Q2 2024 GFL Environmental Inc Earnings Call
His name is breaker and that'll be the moderator today.
Speaker Change: All lines will be muted during the presentation portions of the cool with an opportunity for questions.
And.
I would now like to pass the conference over to Johan.
Patrick Davinci, founder and CEO at G. F out environmental. Thank you you May proceed Patrick.
Patrick Davinci: Thank you and good morning, I would like to welcome everyone to today's call and thank you for joining US. This morning, we will be reviewing our results for the second quarter and updating our guidance for the year I'm joined this morning by Luc <unk>, our CFO, who will take us through our forward looking disclaimer before we get into the details.
Speaker Change: Thank you Patrick good morning, everyone and thank you for joining we filed our earnings press release, which includes important information. The press release is available on our website.
Luc: During this call we will be making some forward looking statements within the meaning of the applicable Canadian and U S securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U S Securities regulators any.
Speaker Change: Forward looking statement is not a guarantee of future performance and actual results may differ materially from those expressed or implied in the forward looking statements. These forward looking statements speak only as of today's date and we do not assume any obligation to update these statements whether as a result of new information future events and developments or otherwise.
Speaker Change: This call will include a discussion of certain non <unk> measures. A reconciliation of these non <unk> measures can be found in our filings with the Canadian and U S Securities regulators I will now turn the call back over to Patrick Thank you Luke.
Speaker Change: Our second quarter financial results continue to prove the highly predictable and recurring nature of our business model. These results are better than we expected and reflect the underlying quality of our asset base and the effectiveness of the value creation strategies that we have put in place over the last few years. Most importantly, these results demonstrate the drive of our employees to deliver consistent.
Speaker Change: High quality results quarter over quarter and to make our business better every day I want to thank each and every one of them for their dedication to team green.
Speaker Change: Both solid waste pricing and volume came in better than expected for the quarter and continued to trend above our initial plan.
Speaker Change: Operating cost inflation is sequentially moderating, mainly around labor rates and repair and maintenance expenses.
Speaker Change: The accretive benefits of shedding low quality revenue and exiting non core service offerings are also evident in our margins.
Speaker Change: <unk> walked through more of the details for the quarter that confirm the ongoing operational excellence of the business that we have built.
Speaker Change: Consistent with our previous guidance, we deployed $89 million into incremental growth investments primarily related to recycling and R&D infrastructure that we expect will generate significant ROIC for years to come.
Speaker Change: We remain on track to deploy a total of $250 million to $300 million into those investments during 2024 as previously guided.
Speaker Change: In the quarter, we also accelerated our exit from our portfolio of residential collection contracts in Michigan that no longer met our return thresholds. The sale of this book of business occurred at the end of the second quarter and will be accretive to our margins in the second half.
Speaker Change: We've seen continued success with the development of our book of business related to EPR in the Canadian markets New.
Speaker Change: New contract awards in Ontario, and Quebec have added to the 80% to $100 million of incremental adjusted EBITDA. We previously identified related to EPR and we now expect to generate approximately $130 million of incremental adjusted EBITDA from the contracts awarded to us to date too.
Speaker Change: To reiterate what I said last quarter. The contribution from these contracts is expected to start late in 2024 <unk>.
Speaker Change: Slowly ramp through 2025 and achieve our expected full contribution in fiscal 2026.
Speaker Change: The contribution of this work is expected to be highly accretive to the margin profile of our Canadian solid waste segment and two our consolidated margins.
Speaker Change: We also remain optimistic about opportunities for further upside as EPR programs are rolled out in Quebec, Western Canada and the Maritimes.
Speaker Change: On <unk>, we continue to expect that two or three more facilities will come online by the end of the year and we remain confident that we will realize a $175 million of adjusted EBITDA previously disclosed once our portfolio of landfill gas energy facility is fully operational in the coming years.
Speaker Change: In the first half of the year, we deployed approximately $500 million into M&A all of which was completed when we provided our first quarter results in May we remain absolutely committed to our cap for the aggregate 2020 for growth investments of $900 million and a net leverage target that we set out late last year.
Slowly ramp through 2025 and achieve our expected full contribution in fiscal 2026. The contribution of this work is expected to be highly accretive to the margin profile of our Canadian solid waste segment and to our consolidated margins.
Speaker Change: While we continue to have a robust pipeline of attractive M&A opportunities in our markets at this stage there will be likely only small transactions in the second half with the majority of the current pipeline to be executed in 2025 and beyond.
We also remain optimistic about opportunities for further upside as EPR programs are rolled out in Quebec, Western Canada, and the Maritimes.
Speaker Change: The quality of our first half results with the continued strength of our business model supports an increase in our guidance for the second time this year.
Speaker Change: We are increasing adjusted EBITDA to $2 two four to $2 25 billion and adjusted EBITDA margin to 28, 4%, a 70 basis point increase over our original guidance and 170 basis point increase over the prior year look.
In the first half of the year, we deployed approximately $500 million into M&A, all of which was completed when we provided our first quarter results in May. We remain absolutely committed to our cap for the Agri-2024 growth investment of $900 million and the net leverage target that we set out late last year.
Speaker Change: Local walk through the guidance in more detail, but to be able to raise the guide two consecutive quarters and to have line of sight to a 170 basis points of annual margin expansion certainly has us feeling very optimistic about the effectiveness of our value creation strategies I will now turn it over to Luke.
While we continue to have a robust pipeline of attractive M&A opportunities in our markets, at this stage, there will be likely only small transactions in the second half, with the majority of the current pipeline to be executed in 2025 and beyond.
Speaker Change: Patrick.
Luke: Revenue for the quarter, a 2.06 billion was 11, 1% higher than the prior year, excluding the impact of the solid waste divestitures solid waste pricing of six 5% and minus one 7% volume were both ahead of plan and the continued strength in recycled commodity prices also contributed to the year over year increase are.
Speaker Change: Environmental services segment price led growth strategy advanced and was further supported by increased soil volumes in used motor oil pricing.
Speaker Change: Large scale event, driven response work around major spills and fires the timing of which can be more variable was lower compared to the prior year.
Luke will walk through the guidance in more detail, but to be able to raise the guide two consecutive quarters and to have line of sight to 170 basis points of annual margin expansion certainly has us feeling very optimistic about the effectiveness of our value creation strategies. I will now turn it over to Luke.
Speaker Change: Adjusted EBITDA margins were 28, 7% for the quarter 90 basis points ahead of the prior year and 20 basis points ahead of our guidance.
Speaker Change: Underlying solid waste margin expansion of 100 basis points reflected the positive impact of price cost spread higher commodity prices plus M&A that came in an accretive EBITDA margins offset by the dilutive margin impact of the increased cost of risk as well as the absence of onetime benefits related to the prior year divestitures and insurance.
Luke: Solid Waste pricing of 6.5% and minus 1.7% volume were both ahead of plan, and the continued strength in recycled commodity prices also contributed to the year-over-year increase.
Speaker Change: OCD received in Q2 2023.
Speaker Change: Our environmental services segment price-led growth strategy advanced and was further supported by increased soil volumes and used motor oil pricing.
Speaker Change: Consistent with the first quarter elevated price cost spread the positive margin impact of our deliberate volume strategies, RMG and favorable commodity price contribution as well as incremental operating leverage are all contributing to margin expansion ahead of expectations.
Luke: Large-scale event-driven response work around major spills and fires, the timing of which can be more variable, was lower compared to the prior year. Adjusted EBITDA margins were 28.7% for the quarter, 90 basis points ahead of the prior year and 20 basis points ahead of our guidance.
Speaker Change: Environmental services adjusted EBIT margins were 29, 6% in line with expectations and inclusive of nearly 100 basis point cost of risk headwind indicative of the success of our price led growth strategy.
Speaker Change: Adjusted free cash flow was $185 million in the quarter of $177 million greater than the prior year period, and approximately $20 million better than guidance. The contributions to the outperformance came from Capex working capital and other operating items, which are all expected to be timing differences that will normalize by the end of the year.
Luke: offset by the dilutive margin impact of the increased cost of risk as well as the absence of one-time benefits related to the prior divestitures and insurance proceeds received in Q2 2023.
Speaker Change: Net leverage at the end of the quarter was $4. Two nine ahead of expectations and consistent with the quarterly cadence on which our year end net leverage target was base.
Speaker Change: Consistent with the first quarter, elevated price-cost spread, the positive margin impact of our deliberate volume strategies, R&G, and favorable commodity price contribution, as well as incremental operating leverage, are all contributing to margin expansion ahead of expectations.
Speaker Change: During the quarter, we were successful in refinancing one of our 2025 bonds with a new bond maturing in 2032.
Speaker Change: After the end of the quarter. We also successfully refinanced our term loan b in a transaction that both reduced the borrowing spread by 50 basis points and extended its maturity to 2031.
Speaker Change: We have one additional bond that becomes callable at par in the third quarter of this year the debt markets remained highly constructive and we expect to Opportunistically refinance this bond when a market window presents itself.
Speaker Change: After we complete that expected refinancing over 90% of our non revolving long term that will have a maturity date of 2028 and beyond.
Speaker Change: Net leverage at the end of the quarter was 4.29, ahead of expectations, and consistent with the quarterly cadence on which our year-end net leverage target was based.
Speaker Change: As Patrick said the success of our first half results sets us up to increased guidance for the second time. This year revenue is now expected to be approximately seven 9% to $792 5 billion driven by solid waste pricing of six and a quarter to six 5% and solid waste volumes of negative one 5%.
Speaker Change: After the end of the quarter, we also successfully refinanced our Term Loan B in a transaction that both reduced the borrowing spread by 50 basis points and extended its maturity to 2031.
Speaker Change: Incremental revenue from in year M&A is more than offset by the Q2 asset sale, which is now expected to reduce our original expectations for second half revenue by just over $110 million on account of seasonality. Additionally.
Speaker Change: Additionally, in light of the lower volume of large event driven work in our Es segment in the first half of the year.
Speaker Change: Taking a more conservative view for the back half of the year and the new guidance assumes this trend continues.
Speaker Change: If large scale event driven work picks up in the back half it should be upside to the guide.
Speaker Change: The contribution from any additional M&A completed in the back half of the year will also provide upside to the guide.
Speaker Change: Revenue is now expected to be approximately $7.9 to $7.925 billion driven by solid waste pricing of 6.25% to 6.5% and solid waste volumes of negative 1.25%.
Speaker Change: Adjusted EBITDA guidance increases to 224 to $2 25 billion, a $30 million increase over our original guide a result of the described changes in revenue together with ongoing expansion of adjusted EBITDA margin, which as Patrick said as increases to 28, 4%.
Patrick Davinci: Adjusted free cash flow increases to $810 million or $10 million increase driven by the incremental adjusted EBITDA and partially offset by $25 million of incremental interest costs, which are now expected to be $500 million for the year. So in summary revenue increases pro forma for the divestitures adjusted EBITDA increases again.
Speaker Change: If large-scale event-driven work picks up in the back half, there should be upsides to the guide.
Speaker Change: Adjusted EBITDA margin expands an additional 70 basis points on top of the original 100 basis points guide and adjusted free cash flow increases as well.
Speaker Change: As it relates to the third quarter, we expect consolidated revenue of approximately 2.0 505 to 2.06 billion with a similar split between solid and Es revenues as what we saw in the second quarter keep.
Speaker Change: Adjusted EBITDA guidance increases to $2.24 to $2.25 billion, a $30 million increase over our original guide, a result of the described changes in revenue together with ongoing expansion of adjusted EBITDA margin, which as Patrick said, has increases to 28.4%.
Speaker Change: Keep in mind that the Michigan residential contract sale resulted in a sequential revenue step down from the second quarter.
Speaker Change: In terms of margin, we expect consolidated adjusted EBITDA margin of 32, 5% over 200 basis points higher than the prior year and the first time in our history, achieving a consolidated margin of over 30% the.
Speaker Change: Adjusted free cash flow increases to $810 million, a $10 million increase driven by the incremental adjusted EBITDA and partially offset by $25 million of incremental interest costs, which are now expected to be $500 million for the year.
Speaker Change: The guidance contemplates margins stepping down in the fourth quarter as per the typical seasonal cadence of the business.
Speaker Change: Those revenue and margin expectations equate to approximately $625 million of adjusted EBITDA for the third quarter. Additionally, we expect $230 million of net capital expenditures of $165 million of cash interest and close to nil impact from the recovery of working capital offsetting other operating items for our Q3 adjusted <unk>.
Speaker Change: Free cash flow of approximately $225 million.
Speaker Change: Keep in mind that the Michigan residential contract sale results in a sequential revenue step down from the second quarter.
Speaker Change: In terms of net leverage we expect a reduction of approximately 15 basis points throughout the quarter to end the quarter at just above four one times and then a larger reduction in the fourth quarter to end the year within the previously stated range of $3 six 5% to $3 85.
Speaker Change: In terms of margin, we expect Consolidated adjusted to even a margin of 30.25%, over 200 basis points higher than the prior year and the first time in our history achieving a consolidated margin of over 30%.
Speaker Change: Adjusted net income is expected to be $125 million for the third quarter I will now pass the call back over to Patrick will provide some closing comments before Q&A.
Speaker Change: The guide then contemplates margin stepping down in the fourth quarter as per the typical seasonal cadence of the business.
Patrick Davinci: Before we open it up for Q&A, although we don't generally comment on market speculation I want to address some of the headlines that you have all seen lately.
Speaker Change: Those revenue and margin expectations equate to approximately $625 million of adjusted EBITDA for the third quarter.
Speaker Change: Additionally, we expect $230 million of net capital expenditures, $165 million of cash interest, and close to a nil impact from the recovery of working capital offsetting other operating items, for a Q3 adjusted free cash flow of approximately $225 million.
Patrick Davinci: We believe that the business today is significantly undervalued when you consider the quality of our assets.
Patrick Davinci: Capabilities and track record of our team the near term growth prospects, especially around EPR in R&D and the deleveraging trajectory. We currently on in.
Speaker Change: In my view the current valuation does not make sense with the current disconnect in valuation we are buyers of GSL not sellers.
Speaker Change: Based on the noncore asset sales, we completed last year at mid teens multiples.
Speaker Change: And the recapitalization, we completed in 2014 and 2018 as a private company at 13 to 14 times EBITDA. We have demonstrated that <unk> assets are worth more than was reflected in our current stock price and since then publicly traded waste multiples have continued to expand.
Speaker Change: Before we open it up for Q&A, although we don't generally comment on market speculation, I want to address some of the headlines that you have all seen lately.
Speaker Change: We believe that the business today is significantly undervalued when you consider the quality of our assets,
Speaker Change: So while selling the entire business is not on the table today, there could be merit and selling a portion of our business at valuations that are more in line with what we believe is fair value of the business.
Speaker Change: The capabilities and track record of our team, the near-term growth prospects, especially around EPR and RNG, and the deleveraging trajectory we're currently on. In my view, the current valuation does not make sense.
Speaker Change: Our sale of high quality assets, such as our Es segment could easily attract mid teens multiples. We've had significant inbound interest from both strategic and financial sponsors that support this valuation perspective.
Speaker Change: With the current disconnect in valuation, we are buyers of GFL, not sellers.
Speaker Change: Based on the non-core asset sales we completed last year, I'd make teens multiples.
Speaker Change: Such a sale conserve the dual purpose of accelerating our deleveraging and most importantly, allowing us the opportunity to buyback a significant amount of stock at an attractive valuation.
Speaker Change: And the recapitalizations we completed in 2014 and 2018 as a private company at 13 to 14 times EBITDA, we have demonstrated that GFL's assets are worth more than was reflected in our current stock price.
Speaker Change: To make a decision around such a significant sale would require a full auction process to ensure we are maximizing shareholder value and achieving the best use of proceeds we are absolutely exploring all of our options and have begun to implement the steps necessary to prepare for a potential transaction.
Speaker Change: And since then, publicly traded waste multiples have continued to expand.
Speaker Change: Since we went public I believe that we have clearly demonstrated that we are dynamic roll up our sleeves management team that can and will implement the appropriate strategies to ensure that we're maximizing long term value creation for all of our shareholders.
Speaker Change: A sale of high-quality assets, such as our ES segment, could easily attract mid-teens multiples. We have had significant inbound interest from both strategic and financial sponsors that support this valuation perspective.
Speaker Change: We have no intention of deviating from that strategy with the opportunities. We now have in front of US I will now call turn the call over to the operator to open up the line for Q&A.
Speaker Change: Such a sale could serve the dual purpose of accelerating our deleveraging, and most importantly, allowing us the opportunity to buy back a significant amount of stock at an attractive valuation.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: If you would like to ask a question. Please press star followed.
Speaker Change: To make a decision around such a significant sale would require a full auction process to ensure we are maximizing shareholder value and achieving the best use of proceeds.
Speaker Change: By one on your telephone.
Speaker Change: If you change your mind and would like to meet that request. Please press star.
Keith: Followed by Keith.
Speaker Change: We are absolutely exploring all of our options and have begun to implement the steps necessary to prepare for a potential transaction.
Speaker Change: And again to ask a question. Please press star one.
Speaker Change: As a reminder, if you are using a speaker phone please amanda.
Speaker Change: Since we went public, I believe that we have clearly demonstrated that we are a dynamic, roll-up-our-sleeves management team that can and will implement the appropriate strategies to ensure that we are maximizing long-term value creation for all of our shareholders.
Speaker Change: I understand.
Speaker Change: Skin cleansing.
Speaker Change: We will pause briefly while question conference.
Speaker Change: Okay.
Speaker Change: We have the first question from David.
Robert: Robert <unk> with RBC.
David: Great. Thanks, and good morning, maybe if we could just start with those closing comments.
Speaker Change: So can you maybe give you an opportunity maybe share a little bit more color on maybe the type of interest you've seen the type of investor or the type of parties that are looking at it do you have like a lower bound on the multiple you're willing to sell timelines and just sort of your decision making process anything any additional color you can share on what the market should expect over the next little while and how youll.
Speaker Change: And again, to ask a question, please press star 1.
Speaker Change: Maybe arriving at that decision. Thank you.
Speaker Change: As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question.
Speaker Change: Yes, I think so.
Speaker Change: But from my perspective.
Speaker Change: Again, we've spent 17 years building his business right. So.
Speaker Change: It's sort of a near and dear to our heart.
Speaker Change: We have the first question from Sabahat Khan with RBC.
Speaker Change: It's been a core portion of the strategy historically and again as I sort of came to light over the last little while and again as I said.
Farba Khan: Great. Thanks and good morning. Maybe if we could just start with those closing comments. I just wanted to maybe give you an opportunity to maybe share a little bit more color on...
Speaker Change: From my perspective, there is a very sort of large valuation gap today.
Speaker Change: Not necessarily to the peers, but it's also just in general in terms of what.
Speaker Change: Maybe the type of interest you've seen, the type of party that are looking at it, do you have a lower bound on the multiple you're willing to sell, timelines?
Speaker Change: I would say.
Speaker Change: Private investors are prepared to pay for these assets and the IRR that they can drive out of each and every one of them. So.
Speaker Change: And just sort of your decision-making process, anything, any additional color you can share on what the market should expect over the next little while and how you're maybe arriving at that decision.
Speaker Change: Where I sit today obviously.
Speaker Change: I think as we started engaging in this process.
Farba Khan: Yeah, I think, Sabah, from my perspective, you know.
Speaker Change: There was multiple different avenues available to us on the table and it will sort of narrow down very specifically and I think to.
Speaker Change: Again, we've spent 17 years building this business, right? So.
Speaker Change: To get alignment from board and specifics of our large shareholders.
Speaker Change: It was a process that we sort of had to go through I think.
Farba Khan: And again, as this sort of came to light over the last little while, and again, as I said,
Speaker Change: Given the amount of inbound interest that we've seen.
Farba Khan: You know, from my perspective, there is a very sort of large valuation gap today.
Speaker Change: From <unk>.
Speaker Change: Investors.
Speaker Change: As well as strategic.
Farba Khan: It's not necessarily to the peers, but it's also just in general, in terms of what...
Speaker Change: I think where we landed is that we need to run an auction to solve it and we've been taking the steps over the last couple of months to prepare for that and.
Speaker Change: And I think what Youll see is.
Speaker Change: Our process launched after labor day sometime over the month of September.
Speaker Change: <unk>.
Speaker Change: To determine what the actual true value of our businesses.
Farba Khan: There was multiple different avenues available to us on the table, and it was sort of narrowed down very specifically. And I think, you know, to get alignment from board and specific sort of large shareholders, you know, it was a process that we sort of had to go through.
Speaker Change: I have no reason to believe.
Speaker Change: That the business today is it worth.
Speaker Change: Significantly higher than what <unk> trading at today I think if you look in the market. If you look at.
Speaker Change: Recent trades of Covanta Cerner Com, if you look at heritage Environmental that was recently sold to EQT.
Farba Khan: from, you know, investors, as well as strategic.
Speaker Change: Look at U S oncology that was sold Republic. The recent Stericycle trade with waste management I mean, I think you can see that.
Speaker Change: All of these traded.
Speaker Change: In that range and I think when you run a model and you run a private equity model on this business.
Brian: I don't care, what model you run a very sort of simple growth algorithm, Brian do you have.
Farba Khan: to determine what the actual, you know, true value of the business is.
Brian: You have topline growth of sort of high single digits Bottomline.
Brian: Flows down to EBITDA, it sort of just low double digit.
Brian: <unk> sort of 555 turns of leverage.
Farba Khan: significantly higher than what GFL is trading at today. I think if you look in the market, if you look at recent trades of Covanta, Sercom, if you look at Heritage Environmental that was recently sold to EQT.
Speaker Change: Model and a bit of M&A I mean in a base case, you get to a sort of a 15% IRR and an upside case, you can underwrite, 23% to 25% and I mean again I go back to.
Speaker Change: This is what <unk> did and recapture a number of years go back to our 2014 recap.
Farba Khan: If you look at U.S. ecology that was sold to the Republic, the recent stereo cycle trade with Waste Management, I mean, I think you can see that, you know, all of these traded...
Brian: <unk> when they recap that business our business they paid for.
Brian: <unk> thousand 14 times for that in 2014, and they left with an equity return of three six times their money in four years. If you look at BC partners. They came in place post a 14 times for the business in 2018 look where their equities mark today. They are at already three times, our equity in massive sort of runway in front of us. So there's no reason to believe that.
Farba Khan: in that range. And I think when you run a model and you run a private equity model on this business, I mean, I don't care what model you run, it's very sort of simple growth algorithm, right? You have...
Brian: Again, a private equity Investor would view this the same way and with our discussions that we've had with them.
Farba Khan: put on sort of five, five and a half turns of leverage, model in a bit of M&A, I mean, in a base case, you get to sort of a 15% IRR and an upside case, you can underwrite 23 to 25%. And I mean, again, I go back to
Brian: We can definitely stand behind those models, but again, there was significantly more interest than I thought more parties and I think that's the only way for sort of auto maximize value, but most importantly.
Brian: If you look at remain co.
Speaker Change: You know, this is what GFL did and recap for a number of years go back for a 2014 recap You know HPS when they recap that business they are business they paid
Speaker Change: Yes, we can look at GFS trading around 12, 12, five times 2024.
Brian: But the reality is let's not look at 'twenty four we need to look at 25 and 26.
Farba Khan: You know 14 times for that in 2014 and they left with an equity return of 3.6 times their money in four years
Speaker Change: And you can take conservative views on what 25% and 26 are we've given you the bread crumbs of what <unk>.
Farba Khan: You look at BC Partners, they came in, played close to 14 times for the business in 2018.
Brian: As you sort of roll out to 'twenty six.
Speaker Change: Look where their equity is marked today, they're at already three times their equity.
Brian: And we have our existing shareholders.
Speaker Change: This is solely a trade for me is the largest shareholder if I can sell something in mid teens and buyback a significant amount of our stock and I can end up owning 12, 5% or 15% more of the company at these values and taken out a lion's share of the overhang that exists from some of our P/e partners.
Brian: And not having to come back to the market and sort of by death by 1000 cuts of them selling every six months.
Speaker Change: If you look at Remainco, and yeah, we can look at GFL trading around 12, 12 and a half times 2024, but the reality is, let's not look at 24, we need to look at 25 and 26.
Speaker Change: That absorbs all of that so that's how I thought about it.
Brian: To get those shareholders onside took time, but I think we've made a decision as a board that that's what we're going to do both.
Speaker Change: <unk> shareholders are on side with that process.
Brian: I think now.
Speaker Change: No there will be limited overhang left in the market. If you want all GFS stock youre not going to wait for a secondary.
Farba Khan: And we have our existing shareholders.
Brian: Because there isn't going to be one because we are going to own the stock and we're going to 50% more of it and thats simply how I sort of thought about it and then the secondary aspect of it is.
Speaker Change: Leverage will be reduced youll have a war chest of capital to go out and do the things you want to do in your sort of core service offerings.
Farba Khan: And I can end up owning 12.5% or 15% more of the company at these values and taking out a lion's share of the overhang that exists from some of our PE partners.
Brian: And there'll be no impediment to doing the things that we want to do in the markets. We want to do while growing our solid waste business. So I think it's a win win.
Farba Khan: and not having to come back to the market and sort of buy death by a thousand cuts of them selling every six months.
Farba Khan: You know, that absolves all of that. So that's how I thought about it.
Speaker Change: Okay I appreciate that color.
Speaker Change: Maybe just shifting over to the guidance.
Speaker Change: A good question for Luc Theres, a few moving pieces in the update to our guidance I think you called out the environmental services I think solid waste doing a little bit better. Some FX benefit. If you can maybe just parse out the puts and takes in the 'twenty four guidance update please.
Luc Theres: Yes, good morning Saba.
Luc Theres: Great question. It was the one thing that may be contemplate we should provide a dec, but we think once you hear the details will be so straightforward enough look at a high level. The EBIT line, starting 2015 guidance number.
Speaker Change: I think about that I think about exogenous factors of FX and commodities, that's giving me a little bit greater than plus 30 to the good and then you have this ER volume right. The large scale event driven stuff. The new guide assumes about a $100 million less of that so the margin on that effectively offsets the benefit youre getting from FX and commodity right. So then we think about M&A.
Farba Khan: This might be a question for Luke. There's a few moving pieces in the update to the guidance. You know, I think you called out the environmental services. I think Solid Waste is doing a little bit better, some effects, benefits. If you can maybe just parse out the puts and the takes in the 24 guidance update, please.
Luc Theres: We did in the early in the year, we did those couple of deals.
Speaker Change: And we have the positive contribution of that offset by the.
Speaker Change: Michigan portfolio sale and the net of those two is roughly about $15 million to the good alright. So if you think about those as the broad based sort of external factors. It leaves you with about 15% to 20 of just pure underlying guidance range and it's really coming out of as you said solid waste in solid waste margin as we're seeing the.
Speaker Change: <unk> of our strategies just come through even greater than anticipated.
Speaker Change: Okay. Thanks, very much I'll pass it on.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question comes from Stephanie Moe with Jefferies. You May proceed.
Speaker Change: So then we think about M&A, and early in the year we did those couple of deals.
Stephanie Moe: Hi, good morning, Thank you.
Speaker Change: Maybe I'll start on that.
Luke: And we have the positive contribution of that offset by the Michigan portfolio sale and the net of those two is roughly about $15 million to the good.
Speaker Change: Turning to take our guidance good morning, maybe just starting on this thanks for any of our guidance.
Speaker Change: Updated guidance has margins expanding 170 basis points year over year.
Luke: So if you think about those as the broad-based sort of external factors, it leaves you with about sort of 15 to 20.
Stephanie Moe: It appears to me the highest margin expansion amongst your peers for the year can you comment on what's driving that how much do you attribute to just the quality of your asset base versus self help initiatives and then can you update us just on what inning you are in.
Farba Khan: you know just pure underlying guidance race and it's really coming out of you know as you said solid waste and solid waste margin as we're seeing the effectiveness of our strategies just come through you know even greater than anticipated
Speaker Change: On yourself.
Speaker Change: Okay.
Speaker Change: Great. Thanks very much. I'll pass it on.
Speaker Change: Yes, good morning, Stephanie as Luke.
Speaker Change: We're certainly impressed with the headline number of 170 as well, but I think the starting point is exactly what you said, it's the quality of the assets in the market selection in which we've gone out. We've always said that we have I think are best in class asset portfolio in the right markets and that's what's allowing us to now sort of execute on our strategies and so.
Speaker Change: Hi, good morning. Thank you.
Speaker Change: You think about the price cost spread that we talked about at the beginning of the year and the ability of that to sort of come in better than anticipated.
Speaker Change: This appears to me the highest margin expansion amongst your peers for the year. Can you comment on what's driving this? How much do you attribute to just the quality of your asset base or self-help initiatives? And then can you update us just on what innings you are in on your self-help initiatives? Thanks.
Speaker Change: About the synergy realization of all the pieces that we've put together historically and starting to get the benefit of that you think about the self help levers that were sort of pulling on and all of these are sort of coming to fruition and youre seeing the benefit come through in the margins and so it's not any specific one thing, yes commodities give a little bit of an incremental impact.
Patrick Dovigi: Pelosi, Patrick Dovigi
Speaker Change: Certainly our intentional shedding in those deliberate volume strategies are helping in the Michigan sale is sort of accelerate that even more but for actual quantify you think the base guide of 100 basis points. If you recall that was effectively all organic right because the M&A was actually a net drag going into the year.
Speaker Change: So now with that we have new M&A this year and improved commodity pricing, that's adding roughly 35 basis points of incremental so of the 70 basis point raise half is coming from those two pieces and then the other half is just the ongoing success of our strategies both on the volume and just the underlying margin.
Speaker Change: And so you think about the price-cost spread that we talked about at the beginning of the year and the ability of that to sort of come in, you know, better than anticipated.
Speaker Change: So I think it's a great Testament to all of the things we've been saying for the past couple of years as we bring these pieces together and what the opportunities in front of us and the most exciting part is we really think this is just getting started.
Speaker Change: Great. Thanks, guys appreciate it.
Speaker Change: You noted in the release and in <unk>.
Speaker Change: to for actual quantify you think the base guide of a hundred basis points if you recall that was effectively all organic
Speaker Change: And in your prepared remarks today that you believe the sale of certain other high quality assets that would be on the table you obviously called out environmental services.
Speaker Change: because the M&A was actually a net drag going into the year.
Patrick Dovigi: So now with that we have...
Speaker Change: But given the way it's wearing it could we assume that there are other assets that could top that.
Patrick Dovigi: new M&A this year and improved commodity pricing. That's adding roughly 35 basis points of incremental. So the 70 basis point raise, half is coming from those two pieces, and then the other half is just the ongoing success of our strategies both on the volume and just the underlying margin.
Speaker Change: Also possibly be.
Speaker Change: No.
Speaker Change: No.
Speaker Change: So it would be.
Speaker Change: Ltd.
Speaker Change: Thank you.
Speaker Change: Thank you Stephanie we now have Kevin Chiang with CIBC.
Speaker Change: <unk>.
Speaker Change: Okay. Good good.
Kevin Chiang: Good morning, everyone.
Kevin Chiang: Maybe just.
Speaker Change: Just looking at your solid waste performance.
Kevin Chiang: I've noticed a bit of a divergence almost diverges as more of the Canadian solid waste organic growth has been tracking at.
Speaker Change: Decent positive spread versus the U S organic growth I'm, just wondering if there's anything you'd call out there that youre seeing in Canada versus the U S. So I'm not sure was just the timing of how some of the M&A comes through when it rolls through after year, one or is there something specifically happening in the Canadian landscape versus the U S landscape.
Speaker Change: Yes, good morning, Kevin Great question.
Speaker Change: Thank you.
Speaker Change: If you think about solid waste organic growth being price and volume recall, our Canadian business was sort of behind the eight ball on pricing. If you will when we really sort of embarked on price discovery call. It sort of five six years ago, and so I think that upside that we've always articulated as to catching up with industry norms in terms of pricing a lot of that.
Patrick Dovigi: Thank you Stephanie. We now have Kevin Chiang with CIBC, Woodcundy.
Kevin Chiang: Hey, good morning everyone. Maybe just looking at your solid waste performance, I guess I've noticed a bit of a divergence, I won't say divergence, it's more the Canadian solid waste organic growth has been tracking at a decent positive spread versus
Speaker Change: <unk> and the Canadian book, and Youre seeing that sort of come through I think Additionally, we're starting to see some of the benefits of these investments we've made in the recycling EPR and other initiatives in the Canadian landscape, which are helping support sort of overall volumes. There and then the off site said is while the U S pricing discipline has been sort of more mature certainly.
Speaker Change: I'm just wondering if there's anything you'd call out there that you're seeing in Canada versus the U.S. I'm not sure if it's just the timing of how some of the M&A comes through and it rolls through after year one or if there's something specifically happening in the Canadian landscape versus the U.S. landscape.
Speaker Change: We have more runway there, but it wasn't as much steep of a ramp as we saw in Canada. Some of our intentional shedding has been more focused in the <unk> in the U S market, where we've done larger quantity of M&A and therefore inherited larger volumes of books of business that no longer meeting our return threshold. So I think it's a combination of those two things certainly we're seeing.
Speaker Change: Robust organic growth across both the segments, but you're absolutely right. When you sort of pick it apart you do see a bit of that sort of divergence, but as we go forward.
Speaker Change: Feeling highly confident in the organic growth prospects on both price and volume in both of those segments.
Speaker Change: I think additionally, we're starting to see some of the benefits of these investments we've made into recycling, EPR, and other initiatives in the Canadian landscape, which are helping support, you know, sort of overall volumes there. And then the offside set is, well, the U.S.
Speaker Change: No that makes a ton of sense and I appreciate the color there.
Speaker Change: I'm sure there'll be.
Speaker Change: A ton of questions through this call on on potentially divesting of a yes, and maybe I'll just ask one on.
Speaker Change: Pricing discipline has been sort of more mature, certainly have more runway there, but it wasn't as much steep of a ramp as we saw in Canada.
Speaker Change: It is a portfolio of assets you have within EES I guess, when you think of potentially divesting of this.
Speaker Change: Some of our intentional shedding has been more focused in the U.S. market where we've done larger quantity of M&A and therefore inherited larger volumes of books of business that no longer meeting our return thresholds. So I think it's a combination of those two things. Certainly we're seeing very robust organic growth across both the segments, but you're absolutely right when you sort of pick it apart, you do see a bit of that sort of divergence. But as we go forward, we're feeling highly confident in the organic growth prospects on both price and volume in both of those segments.
Speaker Change: Do you think of divesting all of it or none of it or divesting parts of it also part of the part of part of the.
Speaker Change: I guess the review you are going through today.
Speaker Change: Beyond block.
Speaker Change:
Speaker Change: Okay.
Speaker Change: It would be it would be it would just.
Speaker Change: You would be selling the entire portfolio I mean, the one piece that's in there is the soil remediation piece.
Speaker Change:
Speaker Change: Uh-huh.
Speaker Change: So that that I would say that's the one piece that could potentially not go with it.
Speaker Change: We wanted to keep that just given the exposure to the GTA and total Gi P, but but everything going on it's a small piece of environmental services, but for the most part it would.
Speaker Change: Beyond block, both Canada, and the U S. Obviously as you know almost 80% of the revenue from you guys coming out of Canada, 20% under the U S. So.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: That makes sense that makes sense.
Speaker Change: Is it for me. Thank you for taking my questions.
Tim: Thanks, Tim.
Speaker Change: I'll be on block.
Speaker Change: Thank you.
Speaker Change: For ES, it would be, it would just be, you know, you would be selling the entire...
Speaker Change: We now have Devin Dodge with BMO capital markets.
Speaker Change: I mean, the one piece that's in there is the solar radiation piece.
Devin Dodge: Alright, Thanks for taking my question I, just wanted to come back to that 2020 for margin guidance.
Speaker Change: Mm-hmm.
Speaker Change: The pace of increase has really stepped up in the second half.
Speaker Change: So that, I would say, that's the one piece that could potentially...
Speaker Change: Compared to the first half I know the sale of the operation in Michigan is part of it but can you help us better understand that sequential improvement.
Luc Theres: Yes, Devin it's Lou its Luc speaking and again I think it sort of goes back to my sort of prior comments Stephanie of the overarching margin and it's sort of all of these things coming together right. So you continue to have price cost spread.
Speaker Change: It would be on block both Canada and the U.S. Obviously, as you know, almost 80% of the revenue from U.S. comes out of Canada, 20% out of the U.S.
Speaker Change: Similar to what we've seen all throughout the year the cost of risk headwind that's been a big drag all year, it's moderating as you get into the second half.
Speaker Change: Thank you.
Speaker Change: Thank you.
Luc Theres: And the benefits of intentional shedding and other deliberate volume strategies are improving as we sort of go forward and youre going to have the M&A contribution as well. So it's not any sort of one thing I mean, the guide does contemplate solid waste margins expanding.
Luc Theres: It's roughly 200 basis points over the prior year and for students of Q3, and if you break that apart the Michigan sale would give you a sort of 80% to 90 basis points of that and commodities give you sort of 70 basis points of the cost of risk is going to be again, not as impactful as the first half I call that another 30 to 40 basis point headwind against you. So it's.
Speaker Change: Price-cost spread, you know, similar to what we've seen all throughout the year. You know, the cost-of-risk headwind, that's been a big drag all year. It's moderating as you get into the second half.
Luc Theres: Sort of when you take the puts and takes speaking to this underlying 100 basis points of solid waste margin expansion, which is we've been consistently seeing and again I think as a function of all of those pieces. We've said starting with the market selection and the assets getting the synergy realization as these businesses are really sort of starting to gel improve.
Speaker Change: And the benefits of intentional shedding and other deliberate volume strategies are improving as we sort of go forward. And you're going to have, you know, the M&A contribution as well. So it's not any sort of one thing. I mean, the guide does contemplate solid waste margins, you know, expanding.
Luc Theres: Asset utilization and all of the Lake and so I think it's all of those pieces and obviously, culminating in a 30% consolidated margin for Q3 through the first time in our history printing that is something that we're pretty excited about.
Speaker Change: I think it's roughly 200 basis points over the prior year in terms of Q3, and if you break that apart, you know, the Michigan sale would give you sort of 80 to 90 basis points of that.
Speaker Change: Okay. Okay. Thanks, and then.
Speaker Change: Another question, we get applications <unk> corporate costs.
Speaker Change: We've seen that drift higher as a percentage of sales.
Speaker Change: Over the last two or three years can.
Speaker Change: Can you speak to some of the drivers behind that and if you have line of sight into when you could be in a position to start.
Speaker Change: Bridging those corporate costs and add to the margin expansion at the underlying businesses.
Speaker Change: Yes, Devin it's another great question, something we sort of look a lot at if you look over the last three years I mean at a high level you buy half of that is salaries, which sort of creeps up at normal course sort of wage inflation now from going to being a public company and doubling our size. We did increase some of the sort of support particularly around ESG and some of these other zones.
Speaker Change: Apartments that werent sort of full fledged. So you did have an investment in resource there another significant component of the non.
Speaker Change: Cost and as we articulated that sort of two years ago, a massive investment to move a lot of our infrastructure into the cloud and just sort of prepare for ongoing scalability now some of that shows up in Capex, obviously, but a large portion of it just sort of sits in that sort of corporate bucket I think the third item to consider is there is actually been beats.
Speaker Change: We've seen this trip higher as a percentage of sales over the last two or three years. Can you speak to some of the drivers behind that? And if you have line of sight into when you could be in a position to start leveraging those corporate costs and add to the margin expansion of the underlying businesses?
Speaker Change: The divestitures of last year, and now Michigan again, some chunkier amounts of revenue dispositions, which obviously is foregoing some of the leverage that you're getting on that number but when you think about it today I think the resource investments have been made I think the it spend is there and I think what you're now going to have is leveraging.
Speaker Change: which sort of accretes up at, you know, normal core sort of wage inflation.
Speaker Change: You know, from going to being a public company and doubling our size, we did increase some of the sort of support, particularly around ESG and some of these other sort of departments that weren't sort of full-fledged. So you did have an investment and resource there. Another significant component of the non-value is IT costs.
Speaker Change: That as you go forward and grow our revenue base off of a corporate cost number that should sort of grow more just at a sort of normal course cost of inflation.
Speaker Change: Okay. Thanks, a lot I'll turn it over.
Devin Dodge: Thank you Devin.
Speaker Change: Jerry Revich with Goldman Sachs. You May proceed Sir.
Jerry Revich: Yes, hi, good morning, everyone.
Jerry Revich: I want to ask your margins in the second quarter were up.
Speaker Change: Call It a point and a half ahead of normal seasonality really strong performance.
Speaker Change: Guidance for the third quarter is for another outsized margin move.
Speaker Change: Versus normal seasonality can you just talk about what level of sequential price increase are you folks implementing to deliver that level of outperformance and what are the sequential trends in unit cost that youre seeing that drove the beat in <unk> and again outperformance, which <unk> got it.
Speaker Change: Okay, thanks a lot. I'll turn it over.
Speaker Change: Thank you, Devin. We now have Jerry Revich with Goldman Sachs. You may proceed, Jerry.
Speaker Change: Yes, thanks for the question James.
Speaker Change: Paul This is a year that is returning back to sort of normal cadence of pricing action. When I mean by that is the vast majority of pricing.
Jerry Revich: Yes, hi. Good morning, everyone.
Speaker Change: It's actually occurred already and so as a result, we're seeing a normal course step down when we started the year. So the high this quarter at six 5% and youre going to be at a high fives number in Q3.
Speaker Change: Call it a point-and-a-half ahead of normal seasonality, really strong performance.
Speaker Change: And then stepping down a little bit further in Q4, so why give that color and cadences because that margin is not being achieved by us going out and implementing a whole host of incremental price increases. It's simply all of the things that we have said coming together. So you guys are getting price cost spread because although Q3 will be high fives youre going to be against the <unk>.
Speaker Change: Drove the beat in 2Q and again outperformance in 3Q guide
Speaker Change: Iterating cost inflation still probably getting somewhere of 100 150 basis points of spread so to on top of that but that moderating cost inflation is also accelerating if you look at.
Speaker Change: Yeah, thanks for the question, Jerry.
Speaker Change: Labor rates last Q2.
Speaker Change: Labor rates year over year would have been up sort of mid to high single digit number versus now it's sort of sub 5% and then sort of continuing to trend in the right direction.
Speaker Change: <unk> is obviously another sort of key cost thats been dry I mean, if you look at R&M as a percentage of revenue I think we're sort of at 10 plus in Q1.
Speaker Change: I'll be in the lower seasonally revenue, but then that step down to a high <unk> number in Q2, it's going to step down to a sort of a low to mid <unk> as a percentage of revenue in Q3.
Speaker Change: And so youre going to be getting to sort of talk coming out of that as well I mean, the commodity prices and the ramp in the first half of the year is certainly helping.
Speaker Change: Q3 margins.
Speaker Change: As is the incremental impact from the exiting the Michigan portfolio, which as I said, but sort of 80 to 90 bps going to help you in the quarter, but it's not any of these one things Jerry it's all of the things coming together and as I said going to yield the 30% margin for the first time in our history and we think there's a lot more room to run as we go for.
Speaker Change: 25, and 26 and beyond as you really start getting the benefit of EPR RMG and all of its margin accretive pieces that we've been talking about for the last couple of years.
Speaker Change: Super I appreciate the color and on the.
Luke: <unk> Luke.
Speaker Change: Can you folks just weigh in on your updated views on.
Luke: The attractiveness of voluntary markets versus <unk> markets.
Speaker Change: <unk> the Chevron ruling is there any uncertainty for the RIN market just weigh in with your updated thoughts on.
Speaker Change: As is, you know, the incremental impact from exiting the Michigan portfolio, which, as I said, about sort of, you know, 80, 90 bits, going to help you in the quarter. But it's not any of these one things, Jerry. It's all of the things coming together. And as I said, it's going to, you know, yield the 30% margin for the first time in our history. And, you know, we think there's a lot more room to run as we go forward to 2025 and 2026 and beyond as you really start getting the benefit of EPR, RNG, and all this margin of creative pieces that we've been talking about for the last couple of years.
Speaker Change: Spot versus potentially locking in those volumes longer term.
Speaker Change: Yes.
Speaker Change: Again, nothing is moving all the smarter people than that is definitely on the Rins havent.
Speaker Change: Certainly don't have that that perspective at Chevron decision will affect anything but from our perspective again market continues to be very stable.
Speaker Change: Being able to push as much as we can sort of in the transportation market given sort of written pricing.
Roland Perry: Roland Perry market continues to creep up so I think as more volume continues to come online I think there's going to be the opportunity to move some of that definitely into the into the voluntary market and I think our strategy long term strategy really hasn't changed.
Speaker Change: Do you view the Chevron ruling as any uncertainty for the D3 markets?
Speaker Change:
Speaker Change: So I think we're again just highly focused on keeping that balance again longer term, we want to be we still have the view that we want to be 60% into the sort of into the voluntary market and then play with spot market on the other is for the balance of 40.
Speaker Change: Yeah, we haven't, again, you know, nothing has moved and, you know, all the smarter people than us definitely on the rims haven't.
Speaker Change: Super.
Speaker Change: Last question on <unk>. So you folks have expanded margins significantly from when you folks acquired those.
Speaker Change: Those businesses can you just talk about what the tax position on a tax basis looks like for those assets. If you do move towards.
Speaker Change: voluntary market continues to creep up. So, you know, I think, as more volume continues to come online, I think, you know, there's going to be the opportunity to move some of that definitely into the into the voluntary market. I think our strategy, long term strategy really hasn't changed.
Speaker Change: Our sales.
Speaker Change: Anything we should be done.
Speaker Change: U S versus Canadian position.
Speaker Change: Yes, So you think about the business.
Speaker Change: We did a couple of things I mean as people know the Canadian government change the capital gains rates earlier. This year. So we were able to do a reorganization within the existing business to preserve the old capital gains rate in that business.
Speaker Change: So, I think we're, you know, again, just highly focused on keeping that balance. Again, longer term, we want to be, we still have the view that we want to be 60 percent into the sort of, into the voluntary market, and then play the spot market on the other sort of balance of 40.
Speaker Change: <unk>.
Speaker Change: So again.
Speaker Change: We had that we had the es business in its own entity I mean, if you look at the irony of it is in the funny thing about when you look at Es and <unk>.
Speaker Change: So I mentioned to the board yesterday as you look at that business 2010, we got offered 100 million for our Es business.
Speaker Change: 2018, we got offered 800 million for our EES business.
Speaker Change: And I think you've seen some of the numbers that are out there.
Speaker Change: Today.
Speaker Change: <unk>.
Speaker Change: And again, we've done we're going to.
Speaker Change: But team has done an amazing job I mean, they printed north of 25% margins.
Speaker Change: In Q2.
Speaker Change: <unk>.
Speaker Change: It's an amazing business, an amazing margin profile with a lot of sort of runway sort of sitting in front of it.
Speaker Change: That being said it would be basically fully taxable in the U S for the 20% piece.
Speaker Change: We do have a significant.
Speaker Change: A number of sort of.
Speaker Change: Losses that we could use in Canada, So I mean I think.
Speaker Change: Depending obviously on the purchase price, but you could think about a tax bill sort of in the $5 million to $600 million range.
Speaker Change: Super I appreciate it thank you.
Speaker Change: And again, we've done, we've done a, you know, the management team there has done an amazing job. I mean, they printed north of 29% margins.
Speaker Change: Thank you Jerry we now have Jane Shang.
Speaker Change: <unk> TV Cowen your line is open.
Speaker Change: In Q2, I mean, you know, it's an amazing business, an amazing margin profile, with a lot of sort of runway sort of sitting in front of it.
Speaker Change: Yeah.
Jane Shang: Hey, good morning, guys nice quarter.
Jane Shang: Most of my questions have been answered maybe just one for me I know, it's way too early for 2025 guidance, but just at a high level with with price cost spread opportunity plus some R&D and EPR contributions could we see another 100 basis points plus improvement to EBITDA margins next year.
Speaker Change: Year, and then just thinking longer term about the volumes what they could do next year could those be flat to marginally up next year or do you still have a lot of shedding.
Speaker Change: Hey, James as Luc speaking I mean, I think where we sit today I would say the definitive yes that we're expecting next year to be another 100 plus.
Speaker Change: Well, obviously unveiled a full guide as we go forward, but I think youre, absolutely thinking about that correct and if you do the math you actually don't need to believe a lot to get to a number like that in terms of the deliberate volume strategy look as we've said previously early this year this portfolio of residential contracts in Michigan with like the last big chunk.
Speaker Change: Theres always going to be pieces and as you do M&A, there's stuff around the edges, but I think.
Speaker Change: The lion's share of the strategy that was actually moving volume and over shadowing actually underlying positive volume is largely sort of behind us. So I think we'll hold until the end of the year early next before we give them.
Speaker Change: Final view on volumes for 2025, but certainly think we're not going to be printing in the minus 3% that we did the beginning half of this year and it's certainly something sort of closer to flat with a path to being up.
Speaker Change: Great. Thanks, Luc I'll turn it back.
James: Thanks James.
Speaker Change: Thank you Jamie and thank you Lee, we now have Brian Butler with Stifel.
Brian Butler: Hi, good morning, Thanks for taking my question.
James: First.
Brian Butler: First one just on EPS.
Speaker Change: Online I guess, you talked about after labor day kind of starting to auction process I guess what.
Speaker Change: What's your thoughts on and maybe appetite how long that process runs I mean does that go through the end of 2024, maybe in the 25 or is there an expectation that tried to do that sooner rather than later.
Speaker Change: So I think, you know, we'll hold until the end of the year or early next before we give a final view on volumes for 2025, but, you know, certainly think, you know, we're not going to be printing at the minus 3% that we did the beginning half this year, and it's certainly something sort of closer to flat with a path to being up.
Speaker Change: I mean from our perspective, we want to get it done.
Speaker Change: We possibly could.
Speaker Change: Again, just it will be a question of how fast we can move I think.
Speaker Change: Great. Thanks, Luke. I'll turn it back. Thanks, James.
James: For most of US that know also generally don't think we waited for a long time.
James:
James: And I think the beauty of this business is this is about a 100 person auction. This in.
James: I would say eight to 10 sophisticated buyers that have played in this space over and over again. So there is not a typical learning for both assets market et cetera. So.
Speaker Change: Thank you.
Speaker Change: First one, just on the EPS timeline, I guess, you talked about after Labor Day, kind of starting the auction process. I guess what's...
Speaker Change: What's your thoughts on, and maybe appetite on, how long that process runs? I mean, does that go through the end of 2024, maybe into 2025? Or is there an expectation to try to do that sooner rather than later?
James: So from our perspective, I think what will move very quickly, but again, we don't.
James: You never know I think.
James: The biggest thing for US is again, just getting the carve out financials dawn, particularly if it's a financial sponsor by obviously, we've been a public company, we reported the segment independently.
James: For someone to get financing.
James: Part of what we have to do is get carbon financial so that's in process, but.
James: And the other one I don't see.
James: Our goal would be clearly to get it done.
James: When we report Q4 at the latest but hopefully.
Speaker Change: And I think the beauty of this business is...
Speaker Change: This is not a 100 person auction, this is...
James: We get we're able to come up with the path one way or another within calendar year 2024.
Speaker Change: Over and over again, so it's not a...
Speaker Change: Okay, and then maybe on the M&A.
Speaker Change: <unk> for the back half and then maybe thinking about the pipeline going into 'twenty five.
Speaker Change: Obviously, it's moderating in the back half of 2004 to be at the leverage targets, but when you think about the opportunities still in front of you and your pipeline how should we think about 2025 M&A and then maybe.
Speaker Change: The biggest thing for us is, again, just, you know, getting the cargo financials done, particularly if it's a financial sponsor buyer. Obviously, we've been a public company. We've reported the segment independently, but, you know, for someone to get financing, you know, a part of what we have to do is get cargo financials, so that's in process. But, you know, other than that, I don't see...
Speaker Change: If the sale of tap in to that.
Speaker Change: Much much larger just trying to think about where that could go.
Speaker Change: Yes, so I mean again.
Speaker Change: Backdrop is again, we've committed to keeping leverage in the <unk> I think the goal is to get sort of leverage absent sort of a sale was to get leverage out of in the mid threes for 25, So again that would drive that.
Speaker Change: That would drive the M&A spend I think when you look at that for next year you could this year, if we spend $600 million to $650 million on M&A, given sort of some of the most recent EPR win that we had him again.
Speaker Change: obviously it's moderating in the back half of 24 to be at the leverage target. But when you think about the opportunities still in front of you in your pipeline, how should we think about 2025?
James: Having a hybrid.
James: Balancing between M&A expense and sort of on the organic growth cap ex spend I think next year, we can step it up for sure.
James: From 615, probably closer to something somewhere between $8 51 billion.
Speaker Change: Yeah, so I mean, again...
Speaker Change: Obviously, if we if we obviously if we.
Speaker Change: Backdrop is again, you know, we've committed
James: Did something with the Es business.
Speaker Change: I mean that would give you ultimate flexibility to do whatever you want.
Speaker Change: I think you can certainly spend more.
Speaker Change: For twenty-five.
James: Leverage wouldn't really move.
Speaker Change: So, I guess, you know, that would drive...
Speaker Change: [inaudible]
James: <unk>, coupled together and sort of what the share buybacks I mean, I think you'd have a lot of flexibility.
Luc Theres: Even take that M&A spend higher and Brian its Luc speaking referenced the $8 50 to 1 billion that you could potentially be looking at in a non EES divestiture sort of scenario I just want everyone to recall.
Speaker Change: You know, balancing between M&H patents and sort of on the organic growth cap expense. You know, I think next year we can step it up for sure.
Brian Butler: The size roughly every $500 million of deploying M&A has an impact of leverage of about 10 basis points round numbers. So if you think about the organic deleveraging model, if youre ending this year and that sort of 36, 5% to 385 range organically you would delever to something well below three five and even it spending that $1 billion of level of M&A.
Speaker Change: you know, from 650 probably closer to something, you know, somewhere between 850 and a billion. Obviously if we, if we, obviously if we...
James: Still very comfortably arriving at the end of 2025 and that sort of mid threes range.
Speaker Change: Okay, that's great color and if I could slip one last one and theyre cutting through kind of maybe on the service.
Speaker Change: Or maybe alright.
Speaker Change: Alright.
Luke: And Brian , it's Luke speaking in reference to 850 to a billion that you could potentially be looking at, you know, in a non-ES divestiture sort of scenario, I just want everyone to recall.
Speaker Change: But the shutting of volume if you look at the service intervals on the commercial business are you still seeing.
Speaker Change: Upgrades kind of outpacing downgrades in that piece of the business.
Speaker Change: Yes.
Speaker Change: It's obviously market specific but by and large yes, we're continuing to see them all painting.
Speaker Change: Declines.
Speaker Change: The market is very healthy.
Speaker Change: So we.
Speaker Change: We haven't seen anything sort of material, obviously special waste volumes continued shortage of Chubb sideways just given.
Speaker Change: While the interest rates are sort of sitting in but I think other than that.
Speaker Change: It's been very good.
Speaker Change: Great. Thanks for taking my questions.
Speaker Change: Thank you, Brian we now have great day.
Speaker Change: Ladies National Bank has come down.
Speaker Change: Good morning, everyone. Thanks for taking the question.
Speaker Change: I'd like to start by following up on that last question. If you are looking to deploy capital from the sale of the Es business. What's your view on the optimal level of debt for the remaining company is it still the same is it mid threes or <unk>.
Brian: Yes, I mean, it's obviously market-specific, but by and large, yes, we continue to see them all taken.
Speaker Change: The market is very healthy.
Speaker Change: If you have the option could that go lower.
Speaker Change: So, you know, we haven't seen anything sort of material. Obviously, special weight volumes continue to sort of chug sideways, just given, you know, where the interest rates are sort of sitting. But I think other than that, it's been very good.
Speaker Change: And then when we ran our models internally.
Speaker Change: With the sale I think.
Speaker Change: You would basically I mean, I think comfortably move into three and that to get to IAG.
Speaker Change: Great, thanks for taking the questions.
Speaker Change: To make sure you are definitively square in the view of getting that sort of investment grade rating I mean, if youre going to be that pulls you might as well move to three and definitively get the IAG rating Theres No reason I'm, sorry, a teeter totter I'm trying to be cute with that number. So I think you would move that target leverage you.
Speaker Change: Thank you, Brian . We now have Rupert Murrah with National Bank First Canada.
Rupert Murrah: Hi, good morning, everyone. Thanks for taking the question.
Speaker Change: Youre going to move between $2 75 in sort of three in a quarter.
Speaker Change: For a period of time, but ultimately sort of target leverage would sit around three post the transaction.
Speaker Change: Okay, Great and then looking at M&A potential with any remaining proceeds how do you see the relative price of <unk>.
Rupert Murrah: I think, you know, when we ran our models internally, you know, with the sale, I think
Speaker Change: Assets in your pipeline today versus the price of your stock. If you are looking at at buybacks and the pipeline have any any platform acquisition opportunities or do you think theres still plenty to do in tuck ins.
Speaker Change: So couple of things in there.
Speaker Change: Again from my perspective to get an asset.
Speaker Change: This quality at this level.
Speaker Change: Again going back to <unk> comments earlier, when talking about 25% and 26. The business is trading at sort of 12 to 12 five times today and you run that out of the 26 and you start in 12 to 14 months from now you are trading off a 26 number.
Rupert Murrah: Okay, great. And then looking at M&A potential with any remaining proceeds, how do you see the relative price of M&A?
Speaker Change: As businesses.
Speaker Change: With EPR NRG is trading somewhere around probably 10 times 2026, depending sort of having them. All this I mean, I don't think there's a higher better use of capital than to buy back sort of our own stock at that level that being said that would be one that would be one use of capital.
Speaker Change: There is a significant amount of M&A in the markets, where we already operate I mean again, we have a very large footprint 10 provinces in Canada.
Speaker Change: 425 states in the U S.
Speaker Change: Some high growth markets with a lot with a lot of opportunity so again.
Speaker Change: We feel very comfortable that we can deploy that capital and again from a valuation perspective.
Speaker Change: 12, 12 and a half times today, and you run that out to 26. And you know, you start in 12 to 14 months from now, you're trading off of a 2026 number.
Speaker Change: Again, it's hit and Miss I mean.
Speaker Change: There are some assets in all of that.
Speaker Change: Are more expensive than others.
Speaker Change: But by and large valuations from our perspective, maybe they've ticked down a little bit.
Speaker Change: It's business as you know.
Speaker Change: Because of the higher interest rates, but.
Speaker Change: <unk>.
Speaker Change: I would say that again from the competition for some of them.
Speaker Change: Medium sized assets you have a little bit on the private equity side that compete with you and as the leveraged finance markets have come back even though rates are a little bit higher <unk>.
Speaker Change: [inaudible]
Speaker Change: <unk> continues.
Speaker Change: Again, similar to the math I get earlier on the call you can make the IRR is work.
Speaker Change: If you believe in the sort of growth trajectory and the stability of the business. So.
Speaker Change: I think nothing has really changed from the tuck in side and again, there is a significant amount of M&A in white space within the existing footprint that we have.
Speaker Change: We feel very comfortable that we can deploy that capital. And again, from a valuation perspective...
Speaker Change: Again, it's hit and miss, I mean...
Speaker Change: Great. Thanks for the color I'll leave it there.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Your next question comes from U K retailer.
Speaker Change: You May proceed.
Speaker Change: I would say that, again, from the competition for some of the, you know, medium-sized assets, you know, you have a little bit on the private equity side that compete with you, and as the leveraged finance markets have come back, even though rates are a little bit higher,
Speaker Change: Thanks.
Speaker Change: How has employee attrition training and safety expense trended year to date is there room for improvement from here.
Speaker Change: Or is there a difference in trends if you if you look at the business geographically between Canada and the U S.
Speaker Change: You know, this continues, you can, again, similar to the math I did earlier on the call, you know, you can make the IRRs work.
Speaker Change: So I think there's a difference between secondary in urban markets.
Speaker Change: Secondary markets again.
Speaker Change: Hawaii turnover, obviously significantly lower than the urban markets, which has been good I think if you look at trailing 12 months as a business as a whole.
Speaker Change: Thanks for coming. We'll leave it there.
Speaker Change: Like I said last year, we were sort of.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Tobey Sommer with Truett. You may proceed.
Speaker Change: We were trending sort of mid Twenty's today, we're just above 20, and we think that again goes back to sort of where we were pre COVID-19 sort of in the high teens.
Speaker Change: Mid to high teens is what the goal is that we are definitely on a trailing 12 month basis trending down.
Speaker Change: Turnover is down over sort of four 5% over the last 12 months. So we are definitely heading in the right direction.
Speaker Change: So, I think there's a difference between secondary and urban markets, you know, secondary markets again.
Speaker Change: And the opportunity is still great to continue moving again down sort of mid to high teens.
Speaker Change: Could you discuss any cross selling or historical benefits that we should have in mind between solid waste in es.
Speaker Change: Generated with those businesses together that might not be a feature of the remain co.
Speaker Change: We were trending sort of mid-20s. Today, we're just above 20. And we think, you know, that, again, goes back to sort of where we were pre-COVID, sort of in the high teens.
Speaker Change: Yes, So I think if you look at it I mean.
Speaker Change: The model.
Speaker Change: So, mid to high teens is what the goal is, and we are definitely on a trailing 12-month basis trending down, I mean, turnovers down over sort of 4, 4.5% over the last 12 months, so we are definitely heading in the right direction.
Speaker Change: I had a solid way need right not in the short of reverse so yes, there was cross selling opportunities, but the way it's structured today.
Speaker Change: As you basically have a solid waste salesman and you have a liquid waste.
Speaker Change: Environmental services salesmen right, so our sales woman.
Speaker Change: And I think when you look at that we basically incorporated effectively a buddy Buddy system. So.
Speaker Change: Thanks. Could you discuss any cross-selling or historical benefits that we should have in mind between solid waste and ES that you've generated with those businesses together that might not be a feature of the Romainco?
Speaker Change: In every region each of the salespeople on their respective sides of the business.
Speaker Change: Has the body body that can cross sell between the two lines.
Speaker Change: That transaction I think that is valuable for both companies.
Speaker Change: Companies in my.
Speaker Change: Inclination today and sort of discussions with certain prospective buyers that would sort of stay in place I don't we don't think that that would change in any material way because it's a benefit to sort of both companies today theyre getting two separate invoices, regardless one for each service. So again that wouldn't be something we have to decouple.
Speaker Change: had a solid weight need, right? Not in the sort of reverse. So
Speaker Change: Yes, there was cross-outing opportunities, but...
Speaker Change: The way it's structured today
Speaker Change: is you basically have a solid waste salesman and you have a liquid waste salesman.
Speaker Change: No.
Speaker Change: From our perspective, I think that would be ongoing and is beneficial to both of us.
Speaker Change: environmental services salesman right so or saleswoman and I think when you look at that we've basically incorporated effectively a buddy-buddy system so in every region each of the sales people on the respective sides of the business has a buddy-buddy that can cross out between the two lines.
Speaker Change: Thanks, I appreciate that.
Chris Murray: As a reminder, this Stephanie if I wanted to ask any more questions can we now have Chris Murray from eight TB capital market.
Chris Murray: Yes, thanks, good morning.
Chris Murray: Maybe turning around.
Chris Murray: Color code, the more boring blocking and tackling stops.
Speaker Change: We've talked in previous calls about some of the margin enhancements and improvements and we touched a little bit on labor.
Speaker Change: Turnover management, but I'm just wondering.
Speaker Change: How you are making progress on kind of core waste margins.
Speaker Change: Today they're getting two separate invoices regardless, one for each service, so again that wouldn't be something we have to decouple, so from our perspective I think that would be ongoing and it's beneficial to both of us.
Speaker Change: And some of the initiatives I think we talked a little bit about rolling out things like tablets and the trups.
Speaker Change: Some of the other pricing initiatives I'm, just wondering if theres any any color on kind of a walk into higher margins as we go through the next few quarters.
Speaker Change: Thanks, appreciate that.
Speaker Change: Yes, it's a great question and something that as we look at the margin profile of what we're being able to deliver in the expansion year over year, it's very evident that the strategies, we've been talking to are being sort of a highly successful.
Speaker Change: And again, Chris I think it's all of the above coming through in the beginning stages of what those ultimate run rates could be I mean, you mentioned the tablets and the trucks I mean that is a.
Speaker Change: on labor and turnover management, but I'm just wondering, you know, how you're making
Chris Murray: A new initiative for this year, that's in the nascent stages and yes, there is a little bit of modest contribution, but nothing compared to once that's fully ramped with the implementation completed.
Speaker Change: progress on, you know, kind of core waste margins.
Chris Murray: Towards the end of Q4 into Q1 of next year. So that's going to be another lever that's going to be sort of additive we talked about the R&D and this year, we have a very modest amount of it but as the full portfolio comes online you think about the margin accretive nature of that is EPR.
Speaker Change: Patrick talking about we now sort of roughly $130 million of EPR contracts in hand, youre going to have I think we said $5 million to $10 million of contribution in this year, but then that ramps up to 25, and 26% and call. That's all accretive margins, which unto itself is going to take our Canadian solid waste margin.
Speaker Change: After low thirties and be accretive to both the consolidated <unk>.
Speaker Change: I mean, you mentioned the tablets in the trucks, I mean, that is...
Speaker Change: a new initiative for this year that's in the nascent stages. And yes, there's a little bit of modest contribution, but nothing compared to once that's fully ramped with the implementation completed, you know, towards, you know, end of Q4 into Q1 of next year. And so that's going to be another lever that's going to be sort of additive. You know, we talked about the RNG, and this year we have a very modest amount of it. But as the, you know, full portfolio comes online, you think about what the margin accretive nature of that is, you know, EPR, you heard Patrick talking about, we now have sort of roughly $130 million of EPR contracts in hand, you're going to have, I think we said $5 to $10 million of contribution in this year, but then that ramps up to $25 and $26. And recall, you know, that's all accretive margins, which unto itself is going to take our Canadian solid waste margin.
Speaker Change: Solid margins in the consolidated business as a whole.
Speaker Change: Continuing with the benefits and the rollover of now this exiting of the Michigan portfolio contracts will be rollover effect into next year any of really all of these pieces coming together I mean, as we start time of the next layer down of CMG conversion improved asset utilization from routing technologies. This is the sort of next leg up that we.
Speaker Change: Being able to see Chris what I'd say is we're actively engaged over on this side looking in figuring out how to prioritize all of these value add levers in front of us and we hope to do as an Investor day later this year.
Speaker Change: This all up and articulate what the next couple of years could look like but as you heard from Patrick I mean, Theres a lot of focus on 2024, but from our perspective, I think we're sort of missing the forest for the trees. When you think about what this looks like and sort of 26 and beyond and so we do look forward at our Investor day at the end of the year sort of to piece out and quantify what all of those buckets could be.
Speaker Change: up to low 30s and be accretive to both the consolidated solid margins and the consolidated business as a whole.
Speaker Change: Okay great.
Speaker Change: Along those lines, though the other question.
Speaker Change: Just in terms of being able to receive things like new vehicles technology things like that I know.
Speaker Change: There's been some supply chain issues and but it seems like a lot of stuff is starting to feel better.
Speaker Change: How are you funding kind of things like truck supply things like that in terms of your ability to get kind of newer trucks into the system.
Speaker Change: Your voice and maintenance costs things like that.
Speaker Change: Yes, so we were sitting at around 70% of what we wanted but if you go back sort of a year and a half two years ago, I think thats trended sort of like 85% to 90, and I think we can be 100% of where we want to be.
Speaker Change: Absent again some of these big new EPR contracts, so we'd have to reallocate.
Speaker Change: Units coming off the floor because he is because of the contracts start both of those but I think yes. The logjam.
Speaker Change: Along those lines though, the other question, just in terms of being able to receive things like new vehicles, technology, things like that, I know there's been some supply chain issues and but you know it seems like a lot of stuff is starting to feel better. How are you finding, you know, kind of things like truck supply, things like that, in terms of your ability to get kind of newer trucks into the system, you know, help you avoid some maintenance costs, things like that?
Speaker Change: Has definitely subsided and we're moving to a point now where we can get exactly what went wrong.
Speaker Change: Okay.
Speaker Change: And then one quick one just to clean up just in terms of the business is there any back office systems or anything I know Patrick you talked about sort of the sales front end, but is there any back office or common areas that you'd have to split up or anything that would make.
Patrick Davinci: Kind of a sales complicated from an operational perspective.
Speaker Change: Yeah, so we were sitting at around 70% of what we wanted, if you go back sort of a year and a half, two years ago. I think that's trended sort of like 85 to 90, and I think we could be a hundred percent of where we want to be.
Patrick Davinci: Not really.
Speaker Change: Obviously, there's a little bit of it in treasury and there's definitely a little bit in HR are the two big sort of overlaps but.
Speaker Change: you know, absent again some of these big new EPR contracts that we've had to reallocate.
Speaker Change: By and large.
Speaker Change: But we want a simpler things we've done.
Speaker Change: In our history result, again, not nothing that would be an impediment to making it happen.
Speaker Change: Chris the divestitures, we did last year were more sort of inextricably linked with the business and yes would be so just as a point of reference this would be a cleaner sort of extraction and that was.
Speaker Change: [inaudible]
Speaker Change: Alright, Okay folks I'll leave it there thank you.
Speaker Change: Thank you.
Speaker Change: Thank you Craig I would now like to hand, it back to <unk>.
Speaker Change: Patrick.
Speaker Change: Final remarks.
Speaker Change: Not really. Obviously there's a little bit in Treasury and there's definitely a little bit in HR, the two big sort of overlaps, but...
Speaker Change: Thank you everyone for joining us this morning, and we look forward to.
Speaker Change: Speaking to you after our Q3, thank you very much.
Speaker Change: Thank you all for joining the <unk> second quarter 2024 earnings call. Please enjoy the rest of your day and you may now disconnect.
Chris: in our history. So again, not nothing that would be an impediment to making it happen. Chris, the divestitures we did last year were more sort of inextricably linked with the business than ES would be. So, you know, just as a point of reference, this would be a cleaner sort of extraction than that was.
Speaker Change: Okay, folks, I'll leave it there. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you everyone for joining us this morning and we look forward to speaking to you after Q3. Thank you very much.
Speaker Change: Thank you all for joining the GFL second quarter 2024 earnings call. Please enjoy the rest of your day and you may now disconnect from the call.