Q2 2023 GFL Environmental Inc Earnings Call

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

Patrick Dovigi: Good morning, ladies and gentlemen, and welcome to the GFL Environmental 2023 Q2 earnings call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. Also, note that the call is being recorded. I would like to turn the conference over to Patrick Dovigi. Please go ahead, sir. Thank you and good morning, everyone. Sorry for the slight delay. Our conference operator is experiencing technical difficulties at the current time. You may hear from others that they may have not been able to log in, but anyone that logged in prior to sort of 8:15 AM had the ability to log in.

The presentation, there will be a question and answer session.

This call you require immediate assistance please pistachio.

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

Uhm.

Sorry for the slight delay.

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He is experiencing technical difficulties at the current time so.

You may hear from others.

Not been able to log in but when I logged in prior to sort of 815, a M has the ability to log in but it is.

Patrick Dovigi: The conference call is available sort of on the webcast, and whoever was logged in before 8:15 can certainly ask questions. I'd like to welcome everyone to today's call and thank you for joining us. This morning, we will be reviewing our results for Q2 and updating our guidance for this year. I'm joined this morning by Luke Pelosi, our CFO, 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 have filed our earnings press release, which includes important information. The press release is available on our website. We've prepared a presentation to accompany this call that is also available on our website.

He is available sort of on the webcast and whoever it was locked in for 815.

Can certainly ask questions. So I'd like to walk him every once of 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.

This morning by loopholes 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.

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.

Luke Pelosi: During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and US securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and US securities regulators. Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date, and we do not assume any obligation to update these statements, whether a result of new information, future events and developments, or otherwise. This call will include a discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and US securities regulators.

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.

<unk> statements speak only as of today's date.

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 <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.

Patrick Dovigi: I will now turn the call back over to Patrick. Thank you, Luke. In Q2, we continue 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 strong performance in H1, 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 were beyond our internal expectations and continue to demonstrate the strength of our best-in-class asset-based and ability of GFL's exceptional team to execute on our proven value creation strategies. With each passing quarter, I continue to be more humbled by the capacity of our 20,000-plus employees to drive our results, I'm grateful to each and every one of them for their contribution to our success.

Thank you look in the second quarter, we continue 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.

Q2 top line broken 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.

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.

Patrick Dovigi: The Q2 also saw the successful completion of our portfolio rationalization initiative that we committed to earlier in the year. From these non-core divestitures, we realized gross proceeds of approximately CAD 1.65 billion, which is CAD 150 million more than our original guidance. We also completed all three divestitures one quarter earlier than we had originally anticipated. Our ability to complete an initiative 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 recognized that while all the divested assets were of high quality, their forecasted return profiles were far less attractive relative to other accretive growth opportunities that we had identified in other areas of our business.

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 Divestures, 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 high quality. There forecasted return profiles were far less attractive relative to other outside decretive growth opportunities that we had identified in other areas of our business. We expect that the resulting geographic concentration of our portfolio ask these divestures well further.

Patrick Dovigi: We expect that the resulting geographic concentration of our portfolio after these divestitures will further support our ability to compound earnings and free cash flow at industry-leading growth rates. The divestitures had the added benefit of accelerating our balance sheet deleveraging with the net proceeds from the sales applied to paying down our highest coupon floating rate debt. As a result of the paydown, we ended Q2 with our lowest net leverage in company history. The resulting enhanced strength of our balance sheet, alongside our margin expansion and accelerated free cash flow generation, sets us on a clear path to ending the year with net leverage at less than four times and the opportunity to delever into the mid-threes by the end of 2024.

Part of 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 leveraging company history.

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

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

The opportunity to delever into the mid three by the end of 2024.

Patrick Dovigi: As we have demonstrated, we remain committed to our stated de-leveraging goals and 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 Q2 operating performance, we achieved revenue growth of nearly 14%, including the impact of asset divestitures, driven by solid waste core pricing of 10.4%. A combination of open market pricing activity, the roll forward of our surcharge initiatives from last year, and the continued elevating price increases on our CPI-linked 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 H1 will position us to achieve a full-year core price of over 9% compared to 8% that was the basis for our initial 2023 guide.

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 achieved revenue growth of nearly 14%, including the impact of assets investors.

Driven by solid waste core pricing of 10.4%.

Combination of open market pricing activity to roll forward of our surcharge initiatives from last year and the continued elevated 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 will position is to achieve a full year core price of over 9%.

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

Patrick Dovigi: Lower solid waste volumes in the quarter were in part driven by the pull forward of volumes in Q1, 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 in our US 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 are seeing in H1 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.

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.

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.

Patrick Dovigi: As the spread between price and cost inflation continues to widen, adjusted EBITDA margin expansion in our underlying solid waste business accelerated to 315 basis points in the quarter. In addition, our solid waste adjusted EBITDA margins were 60 basis points ahead of 2021, meaning we now have more than recovered our pre-cost inflation margin profile. The effectiveness of our fuel cost 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 and the future benefit of margins as we go forward.

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

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.

Effectiveness 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.

Patrick Dovigi: As we anticipated, cost inflation excluding fuel prices continues to moderate, although we continue to see repair and maintenance cost pressures persist. We now expect to end the year 50 basis points above the original plan on the R&M expense line. With the overall cost trending in the right direction, labor costs continue to sequentially improve. We are optimistic about further moderation in H2. Performance in our environmental services segment was equally impressive, with the revenue growth of nearly 20% and adjusted EBITDA margin expansion of 100 basis points. We continue to believe our strategic focus on our revenue quality and asset utilization will yield meaningful incremental operating leverage in this segment over the coming years, with a line of sight to 30% segment EBITDA margins.

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.

Patrick Dovigi: Adjusted free cash flow was ahead of plan, inclusive of incremental interest expense as a result of the earlier debt payment, which was not previously factored into our guide. CapEx spend was slightly behind expectations attributed to timing differences, but CapEx for the quarter included spend on new projects incremental to the original plan. With the success of the divesture transactions, we intend to allocate CAD 200 million to 300 million of the proceeds to a number of incremental sustainability-related capital projects, 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.

Adjusted Free Castle was ahead of plan inclusive of incremental interest expense as a result of the earlier that payment, which was not previously factored into our guide cats.

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 provided 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.

Patrick Dovigi: On RNG, we had the ribbon cutting at our Arbor Hills RNG facility in June, marking the completion of its construction. The Arbor Hills RNG plant is the first and largest GFL renewables project that we have with OPAL Fuels and is expected to produce more than 2 and a half million MMBTUs of RNG when it comes online later this quarter. We had said 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 follow by H2 2024.

An orangey, we had the ribbon cutting at our Arbor Hills RMG facility in June Mark in 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 Btu's RMG. When it comes on line later this quarter.

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We had said 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>.

Patrick Dovigi: The recent run-up that we have seen in the RIN 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 EBITDA from our landfill gas to energy project that we 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 H1 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 M&A strategy of identifying our existing footprints in North America.

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 we will begin to see this year and rammed into 2024 and 20 to 25.

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.

Ah 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 M&A strategy identifying our existing footprints in North America.

Patrick Dovigi: On the ESG front, we made progress in several areas. GFL was named Corporate Knights as one of Canada's 50 best corporate citizens and was awarded the SEAL Business Sustainability Award for the second time in three years for the RNG initiatives that we are implementing in our landfills. These RNG projects are key pillars of our sustainability action plan and support our goals of reducing our own GHG emissions by increasing capture of landfill gas and displacing the use of 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 the recommendation of the task force on climate-related financial disclosures by the end of the year.

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 goals on reducing our own GHT emissions by increasing capture of landfill gas and displacing the use of 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 the 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 who work with a quarter more detailed then I'll share some closing comments before we open it.

Patrick Dovigi: I'll now pass the call over to Luke, who will walk through the quarter in more detail. I'll share some closing comments before we open it up for Q&A.

Patrick Dovigi: Thanks, Patrick. For the following discussion, I will refer to our accompanying investor presentation, which provides supplemental analysis to summarize our performance in the quarter. Page three summarizes the bridge between realized revenue and our guidance, updated to reflect the impact of the divestitures consistent with our 5 June press release. Excluding the impact of the steady appreciation in the Canadian dollar since the beginning of May when we provided this Q2 guide, revenue was CAD 1.955 billion as compared to our pro forma guide of CAD 1.95 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. Recycled commodity prices and higher revenue from our environmental services line contributed to the outperformance, but the amounts were relatively immaterial.

Upper 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.

H 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 <unk>.

Excluding the impact of the steady appreciation that Canadian dollar's since the beginning of May when we provided that Q2 guide revenue was 195 $5 billion as compared to our pro forma guide at $1.95 billion.

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.

Recycled commodity prices and higher revenue from our environmental services line contributed to the outperformance, but the males were relatively immaterial.

Patrick Dovigi: Solid waste core pricing continues to be strong in both our geographies. Recall, the normal and expected cadence of quarterly pricing is a peak in Q1 and then a sequential step down thereafter. The 200 basis point deceleration in pricing from Q1 was less than expected as open market pricing remained constructive and our CPI-linked revenue continued to reset at elevated levels, providing support to the relatively lower percentage price increases historically realized in the residential collection and post-collection lines of business. Q2 solid waste volumes was -3.5%, which included a certain amount of volume pulled forward into Q1, as we had suggested on the Q1 call, as well as intentional shedding of low margin work.

Solid waste core pricing continues to be strong in both our geographies recall 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 with less than expected as open market pricing remain constructive and our CPI linked revenue.

Continued to reset 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 with 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.

Patrick Dovigi: Looking at the H1 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 in our Canadian business. These are lower margin ancillary services inherited through acquisitions that we have decided to no longer provide as a result of our ongoing strategic portfolio reviews that Patrick spoke to. Another 20 basis points relates to special waste volumes, which tend to vary in timing from 1 year to the next. The other 100 basis points relates to non-regrettable losses, substantially all of which is in the collection line of business. Our underlying volume growth for the H1 was approximately 20 basis points.

Thanks.

The components of this negative 160 breaks added 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 20 basis points relates to special waste volumes, which tend to varian timing from one year to the next and the other 100 basis points relates to non regrettable losses substantially all of which is in the collection line of business are underlying volume growth. The first half was approximately 20 basis points.

Patrick Dovigi: 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 at appropriate prices every day. As Patrick mentioned, we're 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 it is better the use of our resources to focus on the many other creative 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 point year-over-year solid waste adjusted EBITDA margin expansion. Commodities continue to be a year-over-year headwind and at a 110 basis point impact compared to the prior year.

The vast majority of our customers are willing to pay for our high quality services and we continue to retain existing customers and when net new customers that appropriate prices every day, but it's 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.

The use 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 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.

Patrick Dovigi: Due to our scale and the quality of the commodities we sell, we typically realize a selling price at a spread above market indices. However, periods of significant price volatility can temporarily cause spread compression such that the net price we realize 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 MRF, which had a blended basket of goods price higher than our company average, also impacted our average commodity price.

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 realize 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.

Patrick Dovigi: The continued decline in non-fiber prices since quarter-end results in a current basket price approximately equal to our original guide. The anticipated stabilization and subsequent recovery in 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 point 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 impacts from future rapid increases in diesel costs, and we see additional upside from continued enhancements that we are implementing, including on the indirect fuel side.

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 impacts from future rapid increases in.

Diesel costs and we see additional upside from continued enhancements that we are implementing including on the indirect fuel side.

Patrick Dovigi: Also shown on the bridge is the impact of M&A and of receiving approximately CAD 5 million of business interruption insurance for the MRF fires that we had in Canada last year. After excluding those items, base business solid waste margins expanded 315 basis points, 125 basis point acceleration over Q1, and demonstrative of the widening spread between price and cost inflation that we forecast in the 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 CAD 9 million, better than our plan despite incurring CAD 10 million incremental cash interest expense as a result of repaying our floating rate debt earlier than originally anticipated. Adjusted cash flows from operating activities increased 18% despite a 32% increase in cash interest expense versus the prior year.

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 demonstrate of of the widening spread between price and cost inflation that we forecast in the two 2000 twenty-three guide.

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

Address that 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.

Patrick Dovigi: On page five, we have summarized the impacts of the now completed divestitures. Due to timing differences between in-year impact of divested adjusted EBITDA and the associated savings and interest costs and CapEx, the divestitures are modestly diluted to 2023 results but are still anticipated to be accretive within the first 12 months. Cash taxes and transaction costs resulting from the asset sales will total just under CAD 400 million, and the approximately CAD 1.3 billion of proceeds were used to repay outstanding borrowings under our revolving credit facility and just under half of our Term Loan B. As Patrick mentioned, with the transactions yielding CAD 150 million more than the original plan and closing a quarter early, we are reallocating a portion of the proceeds toward the attractive of capital opportunities that we have been evaluating, which I will flesh out in more detail when we walk through the guidance update.

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 transaction costs revolting from the asset sales will total 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.

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 toward the attractive the capital opportunities that we have been evaluating which I will flesh out in more detail when we walk through the guidance update.

Patrick Dovigi: As a result of the net debt repayment and the strong H1 operating performance, we ended Q2 with net leverage of 4.18. On page six, we have 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 paydown. In terms of our updated guidance for the year, page eight provides the bridge from our original guidance. Pro forma for the divestitures, we are increasing our revenue guidance by approximately CAD 70 million on a like-for-like basis. The new guide assumes an FX rate of 1.32 for the balance of the year, so the last step on the bridge shows the impact of that change in FX rates. Underlying this new guide are the following assumptions.

As a result of the net debt repayment and the strong first half operating performance, we ended Q too with net leverage of $4 <unk>.

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.

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

The New guide assumes an extra 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.

Patrick Dovigi: Solid waste pricing goes to just under 9.5% from 8%. Surcharges go to -1% from flat, reflecting lower diesel prices. Solid waste volumes go to -2% from flat, with underlying volume growth of +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 -60 basis points, while FX is expected to contribute +160 basis points. The new guide also assumes 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 Q1 and new M&A during the year, offset by the impact of divestitures.

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

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

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

Patrick Dovigi: 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 H2 of the year. Page nine completes the guidance update and shows the pieces to walk from revenue to free cash flow. Adjusted EBITDA increases CAD 55 million using the same FX rate as our original guidance, or CAD 50 million at the new FX rate. An Adjusted EBITDA margin expands an incremental 50 basis points over the original pro forma guide, as the widening spread of price over cost, improved asset utilization, and the accretive impact of shedding low-margin volume all drive incremental margin.

The New guide assumes today's commodity price environment as previously discussed that net impact of which is broadly in line with our original guidance. The expected recovery of commodity prices should provide upside to the guide through 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 original guidance or $50 million at the new F X rays, 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.

Patrick Dovigi: Cash interest expense reduces to CAD 490 million as the in-year savings from the debt repayment are partially offset by the increased interest costs from floating interest rates and borrowing levels higher than originally anticipated. In 2024, the full-year impact of the debt repayment will be realized, and cash interest expense will be closer to CAD 400 million. On CapEx, as we said, we see highly compelling 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. Others are net new opportunities that arose this year.

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

Others 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.

Patrick Dovigi: As Patrick said, we expect that we'll be able to deploy an incremental CAD 200 to 300 million of CapEx before the year is done and have updated our guidance for this gross CapEx accordingly. The breakdown of the incremental investment is approximately CAD 150 to 200 million into 5 MRFs, 4 of which are in Canada and 1 in the US, CAD 25 million to 50 million into RNG project development, and another CAD 25 to 50 million for land and building infrastructure to support these initiatives. The payback on the RNG investments are well known, and at today's RIN prices, the returns are even more attractive at sub-3-year paybacks. We're obviously motivated to accelerate these projects as quickly as possible. In certain instances, the incremental RNG capital is a result of a changing partnership economics, which we expect to be positive.

A breakdown of the incremental investment is approximately $150 million to $200 million 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 R&D capital as a result of the changing partnership economics, which we expect to be positive on the Merv spend.

Patrick Dovigi: On the MRF spend, these projects are largely in response to existing EPR 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 10-year fee-for-processing-based models with accretive margin profiles and sub-5-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 and equal allocation of divestiture proceeds yields an adjusted free cash flow metric that is more reflective of the current cash-generating capabilities of the business. The impacts 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.

Projects are largely in response to existing EPR 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 base 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 divestiture proceeds yields and adjusted free cash flow metric that is more reflective of the current cash generating capabilities of the business.

The impacts 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.

Patrick Dovigi: The resulting balance sheet from the revised operational guide is net leverage of less than 4 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 our specific expectations for Q3, we expect consolidated revenue of approximately CAD 1.865 billion, just under 80% of which will be in solid waste. Keep in mind, the recent divestitures impact Q3 revenues by CAD 115 million compared to the original guide, which is the driver of the atypical step-down from Q2. The recast FX rate also impacts the sequential quarterly comparison by approximately CAD 20 million.

The resulting balance sheet from the revised operational guide is net leverage of less than four times exiting 2023, a level that should organically reduced in other 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 died which is the driver of the atypical step down from the <unk>.

Second quarter, the recast FX right also impacts the sequential quarterly comparison by approximately $20 million.

Patrick Dovigi: Solid waste adjusted EBITDA margins are expected to be in line with Q2, reflecting underlying sequential expansion offset by the 35 basis points 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 Q3 revenues. Corporate cost margins are expected to be 10 basis points higher than Q2 on continued investment in IT development and the impact of the divested revenue. This results in adjusted EBITDA of approximately CAD 525 million at consolidated margins of approximately 28%, representing over 200 basis points of expansion compared to the prior year.

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 queue too and.

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 costs of $115 million a benefit from working capital net of other.

Patrick Dovigi: From that adjusted EBITDA, the components to get to adjusted free cash flow are cash interest costs of CAD 115 million, a benefit from working capital net of other items of about CAD 25 million, and gross CapEx of CAD 275 to 300 million, or approximately CAD 160 million when incorporating the allocation that a divestiture proceeds previously discussed. That results in adjusted free cash flow for the Q3 of approximately CAD 275 million. That's the summary of the guidance update. I will now pass the call back to Patrick, who 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.

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 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.

Patrick Dovigi: We continue to use all of the self-help levers 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 margins and expansion. We are taking action across our network of assets to maximize the returns from our customer base, from each market area, and from strategic capital investments, all confirming the relentless commitment of GFL's employees to long-term value creation for our shareholders. As I said earlier, I'm extremely grateful to all of GFL's 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.

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 tfl'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.

Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchstone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If using a speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question. Your first question will be from Michael E. Hoffman at Stifel. Please go ahead.

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 down here a three ton prompt acknowledging your request and if you would like to withdraw some of your question can you. Please specify followed by two and if you're using a speaker phone that you will need to lift the handset before pressing any keys. Please go ahead and press start one.

Now if you do have a question.

And your first question will be from Michael E Hoffman.

<unk>. Please go ahead.

Michael E. Hoffman: Hey, everybody. Thanks for taking the questions. Patrick, let me start with price. 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 look for more? I'd like to talk about cadence because inflation is starting to ebb, we do need to manage the thought about cadence.

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.

Patrick Dovigi: Yeah. I mean, we had the benefit of, again, some of the surcharge programs and rationalizing the existing book that we had. A lot of that will be recognized in base price. The initial recognition of that comes into base price, so that remains at elevated levels. We still have a good opportunity with an existing book of business with some underpriced customer bases, particularly on the commercial side and on the residential side, to continue moving those up, coupled together with the CPI lags in the residential books of business. All those put together allowed us to sort of move up the guide, particularly on price, particularly with seeing where some of those CPI adjustments have been coming earlier in the year and where we think the balance of those re-rate. We're in a good position.

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 price so that it remains elevated levels, but.

The Mark we still have a good opportunity to an existing book a business with some underpriced customer basis, 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 seminal CPI adjustments have been coming earlier in the year and where we think the balance of those.

Patrick Dovigi: Obviously, with CPI coming down as that moderates, we've built that into our forecast. I think from where we sort of sit today, we feel very comfortable with the guidance that we put out.

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.

Michael E. Hoffman: How should we think about cadence through H2 and then into 2024 because CPI is coming down, and that doesn't mean you won't maintain this really strong spread. Just the rate of change will narrow.

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 it won't maintain this really strong spread just the rate of change will narrow.

Luke Pelosi: Yeah, Michael, it's Luke speaking. I think that's right. For the balance of 2023, we expect what I'll call kind of normal cadence. That's these Q3 stepping down like another 200 basis points, similar to Q1, and then the step-down sort of moderates in Q4, and you're looking at sort of more like 100 basis points step-down then. Look, we're not at the position where we want to talk about 2024 in earnest. As we've said historically, we think there's a constructive backdrop with the delays in CPI as well as the constructiveness of the open market dynamic to continue at what would be elevated levels of pricing. I don't think you're going to see it at 2023 levels. To your point, we're going to be facing a cost inflation number that is well inside of what 2023 saw.

Yeah, Michael It's Luke speaking I think that's right for the balance of 23, we expect a call the kind of normal kaden that these Q3 stepping down like another 200 basis points suddenly Q1, and then the step down sort of moderates in Q4, and you're looking at sort of more like a 100 basis points step 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 to continue at what would be elevated levels of pricing and I'll take you are going to see it at 2023 levels, but to your point, we're going to be.

Facing a cost inflation number that as well as inside of 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.

Luke Pelosi: We think, as we've been saying for the last couple of quarters, that there's an opportunity to continue to maintain what is an outsized spread as compared to historical amounts.

Michael E. Hoffman: Okay. You have socialized in the past the idea of by 2025, an adjusted cash number of CAD 1 billion. It would appear now that, without adjustments, that CAD 1 billion is achievable by 2025. Are we looking at that correctly?

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

And adjusted cash number $1 billion, but it would appear now that without adjustments that one.

Billion dollars is achievable by 2025 or are we looking at that correctly.

Patrick Dovigi: Oh, I would be disappointed if it wasn't there, for sure. I mean, if you sort of look at what the natural I mean, we said we think when you sort of layer in RNG and you layer in all the other aspects, now with the accelerated delevering, I think we're certainly going to my expectation is we are definitely going to exceed the CAD 1 billion in 2025.

I would be disappointed if it wasn't there for sure I mean have you sort of look at what the matter 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.

Think.

We're certainly going to.

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

Michael E. Hoffman: Okay. The RNG projects that you're adding in the accelerated spend, do they qualify for investment tax credits? I'm going to get that capital some of that back anyway.

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

<unk> accelerated spend today qualify for our investment tax credits so.

I'm gonna get that capital.

Patrick Dovigi: Yes. Yes.

Michael E. Hoffman: Okay. Can you max it out at 50%, or should we think about it as 30?

Anyway, Okay.

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

Patrick Dovigi: I mean, we'll push to maximize at 50, but for conservatism's perspective, we're using 30.

30.

Okay.

<unk> pushed to maximize 50, but.

For conservatism perspective, we're using 30.

Michael E. Hoffman: All right. What gives you confidence you can spend all this money in 2023 given the delays that happened in other stuff?

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

Patrick Dovigi: 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 spends, as you know, we've been sort of a leader, particularly on the EPR front. A lot of those contracts have come together over the last couple of months, and they are a combination of MRFs and hauling businesses to support those, not only in Ontario but supporting them in other parts of the country. The way I would think about it, hey, if this was an acquisition, you're basically getting, call it, somewhere between CAD 40 and 50 million of EBITDA at very sort of high EBITDA margins for a spend of CAD 200 million. You're paying sort of 4 to 5 times.

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 EPR front and a lot of those contracts have come together over the last couple of months and they are a combination of Mars 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>.

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. Some of this has been in planning with the expectation that this would happen.

Patrick Dovigi: I think from our perspective, we think we have the ability to deploy those dollars. Some of this has been in planning with the expectation that this would happen because these negotiations started last fall but have really come together over the last couple of months.

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, but you also have to remember is Patrick said a lot of this is an ETR in marks and while machine acts in van Dyke and the lights may not be able to deliver all the equipment.

Luke Pelosi: Michael, the uncertainty about the ability is also the basis for the wider range, put CAD 200 to 300 on that basis. You also have to remember, as Patrick said, a lot of this is in EPR and MRFs. While Machinex and Van Dyk and the likes may not be able to deliver all the equipment, in certain instances, there's land, building, retrofitting existing properties, construction. There's other costs that could be done in preparation for it. You're absolutely right. It's a bit of uncertainty on the absolute quantum and hence the wider range.

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 are absolutely right.

Michael E. Hoffman: Okay. Thank you.

Okay.

Luke Pelosi: Thank you.

Thank you.

Patrick Dovigi: Thanks, Michael.

Operator: Next question will be from Kevin Chiang at CIBC. Please go ahead.

Thank you thanks Bye.

Next question will be from Kevin.

Kevin Chiang: Thanks. Good morning. Thanks for taking my questions here. Maybe just on how to think about CapEx moving past 2023. Gross CapEx, I appreciate you have offsets here given the successful asset divestitures. If I think of what the gross CapEx intensive of the business is in 2024 and onwards, should we hold it at these levels, kind of 14% and 15% of revenue just given the pipeline of opportunities, or do you kind of step back down to, let's say, 10%, 11%, 12% like you were assuming in the original forecast earlier this year?

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 acid 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.

The plight of opportunities or do you kind of step back down to.

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

Earlier this year.

Luke Pelosi: Yeah, Kevin, it's Luke speaking. I think characterizing this year as an outlier is the appropriate approach, and it's really by function of these divestitures' proceeds being reallocated. The other component to this is RNG. If you look at our total spend over all of the projects in totality, it might end up being at a sort of gross level in a sort of CAD 500 million level. When you think about 30% ITCs, and you think about 40% to 50% project-level financing, your actual equity check at the end of the day is going to be materially less than that. Sometimes there's timing differences, and it's part of this year's spend. The ITCs are going to come next year, but we want to invest the capital this year.

Yeah, Kevin is Luke speaking I think characterizing this year as in outliers the appropriate approach and it's really by function of these divestitures proceeds being reallocated note. 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 at.

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 sometimes there's timing differences in as part of this year's spend as 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.

Luke Pelosi: You are going to have a bit of this gross versus netting as we deploy into RNG. 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 services business that both run 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 will talk about it times like this. I think the relative dollars at play as we go forward will become less impactful to the overall, and that in and around 11% is the right intensity to think about.

A bit of this gross 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 services business that both Brian at a lower capital intensity than industry averages, we see a clear path to <unk>.

But 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 at times like this but I think the relative dollars at play as we go forward will become less impactful to the overall and that in and around 11% is the right intensity to think about.

Kevin Chiang: Excellent. That is great color. Then you laid out, I will say, a target to mid-three times leverage exiting 2024. I guess when I think back to your investor day, you kind of laid out a number of acquisition scenarios. If you are able to share with us, which of those three should we be thinking about to get to the mid-threes? Are you kind of back to an elevated M&A scenario in your mid-threes, or are you kind of in the middle of the pack? Does it seem no M&A? Any color there would be helpful.

Excellent that's great color.

And then you laid out a whole set of targets in mid three time it 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 to get to the mysteries are you're kind of back to an elevated M&A scenario mysteries are you kind of.

Patrick Dovigi: Yeah. I think from where we sit today, we have some wonderful acquisition opportunities that will be very compelling for us to execute on in H2 of this year. We put out this guide. We've taken a conservative view on the guide. Obviously, every quarter since we've been public, our philosophy has been sort of underpromise and overdeliver. I think that theme will continue. The backdrop is we've committed to, this year, keeping leverage sort of around 4 turns. We will do that with the model we have as well as executing on the M&A. Where we sort of sit from the company's first time in history, given the free cash flow profile of the business now and what that looks like for next year, we've thrown out a number next year for almost CAD 875 million of free cash flow.

Yeah.

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.

Patrick Dovigi: When you look at that coupled together with the free cash flow in H2 of the year, we're going to be able to do both. The business is going to grow organically. It's going to naturally delever. M&A, taking a bunch of the free cash flow and reinvesting that into our M&A program, again, will all be delevering events. We think we're going to get there regardless of our normal sort of M&A spend.

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.

Luke Pelosi: Kevin, I mean, the math today, it's pretty straightforward. If you think about organically, the business could deleverage to low threes. How much M&A will temper that otherwise delevering? It's roughly four basis points of leverage for every CAD 25 million of EBITDA you buy. If you put that together, if you buy CAD 50 to 100 million of EBITDA, that has an impact of somewhere to the tune of sort of 10 to 20 basis points of incremental leverage.

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.

<unk>, but that together.

$550 million to $100 million EBIT, a as in Impactive similar to the tune of sort of 10% to 20 basis points of incremental leverage.

Kevin Chiang: Got it. That's great color. I guess last one from me. Environmental services, long-term target of getting this to 30% EBITDA margin. You kind of hit that in certain quarters, at least very high 20s. 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 in the shoulder quarters? Does everything have to come up by 400 basis points, or do you just have to kind of hit it out of the park even more so in the Q2, Q3 quarters? Just wondering how you think about getting to that 30 overall, just given the seasonality and that profitability.

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

Environmental services longterm target of getting us to simply.

2% EBITDA margin, you kind of hit that in certain quarters at least very high twenties.

When you think of getting there.

On an annualized basis.

Is it China reduces 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 do you just have to kind of hit it out of the park even more so in the in the Q2 Q3 quarters. Just wondering how you think about getting to that 30 overall, just given seasonality and that profitability.

Patrick Dovigi: There's always going to be a large element of seasonality in that business just because for the simple fact that it's levered to Canada. We are going to 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 that we believe we should be getting in that line of business. 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 lowest, and Q2 and Q3 will be the highest. We have to push Q2 and Q3 exceedingly above sort of where they are today. We have to get those surcharges implemented to offset the sort of Q1 and Q4 dynamic.

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 going to 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 you know 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 lowest in Q2 and Q3 will be the highest we have to push Q2 and Q3 <unk>.

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.

Patrick Dovigi: It's going to be a bit of a mixed bag, but I think we have a clear path to sort of getting there. I think you're seeing that come through quarter-over-quarter, year-over-year.

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 a member of 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're now putting in.

Luke Pelosi: Kevin, you got to remember, the foundation of that business is largely predicated on these post-collection facilities we have across Canada that are very high fixed cost base in nature. As you think about the revenue growth we're now putting in the utilization improvement of those assets, you get a lot of operating leverage coming out of that. You're seeing that this year. As we roll that forward, what used to be CAD 5,600 million of revenue in that segment, we're now going to be approaching CAD a billion and a half. You're going to get meaningful operating leverage at a much more fixed cost base.

Utilization improvement of those assets you get a lot of operating leverage coming at you are seeing that this year and as we roll that forward what was used to be five $600 million of revenue in 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.

Kevin Chiang: That's great color. Thank you very much. That's it from me.

And that's that's a great color. Thank thank you very much that's it for me.

Patrick Dovigi: Thanks, Kevin.

Operator: Next question will be from Jerry Revich at Goldman Sachs. Please go ahead.

Thanks, Kevin.

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

Adam Bubes: Hi. This is Adam Bubes on for Jerry Revich today. Thanks for taking my question. Can you talk just the incremental, I think it was CAD 25 to 50 million RNG investments, does that include any new projects? Should that change how we're thinking about the cadence of projects beyond 2023?

Hi, This is Adam Beavis unfair 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.

Luke Pelosi: Adam, it's Luke speaking. Nothing is new in that number. There is one project that was previously going to be a partnership that we're now going to go alone in that it was a partnership with not one of our core partners but a tertiary partner. We've now bought them out. They're going to go alone in accelerating some of the spend on that. We're still looking at the same number of projects in totality. The reality is, as I was speaking before, with a combination of timing of receipt of ITCs as well as project-level financing, there's just a bit of a change in the cadence of our equity checks. I think when you get to the end of the next couple of years, the actual net investment will remain the same, but there'll be some lumpiness from quarter to quarter.

So.

Adam and flew 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 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 Itc's as well as 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.

Sure.

Adam Bubes: Understood. With RIN3 prices now in the CAD 3 range, can you just update us on how you're thinking about your offtake strategy in RNG? Do you have a targeted % that you intend to sell into transportation markets versus long-term arrangements?

Understood and then which were in three prices now and that $3 range can you just update us on how you're thinking about your off take strategy in RMG do you have a target 8% at you intend to sell into transportation markets versus longterm arrangements.

Patrick Dovigi: Again, currently in process. I think our longer-term strategy may differ from the shorter-term strategy. In the longer term, like we said, we want to get to a point where we basically have 60% to 65% of our offtake parsed off in sort of long-term agreements. Obviously, we want the right price for that. Obviously, with the CAD 3 RIN, that helps the longer-term strategy for those longer offtake agreements. We want to get to a point where we're going to be at sort of longer-term offtake agreements in the sort of 60% to 65% range.

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 offtake.

Parse off and 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 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.

Adam Bubes: Got it. That's helpful. Lastly, really strong margin performance in the quarter with margins well ahead of normal seasonality. Just looking at the H2 guidance, it looks to be implying sequential margins basically in line with normal seasonality. It also looks like your underlying inflation is decelerating much faster than price. Just any puts and takes around the sequential margin cadence from here relative to normal seasonal trends?

Got it that's helpful. And then lastly, really strong margin performance in the quarter with margins. While 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 is decelerating much faster than price. So just any puts and takes around the sequential margin cadence from here.

Relative to normal seasonal trends.

Luke Pelosi: Yeah. I think last year sort of defied the normal seasonality by virtue of the inflationary ramp that was really more focused in H2 of this year. As that's unwinding, it's causing some impact to the current year's sort of seasonality cadence. Look, for the Q3 guide that we've put out, effectively saying solid waste continues to expand from where it is today, just normalized for the insurance recoveries that we received in Q2, which created about a 30, 40 basis point benefit to Q2. If you're stripping that out, continued sequential improvement in solid waste. That's really a function of that continuing widening spread. Yes, cost inflation is anticipated to moderate even further in Q3, and you're going to be at a mid-single digit number.

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

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 points benefit to Q2, so constricting that out continued sequential improvement in solid waste and that's really a function of that.

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 sort of 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.

Luke Pelosi: As pricing sort of comes down accordingly, I think you'll get a little bit more spread above those two. Environmental services is similar to the comment we were saying before, really firing on all cylinders. With the Q3 peak revenue, it's where you're going to get this sort of optimized operating leverage. That's why we see now a path that margins in that segment for Q3 could touch 31%. Q4, obviously, as the seasonal cadence, you have a bit of a step down from there as you move into the winter season.

So are you going to get this sort of optimize.

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

Adam Bubes: Great. Thanks so much.

Great. Thanks, so much.

Luke Pelosi: Thanks, Adam.

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

Thanks, Adam.

Next question will be some Tyler brown at the Raymond James. Please go ahead.

Tyler Brown: Hey. Good morning, guys.

Luke Pelosi: Good morning, Tyler.

Good morning guidance.

Tyler Brown: Hey, Luke, I think you touched on it, but volumes were a bit weak in the quarter. It sounded a bit by design. You gave some color, but H2 volumes are maybe down 2% on my math. Is that about right? Will there be any difference between Q3 and Q4?

Good morning to either.

Okay. Thank you touched on it but volumes were a bit weak and quarter. It can be a bit magazine.

<unk> gaze color, but secondhand volumes or may be down 2% on my math is that about right and will there be any different.

Luke Pelosi: Tyler, I'd say your math is right. Is that what the H2 is looking at? It's really just a continuation of what we articulated in the first. As I said, I think the pull forward from Q2 into Q1, so I think looking at H1 in totality makes more sense, -160 basis points of volume. If you break that down, you got about 60 basis points, which was CAD 15 million of what I'm calling this non-core ancillary services. This is work, stuff like wood chipping or gravel hauling and other ancillary-type services, primarily in secondary markets that we've been doing for a while, but we really don't make any money there, and we're exiting that. That's one component of it. That will sort of basically maintain each quarter throughout the year until that work is gone.

Three and four.

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

Is that what the second half is looking and it's really just a continuation of what we articulate 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 you break that down the end of a 60 basis points, which was $15 million of what I'm, calling this non.

Or in silvery services. This is work stuff like wouldn't shifting or gravel hauling and other tightened sillery type services primary and secondary markets 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 analysis basically maintain each quarter throughout the year until that work is.

Luke Pelosi: For H1, we have about 20 basis points of the event-driven special waste volumes. If you look last Q2, special waste volumes or landfill volume in the US was +12%. I think we 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. I'm anticipating by the end of the year, that's sort of neutralized more back to a sort of flat sort of level. What you're left with for H1 is this sort of 80 basis points, or call it CAD 20 million, of the net of this intentional shedding offset by real underlying volume growth. The intentional shedding, look, it's primarily in residential collection, although some is in IC&I.

Gone.

For the first half we have about 20 basis points of the event driven special waste volumes.

He looked last Q2 special waste volumes are landfill volume in the U S was plus 12% that 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 sort of neutralize more back to sort of flat sort of level and then what you're left with the first half is is what 80 basis points or call at $20 million.

Of 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 far.

Luke Pelosi: This is a function of our strategy of price over volume. I think, by and large, it's working, and you can see it in the numbers and in the margin. Certain select handful of residential large accounts that are unwilling to pay for our service, we're going to walk away from. We're happy to do so in this environment. For the H2 of the year, where you end up with the roughly 200 basis points or CAD -100 million of volume for the year as a whole, you roughly have half of that as a result of the exiting the non-core ancillary services, another sort of, call it, CAD 60 million from the non-regrettable losses or intentional shedding. You have an underlying CAD +10 million, CAD +20 million of growth from our normal course service level increases and new customers.

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.

Tyler Brown: Okay. Yeah. Very detailed. Very helpful. Appreciate that. Patrick, I want to talk about repairs and maintenance because it sounds like the OEs are starting to deliver. It seems like part prices are disinflating, and I think rentals might be down next year. Does R&M feel like it could be a uniquely good story in 2024?

Yeah.

Very detailed and very helpful. Appreciate that.

Patrick I want to talk about repairs and maintenance because it sounds like there 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 a uniquely good story 824.

Patrick Dovigi: Yeah. I mean, we're still basically almost 100 basis points more than where we've been historically. Yes, I think this year is going to be 50 basis points ahead of what our original plan was at the beginning of the year. But things are certainly coming down. We're certainly getting more truck deliveries, and the timeliness of those truck deliveries is coming on board. Now, from an OEM perspective, it's obviously moderating prices on supply of parts as well. All of those coupled together are coming down. I mean, if you look at from us, from a rental truck perspective, we are renting a quarter amount of the trucks that we were renting a year ago, right? That's all in the R&M line. Yes, you're right.

Yeah I remember.

We're still basically 100, almost 100 basis points more than where we've been historically.

So yes, I think we're going to this year is going to be 50 basis points ahead of our what our original plan was at 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.

Obviously 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 our 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.

Patrick Dovigi: I think as that moves into 2024 and 2025, that is certainly going to moderate and be a good news story as you move up for those next two years.

So yes, you are right and I think as that moves into 20 425 that is certainly going to to moderate and be a good news stories you move out for those next few years.

Tyler Brown: Okay. We'll keep an eye on that. Luke, on the CAD 1.65 billion gross proceeds, I think you said CAD 400 million maybe 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? Where will that show up on the cash flow statement?

Okay and will keep on that and then meet 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 flow statement.

Luke Pelosi: Yes. Maybe modest amount of transaction costs have been paid. Roughly, think of it CAD 360 of taxes, CAD 40 of transaction costs, round numbers to get you to that CAD 400. A modest amount of transaction costs would have been paid in Q2. The rest was accrued, and you can see that in the large transaction cost 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 cost bucket. The cash taxes will be paid sort of roughly, call it, half in Q3 and half in Q4, maybe actually more like 60/40 towards Q3. It will show up in our cash tax section of the cash flow. We may have some incremental disclosure to break it out so you can see the impact of what we're calling the sort of one-time versus ongoing.

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 Q2.

The rest was accrued and you can see that and a large transaction cost 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.

Tyler Brown: Okay. Okay. That's helpful. My last one, kind of another question along maybe a similar line, but a couple of your RNG plants are kind of in that initial startup phase. How much EBITDA contribution are you baking in on those facilities? How is the accounting going to work? It seems they're not consolidated. Will you just have some sort of an add-back in the EBITDA reconciliation, or how is that going to work just practically?

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

A couple of your RMG plants.

In that initial startup phase, but how much EBITDA contribution are you taking in on these.

<unk> and how would the account and getting work are you guys.

Okay.

So will you just have some sort of getting back into EBITDA reconciliation, how was that getting work practically.

Luke Pelosi: For 2023, the guide anticipated an inclusion of an immaterial number. I think it was about CAD 10 million in total. With the delays, I mean, that might be a little light, but the RIN pricing probably offsets. The 2020 number is sort of as per the original guide.

So for 2023, the guidance is debated and 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 Guy Twenty-twenty. That's why 23 number as you guys by 24 and that starts ramping up as high there I think thats right. These are.

Tyler Brown: 2023.

Luke Pelosi: The 2023 number. As you get into 2024 and that starts ramping up, yeah, Tyler, I think that's right. These are joint ventures that are unconsolidated. Our perspective is the GAAP-based accounting answer doesn't accurately reflect what our investors are looking for. You will have an adjustment to remove the GAAP-based net income that you're picking up and replace it with your proportionate share of the EBITDA. We'll preview that as part of our 2024 guide and make sure everyone understands very clearly what we're showing there. We anticipate something to that effect.

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 gap 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.

Tyler Brown: Okay. All right. Good stuff. Thanks, guys.

Okay at good step thanks, guys.

Luke Pelosi: Thank you, Tyler.

Patrick Dovigi: Thanks, Tyler.

Thank you thanks, though.

Operator: Next question will be from Walter Spracklin at RBC Capital Markets. Please go ahead.

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

Walter Spracklin: Yeah. Thanks very much. Good morning, everyone.

Patrick Dovigi: Hey, Walter.

Yeah, Thanks, very much good morning, everyone.

Walter Spracklin: On the intentional shedding of business, we're hearing that from your peers as well. Just a basic question, where is that being shed to? 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 through combining with their own operations? Just curious as to what your experience is where a couple of your or at least one of your peers is talking about some pretty significant also intentional shedding of business as to where it's ending up.

Hey, Walter.

So on the ship 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 your own operate just curious as to what your experiences were a coupla years ago at least one of your period is talking about some pretty significant also intentional shedding.

Business as to where it's ending up.

Patrick Dovigi: Yeah. I mean, for the most part, I mean, it's in very selective markets. It's been a mixture of both. It's been some strategics that have some strategic opportunities there, whether that's internalization of streams into their landfills, etc. In a couple of the markets, it's been a municipality taking a chance on a smaller type collector in a market that's sort of a recent startup. History tells us with those, we always generally end up with the work coming back to us over the course of the next sort of year to year and a half. 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. Some of these residential contracts came with acquisitions, etc. I tell everybody in the organization, we're a for-profit organization. We don't need to practice.

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

It's been a 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 somebody's 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 he'll benefit of a mixture of both.

Patrick Dovigi: There's no sense in practicing on some of these residential contracts, particularly in this environment, if we can take those good dollars and deploy them into things that actually we're going to make money from. It's been a bit of a mixture of both.

Walter Spracklin: There's no worry here that this is representative of a lack of discipline among smaller players or anything to that?

There's no worry here the dishes representative of a lack of discipline amongst smaller players or anything to that no no.

Patrick Dovigi: No. No.

Walter Spracklin: Okay. On the margin, Luke, you mentioned margin 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 2023 to be able to allow for an expanding spread whereas perhaps it was contracting last year or was pressured last year. How do you look at it for next year? Are you expecting more of a normalized in other words, is there less benefit from an expanding spread, or could we see that spread last longer into 2024 based on how your mechanisms work?

On the margin you mentioned merging 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 twenty-three to be able to allow for an expanding spread whereas perhaps it was contracting last year.

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.

Used on how your mechanisms work.

Luke Pelosi: Yeah, Walter. I think as we've been saying consistently, we anticipate 2024 being another outsized year. It's a combination of not just the natural spread expansion that you're going to have, but there's also, I mean, Patrick was just talking about 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. I'm not saying you need to bank on commodities for the expansion, but just another example of what should be a tailwind. RNG, as that comes on for us, we have a relatively diminished immaterial amount in the current consolidated results, and it's very high margins.

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 are going to have but there is also I mean patridge assignment R&M that is not going to get fully <unk>.

<unk> 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 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.

<unk> material amount in the current consolidated results and 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 deception.

Luke Pelosi: I think the natural price versus cost inflation spread dynamic unto itself should provide an opportunity for outsized expansion. When you start layering those other pieces on top, we see the setup for 2024 to be an exceptional year.

Walter Spracklin: Okay. That's fantastic. The last question here is on the CapEx spend. It seems like a larger number to happen all at once. Just curious, is this something you were always contemplating and just were mindful of dollars spent and keeping everything in check? With the proceeds now from the acquisition, you saw an opportunity to strike on this one. Is this just something that just popped up recently, and kind of you had the opportunity and the capability, and you hit as a result of that? Just curious as to how they came up.

All year.

Okay, that's fantastic and the cap at 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 just curious as to how they came up.

Patrick Dovigi: Yeah. I think as part of the divesture 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 was tendered and developed with us in the sort of Q1 of 2023 and really formalized in the Q2 of 2023. I think from our perspective, our anticipation was that as we saw the divesture sort of unfolding, that we actually ran a little bit harder at the EPR opportunity than maybe we would have and taking on the amount of work that was available under that program.

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 was is that as we saw the divesture sort of unfolding.

That we actually ran a little bit harder at ETR opportunity, then maybe we would of.

And 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. Aside then these partnerships that we've developed with.

Patrick Dovigi: Listen, from where I sit today, there is no better use of capital, putting the RNG spend aside, than these partnerships that we've developed with the producers in Canada, particularly with some of these MRFs that contracts ranging from 10 to 20 years, annual PIs, ability to recover CapEx dollars to meet their sustainability goals. I mean, it's a wonderful partnership. It's a win-win for both of us. The fact that we've moved these to fixed-fee processing contracts so we don't have any commodity volatility, I mean, it's a wonderful thing where you're basically going to be at around 4-year paybacks on these with 10 to 20-year contracts coupled together with the vertical integration of now putting the collection contracts together with them. We just didn't see a better opportunity to deploy those dollars.

The producers in Canada, particularly with some of these mircette contracts ranging from 10 to 2020 years annual P is the ability to recover capex dollars to meet their sustainability goals. I mean, there are one it's a wonderful partnership.

It's 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.

These with 10 to 20 year contracts, coupled together with the 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.

Patrick Dovigi: Given the fact that we even exceeded our own internal expectations of getting an extra CAD 150 million of proceeds from what we anticipated when we started the process, this was just a logical place to put those dollars. Again, the setup that gives us for 2024 and 2025 is going to lead to a significantly above-average growth CAGR as we move out into 2024 and 2025.

I was 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 I'll lead to.

Significantly above average growth tagger as we move out into 2425.

Walter Spracklin: Okay. Appreciate that caller, Patrick. Thanks, guys.

Okay I appreciate that color Patrick thanks, guys.

Operator: Okay. Thank you. Next question will be from Stephanie Yee at JPMorgan. Please go ahead.

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

Stephanie Yee: Hi. Good morning. Can you talk about within environmental services, how much of the growth is price-driven and surcharge-driven versus the processing volume side?

I am learning and can you talk about with an environmental sounds.

I'll make it the price came in and start trying to strengthen.

The processing volume side.

Luke Pelosi: Yeah, Stephanie, it's Luke speaking. I mean, if you look at the typical sort of growth algorithm in a solid waste business, 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's not as homogeneous of a mix, so it's harder to do exact, but it has certainly been a volumetric growth story and is only recently pivoting to price. Certainly, a larger portion in this quarter versus the prior was price, and you're going to continue to see that migration towards a price-centric growth story. That's what gets us excited about the opportunity because as we start being more thoughtful about the quality of revenue and ensuring we're getting priced appropriately, we see the opportunity for meaningful incremental operating leverage over where we are today.

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 universe 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 meeting.

Incremental operating leverage over where we are today.

Stephanie Yee: Okay. Got it. That makes sense. Can you give us a sense of how the different business lines within environmental services is doing?

Okay.

And can you give us a topic different.

Okay and environmental services.

Cool.

Luke Pelosi: I mean, just at a high-level bifurcation, people have historically asked about our sort of oil and oil-related exposure. Obviously, that business with the decrease in energy costs is realizing revenues at a sort of lower point than it had sort of historically. More and more with the diversification efforts that we've undertaken, I mean, that business is representing sub-10% of the overall as we go forward. Really, when you think about our broad-based sort of environmental services across sort of collection and processing, we continue to see strength. It is particularly leveraged in Canada. I think the brand we have created and the quality of the service that we are offering is very valued by our customers. We continue to see phenomenal sort of growth as you have seen over the past sort of year or two.

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.

Some 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, 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.

Stephanie Yee: Okay. Would you consider expanding environmental services outside of Canada more so into the US?

Okay, and and we can't.

Expanding.

Outside of Canada.

Anyway.

Patrick Dovigi: I mean, if the right opportunities and the right markets presented themselves, for sure. I mean, we have been slowly expanding into the US. Obviously, the market selection and the right asset base is the most important part. Yeah, I mean, we'll definitely look at opportunities. We're not shying away from different opportunities in the US, that's for sure.

Okay. It's 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. That's for sure.

Stephanie Yee: Okay. Sounds good. Thank you.

Okay sounds good thank you.

Patrick Dovigi: Thanks, Stephanie.

Operator: As a reminder, if you do have a question, please press star followed by one on your touchstone phone. Your next question will be from Michael Doumet at Scotiabank. Please go ahead.

Thanks.

As a reminder, if you do have a question. Please press star followed by one touchdown phones.

Your next question will be from Michael debates Scotiabank. Please go ahead.

Michael Doumet: Hey. Good morning, guys. The expectation for price-cost spread to expand the chemical orders, that's been well explained. I wonder, despite inflation slowing, whether you think peak price-cost spread will occur in 2024 rather than in H2 2023. This obviously excludes commodity and RNG piece.

Hey, good morning, guys.

The expectation for <unk>, 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.

Luke Pelosi: Yeah, Michael, it's Luke speaking. I think we could debate whether we'll be sort of Q4 of this year or Q2 that it's actually peaked. I think you're seeing that happening. I think if you think about the way the dynamics roll into 2024, there's clear math that supports continued wider spreads. It's difficult to call the exact sort of when it's going to peak. We're just feeling very optimistic that 2024 will seem to be constructive.

Yeah, 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 rolled into 2002.

Four.

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.

Michael Doumet: That's helpful. Thanks, Luke. 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 from the pro forma 2023 EBITDA guidance, I get to a full-year EBITDA margin of 27.1%. Just thinking if that's a fair starting point for 2024, and obviously, I would add, I don't know if it's two or 300 basis points of price-cost spread, RNG, etc. Just trying to get a sense from you on how to think about those numbers.

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.

Starting point for training 24, and obviously I would ads I don't know, if it's two or 300 basis points of price cost spread.

RMG et cetera, just just trying to get.

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

Luke Pelosi: Michael. We're not going to talk about 2024 today. We gave you the 2023 guide ending at CAD 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. I think it's in that sort of directional zip code. We're going to wait till we close out this year or at least another quarter before we start talking about 2024 guide in too much depth.

Yeah. So we're not going to talk about 2000 2004 today, we gave it a thousand twenty-three 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 here. So I think it's in that sort of directional Zip code, but.

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

Walter Spracklin: Okay. Fair enough. Yeah, those are my questions. Thanks very much.

Okay fair enough yeah.

Those are my questions. Thanks very much.

Operator: Thank you.

Luke Pelosi: Thank you.

Operator: At this time, sir, we have no further questions registered. Please proceed with closing remarks.

Thank you and.

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

Patrick Dovigi: Thank you, everyone, for joining today. Sorry about the conference call. We started a little bit late given the issues with the operator, but we look forward to speaking with you after our Q3 results. Thank you.

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 our QC resolved. Thank you.

Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your line. Have a good day. Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your line. Have a good day.

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

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

Thanks.