GFL Environmental Inc. Q1 2023 Earnings Call
If you would like to rich the question during the presentation. Please press star followed by one on your telephone keypad.
Now I'd like to hand over to Patrick <unk>, founder and CEO Floor's Yours. Please go ahead.
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 first quarter I am joined this morning by Luc <unk>, our CFO , who will take us through our forward looking disclaimer before we get into detail.
Thank you Patrick good morning, everyone and thank you for joining we've filed our earnings press release, which includes important information. The press release is available on our website. We have prepared a presentation to accompany this call that 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 the forward looking statements.
These forward looking statements speak only as of today's date and we do not assume any obligation to update these statements whether as a result of new information future events and developments or otherwise. This call will include a discussion of certain non <unk> measures. A reconciliation of these non <unk> measures can be found in our filings with the Canadians as U S Securities.
<unk>.
I'll now turn the call back over to Patrick.
Thank you Luke.
Our exceptionally strong first quarter performance once again showcases the quality of our assets and the capabilities of our team and sets us up for another year of industry, leading organic growth.
Exceeding our own expectations for revenue adjusted EBITDA margin and free cash flows our results clearly demonstrate the highly successful execution of the value creation strategies, we've been communicating to you since we went public.
For the fifth quarter in a row, we realized double digit organic revenue growth across both of our segments contributing to nearly 30% topline growth in the first quarter.
Solidly core pricing was 12, 6% the highest in our history and an acceleration of 270 basis points over the record pricing, we realized in the fourth quarter.
The impact of our open market pricing strategies fuel surcharge initiatives and the acceleration of price increases on CPI linked revenue all combined to yield a core price levels higher than we anticipated.
Setting us up to exceed the 8% minimum price level on which our 2023 guidance was based.
The positive solid waste volumes were realized in both of our geographies were also ahead of our expectations and speak to the quality of our market selection and the resiliency of our business.
Additionally, the rollover of 2022 solid waste emanate also exceeded our plan.
Our environmental services segment. Once again delivered results significantly ahead of our internal expectation realizing over 25% organic growth in the quarter and continuing to demonstrate the merits of our strategy in this segment.
Our previously discussed focus on pricing quality added to the substantial double digit volume growth that has been ongoing since the second half of 2021.
As I said last quarter, we remain extremely optimistic on this segment's growth prospects and operating leverage opportunities given our focus on quality of revenue and asset utilization.
Adjusted EBITDA grew 24% in the first quarter and margins were nearly 50 basis points better than plan as our diligent focus on optimizing pricing and on our cost base continues to drive our higher underlying profitability.
The $441 million of adjusted EBITDA was ahead of our expectations and attributable to the broad based revenue outperformance and operating leverage across both segments.
The margin impact of higher fuel costs that were focus on most of 2020 to continue to be mitigated by the ongoing implementation of our fuel cost recovery program.
<unk> allows price increases to drive operating leverage.
The quarter saw double digit unit cost inflation, which was in line with expectations and is expected to ratably stepped down as the year progresses.
With that said repair and maintenance cost headwinds continue to linger a.
A record price increases overcame these cost pressures and drove nearly 200 base of basis points of organic solid waste margin expansion when excluding the impact of fuel and commodity prices.
As we look forward to the balance of the year, we're seeing positive signs in labor and commodity prices and which would shape us up to have a tailwind to the guy the.
The strength of the first quarter further solidifies our high degree of visibility on the widening spread between price and cost inflation and makes us optimistic that we should be able to meet or exceed the high end of the already industry, leading margin expansion. We included in our full year guidance.
For adjusted free cash flow, Luke will talk through the moving pieces, but at a high level. The front end loading of working capital investment and capital expenditures resulted in a plan that was negative in the first half and positive in the second half of.
The first quarter results were better than our plan. We are actively trying to pull forward receipt of every truck and piece of equipment. We can in response to the repair and maintenance cost pressures our strategy that we anticipate will drive incremental profitability as we move forward.
In addition to outstanding financial performance of the first quarter also saw material progress on our portfolio rationalization initiative.
On our last call. We told you that we have identified three distinct noncore markets for Divesture.
As of this week, we have signed definitive agreements for all three and we now anticipate total gross gross proceeds of $1 6 billion Canadian dollars over $100 million more than we had said on our February call.
We expect one of the transactions will close as early as next month.
The balance of the tubes or be close by the end of Q2 or the end of the third quarter.
The net proceeds from the transactions will be used to pay down our floating rate debt.
The divested assets represent approximately $110 million of adjusted EBITDA at mid Twenty's margin and the transactions are expected to be immediately free cash flow accretive has the interest and capex savings more than offset the divested adjusted EBITDA.
Because of the mid teens multiple we are realizing on these sales the transactions are delevering by nearly half a turn.
High degree of visibility that we now have on the transaction timing combined with our exceptional first quarter operating performance solidifies our conviction that we will end the year with net leverage that is less than four times.
We are committed to achieving this leverage target by year end and expect further deleveraging in 2024 and beyond.
We think that this will position us to secure an investment grade rating over the medium term.
On the ESG front in Q1, we continued to make progress on our R&D project pipeline with the largest of these projects are Arbor Hills facility in Michigan and is expected to start production in Q2 of this year.
We hired our first director of diversity equity inclusion and belonging.
This month, we expect to begin to see positive impact on employee retention and engagement as we continue to rollout our D E and <unk> roadmap.
And the other employees focused programs that we talked about in our last sustainability report.
Also this month, we announced the appointment of standard <unk> to our board of Directors. Sandra is a great addition to the board with our HR and legal background combined with our experience as an Olympian.
We expect she'll be able to provide some good insights to management as we continue to foster our already strong culture at GSO.
Lastly joined <unk>, our EVP of strategic initiatives, who has been with <unk>. Since the early years will be recognized as one of the five inaugural women, who inspire at waste Expo next month.
To sum it all up the quarter delivered industry, leading financial performance that exceeded our plan and at the same time saw material advancement of our ESG related initiatives. Once again I want to thank each and every one of our 20000 employees for all that they do to allow <unk> to continue to achieve these exceptional results I will now pass the call over to Luke who will.
Walk through the quarter in more detail and then I'll share some closing comments before we open it up for eminent Q&A.
Q&A.
Thanks, Patrick our accompanying investor presentation provide supplemental analysis to summarize our performance in the quarter in a consistent format to what we previously provided.
<unk> three summarizes the bridge between our guidance and actual revenue with outsized underlying price volume fundamentals, combining with M&A outperformance to drive a result more than $100 million above the original guidance.
Note that the M&A outperformance is primarily related to the rollover of 2022 M&A as the contribution from new 2023, M&A, excluding the Heartland deal, which was included in the base guide was approximately only $5 million.
While environmental services continues to materially outperform and consistently surprised to the upside the quarter's overall outperformance was almost equally driven by solid waste where pricing volume and M&A rollover were all ahead of our expectations.
Core solid waste pricing accelerated 270 basis points from Q4 with double digit pricing in both our geographies and high single digit price in the typically lower priced residential collection and post collection service lines.
This result is largely attributable to CPI linked revenue finally, starting to reset at prices commensurate with the cost inflation environment or dynamic that is expected to provide pricing support for quarters to come due to the inherent lag and the mechanics of the underlying contracts.
As Patrick said the strength of the first quarter pricing provides conviction that we'll be we'll do better than the 8% pricing that was included in the guide for the year as a whole.
Page four shows the bridge for solid waste adjusted EBITDA margins compared to the first quarter of 2022 as anticipated the decline in commodity prices in our MRF business was 125 basis point headwind to margins year over year.
Recall, our guide assumed commodity prices remain at January 2023 levels.
While this pricing was broadly in line with first quarter actuals any improvement from here will be upside.
Although fuel cost decreased sequentially from Q4, the increased diesel cost over the prior year continued to be a margin headwind. However, the ongoing improvement of our fuel cost recovery strategies yielded a 35 basis point improvement the net margin impact from higher higher diesel prices as compared to the fourth quarter.
Excluding the impact of commodity and fuel prices solid waste margins expanded 190 basis points on a same stores basis at 65 basis point acceleration over the spread in Q4 and as Patrick said, our result that reinforces our optimism and being able to meet and exceed the already industry leading margin expansion. We included in our.
Base Guide.
And while the positive benefits of using fuel surcharges to mitigate the margin impact of fuel price volatility are clearly evident in our results H five highlights that we still see a substantial opportunity for further improvement in this area. We remain highly confident in our ability to conclude the first phase of this initiative by June of this year to quarter.
As ahead of the original plan and we remain committed to pursuing the additional upside of phase II throughout the second half of 2023 and beyond.
We continue to lag the industry in this area due to the rapid growth of our platform in recent years, but anticipate meaningful improvements to margin stability and quality as we close the gap to industry peers.
Adjusted free cash flow for the quarter was negative $55 million approximately $35 million better than plan, despite $25 million of unanticipated cash interest payments solely due to timing on this point interest rate volatility during the quarter led to the decision to accelerate the timing of our variable.
Right interest payments, which resulted in effectively four months of cash interest payments in the first quarter. This is purely just a timing difference in Q2, we will see cash interest $25 million less than planned in the first half as a whole will be in line with the guide.
When thinking about the cadence of free cash flow. In addition to the seasonality and adjusted EBITDA quarterly variances in free cash flow were primarily attributable to working capital and capital expenditures timing.
On working capital, we typically see an investment in the first quarter, a larger investment in the second quarter, and then a substantially equal and offsetting recovery in the second half predominantly in the fourth quarter. The current year first quarter investment was anticipated to be greater than the prior year in light of the material revenue growth, particularly environmental services, which has a.
Higher DSO profile.
For capital expenditures, we typically see a front end loading in the first half and then a ratable step down in the second half for the current year. The front end loading was expected to be even more pronounced by virtue of the $50 million rollover from 2022, and the active strategy to take delivery of new trucks and equipment early as mitigate.
<unk> to lingering R&M pressures Inc.
Incremental capex tied to recent M&A that is effectively purchase price, but as it was incurred post closing also presents itself as capex in our reporting.
As a result of these dynamics the adjusted free cash flow is expected to be negative $90 million in the first quarter and the actual results were significantly better than our plan.
Reported net leverage was 497 at the end of the quarter.
Looking forward, achieving adjusted EBITDA and adjusted free cash flow at plan with organically reduce year end leverage to low fours and then the divestiture transactions will reduce leverage an additional 40 basis points, resulting in a year end net leverage it starts with the three.
This is the starting point to achieving an investment grade rating in the medium term in the meantime, once our leverages reduced and maintained at these lower levels, we anticipate material credit rating upgrades prior to the maturity of most of our existing debt.
<unk> opportunity for near term borrowing costs and improve.
Free cash flow conversion.
We will wait until the second quarter to update our guidance, but based on the strength of Q1, we certainly see a path to be at or above the high end of our ranges in relation to our expectations for the second quarter. We typically realize just over 25% of annual solid waste revenues in the second quarter and 26% to 27% of the.
Our revenue plan for environmental services, which translates to approximately $1 $97 5 billion of consolidated revenue expected for the second quarter in terms of margins with the toughest margin comp behind us we remain optimistic that margins can accelerate so low to mid 20 sevens for approximately 79.
Basis points expansion over the second quarter of 2022.
At the segment level. This assumes solid rates margins of between 35% and 31% and environmental services margins of almost 30% with corporate margins comparable to Q1 the.
The guidance contemplates further margin expansion in the third quarter before stepping down in the fourth quarter as per the typical cadence of the business.
That yields a Q2 adjusted EBIT expectation of $535 million to $545 million to continue the work to Q2 adjusted free cash flow in Q2, we are expecting capex of approximately $300 million cash.
Cash interest of $110 million and an investment in working capital and other operating cash flow items comparable to Q2 of the prior year or about a $130 million combined for an adjusted free cash flow of about nil.
Noting that the back end loaded free cash flow cadence, primarily driven by working capital seasonality in Capex timing is in line with the expectations and assumptions underlying our original guidance to which we remain committed.
I will now pass the call back to Patrick who will provide some closing comments before Q&A.
Thanks, Luke I wanted to conclude with a few thoughts on where we are today and where we are headed.
We've now reported as a public company for 13 quarters with each quarter the impact of the strategies that we have been talking to you about since our IPO in March of 2020 have been clearly demonstrated.
We have always been confident in our strategy and our ability to execute.
I've said this many times before and I'll say it again, we have built the best team in this industry.
We are all driven to make the business better every day and we deliver on what we say we're going to do that's our culture and it can be felt across CFO .
All of these pieces, including the effective strategies, we use to lever the cumulative impact of both organic growth and M&A programs.
These have been in place for a long time, we didn't adopt a new strategy. When we went public we.
We are consistently applying the same strategies that we've used to create billions of dollars of value for shareholders over the past 15 years.
When you look at what's in front of us Here's what I see the optimization of pricing to provide sustainable durable price cost spread.
The rationalization of the portfolio with a focus on the most attractive markets.
Deleveraging and associated financial leverage.
The ramp up of RMG.
All of the self help levers, we can pull to improve asset utilization and cost efficiency.
And the runway for further M&A and the opportunity for industry, leading growth along with material improvements to our margins and free cash flow conversion is undeniable, so from where I sit I would say, we're just getting started.
I will now turn the call over to the operator to open the line for Q&A.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
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<unk> asked question patients showing a device is on mute locally.
Our first question today comes from Kevin Chiang from CIBC Wood Gundy Your line is open.
Hey, Patrick and Luke Thanks for Thanks for taking my question here.
Congrats on the Q1.
I know you're going to update the outlook when you report Q2.
Thanks for the details on what Q2 looks like but if I just looked at what you did in Q1 and if I could.
The implied seasonality.
You inferred on the Q4 call in terms of what first quarter could look like it does suggest an EBITDA on a full year basis.
Maybe closer to a two 1% to $2 one to $2 2 billion.
Obviously, excluding any of these asset divestitures, just wondering if there's anything.
Along with that simplistic math I guess, just based on how much you outperformed in the first quarter here.
Yes, Kevin it's Luc speaking.
Yeah, we're thinking theres opportunity to exceed the high end of the guidance, we put out based on the strength of Q1, but.
It is premature to just simply roll forward, 100% of the outperformance in Q1 and add that on and Thats why we want to hold off until Q2 before we formally update the guidance I mean, you know in Toronto you were there. This season. It was very mild and no doubt you had some pull forward that benefited and but obviously with the strength of the pricing.
And the quality of the cost optimization that we're seeing in the results. We're feeling very bullish and there is going to be an opportunity to revisit. So we do want to get Q2 under developed but I'd say youre, probably not thinking about it wrong.
Okay. That's helpful. And then just my second question.
Just looking at I guess it would be slide.
Or youre kind of waterfall graph on the on the solid waste margins.
2009 going to have.
As I think through some of the headwinds that dissipate as we get through this year into next year and beyond.
You're obviously clearly through <unk>.
And then you have the R&D projects, which I believe you called up in another couple of hundred basis points of EBITDA margin.
Is this approach in a mid 30% EBITDA margin when I look at some of the puts and takes and you kind of lap some of the headwinds you've experience.
You're so within the solid waste business.
I mean, we've been consistent in saying that we think.
Over time, there's still another 250 to 300 basis points of opportunity within the solid waste business.
Could that be revisited, what theyre moving off of sort of RMG and others for sure. The continued pricing initiatives for sure. The continued cost rationalization for sure but focus on sort of higher margin more accretive markets for sure. So I mean, yes.
We're not going to stop at that incremental sort of 250 to 300 basis points over time.
Like we said there is no reason that this business couldn't push closer to the mid Thirty's overtime, Yes, Kevin If you think about the guide the original guide, we're seeing solid waste, but it's going to be like 35% margin in and around that area and that was inclusive of the material headwind to margin from commodity prices commodity prices are low normals.
And some of them bring that number closer to 31, obviously the strength of the Q1 and the continued durable spread of pricing cost could provide upside on top of that number as well so never mind going forward to RMG in the other market Densification and optimization to Patrick spoke to I think just within this year alone there is an.
<unk> to meaningfully sort of close that gap. So yes, we're very excited on the solid waste and obviously environmental services is the other segment in which we believe theres a lot of runway at the margin level as well.
Perfect Thats it from me and congrats on a great start to the year.
Thank you thanks, Kevin.
Our next question comes from Tyler Brown from Raymond James Your line is open.
Hey, good morning, guys.
Good morning, Todd.
Can you hear me, sorry, sorry about that Hey, I, just wanted to come back to price.
So obviously pricing was very solid but can you just remind us what percent of the book is restricted versus open I think you've got maybe a little bit more tilt towards the open market and then Luke I think you mentioned what the trends were could you could you refresh that was open market and restricted pricing wise.
Yes, so on an annual basis, how does it hasn't it's always book, we have about $1 billion billion won that's tied to more of that CPI linked type revenues, mostly in the residential collection, but we also see it in post collection and some of our MRF processing type contracts.
We're now seeing and we saw in the first quarter that restricted book resetting at 7% to 8% price increases, which is obviously much healthier numbers and what we've seen historically now you're just catching up for the cost pressures that you were effectively eating but it's certainly nice to see.
Sort of feel that relief and then on the open market piece.
What are you seeing pricing in the sort of mid teens now again. This is the catch up in response to the cost environment. We do expect that that will moderate as the year progresses, but you should continue to have broad based support on the CPI linked revenue as those resets.
Continue to occur throughout the balance of 2023 and honestly even into 2024.
Right. Okay. That's helpful. And then I have been kind of asking all the companies just to level set us.
What are you expecting or what is embedded in the guidance today from a unit cost inflation perspective.
Yes, So archive start for the year, we said it was around a 6% number.
And it was really a tale of two halves right.
As Q1 was going to be a high single digit and then moderating to a lower single digit by the time you got to Q4 by virtue of the lapping now if you look at labor labor cost as a five five to low 6% number today that is right in line with the expectation of the guide seems to be.
Moderating <unk> easing in line with expectations, we don't think Theres any material deviations. There R&M continues to linger the cost pressures associated with that now its ability to move the blended number is more limited but that is the one area that we're watching but otherwise we think this year.
<unk> is going to be that sort of.
Just above mid single digit and really <unk>.
Entering into Q4, and therefore into 2024 and now our subs sub mid single digit level.
Okay Alright, good to this kind of brings me to my last question. So there is.
A lot of talk about pricing a lot of talk about unit cost inflation in this idea of spread.
So if you look back over the past what do you think that that spread unit cost inflation has been where do you think it is today and do you think we could see a structurally wider spread.
As we think about it off into the future I don't know if thats it for everything but maybe over the next couple of years, just any thoughts on that I appreciate it.
Yeah, I mean, I think historically part of the industry was trying to get somewhere between 175 basis of spread and that's sort of a 30% margin business.
That would drive year sort of 30% to 50 basis points of annual organic margin expansion I think what happened in 2022 as everyone was trying to catch up with the cost inflation and that spreads compressed.
And now we're coming out the other side of that Youre seeing that spread widening I think 2023 is going to be characterized by an exceptionally widespread particularly as you get into the second half of the year and I think that carries into 2024 at which point, you'll have some sort of moderating.
I think the question you're asking is the right one and that where does that spread now settle out as we go forward over the medium and longer term. Our perspective is that it's a better spreads than it was before and I think when you look at the continued.
Disciplined on pricing in the industry and the need to earn appropriate returns on invested capital in this highly regulated business coupled with the continued consolidation I think those are all supports too.
Again, what is going to be a structurally higher spread I think it's difficult to say what exactly it will be but I think it is clear the industry has demonstrated we will price at the required level in response to the cost environment, we see and in doing so we're going to ensure that that spread is there to earn an appropriate return.
Okay perfect. Thank you guys.
Thanks Heather.
Our next question comes from Michael Hoffman from Stifel. Your line is open.
Good morning look I hope that spring allergies and not a cold.
Matt.
Actually Mr. Divisi housing today Michael.
Okay alright good.
So.
12, six less 190 is 10, 7%. So that's the first quarter inflation heads to four five in the fourth quarter, you add that up on an average basis and there is your midpoint.
That's what I would just say the 10 nine Michael I mean that doesn't that doesn't factor in the fact is the incremental cost investment you think about the spend that we've spoken about etc. Steve Secondly, I've got back that out if you want to get to a real unit cost inflation in doing so the puts and takes you get some more like sort of nine.
Low to mid nine number.
Okay Alright.
Are you starting to see it in.
Ease or is it still persistently high in April .
Evidence of the knee is happening.
The evidence of the ease of the cost inflation is certainly happening you are seeing in reality and Youre seeing the math just the comparison, if I look month by month round numbers. The January margin was backwards like 200 basis points plus by February that was about 50 basis points by April you were actually ahead, I'm, saying on a year over year.
Year basis.
I'm sorry by March you were ahead in April you expected the spreads even widen so we're certainly seeing it and I think it's a combination of both the actual unit cost inflation moderating.
As well as just the year over year Comping back.
And.
That's the point I was going to make US did your wage increases the big ones all through the spring and so we're comping against that and then it starts to.
Okay.
Correct and then when you think about for US we had the second half of the year, we had significant incremental cost inflation from some of our third party suppliers that were then finally, just catching up on their own wage and fuel related headwinds, but then got passed on.
And so Q the Q1 in the first half as a materially more difficult comp in the second and we're seeing that play out as anticipated, which further gifts.
The optimism we have in the guide that we put out.
Okay.
What do we pay down with from the 1213, what instruments are repaying down.
Youll see youll pay your variable rate debt right. So you have your term loan B and you have your revolver balance they have a comparable coupon.
Yield depending on the timing of receipt, you'll look at your revolver and Youll evaluate how much paydowns should happen there in conjunction with the free cash flow generation of the business to preserve an appropriate level of liquidity, but the majority of those dollars will go against the term loan B, which is the highest coupon component of our capital structure.
And what are the rating agencies, telling you today about what they need to see for a period of time in order to get that investment grade.
Jeff the leverage what else do they need to see.
While the leverage will be the primary gating item that I wanted to see sustained leverage at the lower level and then in addition over time they'll want to see sell down from the sponsorship growth to a level slightly below where they are today and that just because as long as the sponsor continues to own.
The size that they do.
As an incremental perspective on the financial part.
<unk> of the business. So those two things have to happen, but the major gating item is simply getting the leverage below three and a half level for more than just a moment in time.
Okay, so and thats sort of without knowing necessary when or how much they want to do it sort of reminding everybody.
That the sponsors are going to seek to monetize and haven't done. So since November 21, so that starts happening again.
And Michael just a question of when and I think.
The shareholders' perspective at least on our side and you'll see a material disconnect between sort of evaluation today.
So I don't think anyone's rushing to do anything sort of any time soon particularly given the value disconnect.
Shareholder group continues to see so.
<unk>.
So I don't see I don't think its anything happening anytime soon but.
As we continue to deliver and as we continue to perform.
And the thesis continues to play out in theory, the stock should move up in the valuations should trend.
Closer to where the sort of industry comps are then I think you might see some of that but until then it's going to be pretty quiet.
Okay, and given the really helping start to Es is there a corollary to what's happening in green infrastructure partners and does that speed up for timing on when you might be able to monetize that.
No.
As you know green infrastructure partners.
Slow and steady.
Obviously last year with the big ramp up in cost inflationary, but we are cautious about what M&A. We did just getting our hands around the business to make sure that we didn't have any headwinds that were material, we got through that and obviously as you ramp up the M&A program. This year in that business actually closing sort of our largest acquisition.
On May one.
Mitch.
<unk> Com Road building business.
But we will spend time getting that integrated in and we have a couple of other things under LOI.
Still on track to meet the targets Michael loses.
Over the course of next year and a half to get the 300 plus million of EBITDA.
We will get that the 300 plus million of EBITDA and then we will look for some strategic strategic alternatives for that business, but.
I don't foresee anything happening with that business in 2023.
Okay and last item for me is you didn't model commodities and as part of the guide much I think it's the right thing to do but what is what are your recycling people.
With Steve Miranda and Stephanie So theyre seeing an.
The trends.
Might also contributed and why you have confidence about high end.
Just on price.
I mean their perspective.
He's been at the beginning of the year Q1, and most of Q2 was going to be pretty soft.
We are seeing increased demand for recycled products I mean, I think our perspective is that late Q2 and into Q3, particularly.
Latter half of Q3, we'll start seeing some movement up in the right direction and that's been their assessment from the beginning of the year I mean, obviously things are subject to change, but there is certainly demand now just moving price to the right spot.
Great. Thank you so much see in New Orleans.
Thank you Michael.
Our next question comes from Jerry Revich from Goldman Sachs.
Your line is open.
Yes, hi, good morning, everyone nice quarter.
I'm wondering if we could just talk about.
How you folks are initially thinking about.
Price cost in 2024, given the outsized gains.
This year does that impact at all in terms of the price cost that you were targeting 24.
Yes, good morning Gerry.
Similar to Tyler's question.
I think our perspective is we are going to have a wider spread back half of 2023 and enter 2024 then.
What is going to be the new structural norm.
The exact.
Some of that I think remains to be seen but we have a high degree of conviction in visibility that 2020 for pricing is still going to be.
Other than mid single digits at a minimum when you think about the rollover effect of the residential and CPI linked book of work and cost inflation from.
From the trend, we're seeing should moderate to something at a low single digit lower like lower than mid single digits. So you put that together is there somewhere between 200 to 300 basis points of spread available I think so but we are going to reserve until we get to the end of the year to put a finer point on that but we think it is.
Underestimated the degree to which this cost price spread dynamic will continue into 2024 in a favorable manner.
That's good to hear.
So youre seeing good acceptance of pricing and then can we talk about the other.
Moving pieces in 'twenty for the landfill gas projects.
Thanks.
But I think $60 million.
Contribution in.
2024 can you update us on how those projects are going.
Should we still think about that as a tailwind.
94 versus 2003.
Yes, I mean, we put up the summary, and the Q4 report related to the patient may have actually replicated into this presentation and that remains our current view in terms of the timing of those <unk> coming online.
Recall that we did that at roughly $2 rins right. So to the extent there is recovery or appreciation in the value of rins that as all upside to those numbers. So the cadence of the development and the commercialization of the plants remains as previously guided and.
To the extent there is recovery and that sort of underlying value of the green gas that will be upside above and beyond what we had previously said and as also some.
Investigations going on our side regarding sort of the <unk> program and.
And some of the facilities that we had slated.
Yes.
For R&D and.
Some that are already under sort of electrical utility fit contract. So we're also assessing those two Jerry So we'll have an update once we see the legislation in June .
Yes, Patrick I'm glad you brought it up can you say more on what you feel like the value capture will be for the industry versus.
The auto Oems Hey, how are those conversations going in.
What.
Can you remind us how much power are you folks generating now just so we can contextualize what your rents could be for you folks.
At existing facilities.
It's unclear for us exactly because we have to make an assessment of our existing sort of fit contract.
So we're literally deepen deferrals of it now but.
I have pretty good conviction that we'll be able to come back to you with a pretty concrete perspective after Q2.
Okay.
We look forward to it thank you and can I ask one last one environmental services.
Standing performance can.
Can we just talk about what part of the portfolio is driving that performance how broad base.
Is it and should we be.
Thinking about any tough comps as we head into 'twenty forward, given just the magnitude of outperformance this year.
Yes, I still think Theres continued I mean remember that business has significant leverage to Canada right. So you have all.
About 80% of the revenue of that business definitely coming out of Canada.
As you know we put two largest players together in Canada ourselves <unk> to put that together, coupled together with coming out of the Cologuard recovery.
Sort of early 2022, so there's continues to be just a lot of demand.
Getting caught backup of AV with work.
<unk> had been slower over the last couple of years during the material aspects of Covid. So that continues to be coupled together with amount of synergies and obviously those two businesses had.
Different service offerings. So now the ability to cross sell those services between the two businesses that we put together sort of driving this material revenue growth.
Do I think you'll see a few levels no.
But it will definitely stay sort of at above average and more importantly, we now have the ability to start pushing.
Trying to get a more material way and focusing on the quality of revenue in that business. So I think you'll continue to see fair.
Fairly healthy sort of margin opex coming from that line of business as you've seen.
Some of our peers recently, yes, Jerry referenced to the comment on 2024 comp I mean, as Patrick said, it's largely been volumetric growth story with price discovery in the very early stages, we like our industry peers are actively initiating on the on the pricing front.
And I think that is going to provide a tailwind that despite what we expect to be very impressive margins in the current year as we've said, we see this blended business getting to 30%.
In the near future on that price driven growth strategy. So we don't see where we sit today material concern about comp.
Comps on the margin level in 2024, despite what we expect to be very healthy 2023 results.
Yes, Jerry I think what's also underappreciated post the divestitures.
For 2024 is just the free cash flow walk right. So when you take out.
Close to $80 million to $90 million of interest costs were set up pretty well.
Well for a very big sort of.
Free cash flow number growth number going into 2024 sort of marketing into 2020 forward guidance, but I can see even with some cash taxes.
That number very easily you can certainly somewhere between 875 and $900 million.
Which is a material step up from sort of what people are thinking today, when you sort of put the different pieces together, coupled together with the outperformance.
Of the business and where we see that going over the next little while so.
I think we positioned ourselves very well for a very healthy and solid 2024 here.
Excellent I appreciate the discussion thank you.
Thanks Jerry.
Our next question comes from Walter <unk> from RBC capital markets. Your line is open.
Thanks, very much good morning, everyone I just wanted to focus in on that M&A strategy post.
Three handle leverage.
You get into 2024.
You'll have a credit upgrade that will further lower your borrowing costs youll be a size then I think Patrick you mentioned the 75 to 900 and then on route to $1 billion of free cash flow generated organically without recourse to that I think all of this has been a great strategy in terms of how you are how you are proceeding here just curious once.
We get to 2024, how do you look at your total addressable market for M&A like when you look at the total market Thats in private hands.
How much of that is in your wheelhouse. So that we can frame kind of the cadence of what you would ramp up too.
And for how long could you run at that rate given the.
Your organic free cash flow, that's fueling that strategy Charlie.
Can you go into at that run rate.
So I think we've been pretty vocal.
I think when you look at analyst consensus numbers out there today, our free cash flow of somewhere between 800 $825 2024.
I think the reality is post these divestitures that we just talked about now that number moves up somewhere between $8 75 to 900 pretty conservatively. So when you think about how we reinvest that $875 million to $900 million in 2024, and that's without further M&A or anything we do this year, that's just sort of taking the base number.
This year.
I think consistently we responsibly deploy capital.
Into M&A and I think you will continue to see us do that.
Obviously with the large focus on continuing to.
Move leverage closer to the mid three so if you just look at what the base business does the base business organically, even in 2024 will delever call. It 70 basis points. So if we finish high threes.
And we finished at high threes.
At the end of 2023 and going into 2024 visit de levers.
Call it into the low threes.
Over the course of 2020 for the first $900 million spend obviously next year is all delevering.
So you can conservatively, even spending closer to $1 billion to $1 billion two in 2024.
That will de lever that will still keep us under sort of three five turns of leverage for 2024, and then that number just continues to ramp up when you look at the free cash flow in 2025.
1 billion, one class closer probably to $1 billion, two with organic growth and then it just keeps stepping up pretty ratably from there, particularly when all the free cash flow from the R&D you start hitting in 'twenty five and 26 so.
I think our program will continue the exact same way continued before.
Albeit with a target leverage sort of sub three five so we can move to that investment grade rating sort of over the next couple of years.
But the pipeline just to go back if I could that's fantastic and I've said this small multiple times listen when you look at Canada.
Canada $758 billion, Mark sorry, $11 billion to $12 billion market today, but maybe.
The big three today do call. It three five to four that this has just been solidly.
You still have six $5 billion to $7 billion unconsolidated through probably 2000 2500 companies and 10 provinces in Canada. So all of that is sort of white space for us.
And then you look in the U S.
<unk>.
Target markets, we think there is $5 billion to $7 billion of revenue.
In the markets, where we want to continue expanding sort of materially and so I think for the next 10 to 12 years, we're going to be sort of continuing to move at this pace.
Albeit obviously our business profile has changed substantially with the amount of free cash flow, we have and we will continue that M&A program as we move forward.
That's fantastic color Patrick.
And maybe one for Luke your Capex guide for the full year.
Is that 300 to 500 I think Luke you said that would be 300 in the second quarter.
Does that mean, we're going to be closer to the $500 million for the full year and does that at all impact.
Your your guidance for the free cash flow of $700 million for the full year.
Curious on that.
I think a little confusion there 300 to 500 was the articulated number in M&A deployment. So dollar spent to M&A. The Capex guide for the year was I think about $830 million.
Gross with the recent M&A as I said this on another 20 30 million Bucks.
Land purchases that are coming on some deals. We just did that number's, probably <unk> 50 ish and so what I'll just try to articulate with the approximately 250 to 260 million spend in Q1, and then $300 million. In Q2, you do have sort of 60% 65% of your Capex plan happening in each one of the front end loading so I can speak to the $300 million to $500 million was our <unk>.
<unk> is the art of the possible and proceeds deployed into M&A by virtue of us Patrick characterize a bit of a later year.
Yes, sorry, I was looking at the wrong note there so yes.
You answered my question in terms of cadence it doesn't.
Cadence of the front end Capex guide, it's not impacting your full year free cash flow.
Target at all correct.
Reading that right.
Yes, correct perfect. That's all my question. Thank you very much for the time.
Thanks Walter.
Yes.
Our next question comes from Rupert <unk> from National Bank.
Understood.
Hi, good morning, Thanks for taking the question.
Follow up on that last question. So I think youre showing acquisitions of $217 million in Q1 can you talk about how the M&A market is shaping up and are you still comfortable you'll fall in that $300 million to $500 million range for this year.
So Rupert this is Luke just one clarification youll recall, we purchased the Heartland facility from vertex in the first week of January or the very beginning of January and that was about $130 million of M&A spend that we actually included in our base guide by virtue of the earliest in the.
<unk>, which is ahead has occurred so when we're talking about spending 300 to 500 that was going to be incremental to the vertex spend so the reality, excluding vertex we spend about $100 million this year.
But to Patrick's point on the quality and opportunities in the pipeline.
We anticipate we will be in that range of that incremental call. It 500 million to deploy into M&A and so that will be on top of the heartland. So on the financial statements. It will present us a $600 million spend because we were always i'ma increments to heartland, and we're able to do that without.
Any implications to our stated goals and commitments around leverage.
Okay.
Okay perfect. Thank you.
And if we could talk about volume trends and solid waste near term and long term in the near term. Thank you talked today about pulling forward some volumes into Q1 and maybe.
Comps are getting tougher in some markets how should we think about volumes.
Under of the year and then in the long term.
We've talked a little about what the business model looks like post 2024, what do you think is.
Going to be a good run rate for volume growth and how do you well do you think you are positioned in.
Some of your target market I'm looking at the population growth in Canada.
You seem to be well positioned there.
How do you see that impacting you.
Yes, so I think yes.
Communicated is sort of flat to up 1%, obviously, there is puts and takes across.
The various parts of the country and in Canada, and the U S.
I think there's a little bit too much of a focus sort of on.
But the volumes plus plus one or minus one it doesn't really move the needle all that much sort of.
In the business, but I think while we sort of sit today, particularly in Canada, I think channel will be more flattish I think for the next little while just given.
We have a small component of C&D volumes that come into landfills et cetera, obviously, what's the lag that will happen sort of in late 'twenty. Three is probably the first half of 'twenty four but we think we will see in some of those T&D related volumes.
That will slow down a little bit, but again it doesn't materially it doesn't materially move the number if you can.
Some markets, we've actually like volume, it's actually back off a little bit. So we can take some of our wars trucks off the road some of them are not so great drivers off the road.
A significantly more efficient operation like we saw in sort of parts of Colgate, but.
<unk> using sort of.
Maybe down a half to up wall, new sort of a range that you'll see sort of over the long term is probably the right place to be and Rupert just to clarify on your comment about pull forward of volume from Q2 into Q1.
Not necessarily saying there was a pull forward, but as you know.
Our exposure to the sort of winter belt, if you will across Canada, but also in Wisconsin, Michigan et cetera, you just never know exactly how the spring is going to play out and Thats why we always want to reserve until Q2 to actually see if there was pull forward or not so not necessarily saying thats. The case such as wood appreciate the incremental time to.
Fully formalize our view on that just wanted to clarify that point.
Yes.
I appreciate that the numbers are pretty small compared to what we're seeing on pricing.
Great I'll leave it there thank you.
Yes sure.
Our next question comes from Stephanie Miller from Jefferies. Your line is open.
Hi, good morning, Thank you.
Good morning.
Good morning, no good.
A good follow up to the previous question you didn't notice you Didnt note any of this.
Paul can speak for themselves just curious through the course of <unk> you saw any maybe volume weakness either in the U S or Canada on the solid waste side I think some of your peers have called out maybe a little bit of slower activity, but just wanted to get some color on what you're seeing thank you.
Yes.
It's clearly moderated not shooting the lights out sort of anywhere specifically, obviously sort of on a roll off polls in specific markets little bit lower particularly around CMV related polls, albeit sort of under sort of 5% of our revenue. So you still see a slowdown in some of the larger.
Primary markets, particularly in Canada.
But in the U S to sort of moderate I mean, we don't we don't have a lot of exposure to the west coast. So we didn't have the west coast sort of weather impact.
Maybe some of the others have that's just.
I would say to a certain extent Lockheed just in terms of where we were this year that we didnt operate in some of those places but.
That will come back for everyone in the industry, but I think by and large we haven't seen any material slowdown sort of anywhere outside of some of the CMV stuff and some of the larger primary markets of Canada.
Great. Thank you and then Luke you mentioned this I think earlier in your remarks about the margin opportunity and maybe some of your investments in new technology or automation can you maybe just give us an update on some of those investments expected for.
2023.
Yes, so definitely what I would say is what we're seeing and realizing thus far is without any substantial incremental dollars in that we've spoken about both of the truck CMG conversion automation and some of these capital spends that have attractive return profiles.
And how we've been more limited in deploying capital into them. There's been this perception around.
Leverage constraints, if you will so our current guide as we previously said just assumes normal course replacement schedules, yes, favoring CMG, where we can but nothing out of the ordinary in terms of incremental spend that would help accelerate the realization of some of those opportunities. So they are real they are there.
And once we perhaps get leverage to a level that is more consistent with what the expectations set looks like youll see an opportunity to revisit.
Profitable high return.
Investments like that and others, but as of now it has been just the normal course, and mostly what you're seeing on the margin as before including what we expect to be the significant benefit once we started implementing more initiatives around those areas.
Great. Thank you so much.
Thank you.
Our next question comes from Stephanie <unk> from J.
J P. Morgan the line is open.
Hi, good morning.
In the first quarter price.
Good morning.
Wanted to ask about the first quarter pricing outperforming.
Do you get less customer pushback from the pricing that you would know and Thats what drove the outperformance.
Comment on how the conversations with customers.
And implementing that.
Yes, I think.
On the question of whether we could get more because it was just I think on some of the outperformance came from.
From the initial realization of the fuel surcharge program that the customers contractually obligated to be charged right. So it was less of a conversation versus just charging them and level setting them for what they are contractually obligated to sort of pay and I think we communicated that through Q3 and Q4 of last year.
This show realization of some of those surcharge environmental sort of fall into base price and Thats why you saw the outperformance to sort of gauge price.
Okay.
Put it back.
Customer churn has been at all time lows so.
Just catching up with voluntary customer terms at all time lows.
Okay, that's great to hear.
And just on M&A.
Are you do you feel like you're you have seen valuations the M&A opportunities differently, because maybe you have to hold back on some opportunities given the leverage.
Okay.
Yes.
I think what we've communicated historically, what we've communicated today is listen we're going to deploy the dollars.
We see fit and we're going to deploy them into markets, where we have a significant amount of fixed page cost facilities.
When we can lever those fixed based cost of sales of incremental volume. So that's looking at markets, where we have a lot of post collection operations that maybe we acquired through other businesses or we got through the divestiture packages, where theyre running at sort of 60, 70% utilization and we want to push close to a 100% utilization and thats where the the.
Lion's share of those dollars are going to be deployed this year as we get through this year. Then we will look at sort of expanding in tertiary markets around those existing platform type markets, we have but.
Within the same geography, so yes, I mean, the focus definitely.
Definitely this year is sort of small tuck ins that we can buy at significantly lower values. So we can leverage that fixed cost base post collection operations that we currently hold today that are running at not 100% utilization.
Okay.
Thank you.
Our next question comes from Chris Murray from <unk> capital markets. Your line is open.
Yes, thanks folks just looking going back to some of the pricing.
You guys have talked about for Q1.
How much of a price for that.
The rest of the year do you feel is already kind of in place today and how much do you think is left to get for the rest of the year.
Yes, good morning, Chris I'd say, you probably have 85% to 90% of the price just in the typical.
Seasonal cadence and that's being most of our price occurs in Q1 with than another.
Pricing event that happened in Q3.
So where we sit that would normally be the level of comfort. When you think about our guide of at least 8% and when you think about the strength of Q1.
Say, you have probably a 100% visibility that youre going to achieve your guide.
<unk> now overcome.
The extent to which there is upside above that.
Okay fair enough.
And then I'm not sure who wants to take this one but you were talking about the fuel surcharge program.
And you were talking about getting into the first phase of the plan and then a second change into 2024 can you just maybe elaborate on what you are talking about in terms of.
Phases for the fuel surcharge and any thoughts around this actually being accretive as perhaps you get these surcharges into.
And the pricing in the next few quarters.
Yes, so because all we were simply saying is what we're looking today is to cover our direct fuel costs with the surcharge mechanism such that for every dollar change in diesel price item to recover my dollar plus my margin and Thats, what we really perceived as phase one get to that point, where we've effectively.
Neutralized the margin impact from fuel fuel costs changes in our P&L. The reality is we are subject to fuel cost and indirect manners through a whole host of.
Lines on the P&L it could be third party trucking support it can be plastic containers and other items that are impacted by petroleum cost. So I think we will continue to pursue the overarching industry approach whereby there's a path to recover all of those types of costs.
Beyond just start direct energy and Thats, what we mean really by sort of phase II and beyond yes. I think this is all margin accretive and that the initial recognition of the surcharges as effectively as a certain tranche of it just like incremental permanent base price and Thats, what youre seeing sort of come through in the results. So we're happy.
Now substantially be at the place, where we've achieved phase one and we will continue through our pricing discovery.
Optimizing the surcharge program in conjunction with our normal course pricing practices as we go forward for the year and beyond.
Okay. That's helpful. Thanks folks.
Thank you.
Our next question comes from Devin Dodge from BMO your.
Your line is open.
Thanks, Good morning.
Alright.
More of a modeling question you know kind of apologies if I missed it earlier, but once the divestitures are.
How does that impact the timing.
<unk> is expected to be cash.
Cash tax.
Sorry, definitely having a really difficult time hearing I think you said I mentioned about cash taxes, so as with the divestitures. So yes. As you know we currently have significant net operating losses.
<unk> provided us tax shield on a regular basis.
Divestitures will.
Consume.
Difficult component of those net operating losses and accelerate the pace at which you become a cash taxpayer now obviously with our capital deployment and M&A deployment, there's opportunities to continue to.
Minimize what has do with the cash taxes level, but starting in 2020 late 2024, and now into 2025, which is probably about half a year earlier than previously anticipated you'll start having a ramp up in cash taxes to the extent there is not mitigating factors such as.
M&A et cetera.
Okay. Thanks, guys I'll leave it there congrats on that some parts of the year.
Thank you Devin Thanks, Kevin.
Our next question comes from Michael Feniger from Bank of America. Your line is open.
Hey, guys. Thanks for just.
Squeezing me and you guys are showing areas of addressing the low hanging fruit as you build this company to fuel surcharge program is a great example, just curious over time do you need to create less seasonality with that free cash flow could smoothed out.
Over the next few years.
Yes, good morning. Thanks.
Look I.
I think the answer is yes.
The capex that we're always going to respond with capital expenditures to what we see in this year pulling forward I think it was just prudent in light of what Youre seeing on the R&M side, but working capital swings that we have we will always have a certain degree of it coupled with by virtue of the Canadian or.
Our winter climates, and environmental services, but then there's a meaningful opportunity to standardize and harmonize our processes and programs. There and you think about all of the sort of payables associated with businesses that have come on to the generator of it and get to a point, where you have more muted amounts from quarter to quarter.
So I think it's a great question.
It's something that will represent an opportunity for us as we go forward with what is now a more sort of.
Stable size core that will allow for that sort of harmonization of those practices.
Great and just to sneak one last in the environmental services side.
Other big player reported a great quarter, there with volume and price.
Yes.
Out of the waste industry is becoming more rational and disciplined and project activity and volumes. There start to soften do you think pricing will stay disciplined on this area of the waste industry. Thanks, everyone.
I do I mean, its been my thesis for almost 16 years now so I think.
It's probably 15 years behind where the solid waste business is but I think over time and those businesses are particularly our facility in Qatar.
Very difficult to replicate today.
Again think about it as a landfill fixed cost based materials come in on a route based collection network come in process, those discharges wastewater or solidify them and put them into a sludge incentives to one of our sort of landfills.
I think where we're sitting is that.
The market and the competitors are realizing what the actual cost is to do that work and it's becoming significantly more rational and as we've said our business. We anticipate it will be a mid twenties margin business. This year and we think we can push that closer to 30% over the coming years. So yes. We are of the same thesis I believe that to be true.
I think youre seeing that sort of come through and some of the competitors numbers as well.
Perfect. Thanks, guys.
Thanks, Mike.
Our final question comes from Michael Hoffman from Stifel. Your line is open.
Hey, Thanks for the follow up I meant to ask this before and I forgot so the U S houses past the debt ceiling Bill.
And they have pulled the R&D investment tax credit.
That was in the IRI out of it.
Kind of get through the Senate, but assuming that goes away.
Still do all of its R&D investing but how does it impact the cash numbers you've been sharing.
Yes, so Michael.
Recall, our previous conversation around this was we were going to use the ITC off the initial jobs to serve as the equity investment in the subsequent ones, where you have this opportunity to recycle that nicely.
To the extent that goes away, but it will require will be a little bit more equity than we were previously anticipating but again as you well know the returns on that equity in the overall profile of these are still probably one of the most compelling opportunities that we've.
We have seen in this industry are in this business. So nothing changes that potentially changes the timing of our sort of capex into those we don't anticipate there being a material shift that this year's guide.
But we'll obviously sort of stay close to it.
As we go forward and think about 2024.
Yes, and just to remind everybody everybody was developing needs before the IRR was even and Congresses line of sight. So correct.
And then the last one.
What do you care about more free cash flow compounded average growth rate and conversion.
The P&L versus margin.
Oh.
I think it is one of them the same.
From my perspective, if we can drive out.
Incremental sort of margin organically out of the base business. All those dollars are going to slow down in the sort of free cash wise. So I think it's fair from my perspective, one of the same.
Well the thing we talked about is the growth of free cash flow per share alright, Thats, where we believe we have a unique opportunity in an industry thats a great compound our free cash flow per share with the idiosyncratic operating leverage opportunities available for us compounded by then the financial leverage we just think we have a very <unk>.
<unk> growth of free cash flow per share for the next.
Pick your duration, but mid to long term that is highly compelling and doing that should create material value.
Right I guess, what I was trying to get at is there is there is.
The point, where margins find a level and then.
The incrementals on those tighter, but but theres almost continuous opportunity to maximize.
Capital.
Asset utilization.
That drives even more cash.
And then of course, all those self help opportunities are going to continue driving more cash and we're just.
And then the transfer of wealth from the debt side of the balance sheet to the equity holders right. So that moves all of that value is going to transfer from that side was sort of analogy to the equity side. So you put those two things together, that's going to drive sort of material sort of free cash flow growth.
Yep, Okay, great. Thanks, Thanks for taking the follow up.
Thank you Michael.
This concludes our Q&A I'll now hand back to Patrick to Vijay founder and CEO for any final remarks.
Thank you very much everyone for joining the call. This morning, and we look forward to speaking to you. After Q2 and again. Thank you to everyone for their sort of continued support and always available to take calls et cetera for the balance, but thank you very much.
Ladies and gentlemen, today's call is now concluded. Thank you for your participation you may now disconnect your lines.