Q3 2024 GFL Environmental Inc Earnings Call
Good morning, and thank you all for attending the GFL third quarter 2024 earnings call. My name is Brika and I will be your moderator for today.
All lines were muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host Patrick Dovigi, founder and CEO at GFL Environmental. Thank you, you may proceed Patrick.
Patrick Dovigi: 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 third quarter and providing updates on other items. I'm joined this morning by Lou Pelosi, our CFO, who will take us through the forward look and disclaimer before we get into details.
Lou Pelosi: 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.
Lou Pelosi: During this call, we 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. 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.
Lou Pelosi: 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.
Lou Pelosi: 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.
Lou Pelosi: 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 U.S. securities regulators.
Lou Pelosi: I will now turn the call back over to Patrick. Thank you, Luke. The momentum from our exceptional first half of the year continues through the third quarter, resulting in nearly 20% adjusted EBITDA growth and another quarter of industry-leading margin expansion.
Patrick Dovigi: The strength of our ongoing operational and financial performance this year once again demonstrates the dedication of our employees, the quality of our asset base, and the effectiveness of our overall value creation strategies.
Lou Pelosi: The impact of the commitment we see every day from our employees cannot be understated. Our employees' handling of the two hurricanes that hit within a two-week period is just one example.
Lou Pelosi: Once again, I am humbled by the more than 20,000 men and women on Team Green.
Lou Pelosi: Consistent with our guide, the third quarter saw the highest adjusted EBITDA margin in GFL's history at 31.1%, a 300 basis point margin expansion over the prior year.
Lou Pelosi: This margin expansion is driven using all the levers that we have talked about in the prior quarters. Our disciplined approach to pricing generating higher price-cost spread against moderating cost inflation.
Lou Pelosi: the accretive margin benefits of shedding low-quality revenue and the exiting of non-core service offerings
Lou Pelosi: improve productivity, onboarding efficiency, and low cost of risk associated with improving employee turnover, and an M&A strategy, synergy realization as the businesses we have acquired continue to mature within our existing footprint.
Lou Pelosi: Luke will walk through more of the specifics on the margin bridge, but we are extremely pleased with how things are working. This quarter's results once again demonstrate the highly predictable and recurring nature of our business model and further enforce our conviction in our near-term roadmap that we believe will continue to drive industry-leading financial performance.
Lou Pelosi: In the quarter, we continue to execute on our capital allocation strategy exactly in line with the framework we provided at the end of last year. We are on track to deploy approximately $900 million on both M&A and incremental growth investments this year, as previously announced.
Lou Pelosi: During the third quarter, we deployed $96 million into these incremental growth investments, primarily related to recycling and R&G infrastructure.
Lou Pelosi: We have commissioned two new MRFs so far this year and expect two more to come online in early 2025. Some of our EPR-related collection contracts started up in the third quarter, and we will see more start up between now and 2026.
Lou Pelosi: The contribution from EPR will be a growth tailwind over the next 24 months and we remain optimistic about incremental contract wins above and beyond the $130 million of EBITDA we have already talked about.
Lou Pelosi: As anticipated, two new R&G plants were commissioned in Q3, and we expect a third to come online before year-end.
Lou Pelosi: All three of these projects will drive incremental contribution in 2025 and beyond. We also deployed $47 million into three token acquisitions, and continue to have a robust pipeline of attractive M&A opportunities in our markets.
Lou Pelosi: We ended the quarter with net leverage of 4.05, the lowest in GFL's history, demonstrating our absolute commitment to the capital allocation and deleveraging targets that we previously shared.
Lou Pelosi: As we previewed in August, we officially launched a robust process to evaluate the sale of our environmental services segment in September.
Lou Pelosi: As anticipated, the best-in-class quality of this asset, coupled with its near-term growth opportunities, has attracted a significant number of highly credible potential buyers from diverse backgrounds.
Lou Pelosi: Based on the first round bids that we received last week, we are highly confident that a transaction at a valuation equal to or greater than we have previously suggested can be signed and announced before we report our full year results in February.
Lou Pelosi: We have conviction that the transaction should net a minimum of $6 billion in after-tax proceeds. We expect to repay at least $3.5 billion of debt with the remainder available to buyback stocks and for general corporate purposes.
Lou Pelosi: Before I hand the call over to Luke, I want to take a minute to talk about the security incidents that you may have read about in recent media reports in the context of where GFL is today.
Lou Pelosi: I started this business in 2007 with one solid waste transfer station and four old roll-off trucks and $250,000 in startup capital.
Lou Pelosi: This December will be GFL's 17th anniversary as a company, and today we are the fourth largest diversified environmental services company in North America.
Lou Pelosi: We have operations across 10 Canadian provinces and 25 U.S. states. And this year we are approaching $8 billion in annual revenue.
Lou Pelosi: We have millions of customers who trust us to provide them with their essential environmental services, including the over 5 million households that we service across Canada and the United States weekly.
Lou Pelosi: We have achieved this level of success by providing high-quality service at a fair price and through the more than 250 acquisitions we have completed to date.
Lou Pelosi: With many of those owner-operators staying on with us post-acquisition to continue to contribute to the integration of their businesses into GFL We have a reputation in the industry of doing what we say we're going to do and we are very proud of that reputation
Lou Pelosi: Investors in GFL now include the highest quality institutions, from private equity funds, to pension funds, sovereign wealth funds, and leading financial institutions around the world.
Lou Pelosi: Many of our investors have been with GFL since our early days and have done extensive due diligence on GFL, our leadership team, and the industry.
Lou Pelosi: All of our long-term investors have earned significant returns on their capital that they've invested with us.
Lou Pelosi: They have and continue to put their confidence in us to be the stewards of their capital and create long-term value for them. We do not take that trust lightly.
Lou Pelosi: Regarding the recent events, we are not going to comment on any specifics because the police are investigating these incidents and the investigations are ongoing.
Lou Pelosi: While the media likes to speculate, we would encourage everyone to allow the authorities to do their work. We are cooperating in the investigations and trust that the authorities will bring them to a successful resolution, hopefully in the near term.
Lou Pelosi: We are also working with a third-party security consultant to review our security measures and any additional precautions we should be taking.
Lou Pelosi: While the authorities continue to do their work, we also remain focused on the safety and well-being of our employees, who, as I said before, are the core to everything we do. The results we've achieved this quarter, and throughout our history, are a reflection of all of the hard work and dedication of GFL's more than 20,000 employees.
Lou Pelosi: We have hundreds of facilities across our platform, and these incidents are not going to derail or distract us from continuing to drive the business forward. I will now turn the call over to Luke for additional color on the quarter, and I will then have some closing remarks before we open it up for Q&A.
Thanks, Patrick.
Luke: Consolidated revenue for the quarter of 2.015 billion was right in line with our guidance after giving effect to FX and commodity prices.
Lou Pelosi: The third quarter saw 11.3% revenue growth in solid waste when excluding the impact of the divestitures.
Lou Pelosi: driven by stronger-than-expected solid waste pricing of 6% and volume of minus 0.8%, a 90 basis point sequential improvement over Q2, despite initial storm-related impacts at the end of the quarter.
Lou Pelosi: We expect volumes to turn positive in the fourth quarter and as we anniversary most of the impacts of our targeted volume shedding initiatives.
Lou Pelosi: Decreases in commodity and energy prices reduce third quarter revenues derived from the sale of commodities as well as fuel surcharges compared to our guidance, a trend we expect to continue in the fourth quarter.
Lou Pelosi: Environmental services revenue was up 3% compared to the prior year, inclusive of the impact of lower UMO pricing and a tough comp arising from a large-scale event-driven revenue realized in the prior year period.
Lou Pelosi: Excluding the impact of these two items segment revenue was up nine percent versus the prior year demonstrating the strength of our price led growth strategy to offset this lower level of event-driven activity that we continue to see in certain markets.
Lou Pelosi: For context, Adjusted EBITDA margins in Q3 2019, the first publicly reported third quarter results we have, were 25.1%. This quarter representing 600 basis points of margin expansion over those past five years.
Lou Pelosi: Solid waste adjusted EBITDA margins were up 340 basis points, inclusive of tailwinds from commodity and fuel prices, the impact of recent divestitures, and the impact of the results of our R&G joint ventures flowing through our P&L, which overcame headwinds from M&A that came in at decreed EBITDA margins. The dilutive margin impact of the increased cost of risk
Lou Pelosi: as well as the impact of reclassification of certain costs that have been recognized in the corporate segment in the prior period.
Lou Pelosi: Environmental services adjusted to EBITDA margins were 32.2%, 110 basis points ahead of the prior year, despite headwinds from used motor oil pricing and increased cost of risk.
Lou Pelosi: Adjusted Pre-Cash Flow and Adjusted Net Income were $225 million and $126 million respectively, both exactly in line with expectations, and another data point illustrating the highly predictable nature of our financial results.
Lou Pelosi: Net leverage at the end of the quarter was 4.05, ahead of expectations, largely on account of translational FX. But when looking through the FX impact, this result is consistent with the quarterly cadence on which our year-end net leverage target is based.
Lou Pelosi: As you all know, it is difficult to predict where FX rates will be in the future, but on a constant currency basis, we continue to track towards the net leverage range outlined in our 2024 Capital Allocation Framework.
Lou Pelosi: After quarter end, we were successful in issuing our first industrial revenue bond, a tax-efficient financing instrument commonly used by all of our public company peers.
Lou Pelosi: The U.S. $210 million bond was issued with a 4.375% coupon rate, approximately 100 basis points lower than the current weighted average effective interest rate on our other long-term debt.
Lou Pelosi: Our initial foray into the tax-exempt bond market is another example of the incremental financing opportunities we expect to become available with our increasing credit quality profile.
Lou Pelosi: We have one additional secured bond in our current debt stack that becomes callable at par in the third quarter of next year.
Lou Pelosi: The debt markets remain highly constructive and we expect to address these notes in advance of their maturity through cash on hand, proceeds from divestitures, or opportunistically accessing the debt markets when a window presents itself.
Lou Pelosi: During the quarter, we also converted approximately 14.5 million of our Series A Perpetual Convertible Preferred Shares into 16 million common shares. The conversion had no impact on our total diluted shares outstanding.
Lou Pelosi: Given our robust Q3 results and our expectations for the fourth quarter, we now expect revenue of approximately $7.82 to $7.85 billion for the year. All other aspects of our previously provided guidance remain unchanged.
Lou Pelosi: As a result, our expectation for fiscal 2024 adjusted EBITDA margin increases for the third time this year to approximately 28.6%, representing an industry-leading 200-basis point margin expansion over the prior year.
Lou Pelosi: Specifically, as it relates to the fourth quarter, we expect consolidated revenue of approximately $1.94 to $1.97 billion at just over 29% adjusted EBITDA margin, representing another quarter of 300 basis points of year-over-year margin expansion.
Lou Pelosi: Q4 adjusted free cash flow and adjusted net income are expected to be approximately $350 million and $75 to $80 million respectively.
Lou Pelosi: Due to the significant impact the potential sale of our environmental services segment would have on our financial outlook, we're going to wait until February to provide our wholesome 2025 framework and guidance.
Lou Pelosi: In addition, we plan to have an Investor Day in early 2024, details of which will be announced soon. However, where we sit today, we have a strong line of sight to a mid-single-digit, top-line organic growth.
Lou Pelosi: Layering in the potential contribution from completing even a portion of our current M&A pipeline, we could see 2025 adjusted EBITDA grow in the low to mid-teens.
Lou Pelosi: I will now pass the call back to Patrick who will provide some closing comments before Q&A.
Patrick Dovigi: Thank you, Luke. The value creation opportunity at GFL has never been better. We have laid out the foundation for long-term growth, and we believe that we are uniquely positioned for industry-leading financial performance over the near term.
Patrick Dovigi: This year's performance demonstrates the strength of what we have built and moving into 2025 the setup is very clear.
Patrick Dovigi: Continue to advance the ESL process, giving us the opportunity to accelerate our deleveraging plan and explore options to buy back our stock. Continue to focus on generating industry-leading organic margin expansion in our solid waste business.
Patrick Dovigi: benefit from the ramping contributions from both Extended Producer Responsibility and our R&G facilities, and execute on our robust M&A pipeline while maintaining leveraged targets and continue progressing towards an investment-grade credit rating.
Lou Pelosi: As I said many times before, all that we have achieved is a testament to the hard work and dedication of all of our employees. On behalf of all of GFL's management team, I want to thank each and every one of our employees and our investors, as well as our customers, and our communities for the continued loyalty and support.
Lou Pelosi: This quarter also sees us announcing the change of our leadership team. In a long-planned succession, effective January 1st, Greg Yorston will transition the COO role to Billy Zaffera, our current EVP of our solid waste operations.
Lou Pelosi: Greg has had a distinguished career in the waste industry of nearly 40 years. Starting in Western Canada in 1986, Greg and his family moved eight times throughout the U.S. before he settled at Waste Industries in 2013.
Lou Pelosi: Greg's Canadian roots came full circle when he took on the role of COO following GFL's 2018 merger with Waste Industries.
Lou Pelosi: Since then, Gregg has been instrumental in executing our growth strategy across our solid waste platform and instilling operational disciplines across all of these operations.
Lou Pelosi: I know that we would not be where we are today if it weren't for Greg's leadership and dedication to GFL over the last six years. I am personally very grateful for all of his contributions and feel very fortunate to know that GFL will continue to benefit from his expertise through 2025.
Lou Pelosi: Billy has been a key member of our operational leadership team since he joined us in 2021.
Lou Pelosi: Billy should be familiar to many of you, who with his more than 30 years of experience in the solid waste industry, including at Republic Services and most recently before he joined GFL at Advance Disposal.
Lou Pelosi: Billy has worked as Greg's right hand since 2021, and with his decades of industry and GFL experience, Billy is uniquely positioned to take on the leadership of our solid waste operations.
Lou Pelosi: This succession has been extensively planned and we are highly confident in a seamless transition. I will now turn the call over to the operator to open the line for Q&A.
Speaker Change: Thank you Patrick. We will now begin the question and answer session. If you would like to ask a question please press star followed by 1 on your telephone keypad.
Speaker Change: And we do ask that you please limit yourself to one question and one follow-up And if you have any further you will need to press star 1 and get back in the queue And again, that is star followed by 1 to ask any questions
Speaker Change: We have the first question on the line from Patrick Brown with Raymond James. Your line is open.
Thank you very much.
Hey, good morning, guys.
Morning, Father. Can you hear me?
Speaker Change: Hey, sorry. Hey, Patrick, I just want to kind of thanks for all the details on the ESL, but I just want to be clear.
Speaker Change: is still very attractive, it's fully consistent with the multiples that you guys had talked about last quarter. Would that be correct?
Speaker Change: Yeah, that's correct. I think, Tyler, what we meant to sort of illustrate with this is, you know, I mean, there's lots, there's been lots of media attention on what the actual value of this business is. I think what we tried to articulate is that
Speaker Change: We have a very, very high degree of confidence that we will deliver a minimum amount of $6 billion in cash proceeds. Obviously, as enterprise values...
Speaker Change: continue to increase so does the tax bill, and I think from our perspective we are looking to find the most efficient structure from a tax perspective, given as increased enterprise value equals increased taxes, and I think
Speaker Change: 3.5 billion of that is going to get, you know, a minimum of 3.5 billion that's going to get these refills, get to repay debt, and then
Speaker Change: The balance will be used for general corporate purposes and shared by Vax. But, you know, I think that was clearly meant to demonstrate we have, you know, a very high degree of confidence in that today.
Yeah, okay. Excellent. And then
Speaker Change: Big Picture Luke, as we kind of look to 25, can we talk about some of the breadcrumbs roll just at a very high level, specifically around EPR and RNG?
Speaker Change: I mean, right now, how much incremental EBITDA would you expect from both of those?
their contribution kind of steps up into 26.
Speaker Change: Yeah, so Tyler I think you're thinking about it right in terms of the ramp I mean if you take EPR this year and as we said the minimus impact I think five to ten million of EBITDA in-year results that number is going to go up To call it a sort of 40 to 50 million next year. So you have that sort of incremental 35-45 million from EPR
The RNG side, RIN pricing can play a factor.
Speaker Change: So, you know, we're basically doubling up the MMBTUs with the new plants that have come on. New plants that will come on later in 25 and into 26 will have the minimum impact in a year. So I'd say the RNG number and that sort of 35 to 45 incremental.
Speaker Change: and sorry EPR 3545 incremental and RNG and that's what a 25 to 30 range
Yeah, perfect. And then just to be clear, there's no.
Speaker Change: At this point, based on deals done to date, there's really no M&A impact in 25.
Leibard,
Speaker Change: No, but what I will say on M&A for 25, obviously with the high degree of confidence that he has,
Speaker Change: You know, we're going to get something done in relatively short order.
Speaker Change: A very good setup from an M&A perspective across both Canada and the U.S. So to Luke's earlier comments of just the setup for 2025 and the potential impact from incremental M&A, well again, you know.
Speaker Change: sort of maintaining leverage targets that we have with the focus on the investment-grade credit rating. Now we're going to have a very good setup with the proceeds that we receive from the S to be able to sort of double down on the solid-waste businesses in our markets.
Speaker Change: that are going to be sort of highly accretive to be both from a free cash flow perspective and just an operational perspective.
Speaker Change: and Tyler I mean to Patrick's point like M&A is really this kicker to what's an extremely attractive organic setup because you know as I said in the prepared remarks
Speaker Change: like mid-single-digit top line like think of it and that will come out with the specifics But you know, I think there's a path where you have another, you know 100 basis point of spread of price over your sort of cost of inflation
Speaker Change: So if you think at the margin level, if you've got a mid-single digit on the top line, 100 basis points of spread, that should give you 60, 70 basis points of margin coming out of the spread. You've got R&G and EPR that we just talked about that's additive to that. The Michigan divestiture is UN anniversary next year, you pick up another 20 basis points there. So you don't need to believe a lot to see 100 basis points with a margin expand.
Speaker Change: And so, just natural, organically, you know, EBITDA would be up 8%. The RNG and EPR contributions, another 2. That puts it at 10% EBITDA increase before considering M&A. And, you know, we're feeling, like, really confident in those numbers, so we think it's just a very attractive setup as we're getting into next year.
Speaker Change: Yep, no, perfect. Sounds great. Appreciate it so much. Thank you guys.
Your thoughts?
Thank you.
Your next question comes from...
Sabah Khan with RBC Capital Markets. Please go ahead.
Speaker Change: Okay, great. Thanks and good morning. Maybe just continuing on the margin discussion, and sounds like you'll probably provide a bit of a medium-term outlook at Investor Day, but
Speaker Change: If you put the ES business aside, can you maybe just give us, maybe we'll just rehash kind of the margin journey, obviously a peak margin this quarter. How we should think about the margins over the next two, three, four years and maybe the bigger bucket drivers over the medium term specifically for the solid waste business. Thanks.
Speaker Change: Yeah, it sounds like you're trying to steal our thunder from Investor Day, but at a high level.
Speaker Change: Look, I think you have the base algorithm of price-cost spread. I think what you're seeing this year and, you know, industry-wide, you're hearing the conviction going to 25 and beyond. I think that's here to stay. We can debate, you know, what the new norm is, but I think you're going to be seeing this ongoing base-margin expansion coming out of that dynamic.
Speaker Change: And I think where we're at, just in the relatively sort of infancy of some of our price discovery, we probably have some runaway of that above and beyond what the industry peers are.
Speaker Change: Then in addition, we have the whole discovery of ancillary pricing charges, which is just net newer in our book, less mature in our application of that, and that's going to provide us what we perceive to be an incremental tailwind as we just catch up to where the industry already is.
Speaker Change: So you have a very attractive sort of price-cost spread driver of annual margin expansion.
Speaker Change: You take PDR that MGikt in Thailand was asking you about the 25 Amex, but take them all the way to fruition And over the next couple years, you're going to get at least 150 million dollars ofечь r coming in at a creative margin
Speaker Change: And you have RNG that from this year's $25-30 million is going to ramp up to $175 million plus, which is highly margineered and creative.
Speaker Change: I think you should realize all the benefit of that in the next.
in two to three years as well.
and the continued maturation of synergy realization from recent M&A.
Speaker Change: And so when you put this all together on the remaining solid waste business, you know, I think there's a very clear path to what should be industry-leading marketing expansion taking us to a place where we should be sort of, you know, very close to best-in-class on our sort of solid waste margin.
Speaker Change: So we're feeling really good. The exact breadcrumbs we'll provide at Investor Day, but that's the broad sort of strokes of the outlook.
Speaker Change: Great, appreciate that. And then, you know, I think the commentary around three and a half billion dollars at least of debt pay down, you know, just that high level numbers gets you to a very low three times leverage.
Speaker Change: Is that sort of the, you know, the leverage ratio, I guess? Would that be a happy place to kind of continue to do M&A and maintain leverage? Is that how we should sort of read into that low three times leverage per form of the sale? Just any thoughts you could share there.
Speaker Change: Yeah, obviously the capsule is going to continue to ramp, and obviously with the organic growth, we're going to continue to organically grow the business, which is going to continue pushing leverage down.
Speaker Change: from a rating agency perspective, you want to maintain a leverage between sort of 3 and 3.5 to get to that investment grade rate credit rating.
Great. Thanks very much. I'll pass the line.
Speaker Change: Thank you. We now have Kevin Chang with CIBC. Please go ahead, Kevin.
Kevin Chang: Hi, thanks for taking my question. Maybe I can just ask on EPR, it seems like as you've gone on this journey, it seems like you kind of pointed to there being just more upside relative to...
Kevin Chang: for the original opportunities you saw in front of you and you kind of mentioned in the prepared remarks, Patrick, you know, you could see upside to $130 million. I'm just wondering, based on the investment you're putting forward, is there a way to think about...
Kevin Chang: I guess the blue sky earnings potential based on the capacity that you'll be putting into the market or when you think about the excess of $130,000, does that require more investment and more facility to service those new contracts?
Speaker Change: Yeah, like we said, Ontario is basically done, and that's, you know, the numbers that Luke's referencing coupled together with an incremental opportunity in Quebec.
What's still out there on the table is the Maritimes
as well as Alberta.
Could we potentially get to the blue sky scenario?
Kevin Chang: The answer is probably yes. Are we underwriting that? The answer is no, but it's certainly going to be more than 130 and potentially sort of slightly less than 200. But we're feeling very confident about our asset positioning and our positions in those markets again.
Kevin Chang: I guess, you know, just from an asset positioning perspective, we're in very good shape in a lot of those markets. So, and obviously with our relationship...
Kevin Chang: with Circular Materials and, you know, how we sort of built this program and designed the program. I think we're in a good spot to get our fair share. But as those bids continue to move forward, you know, we're...
Speaker Change: We're certainly, you know, at the top of the pile and we're continuing to push forward on all of them. And Kevin, I mean, as Patrick said, asset positioning, I mean, some of those markets, we can use an existing facility to drive incremental volume and profitability, so call it CapEx Lite. In another market, we may need to build a facility, but again, going back...
Speaker Change: The return profile of these, it's the type of business to win. We like to invest capital in places where we can have long-term visibility on predictable sort of cash flows. And the new contract supports that.
Speaker Change: And so, you know, I think it will be a combination in the end of that sort of blue sky between using existing and building net new, but both options, you know, I think fit within the overall overarching return on investment capital framework with which we evaluate all of our capital decisions.
Speaker Change: That's helpful. I mentioned my second question. I'm just wondering, like, in a post-ESL world, and obviously you'll have cash here to deploy towards your capital structure.
Speaker Change: Does that change how you think about the working capital seasonality you have? It looks like I guess in 2024 here will be the third year in a row where you have a
Speaker Change: pretty big working capital unwinding Q4, so you kind of have a heavier lift in the first three quarters. Does that change in a post-ES world? Is that something you can address as you kind of think of a pure solid waste business?
Kevin Chang: Yeah, absolutely, Kevin. I mean, a big component of that working capital seasonally profile you see today is driven by yes, it's the most seasonal of our business. It's a function of
Speaker Change: The larger Canadian exposure it has, plus just the sort of nature of the work that gets done. I mean, this year, you know, although the year-to-date investment in working capital is sort of exactly the same as last year, you can see more muted swings in each of the quarters.
Speaker Change: And, you know, the guy has, you know, Q4 sort of reflecting back to sort of zero. So, again, smaller, more muted swings than what you had historically.
Speaker Change: DSO profile of the business on a blended will improve to sort of a lower number and the gap over here to DPO is going to be more stable and narrower.
Speaker Change: So I think you will see exactly what you're anticipating. Our Canadian solid waste business will continue to have a seasonality profile, which you can see in like, you know, one of our other sort of peers that has a more sort of northeastern exposure, but more muted than where we are today.
Perfect. That's super helpful. Thanks for taking my questions.
Thanks, Kevin.
Speaker Change: We now have Jay Ravitch with Goldman Sachs, please go ahead
Jay Ravitch: Yes, hi, good morning everyone and congratulations to Greg and Billy.
Um...
Speaker Change: I want to ask, you know, as a consequence of the divestiture, could you just talk about any benefits from a simplification standpoint to, Luke, you just spoke about the working capital benefits. What about organizational structure? How much does this simplify the process, create the ability to do more M&A without potentially ramping up overhead from here? Can you just address, is that an opportunity?
Speaker Change: Well, Jerry, you know, what I'd say is, I mean, we've contemplated divesting of ES, you know, sort of several times and from a sort of, you know, disintegration perspective, I don't want to say it's standalone, but the thing is sort of, you know,
Speaker Change: Autonomous isn't the right word, but not massively intertwined. And that's what gives us the conviction of the speed with which we could do something. And so why I highlight that is, look, obviously not having that segment would simplify certain aspects. A couple less IT systems, you know, a couple less particular administrative functions that, you know, serve to support DS.
Jay Ravitch: But, you know, I don't think you're going to have a step function change in our overarching overhead. Most of the ES specific overhead is actually already burdened in the ES segment.
Jay Ravitch: So if you think about my corporate cost bucket, you know we have like a 10 to 15 million dollar reduction that comes out of that when ES goes away as opposed to maybe a pro rata number that you might be thinking of and again that's because a lot of the ES specific overhead is already in ES.
Jay Ravitch: Opportunities in solid as we're sort of doing something in, you know, yes, and there's a sort of balancing coming through of that. But if you think about that corporate bucket, you know, as we start doing the M&A, you get the sort of leverage that's going to sort of come out of that. And you're going to see, you know, we don't need incremental overhead investment.
Jay Ravitch: and so with what we have I think we have the base that's in place and if you roll forward the model of the next four or five years you can see what today is a sort of low three percent number you know gravitating towards that you know close one and a half to two percent number I think we expect to get meaningful leverage out of that as we grow the business from here
and others. Thank you.
Speaker Change: Got it. And shifting gears, you know, your inflation was really impressive this quarter, you know, good pricing and inflation actually slowed from last quarter. Can you just talk about what what's driving that and sustainability based on what you're seeing into October?
Yeah, I mean...
Speaker Change: I think it's all of the things that we and, to be honest, the industry have been talking about. I mean, you think about turnover rates, and Patrick spoke about this at our prepared remarks.
Speaker Change: Well, there's been a lot of focus on unit cost inflation like the efficiency and productivity associated with that sort of reducing turnover is real And you're seeing that come through and you're sort of, you know, cost inflation as well. R&M costs, you know, continue to moderate You know, as anticipated and we're getting the benefit of that. So Jerry say it's not any one thing But really a combination of all the things
Speaker Change: in conjunction with, you know, the pricing levels that, you know, we had a high degree of sort of visibility on. So, you know, it's this combination...
Speaker Change: and the recurring nature of it that gives us such sort of conviction on our expectations as I sort of set out for 2025. Again, not a specific thing, but all of the things together.
Luke: Great. And lastly, Luke, the RNG tailwind number that you pointed out, 25 to 30.
Speaker Change: million. It feels like you're leaving a lot of room for rent price volatility. You know, at $2 D3 rents, I think the incremental earnings could be closer to $50 million from the $4 million MNBTU. Can you just expand on that? Is that just say we just had a
Luke: change in the White House? Let's make sure we understand what's happening with D3 room prices and room to execute? Or are there any discrete contract structures that we should be aware of when we talk about just 25 to 30 step up?
Speaker Change: Well, Jerry, just to confirm, it's two million incremental MMBTU, right? We've got two million in hand, two million coming on. But even with that, you're right, there's some conservatism in there. One on the ring pricing, but two more so just, you know, two of those facilities of the net new ones are coming online, you know, in Q4 effectively.
Speaker Change: and there's a ramp up until these facilities actually start contributing at sort of full-run rate. So it's a volumetric conservatism, which I think is appropriate in conjunction with, you know, just some conservatism on rent pricing.
Sounds good. Thank you
Thanks, Jerry.
Speaker Change: Your next question comes from Devin Dodge with BMI Kappa 2 Markets.
Thank you.
Thanks. Good morning.
Hey Devin, it's Luke speaking.
Speaker Change: Getting the things in the trucks is one thing, but then changing the sort of driver behavior and making sure we have the process in place to capture is another. So we're, you know, seeing, I'd say, the infant stages of this, and you can certainly see in the markets where it's being employed, the incremental dollars coming in.
Speaker Change: I want to be clear, right now it's really focusing on blocked bins and overloading. Recycled contamination fees, which I think our peers in the industry have brought into, would be a sort of phase two for us.
Speaker Change: I mean right now we think the low-hanging fruit on the you know overflowing and blocked bins represents a sort of meaningful opportunity.
Exactly what that is.
Speaker Change: and we have a billion and a half, two billion dollars in commercial revenue.
and so one.
Speaker Change: Obviously, particularly on the backs of EPR in Canada, we're developing, you know, also a camera system with AI technology to determine contamination rates, etc., that give us the ability to charge back based on those.
Speaker Change: You know, possibility. But I think as we move into 2026 and 2027 and beyond, you know, the technology is getting very good, and we're piloting a bunch of different initiatives today that we think, again, will just be more value-accretive as we move into 2026 and 2027.
Speaker Change: Okay, good color there. Thank you. And then second question, just based on the EPR contract that you've seen so far, the current R&G project development pipeline, what should we be expecting in terms of sustainability related spending in 2025? And is there much carried over into 2026?
Speaker Change: Yeah, so Devin and Pelosi, I think 25 on the incremental growth trend probably looks something similar to 24.
Speaker Change: Again, gotta figure out which from the contracts when we're actually truck deliveries are gonna be happening on some of the pieces. So we need a little bit more time to get that iron out before we speak to you in Feb 25. But I would think directionally in line with what 2024 was is probably the right way of thinking about EPR and RNG for 25, 26, you know.
Speaker Change: Unknown because there's still a bunch of there's still a bunch of collection contracts that are sort of in flux. So I think that's still a bit of a moving target, but we'll have more color, more color.
Speaker Change: We will have more, we'll definitely have more color by our Investor Day to give, you know, basically an 18th month, a 24 month outlook and we'll sort of have the EPR, sort of what we believe the revenue and even a contribution to be from EPR at the Investor Day.
Speaker Change: But 26 on the face of it today will definitely be lower than 25.
Yeah.
Okay, makes sense. I'll turn it over. Thank you.
Thanks, Devin.
Speaker Change: We now have Corner Crypto with Scotiabank. Please go ahead when you're ready.
Speaker Change: Thanks for taking my question, and Patrick, I appreciate you addressing the recent incidents here. Just back to the ES sales process, you know, I hear you guys, you know, several
Speaker Change: potential bids are coming in. So I just want to understand, like, what would narrow down to the final winner, you know, considering all the kind of different sets of bids you are receiving? You know, you talked about tax.
Speaker Change: implications but are there any other considerations than selecting the final winner and is there also a possibility of a call or put option there?
Speaker Change: Yeah, so I think where we sort of fit today, you know, we went out, you know, went out to sort of 40 interested parties, you know, really at NDAs out to almost 30 different parties, which then translated into, you know, 10 to 11 different proposals.
Speaker Change: all sort of varying degrees in that sort of mix of strategic and financial sponsors.
Speaker Change: And, you know, obviously we have to manage this process now, so we, you know, I think...
Speaker Change: From our perspective, what we're doing is we're going to narrow the field down to four, which we did yesterday. And these are four people that I have met with personally, have relationships with, have a high degree of conviction.
Speaker Change: and I know depending on the structure and the tax structuring just given
Speaker Change: The tax bill goes up exponentially based on sort of increased value. So, you know, I think what was out on the street before, historically, was that it was a six and a half to seven billion dollar EV. You know, I think, comfortably, you're materially higher than that, and you can definitely move that number up five hundred to a billion from where we were. So.
Speaker Change: structure is going to be important to us so we will we will arrive there it's going to play out over the next little while I think where we sit now you know
Speaker Change: We if we do our job, we're going to push and we're going to try and get something done Obviously as Luke said, you know the outside data is having something done by the time we report
You know, but ideally, we'd like to get something done.
Speaker Change: in January and have this closed sometime in Q1 if we could. Now, that would be sort of a blue sky scenario, but from our perspective, we think it's doable and we're going to push to make that happen.
Speaker Change: and if I can follow up just on the housekeeping on solid base side if I heard correctly you guys are expecting volumes turning the corner in Q4 can you you know suggest what are some of the puts and takes driving that volume rebound in Q4 please thanks
Speaker Change: Yeah, hey Connor, it's Luke. You've got to remember the volume that we're seeing this year is really a function of the, you know, shedding activities that in large part took place last year.
So if you think about
The Q3 90 basis point sequential improvement over Q2
Speaker Change: If we're looking at Q4, I think you're going to have 150 basis point, 170 basis point improvement over Q3.
Speaker Change: And that's less about believing what's going to happen in the market, and that's just more the math.
Speaker Change: versus anniversary and what happened last year, right? Because last year Q4 was the minus 3.6 percent.
Speaker Change: which was just the sort of culmination of that sort of anniversary. So I'd say everything is working according to plan. Certainly you're seeing some volume softens in some of the markets as it relates to special waste.
Speaker Change: And I don't think we're unique in seeing that across the sort of footprint. I believe that is just sort of timing in 25 and beyond as things start back up, you'll see that coming back. But the underlying fundamentals across our sort of collection and post-collection businesses are strong.
Speaker Change: and you're seeing that playing out in consistent beating of our volume. Yeah, the numbers are negative, but again, a function of anniversary in last year's intentional shedding.
Speaker Change: and we're feeling really strong that this turns positive in Q4.
Speaker Change: , or . . . . . . . . . . .
Speaker Change: Okay, great. I appreciate the time and all the best for the process.
Thank you. Thank you.
Speaker Change: We now have James Shum with T.D. Cowan. Please go ahead when you're ready.
Speaker Change: Hey good morning and thanks for taking my questions. So I was curious are you are you willing to sell the used motor oil business separately and what would be the likelihood of that?
not
Speaker Change: We provide multiple service to those customers and I don't see any path that I would do that and given the market structure where we operate those UML businesses, it's a very good business and we're very easily able to manage spread in that business.
Speaker Change: And as you saw in Q3, even with the moves in Motiva and demand for base oils, we're able to maintain spread for the most part. Yeah, headline revenue is off a little bit, but by and large we maintain that spread. And, you know, it's been that way since we owned that business back.
since we started in 2008.
Speaker Change: Q4 is expecting the same at the top line but you're able to preserve you know the vast majority of those so they keep it at dollars. When the prices move really quickly you get an EBIT impact as you saw in Q3 but by and large you know you preserve that.
Speaker Change: collection-based milk run type businesses that you know we've had for a long time and we're a big fan of and as Patrick said works very well within our broader EIS business.
Thank you.
Speaker Change: Okay, great. Thank you. And then for Q4, you mentioned the potential for severe disruptions related to storms.
Speaker Change: But is it possible that you'll actually get a storm benefit from the prior hurricanes? Just any color you can provide there would be helpful.
Speaker Change: Yeah, I think it had the potential to be severe disruptions, I think at the end of the day the management view.
Speaker Change: Weathered the storm and we're not expecting any severe disruptions and yes I mean in theory there should be the potentially for some tailwinds of incremental volumes in the southeast Around the area was where we have operations where the hurricane
Speaker Change: Yeah, James, I think we had some light softness in special waste, like some of our peers, and I think now, as Patrick said, absolutely, you'll probably get the benefit from some storm waste, and that should sort of offset that special waste phase. But yes, Patrick was highlighting the excellent work of our team to avoid disruption.
Okay, got it. Thank you for clarifying. Appreciate it.
Thanks James.
Speaker Change: We now have Stephanie Yee with J.P. Morgan. Your line is open.
Stephanie Yee: Hi, good morning. I was going to ask, when you say that you're...
Speaker Change: Good morning. When you say that you're going to use part of the proceeds from the ES sales to buy back stock, do you mean from your largest shareholders and do you have certain targets in mind?
Speaker Change: Mechanism 2BD, and that, you know, is an ongoing discussion, obviously, but I think, you know, as the process continues to evolve, we'll have a clearer answer on that in time. But, you know, I think from our perspective, you know, we just, we have to figure that out, and we will over the next little while.
Speaker Change: Okay, understood. And just on M&A, as you're thinking about M&A into next year, have you seen any changes in the valuation levels given just people's interest rate expectations?
Speaker Change: Yeah, remember, a big part of the arena we play in is in the, you know, we all reference multiples, etc. But at the end of the day, a lot of the companies we are buying, where we've sort of...
Speaker Change: you know, decided to play has been sort of in the 1 to 10 million of EBITDA range. The lion's share of those...
Speaker Change: Business owners don't even really know what multiples are. Generally, a lot of them don't have financing anyway, so they're not overly concerned about being levered to interest rates, etc. So we haven't seen, you know, any real material movement, but at the end of the day, those...
Speaker Change: You know, those acquisitions to us, again, have been sort of in the same zip code and
Speaker Change: We believe that, you know, we're going to be able to execute on a very robust pipeline as we move into 2025 as we bring in the proceeds from EES. And I think those acquisitions will become highly accretive, get tucked into existing regions where we already own assets.
Speaker Change: specifically have underutilized post-collection assets, so we're expecting 2025 to be a great year from that point.
Okay, understood. Thank you.
We now have Brian Butler with Stiefel on the line.
Brian Butler: Good morning, thanks for taking the questions. I'll go start with maybe on the commodity prices, it was a little bit of a headwind. Can you talk about maybe where commodity prices have averaged year to date and where they are right now and what kind of sensitivity that looks like maybe in third quarter or going into 2025?
Hey, Brian, thanks for the question.
Speaker Change: You know, when we gave the guide for Q3, coming out of Q2, Kamadi about $225 Canadian, right on the basket, and that's what we were expecting. I think what you saw in Q3, that was down more like $210, $215.
So you gave up that sort of $10, $15.
Brian Butler: at the revenue line as a result of that change. Post Q3, as you know, continued downward pressure concerns of the sort of northeastern oversupply with the port strike.
Brian Butler: I think you're seeing that in Canadian dollars south of 200 today, it's maybe more $180, $190 level.
Speaker Change: You know, I do think folks believe that this is going to come back.
But if you line today's pricing up
Brian Butler: with the average you realized in 2024, 2025 would be a slight headwind.
Brian Butler: Right, so you'd have a little bit of pressure from that pricing and that would have a little bit of margin impact as well
Brian Butler: You know, modest dollars, I think it's more than 5-10 million dollars headwind at the revenue line.
Brian Butler: prior year, you know, the 2024 average, and so that would be a slight sort of margin tailwind into 2025.
Speaker Change: Okay, that's that's helpful. And then I guess on the industrial revenue bonds that you guys did, you know, how, how big or how large of a part can that become of the GFL is kind of debt stack? And how long does that take? And is that savings 100 basis points, the right place to kind of model it? Or is there maybe some additional savings in there?
Speaker Change: Well, I mean, 100 basis points savings is a function of where our current debt is and where the current sort of debt markets are, right? I think that the idea we were showing, we're now accessing instruments previously, you know, save for higher credit quality than we historically were. So we're going to continue to look at it, and it is a very...
Speaker Change: coupon-efficient sort of structure, which is I think why all of our peers use it.
The counter to that is
Speaker Change: It's typically not the largest sort of component of your cap structure, and that's just because the regulations and Requirements for it is you're really tying it to specific capex in specific states
Speaker Change: Now landfill spend is typically a great capital deployment where these are used.
Speaker Change: And, you know, we do spend hundreds of millions of dollars a year to delay a vote cap end. So we're going to be actively looking at it, but when you look at our peers, you know, we assume that that's what normal course looks like in the future. I think it's, you know, more like 10 to 20% of your cap stack as opposed to 50% plus.
Thank you.
Okay, great. Thanks for taking the question.
Thanks, Brian.
We now have a question from Stephanie Moore with Jefferies.
Your line is now open.
Hey, this is Harold Lontoff, Stephanie Moore. I guess...
Speaker Change: You know, labor inflation has been around 4-5%. We've been hearing from some of your competitors.
Speaker Change: I guess, you know, are you seeing, is it the same for what you're seeing? And then if you could just provide a little bit more clarity on what you're seeing on the labor front line in terms of turnover and stuff, if you could provide any details that are bigger. Thank you.
Speaker Change: Yeah, thanks for the question, Harold. I mean, the labor dynamics is something near and dear to us that we're watching closely. And I think, you know, it continues to sort of track favorably. I think that, you know, four to five percent labor inflation number is probably the right overall, as you think about the industry. I do think, as we've said,
Speaker Change: We have benefited from our secondary market focus whereby we've seen lower wage pressures in the secondary markets and what we see in the dense urban areas and I think that allows us to blend to something a little bit better than peers and so we're probably at that sort of low force level
Speaker Change: and we do credit, you know, the secondary market focus to that. On the turnover, look, we're extremely happy with the direction of travel and the turnover. I remember we were as high as, you know, in the 30s.
Speaker Change: came down to high 20s, you know, it was down to mid 20s and now, you know, we're touching 20% on the voluntary turnover level. So the trend line is moving in the right direction and you're seeing that come through in the sort of productivity and as a result of financial performance.
Speaker Change: So we're going to continue to be actively engaged in managing that and I think the macro backdrop is supportive
Patrick Dovigi
Thank you, that's all for me.
The
We now have Toby Somer with Truist on the line.
Speaker Change: Thank you. Post divestiture, do you intend to change or see opportunities maybe informed by your M&A pipeline to change the mix between the US and Canada in any appreciable way?
Speaker Change: No, I don't think so. I think, you know, I think from, again, where we said, again, we operate ten provinces today.
Speaker Change: 25 states in the U.S. I think largely what you'll see is just continued buying businesses.
Speaker Change: and then defying those existing markets will re-operate, typically around markets where...
Speaker Change: Again, we have capacity in post-collection facilities, and we think that's where we're going to get the highest returns on invested capital.
Speaker Change: I do think the opportunity obviously in the US continues to be larger just from a market size and scale perspective
Speaker Change: But I don't think you'll see us change the strategy that we've had over the last sort of 17 years. I think it'll just be largely the same, but obviously more getting done in the U.S. just given the size of the market that we operate in.
Speaker Change: impact your thinking potentially on M&A, potentially taxes, like what does that mean for the company do you think?
Speaker Change: I don't think it means much because we've been able to both as a company and as an industry
Speaker Change: to basically weather any sort of level of government. I mean, when we started the business, you know, you had the Obama administration.
Speaker Change: And then, you know, that sort of moved to Trump, and then that's moved now to Biden, and now back to Trump. I think, you know, I think the one benefit that I think we're all looking for as an industry, which could be material, is, you know, whether
The Republicans bring back in bonus depreciation.
Speaker Change: Some of that legislation has been tabled now for a while, sort of sitting there as bonus depreciations rolled off. Will that sort of come back on?
Speaker Change: I think the thought is that, or at least the hope is that it will come back.
Speaker Change: given that was something initially supported by the Democrats and not particularly with
Speaker Change: the Republicans having the House and the Senate, that that's something that will probably happen. But, you know, outside of that, I don't think there'll be much change from us in terms of how we operate or where we operate or what we do at the U.S.
Thank you for your help.
Thank you.
Speaker Change: We now have a question from Buddy Wiseman-Barker with National Bank of Canada. Please go ahead.
Speaker Change: Hey guys, just filling in for Rupert here. I appreciate you taking my questions.
Speaker Change: So just back on the environmental service segment, thinking about the tax, I think last quarter you said $500-600 million range was a good way to think about it, is it fair to expect that it's higher now with more visibility on a higher price as you've gotten throughout the process or maybe closer to the top end of that range?
Speaker Change: Yeah, I think that, you know, that's a challenge. Now we're getting into the weeds, we're getting into the specifics, and again, as the enterprise value moves up, so does the taxes, so we're looking at the most.
Speaker Change: The most effective way to structure it that maximizes long-term shareholder value.
Speaker Change: while, you know, addressing the issues that we want to address as we talked about general corporate purposes, potential share buybacks, and then the three and a half billion dollars in debt repayment.
so
Speaker Change: We don't have the exact specifics today. We are confident in the $6 billion net cash number. So, you know, stay tuned in terms of what that ultimately looks like as we move through the process. But yes, ultimately, that number that was cited last was tied to a much lower EV than what Patrick's speaking of today. And just very simply, as the EV goes up, that number goes up.
Speaker Change: I think that would be considered stale and it's a bigger number because the EV is bigger and that's where all the comments Patrick said is what we're contemplating.
Speaker Change: Okay, thank you. And you talked a bit about the corporate overhead impact there, but how does the maintenance capex for the environmental services compared to the solid waste segment?
Okay, thank you. That's it for me.
Speaker Change: Thank you, I can confirm that does conclude the Q&A session and I'd like to hand it back to Patrick Dovigi for some final comments.
Patrick Dovigi: Thank you everyone for attending the call and we're looking forward to catching back up with you and we have some updates both on ES and certainly with our Q4 results as we move into next year. So thanks for attending and thank you for the support.
Speaker Change: Thank you all for joining the GFL third quarter 2024 earnings conference call. I can confirm today's call has now concluded. Please enjoy the rest of your day and you may now disconnect from the call.
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