GFL Environmental Inc. Q1 2023 Earnings Call
Speaker 1: We're also ahead of our expectations and speak to the quality of our market selection and the resiliency of our business. Additionally, the role of 2022 Solid Waste M&A also exceeded our plan.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: As I said last quarter, we remain extremely optimistic on this segment's growth prospect and operating leverage opportunities given our focus on quality of revenue and asset utilization.
Speaker 1: Adjusted EBITDA grew 24% in the first quarter and margins were nearly 50 basis points better than planned as our diligent focus on optimizing pricing and on our cost base continues to drive our higher underlying profitability.
Speaker 1: The $441 million of adjustity but all was ahead of our expectation and attributable to the broad-based revenue outperformance and operating leverage across poll segments.
Speaker 1: The margin impact of higher fuel costs that were focused on most of 2022 continue to be mitigated by the ongoing implementation of our fuel costs recovery program.
Speaker 1: which allows price increases to drive operating leverage.
Speaker 1: The quarter saw almost double digit unit cost inflation, which was in line with expectations and is expected to rateably step down as the year progresses.
Speaker 1: With that said, Repair and Maintenance Costs had wouldn't continue to linger. Our record price increases, overcame these cost pressures and drove nearly 200 base of the basis points of organic solid waste margin expansion, when excluding the impact of fuel with the moderate inflat out pressure.
Speaker 1: As we look forward to the bounce 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 strength in the first quarter further solidifies our high degree of visibility on the widening spread between price and cost inflation.
Speaker 1: 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 Justin Precashlow, Luke will talk through the movie pieces, but at a high level the front-end loading of working capital investment.
Speaker 1: and capital expenditures result in a plan that was negative in the first half and positive in the second half.
Speaker 1: 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 repaired Maiden's cost pressures. A strategy that we anticipate will drive incremental profitability as we move forward.
Speaker 1: In addition to a standing financial performance, the first quarter also saw material progress on our portfolio rationalization initiative.
Speaker 1: On our last call we told you that we had identified three distinct non-core markets for the Vesture.
Speaker 1: As of this week, we have signed definitive agreements for all three, and we now anticipate total growth proceeds of $1.6 billion Canadian dollars over 100 million more than we had signed on the February call.
Speaker 1: We expect one of the transactions will close as early as next month, and the other of the two to be closed by the end of Q2 or the end of the third quarter.
Speaker 1: The net policy from the transit actions will be used to pay down our floating rate debt.
Speaker 1: The DVESET assets represent approximately 110 million of adjusted EBITDA at mid-20s margin, and the transactions are expected to be immediately free cash flow of credoves, as the interest and CapEx savings more than offset the divested adjusted EBITDA. The DVESET assets represent approximately 1 million of adjusted EBITDA.
Speaker 1: Because of the mid-teens multiple we were realizing on these sales, the transactions are de-leparated by nearly half a turn.
Speaker 1: The high degree of visibility that we now have on the transaction timing, combined with our exceptional first-order operating performance, solidifies our conviction that we will end the year with net leverage that is less than four times.
Speaker 1: We are committed to achieving this leveraged target by year-end and expect further deliraging in 2024 and beyond.
Speaker 1: We think that this will position us to secure an investment grade rating over the medium term.
Speaker 1: On the ESG front, in Q1, we continue to make progress on our RNG project pipeline. With the largest of these projects, our Arbor Hills facility Michigan, and it is expected to start production in Q2 of this year.
Speaker 1: We hired our first director of Diversity, Equity, Inclusion, and Blondon.
Speaker 1: This month, we expect to begin to see positive impact on employee retention and engagement as we continue to roll out our DEI and B Roadmap.
Speaker 1: and the other employees focused programs that we talked about in our last sustainability report.
Speaker 1: Also this month, we announced the appointment of Sandra Labbe to our Board of Directors.
Speaker 1: Sandra is a great addition to the board with her HR and legal background from buying with her experience as an Olympian. We expect that she will be able to provide some good insights to management as we continue to foster our already strong culture at GFL.
Speaker 1: Lastly, Joy Grayat, our EVP of Strategic Initiatives, who has been with GFL since the early years, will be recognized as one of the five inaugural women who inspire at Waist Expo next month.
Speaker 1: 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.
Speaker 1: Once again, I want to thank each and every one of our 20,000 employees for all that they do to allow GFL to continue to achieve these exceptional results. I'll now pass the call over to Lou Cool, walk through the corner in more detail, and then I'll share some closing comments before we open it up for eminence.
Speaker 1: of our 20,000 employees for all that they do to allow GFL to continue to achieve these exceptional results. I'll now pass the call over to Lou Cool, walk through the corner in more detail, and then I'll share some closing comments before we open it up for eminent. Q&A.
Speaker 2: Thanks, Patrick. Our accompanying investor presentation provides supplemental analysis to summarize our performance in the quarter in a consistent format to what we previously provided.
Speaker 2: Page 3 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 guide. Note that the M&A outperformance is primarily related to the roll over of 2022 M&A.
Speaker 2: as the contribution from new 2023 M&A, excluding the Heartland deal, which was included in the base guide, was approximately only $5 million.
Speaker 2: 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 price 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, a dynamic that is expected to provide pricing support for quarters to come due to the inherent lag in the mechanics of the underlying contract.
Speaker 2: As Patrick said, the strength of the first quarter pricing provides conviction that we'll do better than the 8% pricing that was included in the guide for the year as a whole.
Speaker 2: Page 4 shows the bridge for solid waste adjust that the EBITDA margins compared to the first quarter of 2022. As anticipated, the decline in commodity prices in our Murph business was 125 basis point in headwind to margins year over year.
Speaker 2: Recall our guide assumed commodity prices remain at January 2023 levels.
Speaker 2: While this pricing was broadly in line with first quarter actuals, any improvement from here will be upside.
Speaker 2: Although fuel costs decreased sequentially from Q4, the increased diesel costs over the prior year continue to be a margin headwind. However, the ongoing improvement of our fuel costs for recovery strategies yielded a 35 basis point improvement than that margin impact from higher diesel prices as compared to the fourth quarter.
Speaker 2: Excluding the impact of commodity and fuel prices, solid waste margins expanded 190 basis points on the same-store basis. A 65 basis point acceleration over the spreading Q4, and as Patrick said, a result that reinforces our optimism and being able to meet and exceed the already industry-leading margin expansion we include.
Speaker 2: We remain highly confident in our ability to conclude the first phase of this initiative by June of this year, two quarters ahead of the original plan, and we remain committed to pursuing the additional upside of Phase 2 throughout the second half of 2023 and beyond.
Speaker 2: We continue to lag the industry in this area due to the rapid growth of our platform in recent years that 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 planned.
Speaker 2: 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 rate interest payments, which resulted in effectively four months of cash interest payments in the first quarter.
Speaker 2: This is purely just a timing difference, and Q2 will see cash injures $25 million less than planned, and the first half of the whole will be in line with the guide. When thinking about the cadence of pre-cash flow, in addition to the seasonality and adjusted EBITDA, the quarterly variances in pre-cash flow are primarily attributable to working capital and capital expenditures time.
Speaker 2: in light of the material revenue growth, particularly the environmental services, which has a higher DSO profile.
Speaker 2: For capital expenditures, we typically see a front end loading in the first half and that a rateable 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 roll over from 2022 and the active strategy to take delivery of new trucks and equipment early as mitigation to lingering R&M pressures.
Speaker 2: significantly better than our plan.
Speaker 2: Reported net leverage was 4.97 at the end of the quarter.
Speaker 2: Looking forward, achieving adjusted EBITDA and adjusted pre-cash flow at plan would organically reduce year-end leverage to low fours. And then the divestiture transactions will reduce leverage in additional 40 basis points resulting in year-end net leverage that starts with a 3.
Speaker 2: This is the starting point to achieving an investment grade rating in the medium term. In the meantime, once our leverage is reduced and maintained at these lower levels, we anticipate material credit rating upgrades prior to the maturity of most of our existing debt, providing opportunity for near-term borrowing costs and improved.
Speaker 2: pre-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.
Speaker 2: 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 revenue plan for environmental services, which translates to approximately 1.975 billion of consolidated revenue expected for the second quarter.
Speaker 2: In terms of margins, with the toughest margin comp behind us, we remain optimistic that margins can accelerate to the low to mid-27s for approximately 70-90 basis points expansion over the second quarter of 2022.
Speaker 2: At the segment level, this assumes solver-based margins of between 30.5 and 31% and environmental services margins of almost 30% with corporate margins comparable to Q1.
Speaker 2: The guide then contemplates further margin expansion in the third quarter before stepping down in the fourth quarter as per the typical cadence of the business.
Speaker 2: That yields the Q2 adjusted to EBITDA expectation of $535 to $545 million. To continue the walk to Q2 adjusted for cash flow, in Q2 we are expecting capex of approximately $300 million cash interest of $110 million, and an investment in working capital and other operating cash flow items can be...
Speaker 2: expectations and assumptions underlying our original guidance to which we remain committed.
Speaker 2: I will now have the call back to Patrick. We'll provide some closing comments before Q&A.
Speaker 1: Thanks, Luke. I want to conclude with a few thoughts on where we are today and where we are headed.
Speaker 1: We have now reported to the public company for 13 quarters.
Speaker 1: 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.
Speaker 1: We have always been confident in our strategy and our ability to execute.
Speaker 1: I said this many times before and I will 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 are going to do. That's our culture and it can be felt across GFL.
Speaker 1: All of these pieces, including the effective strategies we used 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.
Speaker 1: We are consistently applying the same strategies that we have 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 to focus on the most attractive portfolio.
Speaker 1: 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.
Speaker 3: 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 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask a question, please ensure your device is unmuted locally. Our first question today comes from Kevin Chang from CIBC.
Speaker 4: you did him Q-1 and if I take the implied seasonality.
Speaker 4: 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, you know, maybe closer to 2.1 and 2.1 to 2.2 billion, obviously excluding any of these asset divestitures. Just wondering if there's anything wrong with that simplistic math, I guess, based on how much you all performed in the first quarter here.
Speaker 2: Kevin, it's Luke speaking. I'd say, yeah, we're thinking there's opportunity to exceed the high end of the guidance we put on based on the strength of Q1. But, you know, I think it is premature to just simply roll forward 100% of the outperformance of Q1 and add that on.
Speaker 2: cost optimization that we're seeing in the results, we're feeling very bullish and there's gonna be an opportunity to revisit. So we do wanna get Q2 under the belt, but I'd say you're probably not thinking about it wrong.
Speaker 4: Okay, that's helpful. I mean, just my second question. You know, just looking at, I guess it would be slide for your kind of waterfall graph on the solid waste margins, 29.5. You know, as I think through some of the headwinds that dissipate as we get through this year and to next year and beyond.
Speaker 4: You know, you're obviously clearly through 30 percent and then you have the R&G projects which I believe you've called up in another couple of hundred bases points of EBITDA margin.
Speaker 4: If it's approaching 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 experienced, you're or so within your solid weight fitness.
Speaker 1: I mean, we've been consistent in saying that we think, you know, over time, there's still another 250 to 300 basis points of opportunity within the solid waste business. Yeah, could that be revisited with the moving up of sort of RNG and others for sure, the continued pricing initiatives for sure, the continued cost rationalizations for sure, the focus on
Speaker 1: sort of higher margin more creative markets for sure so i mean yeah we're not going to stop at that incremental sort of 200 to 200 basis points but you know over time you know like we said there's no reason that this business couldn't push closer to the mid 30s over time Kevin if you think about the guide the original guide we were saying solid waste was going to be like 30
Speaker 2: spread of pricing costs could provide upside on top of that number as well. So nevermind going forward to RNG and, you know, the other market densification optimization that Patrick spoke to, I think just within this year alone, there's an opportunity to meaningfully sort of close that gap. So yeah, we're very excited on the solid waste and obviously environmental services.
Speaker 2: is the other segment in which we believe there's a lot of runway at the margin level as well.
Speaker 4: Perfect. That's it for me. And congrats on a great start to the year. Thank you. Thank you.
Speaker 3: Our next question comes from Tyler Brown from Raymond James. Your line is open.
Speaker 5: Hey, good morning, guys. Good morning, Doug. Can you hear me? Oh, hey, sorry. Sorry about that. Hey, I just want to come back to price. Yeah, 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, Luke, I think you mentioned the price of the book.
Speaker 2: what the trends were, could you refresh that, what open market and restricted pricing was? Yeah, so on an annual basis, as you said in the solid waste book, we have about a billion one that's tied to more of that CPI link type revenues. Mostly in the residential collection, but we also see it in post collection.
Speaker 2: historically. Now you're just catching up for the cost pressures that you were effectively eating but it's certainly nice to sort of feel that relief.
Speaker 2: Now, you're just catching up for the cost pressures that you were effectively eating, but it's certainly nice to sort of feel that relief. And then on the open market piece,
Speaker 2: You know, you're seeing pricing in the sort of mid-teens.
Speaker 2: 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-length revenue as those resets continue.
Speaker 2: to occur throughout the balance of 2023 and off the even end of 2024.
Speaker 5: Right. Okay, that's helpful. And then I've been kind of asking all the companies this just to level set it. But what are you expecting or what is embedded in the guidance today from a unit cost inflation perspective? Yes, so our guide starts the year, we said it was around a 6% number.
Speaker 2: And it was really a tale of two halves.
Speaker 2: 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 labour, labour cost is a 5.5 to low 6% number today.
Speaker 2: That is right in line with the expectations of the guide and seems to be moderating and or easing in line with expectations. We don't think there's any material deviations there. R&M continues to linger. The cost pressure is associated with that. Now it's ability to move the blended number is more limited.
Speaker 2: But you know that is the one area that we're watching but otherwise we think this this year is going to be that sort of just above mid single digit and really
Speaker 2: entering into Q4 and therefore into 2024 at now a sub-mid-single-digit level.
Speaker 5: Okay, all right, good. This kind of brings me to my last question. As the Dean of the College of Business there,
Speaker 5: A lot of talk about pricing, a lot of talk about unit cost inflation and this idea of spread.
Speaker 5: So if you look back over the past, what do you think that that spread to unit cost inflation has been? Where do you think it is today? And do you think that we could see a structurally wider spread as we think about it off into the future? I don't know if that's a forever thing, but maybe over the next couple of years just any thoughts on that. Appreciate it
Speaker 2: Yeah, I mean I think historically, the industry was trying to get somewhere between 100 to 175 basis of spread and then it's sort of 30% margin business. That would drive your 30 to 50 basis points of annual organic margin expansion.
Speaker 2: I think what happened in 2022 is everyone was trying to catch up with the cost inflation and that spread compressed and now we're coming out the other side of that, you're seeing that spread widening. I think 2023 is going to be characterized by an exceptionally wide spread, 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.
Speaker 2: I think the question you're asking is the right one in 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 spread than it was before. And I think when you look at the continued discipline on pricing in the industry.
Speaker 2: the need to earn appropriate returns on the invested capital in this highly regulated business coupled with the continued consolidation, I think those are all supports to retain 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.
Speaker 2: 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 the appropriate return.
Speaker 5: Thank you guys.
Speaker 5: Okay, perfect. Thank you guys. Thank you, sir.
Speaker 3: Our next question comes from Michael Hoffman from Steve Hall. Your line is open. Good morning, Luke. I hope that's spring allergies and not a cold.
Speaker 2: That's me actually. That's actually Mr. DaVinci. I'm helping today Michael. Oh okay. Very good. All right.
Speaker 5: So 12.6 less 190 is 10.7. So that's the first quarter inflation heads to four or five in the fourth quarter. Add that up on an average basis and there's your midpoint.
Speaker 2: I would just say the 10-9, Michael, that doesn't factor in the fact that there's incremental cost investment. You think about the IT spend that we've spoken about, etc. You technically have to back that out if you want to get to your real unit cost inflation and doing so the puts and takes. You get to more like a sort of nine...
Speaker 6: low to mid 9 number. Okay, alright and
Speaker 2: Are you starting to see it and Ease or is it still persistently high in April is is the evidence of an ease happening? The evidence of the ease of the cost inflation is certainly happening you're seeing in reality and you're seeing in the math of just the comparison if I look month by month round numbers
Speaker 2: The January margin was backwards like 200 basis points plus. By February that was about 50 basis points. By April you were actually ahead and saying on a year over your basis. I'm sorry, by March you were ahead in April you expected it to spread even wider. So we're certainly seeing it and I think it's a combination of both.
Speaker 2: the actual unit cost inflation moderating, as well as just the year-over-year comping fact.
Speaker 5: And this is that's the point I was going to make is you did your wage increases the big ones all through the spring and So we're comping against that and this starts to add
Speaker 2: Correct, and then 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. Thank you upon attention.
Speaker 2: So Q1 in the first half is a materially more difficult comp than the second, and we are seeing that play out as anticipated, which further gives the optimism we have in the guide that we put out. What do we pay down with the 1.2, 1.3? What instruments are we paying down?
Speaker 2: You'll pay your variable rate debt, right? So you have your terminal B and you have your revolver balance. They have a comparable coupon. Depending on the timing of receipt, you'll look at your revolver and you'll evaluate how much pay down should happen there in conjunction with the free cash flow generation of the business.
Speaker 2: to preserve an appropriate level of liquidity, but the majority of those dollars will go against the term loan fee, 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?
Speaker 2: for a period of time in order to get that investment grade. It's not just the leverage. What else do they need to see? Well the leverage will be the primary gaining item. They'll want 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.
Speaker 2: that below three and a half level for more than just a moment in time.
Speaker 7: Okay, so and that's sort of without you knowing necessarily when or what what how much they want to do it's reminding everybody.
Speaker 7: that the sponsors are going to seek to monetize and haven't done so since November 21. So this starts happening again.
Speaker 1: It'll happen, Michael, just the question of when.
Speaker 1: The shareholders perspectives at least on our side. I mean they just see a material disconnect and sort of evaluation today So I don't think anyone's rushing to do anything sort of anytime soon particularly given you know the value disconnect that shareholder group continues to see so I don't think it's anything happening anytime soon, but
Speaker 1: 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 and the valuations should trend closer to where the 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 healthy start to ES,
Speaker 1: Is there a corollary to what's happening at Green Infrastructure Partners and does that speed up the timing on when you might be able to monetize that? No, I mean listen, as you know on Green Infrastructure Partners, you know, sort of slow and steady there. Obviously last year with the big ramp up in cost inflation, you know, we were cautious about what happened here, we did just...
Speaker 1: 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 know we wrapped up the M&A program this year in that business actually closing sort of our largest acquisition on May 1st, which is the ACON road building business.
Speaker 1: But we'll spend time getting that integrated, and we have a couple of other things under L.O.I.
Speaker 1: You know still on track to meet the targets, you know, my goal is sort of in the course of the next year and a half to get that to you know, 300 plus million of EBITDA We'll get that to 300 plus million of EBITDA and then we'll look at sort of, you know, some strategic strategic alternatives for that business, but I don't foresee anything happening with that business in 2023.
Speaker 7: Okay, and last item for me is you didn't model commodities in as part of the guide, which I think is the right thing to do, but what is your, what are your recycling people with Steve, Miranda and Stephanie, so they're seeing in
Speaker 1: the trends that might also contribute it why I have confidence about high-end not just on price. Their perspective has always been from the beginning of the year Q1 and most of Q2 was going to be pretty soft.
Speaker 1: But we are seeing increased demand for the recycled products and I think their perspective is that late Q2 and into Q3 and particularly into the latter half of Q3 we'll start seeing some movements up in the right direction and that's been their assessment from the beginning of the year. I don't think things are subject to change but there's...
Speaker 3: Certainly demand, it's now just moving price to the right spot. Great. Thank you so much. See you in New Orleans. Thank you, Michael. Our next question comes from Jerry Revitch from Goldman Sachs.
Speaker 1: 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 outsize gains this year. Does that impact at all in terms of the price cost that you would target in 2024?
Speaker 8: exact
Speaker 2: quantum of that I think remains to be seen, but we have a high degree of conviction and visibility that 2024 pricing is still going to be better than mid single digits at a minimum when you think about the rollover effect of the residential and CPI link book work and cost inflation.
Speaker 2: 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...
Speaker 1: cost-price spread dynamic will continue into 2024 in a favorable manner. That's good to hear. So you're seeing good acceptance to pricing. Can we talk about the other moving pieces in 2024?
Speaker 1: gas projects. You folks had expected I think 60 million dollars of contribution in 2024. Can you update us on how those projects are going and should we still think about that as a tailwind 24 versus 23?
Speaker 2: Yeah, I mean we put out the summary in the Q4 report where we laid out the pages. We have actually replicated it into this presentation and that remains our current view in terms of the timing of those MMBTUs coming online and recall that we did that at roughly $2 rims.
Speaker 2: So to the extent there is recovery or appreciation in the value of RIN, that is 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 in that underlying value of the green gas, that will be upside above and beyond what we had previously said.
Speaker 1: And there's also some, you know, there's some investigations going on on our side regarding sort of the E-RIN program.
Speaker 1: and some of the facilities that we had slated, you know, for RNG and some that are already under sort of electrical utility fit contract. So we're also assessing those two, Jerry, and we'll have an update once we see the legislation in June .
Speaker 1: Yeah, Patrick, I'm glad you brought that up. Can you say more on what you feel like the value capture will be for the industry versus the auto OEMs? How are those conversations going? And, you know, what can you remind us how much power are you folks generating?
Speaker 1: Now, just so we can contextualize what earrings could be for you folks. That existing facilities. Jeff, it's unclear for us exactly because we have to make an assessment of our existing sort of fit contracts. So we're literally deep in the thrills of it now. But I have...
Speaker 1: pretty good conviction that we'll be able to come back to you with a pretty concrete perspective after Q2. We look forward to it. Thank you, and can I ask one last one? Environmental services, outstanding performance. Can we just talk about what part of the portfolio is driving that performance? How broad-based?
Speaker 1: Is it, and should we be thinking about any tough comps as we head into 24 given just the magnitude of our performance this year?
Speaker 1: Yeah, I still think there's continued, I mean remember that business is significantly levered to Canada right? So you have
Speaker 1: Almost 80% of the revenue out of that business is definitely coming out of Canada. As you know, we put two largest players together in Canada ourselves in paraphrie, we put that together, coupled together with coming out of the Coal Vibration Recovery in sort of early 2022. So, there's continues to be just a lot of demand.
Speaker 1: of people getting caught back up with work that 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
Speaker 1: the two businesses that we put together is sort of driving this material to revenue growth. Do I think it'll stay out of it that these levels know? But it'll definitely stay sort of at above average. And more importantly, we now have the ability to start pushing price in a more material way and focusing on the quality of revenue in that business. So I think you'll continue to see.
Speaker 2: Fairly healthy sort of margin updates coming from that line of business, as you've seen with some of our peers recently. Yeah, Jerry, in reference to the comment on 2024 comp, I mean, as Patrick said, this has largely been a volumetric growth story with price discovery in the very early stages.
Speaker 2: We, like our industry peers, are actively initiating 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%.
Speaker 2: in the near future on that price driven growth strategy. So we don't see where we sit today material concern about comps on the margin level in 2024 despite what we expect to be very healthy 2023 results.
Speaker 1: Yeah, Jerry, I think what's also underappreciated post these investors for 2024 is just the free cash flow walk, right? So when you take out, you know, close to 80, 90 million dollars of interest costs, we're set up pretty well for a very big sort of free cash flow number, growth number going into 2024. And sort of not getting...
Speaker 1: 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 year.
Speaker 1: Excellent. I appreciate the discussion. Thank you. Thanks Jerry.
Speaker 3: Our next question comes from Walter Stracklin from RBC Capital Markets. Your line is open.
Speaker 4: Thanks very much. Good morning, everyone. I just wanted to focus in on that M&A strategy post your three-handle leverage. As you get into 2024, you'll have a credit upgrade. It'll further lower your boring costs. You'll be of size then, I think, Patrick, you mentioned 875 and 900 and then on route to.
Speaker 4: a billion of free cash flow generated organically without recourse to debt. I think all this has been a great strategy in terms of how you're 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, that's in private hands.
Speaker 4: how much of that is in your wheelhouse so that we can frame kind of the cadence of what you would ramp up to and for how long could you run at that rate given the you know your Organic free cash flow that's fueling that strategy. How long can you go in at that run rate? Yeah So I think we were pretty vocal
Speaker 1: I think when you look at analysts' consensus numbers out there today, from a free cash flow, it's summer between 800 and 825 or 2024. I think the reality is post these divestors that we just talked about now, that number moves up, you know, summer between 875 and 900, pretty conservatively.
Speaker 1: So you think about how we reinvest at $875 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. You know, I think consistently we responsibly deployed capital into M&A.
Speaker 1: And I think you will continue to see us do that. Obviously with the large focus on continuing to...
Speaker 1: 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 be lever, call it 70 basis point. So if we finish high threes,
Speaker 1: If we finish at high threes at the end of 2023, going into 2024, business de-levers, call it into the low threes over the course of 2024, the first $900 million to spend obviously next year is all de-levering. So you can conservatively even spending closer to a billion to a billion too in 2024.
Speaker 1: That will be lever that will still keep us under sort of three and a half terms of leverage for 2024 And then that number just continues to ramp up when you look at the free cash flow of 2025 That is a billion one plus Closer probably to a billion two with organic growth and then it just keeps stepping up pretty Ratedly from there particularly when all the free cash flow from the RNG start hitting in 25 and 26 so
Speaker 1: I think our program will continue the exact same way it continued before, albeit with the target leverage sort of sub 3.5 so we can move to that investment grade rating over the next couple of years. But the pipeline just to go back to that's fantastic. I said this multiple.
Speaker 1: You still have 6.5 to 7 billion unconsolidated through probably 2,000 to 2,500 companies in 10 provinces of Canada. So all of that is sort of white space for us.
Speaker 1: And then you look in the US, I mean, you know, our target market is, you know, we think there's five to seven 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 are going to be sort of continuing to move at this pace. Thank you very much.
Speaker 1: Albeit, obviously, our business profile changes substantially with the amount of cash that we have, but we will continue that M&A program as we move forward. That's fantastic, color-patrick. And maybe one for Luke here. CapEx guide.
Speaker 7: the full year I think is at 300 to 500. I think look you said that would be 300 in the second quarter. So does that mean we're going to be closer to the 500 million for the full year and does that at all impact?
Speaker 2: your guidance for the free cash flow of $700 million for the full year. Just curious on that. Yeah, I think a little confusion there. $300 to $500 was the articulated number in M&A deployment, so dollars spent into M&A. The CapEx guide for the year was I think about $830 million.
Speaker 2: gross, you know with the recent M&A as I said, there's probably another 20-30 million bucks of land purchases that are coming on some deals, which is, that number is probably 8.50ish and so we're always just trying to articulate with the approximately 250-260 million spent in Q1 and then 300 million in Q2, you do have sort of 60-65% of your capex plan happening in H1.
Speaker 7: I was looking at the wrong note there. So yeah, but you answered my question in terms of cadence. It doesn't, the cadence of the front end CapEx guide is not impacting your full year free cash flow target at all. Correct. I'm reading that right. Yeah, correct. Perfect. That's all my question. Thank you very much for the time.
Speaker 3: Thanks, Walter. Our next question comes from Rupert Mera from National Bank. Your line is open.
Speaker 3: Our next question comes from Rupert Mera from National Bank. The line is open.
Speaker 3: Thanks for taking the question. Just to follow up on that last question, so I think you're 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 to $500 million range for this year? So Rupert, this is Luke. Just one clarification.
Speaker 2: So when we're talking about spending $300 to $500, that was going to be incremental to the Vertex spend. So in reality, excluding Vertex, we spent about $100 million this year. And to Patrick's point on the quality and opportunities and the pipeline, we spent $300
Yes, we anticipate we will be on that range of that incremental, call it 500 million to deploy into M&A. And so that'll be on top of the Heartland. So on the financial statements that we'll present as a 600 million dollar spend, as we were, we're talking about incremental Heartland and we're able to do that without any implications to our stated goals and commitments.
and tougher in some markets, how should we think about volumes the remainder 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 well do you think you are positioned in some of your target markets? I'm looking at the population growth in Canada.
You seem to be well positioned there. How do you see that impacting you?
Yeah, so I think, you know, what we've communicated is sort of flat, up 1%.
Obviously, there's puts and takes across the various parts of the country and in Canada and the US. But I think there's a little bit too much of a focus sort of on what the volumes. Plus 1 or minus 1 doesn't really move the needle all that much so does we hope to get into this application again tomorrow,
in the business, but I think where we sort of sit today, particularly in Canada, I think, you know, Canada will be more flattish I think for the next little while just given, you know, we have a small component of C&D volumes that come into landfill, etc. You know, obviously, with the lag that will happen sort of in...
you know, late 23 and into probably the first half of 24 that we think we'll see in some of those C&D related volumes. You know, that'll slow down a little bit, but again, it doesn't materially move the number. In some markets, we'd actually like volume potentially to back off a little bit so we can take some of our worst trucks off the road, some of our not so great drivers off the road, and you know, just have a significantly more efficient operation like we saw in sort of parts of Covid.
I think using sort of, you know, maybe down a half to up one is sort of the range that you 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 to Q1, we're not necessarily saying there was a pull forward, but as you know, with our exposure to the sort of winter belt, if you will, across Canada, but also to Wisconsin, Michigan, etc., you just never know exactly how the spring is going to play out. And that's just why we always want to...
Yeah, and I appreciate that the numbers are pretty small compared to what we're seeing on pricing.
Great, I'll leave it there. Thank you. Thanks Rupert. Our next question comes from Stephanie Moore from Jefferies. Your line is open.
Hi, good morning. Thank you. Good morning. Good morning. No, I made a good follow-up to the previous question. You didn't note any of this, and your results can speak for themselves, but just curious as to the course of 1Q.
you saw any maybe volume weakness either in the US 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 love to get some color on what you're seeing. Thank you. Yeah, I think it's clearly moderated, you know, not shooting the lights out sort of anywhere.
in Canada. But you know in the US it's sort of moderated. We don't have a lot of exposure to the West Coast so we didn't have the West Coast sort of weather impact that maybe some of the others have. That's just, I would say to a certain extent, lucky just in terms of where we were this year that we didn't 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 slow down sort of anywhere.
in 2023.
Yeah, so Stephanie, what I would say is what we're seeing and realizing thus far is without any substantial incremental dollars in there. You know, we've spoken about both of the, you know, truck to CNG 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 as 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, favouring CNG where we can, but nothing out of the ordinary in terms of incremental spend that would help accelerate the realisation of some of those opportunities.
So they're real, they're there, and once we perhaps get leverage to a level that is more consistent with what the expectation set looks like, you'll see an opportunity to revisit profitable, high return investments like that and others. But as of now, there's been just the normal course and mostly what you're seeing on the market.
sorry, JP Morgan, the line is open.
Hi, good morning. I wanted to ask about the first quarter pricing. Good morning. I wanted to ask about the first quarter pricing outperformance. Did you get less customer pushback from the pricing that you rolled out and that's what drove the outperformance or did you comment on how the conversations with customers went?
in implementing those prices. Yeah, I think it wasn't a question of whether we could get more because it was just, I think some of the outperformance came from the initial realization of the fuel and 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 to what they're contractually obligated to sort of pay. And I think we communicated after 2.3 and 2.4 of last year that the initial realization of some of those surcharge environmental would sort of fall into base price and that's why you saw the outperformance at sort of base price.
But to put it back in customer churn, customer churn has been at all-time lows. So, you know, just catching up has gone up there, but customer churn is at all-time lows. Okay, that's great to hear. And just on M&A, do you feel like you have to evaluate the M&A opportunities differently? Because...
significant amount of fixed-based cost facilities where we can lever those fixed-based cost facilities with incremental volumes. So that's looking at markets where we have a lot of post collection operations, you know that maybe we acquired through other businesses or we got through the divestor packages where they're running at sort of 60-70% utilization and we want to push those to 100% utilization.
And that's where 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. But so yeah, I mean the focus definitely this year is sort of small tuck ins that we can buy at significantly lower prices.
from Chris Murray from ATB Capital Markets. Your line is open.
Thanks folks. Just looking going back to some of the pricing that you guys were talking about for Q1.
How much is the price for 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?
Yeah, good morning, Chris. I'd say you probably have 85 to 90 percent of the price just in the typical seasonal cadence, and that's being most of our price occurs in Q1, with then another pricing event that happens in Q3.
So where we would 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, I would say you have probably 100% visibility that you're going to achieve your guide. The question now will become the extent to which there's upside above that. Okay, fair enough. And then I'm not sure who wants to take this one, but we were talking about the fuel surcharge program.
Yeah, so because all we were simply saying is what we're looking today is to cover our direct fuel costs with a surcharge mechanism such that for every dollar change in diesel price I can recover my dollar plus my margin. And that's what we really perceived as phase one, get to that point where we've effectively neutralized the margin impact from...
to fuel cost changes in our P&L. The reality is we are subject to fuel costs in indirect manners through a whole host of lines on the P&L. It can be third-party trucking support, it can be plastic containers and other items that are impacted by petroleum costs.
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 our direct energy and that's what we mean really by sort of phase two and beyond. Yes, I think this is all margin accretive.
that the initial recognition of these surcharges is effectively there's a certain tranche of it that's just like incremental permanent base price and that's what you're seeing sort of come through in the results. So we're happy to now substantially be at the place where we've achieved phase one and we will continue through our pricing discovery to optimize the surcharge program in conjunction with our normal course pricing practices as we go forward.
I know you said it earlier, but once the divestitures are completed, how does that impact the timing
but once the divestitures are completed, how does that impact the timing when GFL is expected to be a false hashtag?
Sorry, I'm having a really difficult time hearing. I think you said a mention about cash taxes, those with the divestitures. So yes, as you know, we currently have significant net operating losses that have provided us with a tax shield on a regular basis.
The divestitures will consume a significant component of those operating losses and accelerate the pace at which you become a sort of cash tax payer. Now obviously with our capital deployment and M&A deployment there's opportunities to continue.
to minimize what it would do at 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 that you're going to be able to get a cash tax.
There is not mitigating factors such as M&A, et cetera. Okay, makes sense. I'll leave it there. Congrats on those strong starts of the year. Thank you, Devin. Thanks, Devin. Our next question comes from Michael Feniger from Bank of America. Your line is open. Hey guys, thanks for just...
squeezing me in. You guys are showing areas of addressing the low-hanging fruit as you build this company. The fuel surcharge program is a great example. Just curious over time, do you think you'd create less seasonality with that free cash flow? Could it smooth out over the next few years? Yeah, good morning, Mike. It's Luke. I think the answer is yes.
of it coupled with by virtue of the Canadian or winter climate and environmental services. But then there's a meaningful opportunity to standardize and harmonize our processes and programs there. And you think about all the sort of payables associated with the systems that have come on and through 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. I think it's something that will represent an opportunity for us as we go forward with what is now a more sort of, you know, 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, another big play report, a great quarter there with volume and price. Do you sense that this side of the waste industry is becoming more rational and disciplined if 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, it's been my thesis for a long time.
or solidify them, put them into a sludge and send it to one of our sort of landfills. I think where we're sitting is that, you know,
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, you know our business we anticipate will be a mid-20s 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 and
Hey, thanks for the follow up. I meant to ask this before and I forgot. So the US House has passed a debt ceiling bill and they have pulled the RNG investment tax credit that was in the IRA out of it. That's got to get through the Senate. But assuming that goes away, you'd still do all of this RNG investing. How does it impact the cash?
To the extent that goes away, what 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 and the overall profile of these are still probably one of the most compelling opportunities that we've seen in this industry or in this business. So nothing changes. It potentially changes the timing of our sort of capex into the next year.
What do you care about more, free cash flow, compounded average growth rate, and conversion?
about more. Free cash flow, compounded average growth rate and conversion of the P&L versus margin.
I think it's one and the same from my perspective because you know if we can drive out the incremental sort of margin organically out of the base business you know all those dollars are going to flow down on the sort of free cash line so I think it's from my perspective one and the same. Well Michael the thing we talked about is the growth of free cash flow per share right that's.
where we believe we have a unique opportunity in an industry that's a great compound or a pre-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 compelling...
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's a point where margins find a level there and they issue changes with transactions, including the days after, the capital said pay.
incrementals on those get tighter but but there's an almost continuous opportunity to maximize
capital asset utilization that drives even more cash. And I get the message. Of course, all those self-help opportunities are gonna 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 as that moves, all that value's gonna transfer from the debt side of the balance sheet to the equity side. So.
you put those two things together, that's going to drive sort of material free cash flow. Yep, okay, great, thanks, thanks for taking the poll.
those two things together, that's going to drive sort of material sort of free cash flow. Yep, okay, great. Thanks. Thanks for taking the time. Thank you, Michael.
This concludes our Q&A. I'll now hand back to Patrick Pavicchi, founder and CEO , for any final remarks. Thank you very much everyone for joining the call this morning. We look forward to speaking to you after Q2. Again, thank you to everyone for their sort of continued support. Always available to take calls, et cetera, for the balance of the day. Thank you very much. Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
acid router.