Q2 2023 GFL Environmental Inc Earnings Call

[music].

[noise] good morning, ladies and gentlemen, and welcome to the G. F. L. Environmental 2023 Q2 earnings call. At this time, all participants are in a listen only about.

The presentation, there will be a question and answer session. If at any time. During this call you require immediate assistance. Please.

Operator also note that the call is being recorded and I would like to turn the conference over to Patrick. Please go ahead Sir.

Good morning, everyone, sorry for the slight delay.

Conference operating is experiencing technical difficulties at the current time so.

You may hear from others.

Been able to log in but.

Prior to sort of 815, a M has the ability to log in but it is the conference call. He is available sort of on the webcast and whoever it was logging for 815.

Certainly ask questions, so I'd like to walk.

Today's call and thank you for joining us.

Morning, we will be reviewing our results for the second quarter and updating our guidance for this year I'm joined this morning by loophole CRC F O who will take us through our forward looking disclaimer before we get into details.

Thank you Patrick good morning, everyone and thank you for joining we filed our earnings press release, which includes important information. The press releases available on our website. We have prepared a presentation to accompany this call is also available on our website during.

During this call will be making some forward looking statements within the meaning of applicable Canadian and U S securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future.

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.

Looking statement is not a guarantee of future performance that actual results may differ materially from those expressed or implied in the forward looking statements. These forward looking speed statements speak only as of today's date and we do not assume any obligation to update these statements whether resolved new information future events and developments or otherwise. This call will include a discussion of.

Certain non <unk> measures a reconciliation of these measures can be found in our filings with the Canadian and U S Securities regulators I will now turn the call back over to Patrick.

Thank you look in the second quarter, we continued to build on our strong start to the year with another quarter of double digit core pricing and over 300 basis point expansion of underlying solid waste margins.

Based on our performance in the first half.

Together with our optimistic outlook for the remainder of the year, we are increasing our already industry leading guidance for 2023.

Both Q2 top line growth and margin expansion, we're beyond our internal expectations and continue to demonstrate the strength of our best in class asset base and the ability of Tfl's exceptional team.

Cute on our proven value creation strategies with each passing quarter I continued to be more humbled by the capacity of our 20000 plus employees to drive our results and I'm grateful to each and every one of them for their contribution to our success.

The second quarter also saw the successful completion of our portfolio rationalization initiative that we committed to earlier in the year.

From these non-core diverse yours, we realized gross proceeds of approximately 1.65 billion, which is $150 million more than our original guidance. We also completed all three divestures one quarter earlier than we had originally anticipated our ability to complete.

Of this size and complexity over a short six month period is another testament to the capabilities of our team to successfully execute on our strategies.

The rationalization initiative was part of a broader more comprehensive portfolio review that we undertook in 2022.

As a result of that review, we recognize that while all the divested assets were of high quality. There forecasted return profiles were far less attractive relative to other outside decretive growth opportunities that we have identified in other areas of our business, we expect that the resulting geographic concentration of our portfolio activities Divestures will further.

Our ability to compound earnings and free cash phone industry, leading brokerage.

The divestures.

The added benefit of accelerating our balance sheet deleveraging with a net proceeds from the sale of apply to paying down our highest coupon floating rate that as a result of the pay down we ended Q2 with our lowest net leveraged in company history.

The resulting in hand strength of our balance sheet, alongside our margin expansion and Alex.

Free cash flow generation sets us on a clear path to ending the year with Nat leverage at less than four times and.

The opportunity to delever into the mysteries by the end of 2024.

We have demonstrated we remain committed to our stated deleveraging goals that are optimistic about the positive impact of the credit rating upgrades that we expect will occur along the way as our net leverage decreases with an eventual path to investment grade ratings.

On our queue to operating performance, we have trees revenue growth of nearly 14%, including the impact of assets investors.

Driven by solid waste score pricing of 10.4%.

Combination of open market pricing activity to roll forward of our surcharge initiatives from last year and the continued elevating price increases on our CPI length revenue drove our core prices to close to 200 basis points higher than expectations.

We expect that the strength of the pricing that we have experienced in the first half opposition is to achieve a full year core price of over 9%.

To 8% that was the basis for our initial 2000 twenty-three guide.

Lower solid waste volumes in the quarter were in part driven by the pull forward of volumes in the first quarter, but also our exit from non-core service offerings, mostly in our Canadian business as part of our strategic portfolio review that I described earlier, we also decided to intentionally shed high volume low quality revenue, primarily an R. U S residential service.

Line.

To deploy our resources into other attractive opportunities. We believe that this quality of revenue focus is yet. Another example of our discipline around capital allocation and our returns on invested capital.

The margin expansion that we're seeing in the first half of 2023 continues to demonstrate the impact of our diligent focus on optimizing price and our cost base to drive higher underlying profitability consolidated margins in the quarter expanded 130 basis points over the prior year as the spread between pricing causes.

<unk> continues to widen adjusted EBITDA margin expansion in our underlying solid waste business accelerated to 315 basis points in the quarter.

<unk>, our solid waste adjusted EBITDA margins, where 60 basis points ahead of 2021, meaning we now have more than recovered our pre cost inflation margin profile.

Factivists there are fewer crossed strategy initiatives can be seen in the quarter over quarter decrease in the margin impact of diesel prices. We are pleased with the progress. We have made on the respect of fuel surcharges and see incremental opportunity as we continue to optimize the program across our platform.

While commodity prices continue to be a margin headwind compared to the prior year. We believe an eventual price recovery will occur in the future benefit of margins as we go forward.

As we anticipated cost inflation, excluding fuel prices continues to moderate although we continue to see repair and maintenance cost pressures percent we.

We now expect to end the year 50 basis points above the original plan on the R&M expense line.

What the overall cost treading in the right direction.

Labor costs continue to sequentially improve and we are optimistic about further moderation in the back half of the year.

Performance and our environmental services segment was equally impressive what the revenue growth of nearly 20% and adjusted EBITDA margin expansion of 100 basis points. We continue to believe our strategic focus on a revenue quality, an asset utilization will yield meaningful incremental operating leverage in this segment over the coming years with the line of sight to 30%.

Segment EBITDA margins.

Adjusted free cash flow was ahead of plan inclusive in incremental interest expense as a result of the earlier that payment, which was not previously factored into our guide Kappa.

Capex panel slightly behind expectations attributed the timing differences the capex for the quarter included spend on new projects incremental to the original plan with the success of the disaster transactions, we intend to allocate $2 million to $300 million of the proceeds to a number of incremental sustainability related capital projects provide primarily related to opportunities.

Arising from extended producer responsibility legislation and renewable natural gas.

In keeping with our strategy to maximize our returns on invested capital. We believe that these projects represent some of the highest quality near term investment opportunities and are excited about the positive contribution that these investments will have across many facets of our strategy going forward.

An orangey, we had the ribbon cutting at our Army Hills RMG facility in June marking the completion of its construction. The Arbor Hills RMG plan is the first and largest GFR renewables project that we have an opal fuels and is expected to produce more than two and a half million MBT use of RMG. When it comes online later this quarter.

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We et cetera earlier in the year that we expected to have two projects. In addition to the Arbor Hills online later as part of this review we now expect that we only have one of the additional projects to meet that timeline with the third project now expected to followed by the second half of 2024 <unk>.

Recent run up that.

That we have seen in the rain prices is very positive for our investments in these projects, but even without those larger higher prices. We remain very excited about the contributions of EBIT from our landfill gas to energy project that will begin to see this year and ramp into 2024 and 2025.

We believe that our existing network of best in class assets and market selections positions us for high quality organic profitable growth.

In the first half of this year, we have been very focused on completing the three non-core divestures and harvesting the self help opportunities in our existing platform.

Our results demonstrate our success in implementing these initiatives we continue to have a robust M&A pipeline and given the enhanced strength of our balance sheet and free cash flow profile, we will again focus on our <unk> strategy identifying our existing footprint in North America.

On the ESG front, we made progress in several areas GSL was named corporate night as one of the candidates 50, best corporate citizens and was awarded a seal business Sustainability Award for the second time in three years for the RMG initiatives that we are implementing in our landfills.

RMG projects are key pillars of our sustainability action plan and support our goal of reducing our own GHT emissions by increasing capture of landfill gas and displacing you use a virgin fuels in our fleet.

We are also continuing to increase our ESG disclosure with the filing of our first CDP report this month and we are on the path to completing our first comprehensive Standalone report in line with a recommendation of the task force on climate related financial disclosures by the end of the year I'll now pass the call over to Luke will walk the quarter more detailed then I'll share some closing comments before we opened it.

For Q&A.

Thanks Magic for the following discussion I will refer to our accompanying investor presentation, which provide supplemental analysis to summarize our performance in the quarter page.

Page three summarizes the bridge between realized revenue in our guidance updated to reflect the impact of the divestitures consistent with our June 5th press release, excluding the impact of the steady appreciation that Canadian dollar's at the beginning of May when we provided the queue to guide revenue was 195 $5 billion as compared to our pro forma guide of one nine.

5 billion.

When unpacking the outperformance it is really a function of incremental solid waste pricing, which was about 175 basis points ahead of plan offset by just under 200 basis points of incremental negative solid waste volume.

Commodity prices and higher revenue from our environmental services line contributed to the outperformance, but they may also relatively immaterial.

Solid waste core pricing continues to be strong in both our geographies.

Call the normal and expected cadence of quarterly pricing is a peek in the first quarter and then a sequential step down thereafter, the 200 basis point deceleration in pricing from Q1 was less than expected as open market pricing remain constructive and our CPI linked revenue continued to reset at elevated levels, providing support to the relatively.

Lower percentage price increases historically realized and the residential collection and post collection lines of business.

Q2 solid waste volumes was negative 3.5%, which included a certain amount of volume pulled forward into Q1 as we had suggested on the first quarter call as well as intentional shedding of low margin work looking at the first half as a whole which is more reflective of the underlying performance of the business solid waste volume was negative 160 basis.

Points.

The components of this negative 160 breaks out as follows approximately 60 basis points relates to the exiting of non core other revenues and our Canadian business. These are lower margin and silvery services inherited through acquisitions that we've decided to no longer provide as a result of our ongoing strategic portfolio reviews that Patrick spoke to another <unk>.

20 basis points relates to the special waste volumes, which tend to varying timing from one year to the next and the other 100 basis points relates to non regrettable losses substantially olive which is in the collection line of business are underlying volume growth. The first half was approximately 20 basis points.

The vast majority of our customers are willing to pay for our high quality services and we continue to retain existing customers and win net new customers that appropriate prices every day, but as Patrick mentioned were electing to not renew contracts that do not meet our return thresholds given our increased focus on quality of revenue in the current operating environment. We believe that is better than <unk>.

<unk> of our resources to focus on the many other accretive opportunities we see before us.

The positive impact of our pricing and deliberate volume strategies can be seen in the underlying adjusted EBITDA margin expansion on page four we show the bridge of the 220 basis points you over a year solid waste adjusted EBITDA margin expansion.

Commodities continuing to be a year over year headwind in at 110 basis points impact compared to the prior year.

Due to our scale and the quality of the commodities, we sell we typically realize the selling price at a spread above market indices. However periods of significant price volatility contemporary cause spread compression such that the net price we realized can decrease even when the headline market indices increase and that's what we saw in Q2.

Although fiber prices have increased recently, the coincident rapid and significant decline in non fiber prices yielded this type of spread compression. During the end of Q2 as a result, the average net commodity price we realized for the quarter was only very modestly above our initial guidance the divestiture of the Colorado, Murph, which had a blended basket of goods price higher than our.

Company average also impacted our average commodity price.

The continued decline in non fiber prices since quarter and results in a current basket price approximately equal to our original guide the anticipated stabilization and subsequent recovery and commodity prices towards the end of the year should result in a reversal of this trend.

The incremental effectiveness of our fuel cost recovery strategies is clearly evident on the bridge on page four of the presentation with an 85 basis points sequential improvement to the net margin impact over Q1 with the substantial completion of the first phase of our surcharge initiative, we do not anticipate material negative margin impact some future rapid incur.

Greece's and diesel costs, and we see additional upside from continued enhancements that we are implementing including on the indirect fuel side.

Also shown on the bridges the impact of M&A and of receiving approximately $5 million a business interruption insurance for the <unk> that we had in Canada last year.

After excluding those items based business solid waste margins expanded 315 basis points 125 basis point acceleration over Q1 and demonstrated of the widening spread between price and cost inflation that we forecast in the two 2023 guide.

The accretive margin impact of the non regrettable revenue losses that Patrick and I. Just described also contributed to the margin expansion outperformance.

Adjusted free cash flow for the quarter was $9 million better than our plan. Despite incurring 10 million incremental cash interest expense as a result of repaying are floating rate that earlier than originally anticipated.

Adjusted cashless from operating activities increased 18%, despite a 32% increase in cash interest expense versus the prior year.

On page five we have summarized the impacts of the now completed divestitures due to timing differences between in your impact of divested adjusted EBITDA and the associated savings in interest costs in Capex. The divestitures are modestly diluted to 2023 results, but is still anticipated to be accretive within the first 12 months cash taxes and <unk>.

Transaction costs, resulting from the asset sales will total of just under $400 million and the approximately $1.3 billion of proceeds we're used to repay outstanding borrowings under a revolving credit facility and just under half of our term loan b.

As Patrick mentioned with the transactions, yielding $150 million more than the original plan and closing a quarter. Early we are reallocating a portion of the proceeds towards attractive the capital opportunities that we have been evaluating which I will flesh out in more detail when we walk through the guidance update.

As a result of the net debt repayment and the strong first half operating performance. We ended Q too with net leverage a 418.

On page six we've summarized our new debt profile, where it shows that now almost 80% of our debt is fixed rate and the overall complex blends to a borrowing rate of approximately 5.2% nearly 50 basis points better than before the debt pay down and.

In terms of our updated guidance for the year PJ provides the bridge from our original guidance pro forma for the divestitures, we are increasing our revenue guidance by approximately $70 million on a like for like basis. The.

The New guide assumes an X FX rate of 132 for the balance of the year. So the last step on the bridge shows the impact of that change and FX rates.

Underlying this new guy to the following assumptions solid waste pricing goes to just under 95% from 8% surcharges go into negative 1% from flat, reflecting lower diesel prices solid waste volumes go to negative 2% from flat with underlying volume growth deposit 20 basis points offset by approximately.

110 basis points of intentional shedding and approximately 90 basis points from exiting non-core ancillary services, mostly in our Canadian business.

Commodity prices are expected to impact consolidated revenue by negative 60 basis points, while FX is expected to contribute positive 160 basis points.

New guide also assumed that environmental services organic growth improves 200 basis points to around 7% and the net impact of M&A decreases to 1.7%, reflecting the outperformance in the first quarter and new emit M&A during the year offset by the impact of divestitures.

The New guide assumes today's commodity price environment as previously discussed the net impact of which is broadly in line with our original guidance. The expected recovery of commodity prices should provide upside to the guide throughout the back half of the year.

Page nine complete the guidance update and shows the pieces to walk from revenue to free cash flow adjusted EBITDA increase is $55 million using the same F. X rated is our original guidance or $50 million at the new F X Ray and adjusted EBITDA margin expands and incremental 50 basis points over the original pro forma guide as the widen.

<unk> spread of price over costs improved asset utilization and the accretive impact of shedding low margin volume all drive incremental margin.

Cash interest expense reduces to $490 million as the in your savings from the debt repayment our costs, partially offset by the increased interest costs from floating interest rates and borrowing levels higher than originally anticipated and.

In 2020 for the full year impacted the debt repayment will be realized in cash interest expense will be closer to $400 million.

On Capex as we said, we see highly compelling and opportunities to redeploy a portion of the proceeds from the divestitures into incremental organic growth initiatives, which we anticipate will provide accretive returns on invested capital long into the future and further improve our ability to generate high quality sustainable free cash flow growth.

Some of these projects were already in our queue and the incremental expenditure reflects the acceleration of investment that would have otherwise been made beyond 2023.

Those are net new opportunities that arose this year as Patrick said, we expect that will able to deploy an incremental $200 million to $300 million of Capex before the year is done and have updated our guidance for this gross capex accordingly.

Breakdown of the incremental investment is approximately 150 to 200 million dollar into five mercs or of which are in Canada and one in the U S $25 million or $50 million into RMG project development, and another 25% to $50 million for land and building infrastructure to support these initiatives.

The payback on the RMG investments are well known and at today's when prices. The returns are even more attractive it's up three year paybacks. So we're obviously motivated to accelerate these projects as quickly as possible and in certain instances the incremental RMG capital as a result of the changing partnership economics, which we expect to be positive on the Merv spend.

These projects are largely in response to existing ETR legislation and strategic positioning in markets, where we expect EPR to arrive or where we have sufficient internal volumes. These new EPR contracts can be tenure fee for processing based models with a creative margin profiles sub five year paybacks.

We view these investments as a reallocation of the proceeds received from the divestitures, we think that offsetting this excess investment by a corresponding an equal allocation of a divestiture proceeds yields and adjusted free cash flow metric that is more reflective of the current cash generating capabilities of the business.

The impact of working capital and other operating cash flow items are expected to be close to nil, excluding the impact of the cash taxes associated with the divestitures, which we intend to exclude in our adjusted free cash flow reconciliation.

The resulting balance sheet from the revised operational guide is net leverage of less than four times exiting 2023, a level that should organically reduce another 50 to 70 basis points by the end of 2024 as shown on page 11 of the presentation, putting us on a solid path toward an investment grade rating in the medium term.

In relation to specific expectations for the third quarter, we expect consolidated revenue approximately 186 $5 billion, just under 80% of which will be in solid waste keep in mind. The recent divestitures impact Q3 revenues by $115 million compared to the original guide, which is the driver of the atypical stepped down from the <unk>.

Quarter, the recast F X ray it also impacts the sequential quarterly comparison by approximately $20 million.

Solid waste adjusted EBITDA margins are expected to be in line with the second quarter, reflecting underlying sequential expansion offset by the 35 basis point benefit of insurance recoveries that we recognized in Q2.

Environmental services margins are expected to be between 30, and 31% through operating leverage realized on the peak third quarter revenues.

Corporate cost margins are expected to be 10 basis points higher than Q2 on continued investment and development and the impact of the divested revenue.

This results in adjusted EBITDA of approximately $525 million, a consolidated margins of approximately 28% representing over 200 basis points of expansion compared to the prior year from that adjusted EBITDA the components to get to adjusted free cash flow or cash interest cost of $115 million a benefit from working capital net of other.

Items of about $25 million in gross capex of $275 million to $300 million or approximately $160 million when incorporating the allegation that a divestiture proceeds previously discussed that results in adjusted free cash flow for the third quarter, approximately 270 million $5 million.

That's the summary of the guidance update I'll now pass the call back to Patrick we will provide some closing comments before Q&A.

Thanks Luke.

This quarter shows the results of our focus on taking the exceptional platform, we have built and continuing to enhance it to produce industry leading results.

We continue to use all of the self help leavers that we have at our disposal to improve asset utilization and cost efficiency and the impact of that is demonstrated in the quarter over quarter underlying margin expansion.

We are taking action across our network of assets to maximize the return from our customer base from each market area and from strategic capital investments all confirming the relentless commitment gfx's employees to long term value creation for our shareholders.

As I said earlier I'm extremely grateful to all of <unk> employees for the commitment to the success of team Green I will now turn the call over to the operator to open the line for Q&A.

Thank you said, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone. It will then hear a three tone prompt acknowledging your request and if you would like to withdraw some of your question can you. Please first followed by two and if you.

Speaker phone that you will need to lift the handset before pressing any keys. Please go ahead and buy style. One now if you do have a question.

Your first question will be from Michael E Hoffman.

<unk>. Please go ahead.

Hey, everybody thanks for taking the questions.

Patrick let me start with price so the whole industry has been enjoying this benefit from your perspective is it.

Better retention of what you've been doing or did you come back through and ads look for more.

And then I'd like to talk about cadence because inflation is starting to add so we do need to manage the thought about cadence.

Yeah. So I think I mean, we had the benefit of again.

Some of the.

Surcharge programs and rationalizing the existing book that we had we had a lot of that will be recognized in base price. The initial recognition that comes in debate Friday, so that it remains elevated levels, but.

The Mark we still have a good opportunity a as an existing book a business with some underpriced customer base is particularly on the commercial side and on the residential side to continue moving nose up coupled together with the CPI lags in the residential blocks of business. So all those put together.

Allowed us to sort of move up the guide, particularly on price, particularly with seeing where several CPI adjustments have been coming earlier in the year and where we think the balance of those.

Re right. So we're in a good position, obviously with CPI coming down is that moderate we've built that we've built that into our forecasts, but I think from where we sort of sit today, we feel very comfortable with the guidance that we put out.

And how should we think about cadence through the second half and then into 2004, because CPI is coming down and.

That doesn't mean you you won't maintain this really strong spread just the rate of change will know Romero.

Yeah, Michael It's Luke speaking I think that's right for the balance of twenty-three we expect the call the kind of normal kaden that these Q3 stepping down like another 200 basis points suddenly a Q1 and then the step down sort of moderates in Q4, and you're looking at sort of more like 100 basis points stepped down then and then we're not in a position where we wanted to.

Talk about 2024, and Ernest but as we've said historically, we think there is a constructive backdrop with the delays and CPI as well as the constructive this of the open market dynamics that continues what would be elevated levels of pricing and I'll think you're going to see it at 2023 levels, but to your point, we're going to be.

Facing a cost inflation number that is well inside of what 2023 saw so we think as we've been saying for the last couple of quarters that there is an opportunity to continue to maintain what is an outsize spread as compared to historical amounts.

Okay, and you have socialized in the past the idea of by 2025.

And adjusted cash number $1 billion, but it would appear now.

Without adjustments that one.

$1 billion is achievable by 2025 or are we looking at that correctly.

I would be disappointed if it wasn't there for sure I mean have you sort of look at what the natural I mean, we said, we think when you're sort of Larian RMG in your area and all the other aspects and now with the accelerated delevering.

Hank.

We're certainly going to.

My expectation is we are definitely going to exceed $1 billion in 2025.

And then the RMG projects that you're adding an.

Accelerated spend today qualify for our investment tax credits so.

I'm gonna get that capital.

Anyway, Okay, yes, and can you Max it out at 50 per cent or should we think about it is 33.

30.

Okay.

<unk> pushed to maximize 50, but.

For conservatism perspective, we're using 30.

Alright, and then what gives you confidence you can spend all this money and twenty-three given the delays that happen and other stuff.

So.

We're not certain I think from our perspective, it was prudent to sort of bring it up I think when you think about these incremental capital spend.

As you know we've been sort of a leader, particularly on the APR front and a lot of those contracts have come together over the last couple of months and they are a combination of merce and hauling businesses to support those not only in Ontario, but supporting them in other parts of the country.

And the way I would think about it hey, if this was an acquisition you're basically getting <unk>.

Call it somewhere between 40, and 50 million of EBITDA at very sort of high EBITDA margins.

For a span of a couple of hundred million dollars. So you are paying sort of sort of four to five times. So I think from our perspective, we think we have the ability to deploy those dollars someone that has been in planning with the expectation that this would happen.

These negotiations started last fall, but I've really come together over the last couple of months and Michael the uncertainty about the ability is also the basis for the wider range, but 200 to 300 on that basis. We also have to remember is Patrick said a lot of this is an ETR in mergers and while machine Act in van Dyke and the lights may not be able to deliver all the equipment.

In in certain instances land building.

Retrofitting existing properties construction. So there's other costs that can be done in preparation for it but you're absolutely right.

Date of uncertainty on absolute quantity and hence the wider range.

Okay.

Thank you thank.

Thank you thanks Bye.

Please go ahead.

Thanks, Good morning, and thanks for taking my questions here.

Maybe just on all on how to think about Capex moving past 2023.

Gross Capex and I appreciate you have offsets your gift given the successful as a divestitures, but if I think of.

What the gross capex intensive the businesses and 24 and onwards shall be holding at these levels kind of 14, 15% of revenue just given the pie.

Pipeline of opportunities or do you kind of step back down to and all that.

Say 10 11, 12% like you were assuming in the original forecast.

Earlier this year.

Yeah, Kevin is Luke speaking I think characterizing this year as an outlier the appropriate approach and it's really bad function of these divestitures proceeds being reallocated.

The other component to this is orange G and if you look at our total spend over all of the projects in totality might be end up being it is sort of gross level and that sort of 500 million level, but when you think about 30% itc's anything about 40% to 50% project level financing your actual equity check at the end of the days can be materially less than that but some.

There is timing differences as part of this year to spend is the itc's are going to come next year, but we want to invest the capital. This year and so you are going to have a bit of this growth versus netting as we deploy into RMG I think when you look at our underlying business you think about the relatively lower landfill concentration that we have because of the Canadian dynamic and the environmental.

<unk> services business that both Brian at a lower capital intensity than industry averages, we see a clear path to live at that sort of 11% level, which is inclusive of the normal course growth to the extent attractive compelling opportunities to deploy capital arise we'll talk about it like that it's like this but I think the relative dollars it.

As we go forward will become less impactful to the overall and that in and around 11% is the right intensity to think about.

Excellent that's great color.

And then you laid out a whole set of targets in mid three time that leverage exiting 2024.

I guess when I think back to your Investor Day, you kind of laid out a number of of acquisition scenarios just.

If you're able to share with us which of those three should we be thinking about the mysteries are you're kind of back to an elevated M&A scenario mysteries are you kind of.

Yeah.

Hi, Thank you from where we sit today, we have some wonderful acquisition opportunities that will be very compelling for us to execute on.

In the back half of this year. So we put out this guide you've taken a conservative view on the Guy obviously ever corner since we've been public our philosophy has been sort of.

Under promise and over deliver.

So I think that theme will continue.

The backdrop as we've committed to this year, keeping leverage sort of around four times and we will do that with the model, we have as well as executing on the M&A. So.

Why are we sort of sit from the companies.

First time in history, given the free cash flow profile, the business now and what that looks like three for next year throwing out a number next year for almost $875 million a free cash flow.

When you look at that coupled together with the free cash on the back half of the year, we're going to be able to do both.

The business is going to grow organically naturally delever.

MAA, taking that taken a bunch of the free cash flow and reinvesting that into our M&A program again will all be delevering events. So we think we're going to get their irregardless of our normal sort of M&A spent and Kevin the math today I mean, it's pretty straightforward. If you think about organically that business could deleverage a low threes.

How much M&A will temper that otherwise delevering, it's roughly four basis points of leverage for every $25 million of EBITDA you buy and.

So if you put that together.

$550 million to $100 million or even a as an impact of similar to the tune of sort of 10% to 20 basis points of incremental leverage.

That's that's that's that's a great color and this last one for me.

Environmental services longterm target of getting this to a 30% EBITDA margin you kind of hit that in certain quarters at least very high twenties. Just when you think of getting there I guess on an annualized basis.

Is it trying to reduce the seasonality of the margins, which are a little bit lower than the shoulder quarters does everything have to come up by 400 basis points or or do you just have to kind of hit it out of the park even more so in the in the Q2 Q3 quarters. This wondering how do you think about getting into that 30 overall, just given seasonality and that profitability.

Yeah, there's always going to be a large element of seasonality in that business just because for the simple fact that lever to Canada. So we're gonna have that normal cadence each and every year.

That being said, there's going to be a high focus on quality of revenue.

And surcharges.

We believe we should be getting in that line of business. So I think when you look at it I think there's the ability to just really take up margins.

The Q1 margins will obviously always be the lowest Q4 will be the next blow up in Q2, and Q3 will be the highest we have to push Q2 and Q3.

Exceedingly above sort of where they are today and we have to get those surcharges implemented.

To offset sort of Q1 and Q4 dynamic so.

It's going to be a bit of a mixed bag, but I think we have a clear path to sort of getting there and I think you're seeing that come through quarter over quarter year over year and Kevin you've got to remember the foundation of that business is largely predicated on these posts collection facilities, we have across Canada that are very high fixed cost base in nature and as you think about the revenue growth we are now putting in.

Utilization improvement of those assets you get a lot of operating leverage coming at you are seeing that this year and as we rolled out forward what was used to be five $600 million of revenue that segment, we're not going to be approaching 1 billion in the <expletive> and you're going to get meaningful operating leverage at a much more fixed cost base.

That's great. Thank you very much that's it for me.

Thanks, Kevin.

Next question will be from Jamie that's at Goldman Sachs. Please go ahead.

Hi, This is Adam Beavis on Jerry ravaged today, Thanks for taking my question.

Can you talk to increments all I think it was $25 million to $50 million RMG investments does that include any new projects and should that change how we're thinking about the cadence of projects beyond 2023.

So.

Adam It's Lou speaking nothing is new and that number there is one project that was previously going to be a partnership that we are now going to go alone and that it was a partnership with not one of our core partners, but a tertiary partner and we've now bought them out I'm going to go alone and accelerating some of the spend on that so we're still looking at the same number of Prague.

Jack's in totality.

The reality is as I was speaking before with a combination of timing of receipt of it sees as well as for project level of financing is just a bit of a change in the cadence of our equity checks and so I think when you when you get to the end of the next couple of years. The actual net investment will remain the same but just there'll be some lumpiness from quarter to quarter.

<unk>.

Understood and then which were in three prices now and at $3 range can you just update us on how you're thinking about your off take strategy in RMG do you have a targeted percent you intend to sell into transportation markets versus longterm arrangements.

Yeah. So again currently in process.

I think our long longer term strategy may differ from the short term strategy, but in the longer term like we said, we want to get to a point, where we basically have 60% to 65% of our off take.

Parsed, often sort of long term agreements, obviously, we want the right price for that obviously with a $3 <unk> that helps to longer term strategy for.

For those longer off take agreement, but we want to get to a point, where we are going to be at sort of.

Longer term off take agreements and sort of 60% to 65% range.

Got it that's helpful. And then lastly, really strong margin performance in the quarter with margins well ahead of normal seasonality just looking at the back half guidance it looks to be implying sequential margins basically in line with normal seasonality and.

It also looks like your underlying inflation <unk> decelerating much faster than price. So just any puts and takes around the sequential margin cadence from here.

Relative to normal seasonal trends.

Yeah. So I think last year sorted defied the normal seasonality by virtue of the inflationary ramp that was really more focused on the second half of this year and so as that's unwinding, it's causing some impact the current year sort of.

Seasonality cadence, but look for the Q3 guide that we've put out effectively saying solid waste continues to expand from where it is today just normalize for the insurance recoveries that we received in Q2, which creative at a 30% 40 basis point benefit to Q2, so if you're stripping that out continued sequential improvement in solid waste and that's really a function of.

Continuing widening spread as cost inflation is anticipated to moderate even further in Q3 and you're going to be in a mid single digit number and as pricing is what it comes down accordingly, I think you'll get a little bit more spread about those two environmental services is similar to a comment were saying before really firing on all cylinders, but with the Q3 peak revenue.

So are you going to get this sort of optimize.

Operating leverage and that's why we see now a path that margins in that segment for Q3 could touch 31% and then Q4, obviously is seasonal cadence you have a bit of a step down from there as soon as you move into the winter season.

Great. Thanks, so much.

Thanks, Adam.

Next question will be from Tyler Brown at Raymond James. Please go ahead.

Good morning guidance.

Good morning to either.

Okay. Thank you touched on it but volumes were a bit weak quarter, it candy a bit magazine.

You gave some color, but second half volumes or may be down 2% on my math is that about right and will there be any different.

Three and four.

Yeah, So thought I'd say your math is right.

Is that what the second half is looking at him and it's really just a continuation of what we articulated in the first so as I said I think the pull forward from Q2 into Q1. So I think looking at first half in totality makes more sense negative 160 basis points of volume. If you break that down you had about 60 basis points, which was $15 million of what I'm, calling this non.

Or in Sillery services. This is work stuff like wouldn't shifting or gravel hauling and other tightened sillery type services primary and secondary markets had been doing for awhile, but we really don't make any money there and we're exiting that so that's one component of it and that will sort of basically maintain each quarter throughout the year until that work.

Gone.

For the first half way vote 20 basis points of the event driven special waste volumes.

If you looked last Q2 special waste volumes are landfill volume in the U S was plus 12% I think we've benefited from cleanup from some tornadoes and other events, that's always going to have a certain degree of Lumpiness I don't think there's anything indicative of underlying trends that are concerning there, but rather just the normal sort of change so I'm anticipating by the end of the year.

That's what a neutralize more back this sort of flat footed level and then what you're left with the first half is is what 80 basis points or call at $20 million.

The net of this intangible shedding offset by real underlying volume growth and the intentional shedding look.

Primarily in residential collection, although some as in Iceni and this is a function of our strategy of price over volume and I think by and large it's working and you can see it in the numbers and in the margin, but certain select handful of residential large accounts that are unwilling to pay for our service, we're going to walk away from and we're happy to do so in this environment. So.

For the back half of the year, where you end up with the roughly 200 basis points.

Or $100 million of negative volume for the year as a whole you roughly half half of that as a result of the exiting the non core ancillary services.

So to call at $60 million from the non regrettable losses or intentional shedding and then you have a an underlying 10 $20 million a positive growth from our normal course surface level increases in new customers.

Yeah.

Very detailed very helpful. Appreciate that.

Patrick I wanted to talk about repairs and maintenance because it sounds like that always are starting to deliver it seems like the Hulk prices are just inflating and I think reynolds might be down next year, but his arm and feel like it could be equally good story in 2004.

Yeah I remember if you were so basically 100, almost 100 basis points more than where we've been historically.

So yes, I think we're gonna this year is going to be 50 basis points ahead of our what our original plan was the beginning of the year, but things are certainly coming down we're certainly certainly getting.

More truck deliveries and the timeliness of those truck deliveries is coming on board now from an OEM perspective.

Moderating prices on supply of parts as well so all of those coupled together are coming down I mean, if you look at from US from a rental truck perspective, we are a quarter. We are renting a quarter amount of the trucks that were renting a year ago right. So that's all in the R&M line.

So yes, you are right and I think as that moves into 24, and 25 that is certainly going to to moderate and be a good news stories you move out for those next few years.

Okay and will keep on that and then on the one in 1.65 billion gross proceeds I think you said 400 million may be in taxes and transactions that's going to be out the door has any of that been paid if not when will that be paid and where will that show up on the cash.

<unk> statement.

Yeah. So may be modest amount of transaction costs have been bathed roughly think of a 360 of taxes 40 of transaction costs round numbers to get you to that 400.

A modest amount of transaction costs would have been paid in queue to the.

The rest was accrued and you can see that and a large transaction costs adjustment that we have in the P&L. The balance of those transaction costs will be paid in Q3 and will show up in our normal transaction costs bucket. The cash taxes will be paid sort of roughly call. It half remain Q.

Q3, and half in queue for maybe actually more like $60 40 towards Q3, and it will show up in our cash tax section in the cash flow we may.

Have some incremental disclosure to break it out so you can see the impact of what we are calling this sort of one time versus ongoing.

Okay. That's helpful and my last one kind of another question along maybe a similar line but.

A couple of your RMG plants, all panic in that initial startup phase, but how much EBITDA contribution are you baking in on these facilities and how is the account and getting worse.

Guys.

So will you can have some sort of getting back in the EBITDA reconciliation.

That getting work practically.

So for 2023, the guide anticipated an inclusion of immaterial number I think it was about 10 million Bucks in total with the delays I mean that might be a little light, but the rain pricing probably offset so the 2020 number is sort of ads for the original guide Twenty-twenty. That's why 23 number as you again, just by 24 that starts ramping up as high there I think thats right. These are.

Joint ventures that are on consolidated in our perspective is the gap based accounting answer doesn't accurately reflects what are investors are looking for so you will have a adjustment to remove the gas base net income that you are picking up and replace it with your proportionate share of the EBITDA. So we'll preview that is part of our 2024.

Guide and make sure everyone understands very clearly what we're showing that but we anticipate something to that effect.

Okay. Good step thanks, guys.

Thank you thanks, though.

Next question will be from Walton Spratlin RBC capital markets. Please go ahead.

Thanks, very much good morning, everyone.

Hey, Walter.

So on this shift intentional shutting his business, we're hearing that from your peers as well.

Basic question.

Where is that being shed too are you seeing smaller players now picking up some of this is it going to some of the majors that are seeing a better opportunity to combining with their own operate just curious as to what your experiences were a coupla years or at least one of your peers is talking about some pretty significant also intentional shedding.

Business as to where it's ending up.

Yeah, I mean for the most part I mean, it's been very selective market. It's been a mixture of both extend some strategic that have some strategic opportunity there whether that internalization of streams into their landfills et cetera, and then a couple of the market.

It's been municipality taken a chance on a smaller type collector.

And a market that's sort of a recent startup.

History tells us with those we always generally and ended up so we're coming back to us over the course of the next door to year to year and a half and from our perspective, particularly in this OEM environment of getting new trucks and the cost of capital we want to be rewarded appropriately for it so.

And some of these residential contracts came with acquisitions et cetera.

I tell everybody in the organization, where a for profit organization, we don't need to practice. So there's no sense in practicing on some of these residential contracts, particularly in this environment. So we can take those dollars and deploy them into things that are actually we're going to make money from so so I've been a bit of a mixture of old.

And there is no worry here that this is representative of a lack of discipline amongst smaller players or anything to that now.

Okay.

On the margin you mentioned murgeon spread expansion in 2023 and that comes after.

You saw some cost inflation really ramp in 2022 and your mechanisms kicking in nicely now in 2003 to be able to allow for an expanding spread whereas perhaps it was contracting last year was.

He was pressured last year, how do you look at it for next year.

Are you expecting more of a normalized.

In other words these are less benefit from an expanding spread or or could we see that spread last longer into 2024.

Based on how your mechanisms work.

Yeah, Walter So I think as we've been saying consistently we anticipate 24 being another outsized year and it's a combination of not just the natural spread expansion that you're going to have but there's also I mean patridge assignment R&M that is not going to get fully.

Sorted this year and will represent an incremental tailwind you can talk about commodities. I mean, we are very optimistic commodities will start rebounding. This year, but I think that's going to be a real tailwind going into next year and I'm not saying you need to bank on commodities for the expansion, but just another example of what should be a tailwind RMG at that comes on for US we have a relative.

The diminutive.

The material amount in the current consolidated results and it is very high margins. So I think the natural price versus cost inflation spread dynamic unto itself should provide an opportunity for outsized expansion, but when you start layering those other pieces on top.

We ceases those setup for 2000 2400 meetings exceptional year.

Okay, that's fantastic and the cap that last question here is on the Capex spending.

It seems like a larger number to happen all at once and just curious is this something you were always contemplating and just to mindful of dollars spent in keeping everything and check in with with the proceeds now from the acquisition you saw an opportunity to strike on this one.

Or or is this is something that just popped up recently and and kind of your you had the opportunity.

Capability in your head as a result of that we're just curious as to how they came up.

Yeah. So I think that's part of the disaster program, we knew that there was going to be an opportunity.

Particularly with where we saw the EPR opportunity going at the last half of the year.

Meaning in 2022.

A lot of that work.

It was tender and developed with us and the sort of first quarter of 2023.

And really formalized in the second quarter of 2023 so.

I think from our perspective, we are anticipation wyse's that as we saw the divestures sort of unfolding that.

That we actually ran a little bit harder F. E. R opportunity then maybe we what of.

Taking on the amount of work that was available under that program, but from where I sit today. There is no better use of capital putting the Rmg's bend the side than these partnerships that we've developed with.

The producers in Canada, particularly with some of these merced contracts ranging from 10 to 2020 years annual P is the ability to recover capex dollars to meet their sustainability goals.

R. One it's a wonderful partnership.

A win win for both of US and the fact that we move these to fixed fee processing contract. So we don't have any commodity volatility I mean, it's just it's a wonderful thing where you're basically going to be at around four year paybacks on these with 10 to 20 year contracts, coupled together with a vertical integration of now.

Putting the collection contracts together with them.

We just didn't see a better opportunity to deploy those dollars and given the fact that we even exceeded our own internal expectations.

Getting an extra $150 million of proceeds from what we anticipated when we started the process. This was just a logical place to put those dollars and again the setup that gives us for 24, and 25 and again a lead to significantly above average growth kanger as we move out into.

24 and 25.

Okay I appreciate that color Patrick thanks, guys.

Thank you next question will be from Stephanie J P. Morgan. Please go ahead.

Alright, and learning and can you talk about with an environmental Sir.

I'll make it the crowd.

<unk> <unk>.

The processing volume side.

Stephanie It's Luke speaking I mean, if you look at the typical sort of growth algorithm and a solid waste business, where you probably have 80% coming from price and 20% from volume I think our environmental services business today is probably the inverse of that now it is not as homogenous of a mix. So it's harder to do exact but it has certainly been a volume metric growth story in as on.

Recently pivoting the price so certainly larger portion in this quarter versus the prior was price and you are going to continue to see that migration towards a price centric growth story, but that's what gets us excited about the opportunity as as we start being more thoughtful but the quality of revenue in ensuring we're getting priced appropriately we see the opportunity for meaning.

Incremental operating leverage over where we are today.

Okay got it.

And can get at this bank account that different okay fine.

Okay.

Cool.

I mean, just at a high level of bifurcation people historically asked about our sort of oil and oil related exposure and obviously that business with the decrease in energy costs.

Is realizing revenues that are sort of lower point, then had sort of historically.

But more and more that diversification efforts that we've undertaken.

That business is representing.

10% of the overall as we go forward.

So really when you think about our broad based sort of environmental services across with a collection and processing. We continue to see strength, it's particularly levered in Canada I think the brand we have created and the quality of the service that we offering is very valued by our customers and we continue to see.

Phenomenal sort of growth as you've seen over the past year or two.

Okay, and and we can consider expanding and financial services outside of Canada.

<unk>.

The right opportunities in the right market presented themselves for sure I mean, we have been slowly expanding into the U S. Obviously, the market selection and the right acid base is the most important part, but yeah. I mean, we will definitely look at opportunities were not shying away from different opportunities in the U S.

For sure.

Okay sounds good thank you.

As a reminder, if you do have a question. Please press star followed by one on your Touchtone phones. In your next question will be from Michael Dumais Scotiabank. Please go ahead.

Hey, good morning, guys.

The expectation for price dawn spread to expand the camera court that's been while explained I wonder despite reflation slowing whether you think peak price costs spread will occur in 2024, rather than in the second half of 2023 at this obviously excludes commodity rmbp's.

Yes, Michael <unk> speaking I think.

We could debate whether it will be sort of Q4 of this year or Q2 that it's actually peaked I think our perspective is the trend line is supportive of establishing a new wider spread than what we had before.

And I think you're seeing that happening I think if you think about the way the dynamics roll into 2024.

There is clear math that supports continued.

Wider spreads.

But it's difficult to call the exact sort of when it's going to peak, we just feeling very optimistic of 2024 seems to be constructive.

That's helpful. Thanks, Luke and then on 2024 EBITDA margins, maybe a little bit early to discuss but if I were to exclude the full revenue and EBITDA contributions from the divestitures.

The pro forma twenty-three EBITDA guidance.

Again.

Full year EBIT margin of 27, one so just thinking if that's a fair star.

Starting point for 2024, and obviously I would ads I don't know, if it's two or 300 basis points of price cost Brad.

RMG et cetera, just trying to get.

A sense from you on how to how to think about those numbers.

Yes, so we're not gonna talk about 2000 2004 today, we gave it a 2023 guide ending at $2 billion, 27% margin I think normal course, historically, we've been saying 50 to 100 basis points of margin expansion. We think 2024 is an outsized year. So I think it's in that sort of directional Zip code.

But we're going to wait until we close out this year or at least another quarter before we start talking about 2000, 2004 guide and too much debt.

Okay fair enough.

Yes, those are my questions. Thanks very much.

Thank you and.

And at this time, so we have no further questions registered please proceed with closing remarks.

Thank you everyone for joining today and sorry about the.

Conference call to start a little bit late given the issue that the operator, but we look forward to speaking with you after <unk> resolved. Thank you.

Thank you ladies and gentlemen, this doesn't conclude your conference call for today. Once again, thank you for attacking and at this time, we do ask that you. Please disconnect your lines have a good day.

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