellent.
It seems like I mean, the gross proceeds are obviously a large amount.
It feels as though the.
The assets are being sold.
Maybe back in November the quantum of EBITDA potential was a tad higher.
Does that suggest there's more opportunities to divest of noncore assets. Even after you kind of go through this.
More significant portfolio rationalization or or have you kind of touched on all the assets do you think you need to divest of or or.
Sure shed the market. So you don't think youre going to invest into growth.
Yeah, I think the November call Man came from the fact that we had a lot of inbounds over the last year about different parts of the business I think when we sat down with all of our operators and we went through it.
Yeah. This is what we.
We said, we're going to do this one because it's going to be one big sleep and this is what we're going to do.
And this is what we sort of shook out and I think listen these assets. There are great assets. They just I think they are of a higher and better used to somebody else and in markets, where you know either were geographically sort of disadvantaged or in their markets, where there's multiple sort of strategics and I just think when I look at the opportunity set of where we.
He can deploy incremental capital into M&A in incremental organic initiatives.
We're going to do it in other markets, where we have the ability that we can you know grow at a much higher clip and have a better return on our invested capital and I think when you look at that that's what we're doing so are these assets will be perfectly situated in.
Others hands, who have a larger presence in those markets and I think they will do very well with them, but from our perspective. They just they want a priority for us in markets that we were actually going to spend a lot of time with them.
So hence we kill two birds with one stone get it would always have a significant amount of incremental capital to grow grow in the markets, where we want to grow them and at the same time set us up on the path to Delevering, particularly at an interest rate environment, that's uncertain and it's going to set us up to expedite our ability to get to investment grade. So.
All of those coupled together we think.
I'll yield.
Great equity value creation for all the stakeholders involved here so that was the sort of rationale behind it.
Theres, a significant amount of opportunities out of this.
It's not if someone asked the question why did you do this because he wanted to just have to Delever. It had nothing to do with Delevering, yes, it fulfilled that requirement as well, but at the same time. It was just the right thing to do it but where we wanted to deploy capital and that's what we did so you know our expectation is that we should like I said, we signed one.
That agreement last night after we actually reported.
Which leaves which is over 50% of the you know the the dollars we're gonna be repatriating and then the other two we expect you know over the next little while here and we expect to close them between you know sometime in late Q2 and early Q3 as we go through the regulatory process, but.
For your benefit we selected partners and we've done all of that Doj analysis to make sure going in that we Didnt think there were any issues with anyone that was a big part of the criteria in selecting who actually acquire the businesses. So.
It's a wonderful thing and I think it's gonna yielded great results.
No.
Agree with you and maybe just last question for me.
Again, a growth within the U S solid waste business is tracking nicely ahead of what you're seeing in Canada is there anything to call out there or is it primarily just you know you've owned Canada longer so there's the.
There's just more low hanging fruit I guess from an organic growth perspective in the U S or are you seeing something different in the volume or pricing environment between the two countries.
Kevin It's Luc speaking I think that has more to do with our mix. If you think about when we talk about our <unk> revenue, we have a greater proportion of that in our Canadian book of business in the U S and that has obviously been the tranche of revenue that has been the anchor to your blended price. So actually I think when you roll into 2023 and you finally get those.
P I resets breaking that mid single digit level youre going to start to see more price acceleration in Canada as we finally get that sort of catch up so the pricing environment in Canada. We think is equally attractive on a like for like basis from service levels. I think it is the revenue mix that is driving that.
I'll talk more than anything.
That makes sense. Thank you very much thanks for taking my questions and best of luck in 'twenty three.
Thanks, Kevin.
Yeah.
The next question comes from Jerry Revich with Goldman Sachs. Karen. Your line is open. Please go ahead.
Yes, hi, good morning, everyone.
Good morning, Jerry.
Can we talk about price.
Price cost.
Just the cadence of it.
Course of the year.
Obviously offsetting all of inflation. So it looks like you're starting out with something like 10 points pricing 10 points of inflation and based on the margin guidance it looks like you're planning to exit.
<unk> seven points of price three points of inflation, just directionally, but I'm wondering if we might be able to put a finer point on that.
<unk>.
How are you folks are anticipating that spread as the year progresses.
Jerry you did my work for me.
You summarized it quite well it is very much a tale of two halves on the cost side.
Where you start the year you know argue but I think Q1 is a double digit number and then it steps down sort of ratably throughout the year and it will really be each one versus each do I need to point out is that in addition to the pure unit cost inflation. We're also just looking at you know removal or absence of some of these one time costs.
It's that we incurred this year like truck rentals as being an example, so when you're getting to that lower single digit number in the back end of the year. It cost it's not just unit cost, but it's also just cost avoidance for some of these one.
One time costs, we had particularly in the back half of this year at the pricing level.
You know I think we're anticipating in the guide in more normal poorest pricing cadence and what that is is Q1 being the highest and you're right. We're expecting double digit number there and then that ratably steps down call. It 100 hundred and 25 basis points a quarter as you move through the year, which is more typical.
Pricing cadence, obviously, if our assessment or expectations on cost inflation are different than what we just said we are demonstrated an openness to go after more price in year and we will continue to do so to the extent, that's what's necessary to drive our appropriate return, but the guide.
A day is predicated on that cadence I just described.
Super.
Can we shift gears and talk about the dive.
Divested asset where you have a definitive yes.
Agreement I'm wondering Patrick if you wouldn't mind.
Sharing what the market position was of that asset.
What's the anticipated.
Is it similar to.
The transactions that you folks.
What's that.
A year or so ago.
So it wasn't a significant sorry, yeah.
Yeah, we're not going to let the market well once I think we will update everybody once our definitive agreements are signed.
From we have M D age with everyone, but I think from that perspective.
Now like I said, we had three markets for sure you know, the Colorado market, Pennsylvania, Maryland, Delaware and National market was market. We were interested in sort of looking to divest them as for your other comment what we acquired in the last years, what was what was that.
So you had a significant gain on your last set of divestitures and you were something like number four number five in the markets you divested. So I'm wondering if you could give us.
Sorry, the margin equation.
These assets.
Yeah. So in all of the assets. We are we are three.
Third or below so there's two others that are larger than us in the market. So.
And their markets with sort of multiple strategics right. So.
As you know we've.
Our experience has been and we like to be in sort of a duopoly type market secondary market.
These are markets, where we're divesting of where you are and you know we were in third and fourth position. So we just didn't see a path to deploying incremental dollars into those markets to be able to grow them significantly from the position we already have.
Okay got it and can we shift gears and talk about landfill gas. Thank you for the update on the earnings cadence can you just talk about.
The off take agreements and how those are trending we're hearing that for voluntary markets. The market has remained in the 20.
Twenty's, even though Henry hub.
Gas was obviously come in I'm wondering if you could just comment on if youre seeing that as well and just give us an update on your.
Your contracted status relative to the pipeline.
Yeah. So we haven't we haven't lost anything sort of long term, yet obviously, we're sort of watching the thoughts at all particularly around the hearings et cetera, and then what was going to happen sort of the long term pricing around rins. We knew there was going to be some compression for sure. This year I don't think people expected $2 range, but I think $2 50 to $2 70 range was.
Where people were hoping I think again is a voluntary market demand continues to come on.
We think like you said there is there is a lot of.
Demand for having a long term supply agreement so.
As we move into getting these projects online.
In the near term, we will then look at sort of entering into you know somewhere between 7% and 20 year agreement for a good portion of the fuel but as of this minute, we havent locked into anything yet, but you are correct that pricing still exists and people are taking a longer term view versus taking a view of the shorter term movements.
Okay.
And you can actually for your views on Iran. So it looks like the subsidies going to add something like 30 to 40 per kilowatt hour.
Free subsidies I'm wondering with your footprint.
As it stands today you know how much.
Electricity do you folks generated from gas to electric.
How are you thinking about that opportunity I know, it's early stages, but we would love to get your thoughts.
Yeah, Hey, Gerry It's live look we were excited about events as we viewed as another incremental opportunity that's not sort of in our portfolio today, we have about five landfills.
That have existing landfill gas electricity operating of those under our royalty agreements with third parties, but all of those sort of roll off and at which time, we can sort of.
Those under this sort of hybrid landscape and then there's other landfills I mean, as you know electricity build out much but much less capital intensive than <unk>. So we have some other sites that we're evaluating that may also be a good.
So to host sites and so we've yet to quantify the benefits.
We need to understand a little bit more you know where its all going to sort of shake out.
But this would be additive to our current sort of our LNG and landfill gas.
They did economics and we're excited to monitor the progress and we'll provide updates as we get more certainty there.
I appreciate the discussion thank you.
Thanks Jerry.
The next question comes from Tyler Brown from Raymond James Your line is open. Please go ahead.
Hey, good morning, guys.
Good morning, John .
Okay.
Hum.
No.
Wow.
Can you just talk about some of the.
No.
Okay.
Yeah.
Thank you.
Okay.
So Tyler.
We're having real difficulty hearing your line I think he asked about the hundred basis point margin expansion I'm going to respond to that and hopefully that was sort of right.
Question on the moving pieces.
If you think about the 100 basis points I mean, if you break it down by segment.
Right you know talking about our solid waste segment first we're actually anticipating them up.
Upwards of.
200 basis points in solid waste when you think about the commodity headwind for commodities. If you assume at the current basket prices about a 50 million dollar headwind just from our sales of commodity and that alone is about it.
The 60 basis point headwind at the solid waste margin line.
We have incremental headwind in those locations, where we use third party disposal right now that rebate.
Part of it is often not talked about probably have another.
The basis point headwind coming out of that so solid waste anticipating you know.
150 basis point margin as is you actually that's closer to 200, what do you think about the headwind.
Headwind coming from the commodities.
Our environmental services, they'll also anticipating a sort of a 200 basis point plus margin expansion I think he's actually mid two hundreds and that's really a function of you know as Patrick said prioritizing.
Quality of revenue over quantity and really starting to leverage the sort of fixed cost based structure that we have there.
If you think about those two margin expansion in this segment. The third piece is the corporate cost bucket.
As we said we are anticipating incremental investment.
Primarily it related costs in the corporate segment, and that's going to see an incremental sort of 30 or $45 million spend in the year as we sort of bolster our sort of transition to the cloud and also the security associated with the CRA and see they are expecting that corporate cost bucket and that sort of 325.
330 basis points of revenue.
Somewhat offsetting the very strong organic.
EBITDA margin expansion in both solid and liquid.
M&A I mean, the rollover of factory and a half to 4% of topline that's a slight drag.
I'd call it.
25 basis point drag I think is what we have in the plan today coming out of that M&A and then fuel your last point look fuel costing alone direct fuel pass through as I said, our surcharges more mature and the fuel price actually slightly coming down so not a significant impact there of late.
Tailwind, but what we do have is indirect fuel pass through that was really prominent in the second half of 2022 what do we mean by this is the third party transport providers.
And disposal providers that came with incremental price to recover their own energy costs those represent a pretty meaningful headwind as we go into next year by virtue of lapping those cost that arose really in the second half. So we'll see how that plays out of energy.
Rice's continue to moderate but net net aggregate fuel is a headwind as well and so you take all those pieces together okay.
The organic margin expansion underlying as a result of this pricing and operating leverage is quite significant.
Yeah. Okay can you guys hear me better.
Yeah much better.
Okay. Good yeah, sorry about that.
I do want to switch gears, just a little bit.
Given that it's year end can you guys update us on where G. Ipi EBITDA came in for the year. If you have any expectations for 'twenty, three and what that leverage profile looks on that entity, it's kind of hard to ascribe value for it without some of those financials. So could you just give us any help there.
Sure Yeah, the business that business this year will generate sort of somewhere between 165 and $170 million of EBITDA.
Roughly sort of roughly about five turns of leverage on that.
I'm, just sort of where it shook out.
When you look at that and I'll, just sort of reiterate the plan for that business.
Where are we sort of sit today that'll grow they they obviously had cost inflationary pressures as well for contracts that get in 2020, one that they actually had to do in 2022.
So we expect for 2023 that business will do somewhere around 195 million to 200 million of EBITDA.
We expect that we will acquire.
$65 million to $70 million of EBITDA this year.
And that business largely last year, we just spent on integration we didn't do any M&A.
I have three.
<unk> targets under LOI at the moment.
So we expect that that business will exit 2023 with somewhere around 270 275 million of EBITDA.
On a path to growing that to 300. So if you think about the original plan.
Our plan was hey, we're going to grow that to 300 plus.
We think that business. If you look at the comps like road and others and what it's worth sort of private equity and the value creation opportunity from an M&A perspective, we think those businesses conservatively trade for somewhere between 11 to 12 times.
Would roughly put that at around $3 $5 billion of enterprise value.
Net that would roughly be a billion and a half.
So there'd be combined equity about $2 billion and GFS loans, just under 50% so.
From our perspective that gets us to the $1 billion of equity that we.
We set out to create.
Truthfully, that's nowhere to be seen today, but one day GFS shareholders are going to get a check right I'm very confident if we're closer to $1 billion.
But that's that's the math behind it okay that is.
Yeah that is Super Super helpful. Okay, and then my last one here if I look at the pro forma schedule on the proposed divestitures.
It looks like they run around 25% margins, the capex profile with 7% to 8% of sales.
If I just read those bread crumbs does that indicate that there likely hauling operations or are there some vertically integrated markets.
It's.
A mixture of both I mean, a couple of the markets are hauling and transfer some are hauling only and then other another market sort of vertically integrated as well will get smaller landfill, but youre right.
It's mostly it's more sort of on the on the hauling and transfer side.
Okay. Appreciate it thank you.
Thanks, Don.
The next question comes from Tim James with TD Securities. Tim. Your line is open. Please go ahead.
Thanks, very much and good morning.
Wonder if you could talk a little bit about the moving parts by market as you think about your volume expectations. Your guidance for 23, I'm, just thinking about different kinds of expectations within commercial industrial residential and maybe any any differences you see in the U S market versus Canada.
Yeah.
Yeah, Hey, Tim it's Luke.
Okay.
As presented in the prepared remarks that we're taking a conservative view on volumes just in light of uncertainty.
Audi is as you can see throughout even the second half of 2022, I mean, our volume growth remains strong and I think that's a testament to our market selection as well as the sort of quality of service that that we're seeing I mean in a typical recessionary type environment, it's the C and D related volume right that that drives.
Up first do you see that the landfills in your sort of roll off business. So the guide does assume.
More tempered sort of landfill volumes at gene.
Collection, although I would say that's sort of together sort.
Sort of a single digit.
Each of our total revenue.
So it's not a material number I think really what we're anticipating is broad based across both of the markets.
A general slowdown in the sort of commercial industrial type volume residential sort of remains strong.
And sort of a little bit more of a cycle agnostic.
So it's really in those areas, but I would highlight is a conservative perspective based on the uncertainty versus Ah indication based on what we're seeing in the current data.
Okay, that's really helpful.
The environmental services business that you know the growth that you've reported last year I mean, just the great performance.
Can you comment and I don't know if it's possible to talk about how much of that performance was overall market strength versus GSL.
Specific.
Market share gains or opportunities that maybe you capitalized to outgrow the market.
Yeah, I mean from environmental services, I mean, I think listen we had we were very opportunistic when we bought when.
When we stepped in and bought tear up here right. So we bought that I think when others were scared of Covid and other things and I think we bought that on an LTM number that was significantly affected by COVID-19 at a very reasonable purchase price multiple of like just over eight times.
So you put that all together today and you look at the market position you look at the synergy opportunities you look at the diversification of our service offerings and being able to offer our existing customers services that tariff here was off being able to offer their customers and servicing our existing gee, if all customers couldn't get because there if you did that work.
I think when you put that all together that led to this outside sort of growth opportunity.
In conjunction with keep in mind.
Due to Covid for the most part of Canada in the spring of 2022 right. So there was a lot of pent up demand as well.
But when I think if you look at that business. When you look at the scale. We now have in Canada. The facilities, we now own in Canada, and what that's able to do with the service offerings, we are able to offer our customers.
And being able to sort of leverage that the leverage that fixed cost base facilities pushed price et cetera, that's the sort of leading to that and you know.
It's an already industry, leading margin business that sort of mid twenties.
My goal over the next two to three years to get that closer to 30%.
We think we can do that.
We have the power to do it and I think when you look at the platform that we add and if we're selective about the markets. We go with the focus on the revenue from the existing customers I think that is going to yield an exceptional result.
Okay. That's really helpful. Patrick and then just a final question I just wanted to confirm my thinking just doing some simple math here.
The asset sales planned for this year.
They would be effectively slightly accretive once those sales are done to your solid waste margin percentage, but really have no material impact on the consolidated is that the right way to think about it.
That's right Tim.
Okay, great. Thank you very much for the time.
Thanks, Tim.
The next question is from Stephanie <unk> from Jefferies. Stephanie Youre line is open. Please go ahead.
Hi, good morning, Thank you.
I wanted to follow up on good morning, I wanted to follow up on Tyler's question Real quick here I think you called out obviously, some nice progress made on the fuel surcharge program and some other initiatives, but maybe you could talk about some of the other self help initiatives just embedded in your margin guidance. If you think of do you think for this year.
Thanks.
Yeah. So I mean look when you're speaking about self help I assume you're talking about the three sort of levers that we identified at investor day across the fleet conversion.
Orange exactly yep.
I mean, we continue to make progress on those I mean, if you. If you think about <unk> conversion like our peers has demonstrated the power of moving off of diesel onto these alternative fuels and it's something that we're excited about and deploying capital into however in light of all the via <unk>.
Certainty that we've sort of spoken about I think deploying excess capital today at todays leverage levels et cetera, It's just not something that we've got an appetite for so as we've articulated that we're currently just spending a replacement capex.
Into those streams as opposed to outsized accelerated spend.
As we move forward to the extent there is perhaps less of perception of leverage and therefore, a tolerance of perhaps spending sort of outsized accelerated capital you could look at accelerating the pace at which you would do that conversion and reaping the benefits.
But I highlight what we have included in the guide is a normal course replacement capex being fever towards <unk>, so while you're getting some benefit it's by no means the lion's share of this EBITDA margin expansion that we're talking about that continues that fleet conversion continues to remain an incremental leg up on them.
Margin expansion that we are slowly chipping away at today with potential design at some time.
Few years out we get that accelerated the realization of that opportunity.
Great. Thank you and then just on the labor headwind that you kind of look into 2023 I think you know what are you seeing in terms of maybe improvements in retention I think wages remain high but any kind of color on just labor expectation. Thanks.
Yeah, I think you know one thing, we track pretty closely and sort of voluntary.
Resignations and I think where we were if you look sort of pre COVID-19, we were sort of sitting at around 18% to 20% that went as high as sort of 30% to 32% in 2022, and I think that's moderated significantly now down to the sort of mid twenties.
And trending back sort of closer to sort of pre COVID-19 levels.
You know I think it's now Napa cobham necessarily sort of a wage game I think obviously with a lot of last mile guys started to slow down well you know we saw a lot of pressure coming in some of the urban market that has largely subsided I think we were moving to a more normalized wage increase.
Model and the retention has been very high.
Through sort of later in Q2 Q3 into Q4 and now into Q1 so.
As Luke said earlier in the script I think from our perspective that is sort of moderating now and we think we're in a very good position to get back to sort of a more normalized state.
For the current environment. So we're pretty optimistic about where are we sort of said.
And I think it's it's it's certainly getting significantly better than it was in late 2021 and through the early half of 2022.
Great. Thank you guys so much for the time.
Thank you.
The next question comes from Michael Feniger from Bank of America. Michael. Please go ahead. Your line is open.
Yes, thanks for taking my question.
We're going a little long.
I guess I just wanted to ask some of your comments Luke on first half versus second half.
The costs, you're absorbing in 'twenty, three obviously low OCC rates rens ramping Ken.
<unk> 'twenty 'twenty four it looked like an outsized year in terms of margin expansion and free cash flow conversion.
Not like what would kind of hold back 24 from being an outsized year.
Michael I think youre thinking about it exactly right, we anticipated 2024 to be another year of outsized organic EBIT margin expansion right. If you think about the way the pricing cadence is now going to marry up against what should be a more.
Moderating cost inflation and entering into 2024 was still better than mid single digit pricing. We think the organic algorithm there should yield another outsized year of expansion and at the free cash flow conversion.
I think you said it exactly right. This.
This year I would characterize as Recalibrating here right your free cash flow conversion by virtue of absorbing the extra interest expense is stepping down and they'll be in the sort of high thirties.
Our EBIT conversion, but when you roll into 2020 three 'twenty 'twenty four with the benefit of the divestitures youre going to be back into a low forties percent free cash flow conversion and then ramping up from there. So I know there's always a lot of focus on the guide for what it means in the next 12 months, but I think you know Patrick articulating the prep.
Third remarks, when we are going out to 2025, we don't see a path that is less than sort of a 1 billion one of free cash flow at you know approaching mid forty's free cash flow conversion and continue to have opportunity to go up from there. So I think youre thinking about it right. This is the year to absorb the interest costs, but thereafter, we get meaningful leverage as we go forward.
Very helpful Patrick.
On the IPO in.
In 2020, there was a knock.
On the fact that.
You had lower solid lease exposure and some other.
Yes, we're seeing other large public players starting to get more into environmental services. So I'm just curious.
We've seen some of these developments are you observing in that market.
Where does the connotation of volatility not as much disappointed if youre seeing any shifts there.
The last year or so.
That's noteworthy.
No I think.
<unk> services are just I think we're solid waste was 15 years ago right.
Very fragmented across all the different geographies you really only had one consolidator for a long period of time, which was clean harbors, but again focus on different parts of the business.
When you look at that business. It's the exact same as our solid waste business and I've said this for like 15 years out I mean, maybe not everyone sort of I believe me, but I think when you sort of leverage.
In this regulatory environment and having these sort of moats, which are our wastewater treatment plants all of our sort of TV episodes et cetera, all of these yield.
Exceptional pricing power over time, right as the regulatory environment could keeps getting tighter as this market's continued to consolidate its gonna help with pricing power because theres a higher focus for customers on the regulatory environment. It makes it more and more difficult for the smaller mom and pops to sort of compete so.
Just because of the amount of money you have to spend on infrastructure to be able to service the customer to meet today's regulatory requirements. So with that I think you know this is going to be an exceptional business over sort of a long period of time I think when you look at our business today, it's mid Twenty's margin running at sort of eight eight ish percent Capex. My goal is to get that to Scott.
Closer to 30% and maintain that sort of capex level at 88, and a half and it'll be you know the exact same free cash flow contributor as solid waste into our existing business today and you know I think that opportunity exists and you know yeah. I think we always people always ask the question historically about why are we in that business obviously.
Republic identified a similar opportunity that we had over time I think it's.
<unk> become a more of a normalized view, but.
But you know I think where are we sort of sit today it'll be a.
Very similar margin business through our solid waste business, and it's going to be as good or better over the free cash flow contributor. So put all those together I think we've been cognizant I think under private equity ownership being an important thing to note.
When we were under private equity ownership, we're wanting leveraged levels of closer to six five to seven we really couldnt afford to being cyclical type businesses.
So we really stayed out of the E&P space. So none of our business is levered to the E&P space.
So with that in all of this is just a sort of normal course steady Eddie type business. Yes. It was abnormally impacted because of COVID-19, but that was because of the dynamic that we were levered to Canada in Canada was closed for basically two years, but outside of that I think youre going to see our business continue to grow and be a great contributor to the GFS book of business for a long period of time.
Yeah.
I appreciate it thank you.
Thanks, Michael.
Our final question today comes from Chris Murray from <unk> Capital markets. Chris. Your line is open. Please go ahead.
Yes, thanks folks so just a couple of quick questions on margins.
I was just thinking back to the fuel surcharge I think Luke you mentioned that there is a delta of about 200 basis points between you and your peers.
But in a flat to falling fuel price environment.
You'll probably get it on the cost side can you just talk a little bit of both.
You think you'll be able to recapture about both 200.
Sometime in 'twenty, three or is it still going to take a little bit longer than that is unique contracts rollover.
No.
To clarify the 200 is the gap of the impact in Q4, right because of what I'm, suggesting is we had 130 basis point headwind, whereas I can get some of my peers, probably had a tailwind of 50 to 75 basis points. So 200 basis point gap any impact as we go into next year, what we've now established as a.
A functional fuel cost recovery program.
So the initial recognition of that is almost like a permanent price layer in our book of business.
The benefit from yes, if fuel prices fall materially off you will give some of that back but doing so in conjunction with a much lower energy cost in the P&L. So I think it was this year of initial recognition, where we were sort of behind as we go forward. We think we are now.
Better positioned to respond to volatile energy prices.
Godless of the dynamic it up or down.
Okay.
And then just my last question just on the environmental services business, you did talk about being able to grow margins up to the 30% by call it optimizing revenue.
Well Youre also talking kind of mid single digit growth now.
Are you intentionally starting to add revenue I mean, historically, we've seen a pretty a higher growth rate than that.
But can you just talk about the kind of a price versus volume dynamic that you are willing to entertain to get those margins up.
Yeah, I think again bigger false a bigger focus on quality of revenue and you know.
This is a specialty type trade right. So our guys again, hey, we want to get paid for the work, we do and for the people. We can do and we can't do all the work. So let's focus on the work we're going to get paid the most for us and for the customers that appreciate the work that we do for them and the basis and the timely basis that we do it on so yeah.
Yes, we are going to push we are going to we are going to push that we are going to push the quality of the revenue and we're going to push pricing surcharges and that seems to listen when we looked at our overall fuel surcharge in that business. It was sitting at around sort of 5% that should be at closer to 15% today. So there's opportunity just on the surcharge line there as well just to cover.
Our existing cost.
But again, pushing core price and surcharges and that space is going to sort of push that up as well as the quality of revenue in the customer base in that business.
Okay and does that does that reduced volume as you think going forward or just flattened out.
It'll flatten it out a little bit for sure you know I think 2022 was an abnormal year from there just a ramp in terms of the amount of volume that came and how fast. It came just given the recovery from COVID-19, but yeah, it'll normalize in normalized just like the solid waste business what itself.
Okay fair enough thanks folks.
Thank you so much.
We have no further questions at this time, so I'll hand back to the management team for any concluding remarks.
Thank you very much everyone I'm, sorry, the call dragged on a little longer but we look forward to speaking to you after our Q1 results and.
I appreciate all your support over the last number of years. Thank you.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
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Yes.
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