Q2 2025 GFL Environmental Inc Earnings Call
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Good morning, everyone.
Thank you for attending today's T. F O second quarter 2025 earnings call. My name is Gary and I will be our moderator today all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone.
Pat.
I would now like to pass the conference over to our host Patrick <unk> founder and CEO or CFO. Please go ahead.
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 the forward looking disclaimer before we get into the details.
Thank you Patrick good morning, everyone and thank you for joining we filed our earnings press release, which includes important information in the press release is available on our website.
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 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 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.
This quarter saw a continuation of the broad based outperformance with which we started the year driving results ahead of expectations, despite multiple external headwinds.
We achieved solid waste adjusted EBITDA margins in the second quarter of 34, 7%, our highest Q2 in our company's history.
And our revised outlook for the remainder of the year is better than we originally anticipated.
This consistent delivery of record setting performance once again demonstrates the ongoing dedication and capabilities of our employees and I want to again, thank each and every one of them for their commitment to team green.
Our top to bottom beat against expectations was achieved despite FX rates and commodity prices moving against US since we provided the Q2 guidance back in May. We believe this is a continued demonstration of the quality of our asset base the effectiveness of our value creation strategy and the resiliency of our business model.
Both pricing and volume were higher than expected for the quarter and continued to trend above our initial guidance the intentional shedding of lower quality revenue and disciplined pricing strategy ensures we are generating appropriate returns for the high quality services, we provide.
Because of this we are increasing our pricing guidance and now expect to deliver over five 5% pricing for the year.
Volume was positive for the third quarter, neuro and accelerated 150 basis points over the first quarter.
This result was achieved even with macro headwinds impacting construction oriented with volumes and industrial demand we.
We believe the current tariff environment and broader economic uncertainty are limiting activity levels of many of our industrial customers, having a flow through impact on volumes, especially in a roll off collection.
Tailwind from our recent strategic growth investments and EPR together with the positive underlying trends arising from our market selection are more than offsetting these demand side pressures.
Although our exposure to cyclical end markets as low overall, we remain well positioned to benefit from any recovery in the macro economic environment.
The effectiveness of our revenue related strategies is also reflected in our margins, where we realized a 230 basis point expansion over the prior year.
Lower labor turnover together with continuing progress in implementing our self help initiatives and M&A synergy realization all continue to contribute to our industry, leading organic margin expansion as highlighted at our Investor day, we see a clear path in the near term to low to mid 30% adjusted EBITDA margins, which should result in higher free.
Cash flow conversion and returns across all of our asset base.
On M&A, we completed three small tuck in acquisitions for the quarter and are anticipating closing three more tomorrow, our pipeline remains robust and we remain highly confident in our ability to meet or exceed our M&A capital deployment targets for 2025 and beyond.
The backend weighting of this year's M&A activity gives rise to a lower current year contribution, but sets us up for a larger rollover amount into 2026 positioning us for yet another year of exceptional growth.
The strength of our first half results together with the opportunities we see in front of us allow us to increase our full year guidance, even in the face of economic uncertainty, we see in many of our markets. Our 2025 guidance is industry, leading organic revenue growth and adjusted EBITDA margin expansion Luke will walk you through the updated guidance in more detail, but we are.
<unk>, our adjusted EBITDA target by $50 million or two 6% before the considering the translation impact of FX I will now turn the call to Luke who will walk through the quarter in more detail and then I'll share. Some closing comments before we open up for Q&A.
Thanks, Patrick.
Similar to our first quarter discussion all of our financial results and the associated analysis exclude the contribution from Es from the comparative prior year period.
Consolidated revenue for the quarter of $1 67, 5 billion was nine 5% ahead of the prior year pro forma for divestitures.
<unk> and volume were both ahead of plan, whereas commodity prices surcharges and contribution from FX were all headwinds to plan as the external factors on which these amounts are calculated change significantly between the time, we gave our guidance at the end of the second quarter.
Quarter revenues would have been approximately $10 million higher if not for these exogenous changes.
The carry forward of our strong first quarter pricing along with incremental pricing actions enacted in response to ongoing cost inflation in select markets contributed to pricing of five 8% 30 basis points ahead of plan.
For the full year, we now expect to realized pricing of five 5% to 575% 25 basis points better than our original guide.
Volume was positive in both of our geographies with over 200 basis points of sequential volume growth acceleration in our U S geography, as we move past the weather related headwinds that impacted the first quarter.
Positive volume was achieved inclusive of both roll off polls and C&D landfill volumes being down and what we ascribed to macro related slowdown.
Consistent with the first quarter recyclable volumes associated with the ECR related activities continues to be a tailwind.
Second quarter, adjusted EBIT margin was 37% 230 basis points higher than the prior year and 60 basis points ahead of our guide.
2020 for Michigan residential divestiture, the net impact of lower fuel prices and R&D contributions were a tailwind to margins, whereas commodity prices and acquisitions were a headwind. Excluding all these items underlying solid waste margins expanded 170 basis points.
Adjusted free cash flow was approximately $137 million.
A result, better than plan on account of the adjusted EBITDA outperformance and the timing of Capex.
$190 million a year to date investment in working capital is consistent with our typical seasonal cadence and is expected to largely reverse by the end of the year, although with the revenue growth outperformance. We now expect a modest investment in working capital for the year as a whole.
As Patrick said, despite the multitude of external headwinds the success of our first half results set us up to increase our guidance for the year revenue is now expected to be approximately $6 five five to $6 $5 75 billion based on the FX rate of 137 for the remainder of the year.
Call our original revenue guidance of six five to $6 55 billion was based on the then FX rate of 141 every one point move in FX is about $30 million impact of annualized revenues.
Our updated guidance would have been six six to five to 665 billion on a constant currency basis, representing a one 7% increase over our original guidance.
The updated guidance assumes pricing of five 5% to 575% volume a positive $25 to 75 basis points and net M&A contribution of 40% to 50 basis points.
<unk> assumes todays commodity in RIN prices and the current macro environment persists any improvement to these variables will provide upside to the guide.
The contribution from M&A incremental to what has been included in the guide we will also be additive.
Adjusted EBIT guidance increases to $1 95 to $1 970, $525 million increase at today's FX rates or a $50 million increase over our original guide on a constant currency basis at the midpoint year over year margin expansion increases to 120 basis points and ink.
<unk> 20 basis points over our original guidance, resulting in consolidated margins of just under 30% as the strength of our base business performance more than offsets the industry wide margin headwinds from you did industrial and construction related volumes and lower commodity prices.
In terms of adjusted free cash flow the $25 billion of incremental adjusted EBITDA gets offset by incremental cash interest expense associated with deploying the es proceeds into share repurchases faster than originally anticipated and capital deployed into M&A.
As I previously said, we now expect a modest working capital investment for the year as well as net capex of approximately $750 million an increase over our original guidance largely attributable to the acquisition of a strategic property that was previously being leased.
Expectation is that these incremental investments will be largely offset by reduced cash taxes from recent changes to U S tax legislation.
We are therefore, reaffirming our $750 million of adjusted free cash flow expectation.
As to the third quarter of 2025, we expect consolidated revenue of approximately $1 69 to $1 695 billion and adjusted EBITDA of $525 million, which implies an adjusted EBITDA margin of about 31% and continued margin expansion over the prior year pro forma for the Es sale Q.
<unk> adjusted free cash flow is expected to be approximately $175 million inclusive of a $120 million in cash interest $250 million and base Capex and $20 million net recovery from working capital and other operating cash flow items.
I will now pass the call back to Patrick who will provide some closing comments before Q&A.
Thank you look as I said in the quarter, our financial performance continues to prove the quality of our assets and market selection and the effectiveness of our strategic plan that we laid out at Investor day.
The operational resiliency of our business in the face of multiple external headwinds that we demonstrated with our results. This quarter further reinforces our conviction that <unk> is uniquely positioned for industry, leading financial performance and value creation for all of our shareholders in the near term.
I'll now turn the call over to the operator to open up the line for Q&A.
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Okay.
Thank you our first question comes from.
So perhaps khan from RBC capital you May now proceed.
Okay, great. Thanks, and good morning, just before getting into the business. There are a bunch of headlines in the press over the recent months around the potential options the company might be considering for the GSP business, maybe I wanted to give you an opportunity to talk about.
How youre thinking about that business and some options on kind of second part there maybe.
Maybe you can just give us some color on the current composition of that business across aggregates and some of the other business lines and just sort of a third clarification question there was a $24 million.
Monetization or a gain that was reflected in the quarters can you just clarify that as well. Thanks.
Yes, I have a hard yes. So as you know I mean, I think we carve that business sort of the GFS book in 2022.
So very high on it as a private business now for approximately three years I think over the at the time.
Our equity value in that business was valued.
On the books is somewhere around $250 million.
I think you mentioned a footnote of just re basing of that.
That $25 million is really nothing it's really.
We did an acquisition in one of the.
The principals of that business that we bought.
We actually ended up taking equity in VIP. So technically we sold them equity at a much higher value. So it's sort of that rebate, but by and large I think what youll see through the process that you know we've seen some headlines recently.
We're looking to conclude that process over the next.
Two or three weeks I think we are on the five yard line, we're down to two to two final bidders and.
We're in the process of just winding that process down and I think youll see a very favorable result, but.
We'll share that when the final party is selected and we get to the market, but I think what Youll see is a rebase of our equity significantly higher consistent with what we.
Thought values that that business could be over.
Nir.
Near the sort of medium term.
As we said it would be I think from our perspective.
The partial monetization not a full monetization we've continued to see a significant amount of opportunities in that business, but there will be a dividend that comes back to GSL.
To use again for further M&A within the existing portfolio.
And certainly at these levels continued share buybacks with the proceeds that we get from that sale process.
Like I said nothing is 100% done until it's done, but we're feeling very good about it and we think that we'll have something to report.
Next coming weeks.
Okay.
Great and then just on the on the margin side. Good progress this quarter it sounds like you're pointing to 31% for the next quarter. If you can maybe just recap will give us an update on some of the self help levers and the improvements that you sort of highlighted at the Investor Day, where you are on those and what you expect to contribute to this full year guidance here for the rest of the year. So just a bit of an update.
On the margin side please.
Hey, good morning, it's look it's a great question and obviously something that we're really excited about you can see it in the current quarter results exceeding what we're already we think pretty sort of ambitious.
Expectations or goals and it's as you said a function of all of those levers contributing.
So the overall sort of cost you've already.
Starting with the top line you can see the pricing outperformance for the current quarter I mean, one of the self help levers we had talked about at the Investor day was on the surcharges line right and Theres, just a whole host of incremental fees that we should be getting for the services, we provide and we've talked about initiatives to get those in place and go out and harvest that off.
<unk> and while we're early stages, it's starting to contribute and so some of that price outperformance I think we had articulated a $40 to $80 million opportunity for surcharges by the time, we got to 2028.
Very early stages, but we are starting to realize some of that benefit youre seeing that come through on the top line as you go down the P&L.
Another key opportunity was labor turnover and just the benefits that will come from attracting and retaining talent and keeping them in the doors for longer and youre seeing that it continued sequential improvement in the turnover rates still not where we ultimately want to be but it's probably another 102 hundred basis points improvement in the current quarter versus <unk>.
On a year over year basis, and that accrues into that that labor line right. All in labor you can take it was $25 35 per cent of the P&L.
And obviously improving that turnover is a key part of driving productivity and cost savings and you're seeing that come through and then you know as you just think about the broader buckets of costs.
We've talked about synergy realization, we talked about procurement optimization each of those levers are being pulled and the team is being able to deliver in excess of as I said, what was already pretty ambitious 2025 expectations. So you are right Q3, the expectation as it continues for the guide the year as a whole.
We now see an incremental 20 basis points at the midpoint over what was already are starting 100 basis points.
Sure.
Really excited for the continued performance and proud of how well everyone is executing on these strategic plans.
Thanks very much.
Thank you.
Our next question from Stephanie Mark from Jefferies.
May now proceed.
Hi, good morning, Thank you.
You know Patrick you know previously.
About your M&A pipeline.
The majority of the pipeline you are looking at tuck in acquisitions within existing markets I'm. Just curious if maybe that has changed at all if you look at the back half and then if you could maybe speak to the visibility that you have in the second half of this year.
Yes, no problem. Thanks, Stephanie.
I think from where are we sort of sit today.
First there has been a very busy first half of the year.
One with the original the carve out of the business and then.
I would say the the recapitalization of the infrastructure business combined to sort of what we do every day on the solid waste side I think we've deployed.
Just over $300 million of capital today into M&A.
I think we guided to $700 million to $900 million spend this year on M&A.
We are fully on track to do that fully on track to achieve the high end of that range. So visibility is very good.
And although there won't be a large in year contribution from the M&A I think setting us up perfectly for an outsized year of growth in 2026, because of the rollover effect of that M&A, that's going to close in the back half of the year here. So.
Very good visibility in terms of moving to new markets nothing has changed on that thinking again continuing to focus is on densify in existing markets, where we have underutilized post collection assets.
We think that's going to get the highest returns on invested capital.
For the for the time being that's where we're focused and we don't see any reasons to step outside of those markets that were currently operating in today.
Got it. Thank you and then maybe just a follow up to the volume performance.
Look I think at this point, we've all seen or heard that obviously the industrial economy is really weak there can be lumpiness with special waste volume, but your volume performance definitely continues to be a clear standout. So if you could just kind of talk about the puts and takes for the volume performance in the quarter, specifically with you now that both regions seeing positive contribution.
Yes.
Yes, Thanks, Stephanie look here.
Happy to walk through it again performance that we're sort of proud of and I think it speaks to some of the strategies that we've been talking about it both in terms of market selection as well as the strategic investments that we've been sort of making the market selection piece again, we've spoken to the benefit we have of having large businesses in.
The U S southeast where a lot of people are sort of moving to.
New houses yields new business, which yields.
New opportunities for US and then also a regulatory environment in Canada as a whole tends to historically has been a big volumetric business just by virtue of increased regulation that drives volumetric opportunities and we're certainly seeing that with EPR, which ties into the sort of strategic investment right. The regulatory change gave opportunity for capital deployment.
And we saw as attractive return profile and as you know we have heavily invested in that and there's been a couple of years. We've been on these calls talking about all of this investment we've been making but now Fortunately. We're finally at a time when we get to see reap the rewards from that and it's sort of playing out as anticipated.
Canadian volume was six 3% for the quarter now it was $6 nine in Q1, but Q1 benefited from a one large event driven sort of destruction of a car plant. It was about $10 million of transfer station volume. We currently called out if you exclude that Q1 was four six so you're really sequentially increasing to six three.
Canada for Q2.
Now EPR is a big driver of that as it was intended to be and so if you back that out for Canada, but sort of two 5% volume growth.
Which I think is just a sort of a function of the quality of the business that we have and a little bit of a catch up of Q1, because recall that was a little bit sort of muted by virtue of the real sort of winter that was experienced in many markets. The U S is arguably the more sort of a shining star.
Volume growth returned positive from what we had in Q1 Q1 heavy weather related impacts.
Print positive volume growth there, despite the industrial and construction oriented slowdown I think.
Really speaks volumes part and the use of that word.
The business that we have there I mean, if I look at CMT waste was down 8% quarter over quarter, which I think is a function of that sort of macro piece now as we said in the prepared remarks, we've never been able to grow a business that had.
High degree of exposure to the most cyclical ends of the market and that's really coming out of our historical leverage profile. So I think we have more de minimis exposure to some of the soft areas, but it's also just a function of benefiting from the investments that we've been made.
Both organically and Inorganically and we're excited to sort of continue as we go forward.
Thank you. Our next question is from Patrick <unk> from from Raymond James You May now proceed.
Hey, guys. This is Tyler.
Can you hear me.
Yeah, we can hear you.
Hello.
Alright, yes, Hello, we can hear you sorry.
Okay.
Okay. Good deal.
Can we can we go back to the volume thing I just need some clarification, because I think it's a little bit confusing. So you print it two 5% volumes, but my hunch is.
The vast majority of that with EPR and R&D investments layering in is that correct and two on the 25 to 75 basis points on volume guidance.
Is that excluding EPR in R&D or is that what we're going to see in the table does that makes sense.
Yeah, Todd I'm not sure. If you just heard my response to Stephanie is that just sort of covered a bunch of that but just to reiterate.
<unk>. If you think about if you think about for the quarter ETR is contributing about $2 $25 million of the global volume number right. So certainly EPR is providing a tailwind to the consolidated volumes now even without that Canada volumes positive two 6% in the.
U S volume is also positive, but yes, you got a big chunk of it for being EPR now remember EPR was in our base guide alright, so for the year as a whole. The initial guidance was assuming we're going to be call. It roughly flat on volume I think we said minus 25% to positive 25, the new guide takes that up 50 bps.
So now, we're saying 25% to 75, a little bit of that outperformance over our original guide is incremental EPR benefits right. So we're doing a little bit better than what the pro forma was an EPR volume, but the balance of that incremental volumetric guide is just broad based volume across the system.
On R&D.
By virtue of our arrangement very de Minimis amount of our R&D EBITDA is actually manifested in the revenue line right. It's just all the sort of JV EBITDA pick up so RMG really is not factoring in to the volume story.
But ETR is although I would say the guidance raise is less about EPR and more about broad based outperformance.
Okay. Okay. That's very helpful. I appreciate that and then I know the Capex is obviously split between U S and Canada.
Just any broad color on the dollar of what bonus depreciation means in 'twenty five and if I go back to the analyst Day. I think you said that you were expecting call. It a mid 40 percents free cash conversion.
Bonus depreciation does that may be geography, say 100 basis points or something like that just any any color there.
Yes, Great question, Tyler and obviously very topical.
For the current year bonus depreciation split to be about $25 million to $30 million tailwind right and that's really as you said coming out of the U S. Dollar capex, but as we said in the prepared remarks, I really have a little bit of extra capex really $25 million associated with one transfer stations that we used to lease and we had to buy because we tend to lose it.
And then a little bit of working capital investment. So that's sort of a wash at the free cash flow line, but $25 million to $30 million bonus depreciation benefit this year and that ramps up.
$40 million next year, and then grows from there obviously contingent on the U S dollar qualifying capex spend but to your point on the free cash flow conversion.
That's a very important one.
If you think about the page that you're referring to the Investor day deck, We said hey over the next couple of years to get up to 28, you got roughly $9 billion revenue $2 $93 billion of EBITDA, and we're going to be converting sort of mid four.
Low to mid 40% free cash flow conversion and what were the drivers of that well. It was the EBITDA margin expansion capital intensity is what it is we're going to enjoy a reduction in cash interest intensity as we migrated towards a more industry norm the level of cash interest.
Burden, but partially offsetting that was going to be this ramp in cash taxes right. Because we're now sort of a cash taxpayer and we're going to go from cash taxes, historically being 30% to 40 basis points of revenue that was going to ramp up to the sort of 200 basis points of revenue that it represents for all of our peers, what the bonus depreciation is going to do.
<unk> is materially.
Slow down that ramp in the cash tax burden. So all other things being equal if you go back to that Investor Day, We said $2 $93 billion of EBITDA at call. It 43% to 45% free cash conversion that would have been $12 75 to 13 and a quarter of free cash and now you'd say the 50 million.
Better than that right and so to your point I think it would be close about 200 basis points of incremental free cash flow conversion that 28 is a long way away and there's obviously a lot of moving pieces, but absolutely wherever we were going to get to before we probably now have 100 to 200 basis point tailwind and that's going to allow us.
To hit that four handle and go through that in a free cash flow conversion faster than we otherwise would have.
Alright, Okay no great color. Thank you guys.
Yeah.
Thank you. Our next question is from Kevin Chiang from CIBC Wood Gundy you May now proceed.
Hey, Thanks for thanks for taking my question.
Good morning.
Yeah.
Look you've kind of highlighted the strong organic growth in Canada EPR is obviously.
A contributor there it does feel like EPR coming in as expected, maybe a little bit better just wondering I know in the past you've talked about as a team kind of upside to EPR EBITDA realm.
Relative to the base cases is that kind of what we're tracking to now and and or.
Thats something we could see in future years like in 2006 2007 as you continue to build on this ETR ETR revenue stream.
Yes, so Kevin what we're seeing in the current year is not those incremental opportunities. So it's going to be clear. This is really picture a scenario of Montreal, we opened our mirth to deal with EPR, we're expecting to do volume of 100 in the in the first year.
We're actually doing volume of 110, because our customer base is using our facility.
So on a temporary basis as other sort of components of EPR get up and running so I think we're benefiting from some transitional style volumes that effectively are going to allow us to ramp to the $130 million of EBITDA faster than we otherwise would have because if I use that.
<unk> are all examples of this incremental volume that are enjoying today I'm not going to have that necessarily into next year, but incremental contracts are going to come on that will effectively replace it. So I'd say, what we're enjoying today is a modest.
Sort of pick up of just volume associated with the transition to EPR now the broader opportunities remain.
Let patrick speak to that but we still see across the country incremental opportunities as we have before Patrick do you want to provide some color on that.
Yeah.
Yes. So if you look at EPR I mean, there were.
As we talked about there was a couple of opportunities.
One that was in sort of Maritimes throw in Canada.
Which we were not successful on there's still a couple of opportunities in Quebec that we feel we're very well positioned for.
And then as Western Canada comes online.
Again, very well positioned with our assets but.
Everything is tracking to plan I think the investments we made.
Are going well.
And are on plan. So I think if we can just keep up this trajectory. We're it will play out as we anticipated.
That makes sense and maybe just a quick modeling question I guess, maybe this is for you Luca.
Obviously.
A lot of M&A this year and it seems like the pipeline is huge.
You spoke of outsized contribution in 2006 from M&A completed this year as I think of how that impacts.
The corporate line item should we assume that stays flat because if I recall at the Investor Day, you kind of talked about as you build out the.
Platform here that corporate costs get a little bit more incremental leverage into the bottom line is that kind of the right way to think about it as we as we think about the earnings contribution on a consolidated basis from from this.
Elevated M&A activity.
Absolutely Kevin I think you are thinking about exactly right I mean, we've made investments over the last years into the corporate office as we grew as a public company and then.
Most significantly over the last couple of years in it related infrastructure and cloud et cetera, but I think where we're at today is we have the corporate.
Punctures that we need and we do not see the need for material incremental investment. So now is the time to drive meaningful operating leverage on that line recall we had.
Levered that line down to sort of a 253% of revenue, but then with the divestitures both the smaller pieces through 'twenty three and then the es divestiture that cost bucket so to jump back up to the sort of 4% as we retained a lot of that sort of corporate infrastructure now we fully anticipate from a modeling.
Perspective for that item to sort of grow organically yet of sort of low to mid single digit number, whereas the topline will be able to grow at a faster clip by virtue of the M&A and you should get the operating exact operating leverage that youre describing.
Yeah.
Perfect.
Great clarification. Thank you very much guys.
Thanks, Kevin.
Okay.
Thank you next question is from <unk> Gupta from.
Scott do you think you May now proceed.
Thanks, and good morning, guys.
Probably expressed on the guidance for revenue and EBITDA.
Looks like.
FX.
S shaving off 52, like two thirds, 60% to two thirds of your revenue and EBITDA for the full year what are the remaining items that are driving the guidance.
I think you had some M&A sort of catch up from Q1 on gas and then you had some incremental M&A I guess.
<unk> seem to bump up the volume and pricing assumptions as well can you put some numbers into the buckets in terms of whats driving those revenue and EBITDA attribution.
Hello.
I'm, sorry, I think we had some technical issues can Conor can you hear me.
I can hear you can you hear me now.
Yeah, I'm, sorry economy, so I'm not sure where you cut off but what I'll describe is for the update to the guidance. So really what you have incremental M&A completed.
As I've said, we have sort of $70 million to $80 million of incremental M&A contribution recall when we gave the guidance for the year of the $105 million, we said roughly $30 million of that was already included in the base Guide has that happened on January one. So you have an incremental call it $70 million to $80 million coming out of M&A.
You then have $75 million of FX headwinds going against you and that's just the translational impact of FX. So those are a bit of a wash. So what are you left with youre left with organic growth and where we're effectively bringing up pricing 50 bps, bringing up volume roughly sort of 50 bps right are driving that and then going against that on the way.
Gaining side is really commodity and fuel surcharges and commodity price.
$10 million sort of headwind versus your original guide and same with fuel surcharges and that just a function of where that sort of diesel price. When you have a $510 million headwind on the fuel surcharge line just as that re rates tied to sort of the diesel pricing. So you put those those are the pieces that at the revenue line and the EBITDA bridge just sort of.
All of those accordingly right.
M&A comes in at slightly Decretive margins initially price all falls to the bottom line volume falls at an appropriate margin. The fuel surcharge really doesn't have an impact falling down to EBITDA as youre getting an equal and offsetting change too so the diesel costs.
And the commodity falls all to the bottom line is that $10 million.
Straight flow through the FX is at roughly the consolidated margins and when you do that bridge. What are you going to be left with is an incremental EBITDA tick up and that's less about the revenue, but just more about the sort of operational efficiency productivity and self help levers, we've been realizing and getting incremental benefit from that in the current year period.
Okay. No that's really helpful. Thanks, so much for that.
And then in turn.
The second quarter.
The margin drivers I think that you guys had a pretty solid margin expansion.
Compared to the rest of the industry I mean, I think you talked about you know setup unique markets for you guys and.
Some other levers.
Is there is it possible to kind of a kind of attribute some of this margin expansion you saw in Q2 due to some buckets like E. P. R.
Two the volumes end up.
Or maybe some commodity impact on all of that.
Yeah, I think so.
Great question again margin expansion industry, leading we believe and something we're sort of proud of but also as anticipated. Obviously you can see the Canadian segment margin.
Expanding significantly as we're sort of getting the benefits of those investments that we have been made and so that's sort of been beneficial, but what we historically do and happy to walk through is the sort of impact of the exogenous factors right. So if you think for the quarter commodities was about a 30 basis point headwind to margin where.
As RMG and fuel to other sort of externalities. If you were were about 25 basis point tailwind. Additionally, Q2 is the last quarter, where we're getting the tailwind from the Michigan divestiture. So that was about 75 basis point tailwind year over year.
And then the M&A contribution for this quarter came in about 20 basis point headwind. So when you put those all together you know you're still left with sort of roughly 160 170 basis points of underlying base business margin expansion and in there you have all the pieces you have the price cost spread you have EPR.
The realization of the ongoing operational efficiencies, both synergy realization and the cost optimization efforts we've been undertaking.
Yeah, No again I appreciate the time thank you.
Thank you. Our next question is from Michael domains from National Bank of Canada, You May now proceed.
Hey, good morning, guys nice quarter.
As it relates to margins.
Investor Day expectations, and I think you discussed some of this already but the guy had margin expansion in 2025 suggest youre moving obviously, a little bit faster for Chile, given some of the headwinds of known headwinds this year.
And some of the R&D benefits that you expected to realize in the outer years.
You characterize them.
So would you characterize it as executing more quickly and therefore, maybe pulling forward some of that margin expansion or are you just finding more ways to expand margins at this point.
Yes, Mike that's a great question I think you know it's predicated on you know it was never assumption that that March to the low to mid thirties margin that we articulated at Investor day was going to be straight line right because there's been some.
Investments over the past few years into things like R&D and EPR that.
Post to start bearing fruit in a material way as a 25, so I think youre getting this initial sort of pickup and lift from some of those investments that's going to give some <unk>.
Significant tailwind to that work to our our margin goal if you will.
So that's certainly part of it but look we are raising the guidance another 20 basis points at the midpoint and I think that is the acceleration right because we are achieving.
<unk> higher margin than what the initial sort of plan was and I think that could be viewed as a sort of acceleration component, but the outsized margin expansion of 25 was always sort of part of the plan I think 26 as an opportunity to be another one because youre going to continue to have sort of EPR in some of these other investments remain.
Fully sort of come online at their margin accretive profiles.
So I just I think we'd be remiss that at this point based on 25 performance to now say the new bogey is something materially higher than mid thirties.
But certainly performance like this.
Further enforces our confidence in the ability to execute on that plan that we put out.
Thanks, Loopnet and I guess, if I go back to them to the prior expectations for EPR related EBITDA growth through 2007.
I mean like it seems to me the DVR should provide.
All in all good baseline organic growth of about $80 million to $100 million.
Per year, and I know that DVA year to year, but does that not translate JV you. The <unk> balance should be I can just add 1% to 2% organic volume growth.
Going forward.
Before layering other expectations.
Wanted to get your thoughts on that.
Oh, sorry, but just in terms of the graph Michael just to be clear. The majority of EPR is going to be in hand by the end of 'twenty fives, we're gonna have a sort of tail into 'twenty, six and a little bit in 2007, but the.
The majority of that if we if we quantified $130 million of EBITDA youre going to have a substantial majority of that in by the end of 2006. So this is really a sort of near term growth profile.
And not so much.
Ongoing source of growth over that sort of multi year projection.
Okay.
Okay no. Thanks for the question appreciate it.
Okay.
Thank you next question is from Jim Sheehan of TB Cohen you May now proceed.
Hey, Hey, guys good morning nice quarter.
In the past I believe you've noted our exposure to economically sensitive businesses was only roughly 3% of your revenues versus like a much higher double digit number at most of your peers.
So it seems like an important competitive advantage right now what do you think drives that difference with peers and can you sort of outline what your exposure is specifically the construction volumes and what your exposure is to industrial volumes.
Separately.
Yes, I think the historical comment was largely driven around CMV related volumes led CMV related volumes at GMO would have been.
Sub sort of 5%.
Industrial volumes are significantly more than that so I think that'd be pretty consistent with you.
You know with our peers I think.
Some of the difference you're seeing is this is regionally focused right and where theres more impact coming from tariffs and tariff related businesses and so I think.
I think our business is materially different.
I can't speak for what others have in terms of CMV volumes. What are the volumes that reference was made to two C&D volumes that are sub 5% of the overall sort of book of business.
Okay, and then maybe could you just.
Update us on your fleet conversion.
Either you know to automated trucks, our <unk> trucks.
Now, what what's going on with that at the moment and.
Just how that's proceeding.
Yeah, I mean, the golar back to the Investor Day, I mean I think.
Roughly sort of 20% 25% of fleet today is <unk>.
<unk>, we had the ability to move that up to sort of somewhere between 50 and 55 reasonably within the book.
That is largely in track over the next sort of three to four years.
So I think we're 50% of the way there in terms of our <unk> and automated fleet conversion I think a lot of that'll happen on some of the backs of these EPR collection contracts, where we're moving away from rear load collection into more automated collection and moving those trucks off of diesel on the compressed natural.
Gas and some of our large residential contracts.
As well as on the city of Toronto renewals.
No we basically renewed.
Two of our largest municipal contracts that come on the renewals take place in sort of mid 2026. So again all of those trucks will be converted to compressed.
Compressed natural gas so I think you'll see that number start moving up materially.
Over the course of 'twenty six 'twenty seven.
Okay, great. Thanks, guys.
Thank you. The next question is from creates Murray from <unk> capital markets. You May now proceed.
Yes. Thanks, Thanks, guys good morning.
Maybe just a quick question on M&A and just what we're thinking about if you look at M&A for 'twenty contribution for 2026 as it stands today like let's not talk about future acquisitions, what's the rollover amount that youre thinking that that you have today.
Chris as Luc speaking, yeah. So I mean, he bought a $105 million for the year and the Majeste majority of that was bought very early in the year. So you call it roughly.
Youre left with.
$30 million to $40 million bought in Q2, so you're going to have roughly half of year conversion I think where we sit today. The rollover is probably measured in a call it $10 million to $30 million of revenue.
What Patrick's prepared remark comment was really referring to if you go and deploy another sort of $600 million on the.
Last quarter of the year or back half say roughly round numbers that means you're buying $300 million of revenue in the majority of that is going to be rolled over into next year and that's what's going to be give rise to a good head start as you think about 2026th growth.
Okay. That's helpful. Thank you.
And then another question just as I'm sitting here kind of listening to the call.
We've heard about.
Centrally some proceeds from VIP certainly the maybe the cash flow conversion number.
Moves up and start thinking about leverage it sounds like you guys are probably comfortable running plus or minus three times now.
So if we start thinking about capital allocation that business is going to throw off probably enough cash.
What I would call normal course, capex, probably allow for kind of.
On M&A bucket, that's something where youre at right now.
Outside of maybe proceeds from things like the CIP being used for outside share repurchases or something like that.
How are you guys starting to think about capital allocation because now is as the business continues to mature.
It's a room to start increasing the dividend to bring it more kind of in line with tears I know historically, it's always been.
Is there, but the focus was more on M&A is there more of a thought around the balanced in how youre going to deploy capital.
As youre kind of getting to be more stable and maybe better better earnings and cash flow generation.
Yeah, I mean, I, we said that.
We will as part of the capital allocation program and the deleveraging program.
And obviously with the continued repatriation of funds from someone whose assets that we do.
On an R&R part of sort of our income statement today, I think that affords us ultimate flexibility again to continue executing on share buybacks.
And increased dividends. So that is part of the plan. We think over the next sort of 12 to 24 months that will continue to be.
Part of it's sort of our capital deployment plans. So you are correct in saying that in.
That dividend will start normalizing sort of over that period.
I'll leave it there thanks guys.
Thank you.
Thank you. The next question is from Jon Windham from UBS you May now proceed.
Perfect Hey, congratulations on the <unk>.
So bucking the trend here.
I'm on a better than expected result, actually had a very big picture question.
If we could talk about.
The Canadian dollar U S. Dollar ratio has been more or less range bound for about a decade like $1 25, and $1 41, something like that.
Given all the political uncertainty and a lot of changes how do you feel and what is the strategy Jay.
How do you feel insulated to maybe bigger swings and that ratio. If you could just talk through how you might be.
Insulated in your hedging mitigation strategies should there be a bigger move outside of that sort of 10 year range. Thanks appreciate it.
Hey, John.
Great question, I mean, oftentimes, we're in the weeds of price or volume its nice to hear somebody a little bit sort of bigger picture.
Certainly something we give a lot of thought to particularly considering we are the one outlier to the peer group right in terms of the implications of changes in foreign currency as we're moving in the opposite direction.
Underlying when you look there's there's a pretty good nice natural underlying economic hedge when you look at across sort of interest expense.
Capital deployment et cetera between the cash flows that we bring in and those that go out so from our perspective, we're really out today is more sort of translational type issue.
I think the reality of the business and direction of travel is Canada is still a massive growth market for us and will be but the law of big numbers is going to have the U S proportion business grow at a faster clip.
And I think youre going to get to a point, where a U S. Dollar functional currency is probably the right choice for the business and you would flip to be a U S dollar reporter and be consistent with our sort of peer group.
And I don't think that that's not a 2020 five's activity, but I'd say, that's more in the sort of near to medium term versus the long term in terms of the actual underlying economics, I mean, obviously as our business mix changes between Canadian and U S. That's something we'll continue to evaluate as I said today, there's a pretty.
Nice natural economic hedge between interest expense and Capex, but obviously as the ratio has changed its something that will sort of stay on top of and obviously theres a whole magnitude is.
Synthetic or direct hedging instruments that can be used to navigate.
We extend our exposures are no longer naturally economically hedged.
Really appreciate it thanks.
Thank you. The next question is from Tobey Sommer from Chili's Securities. Your line you.
You May now proceed.
Hi, Al it's Henry on for Tobey here. Thanks for taking my questions, maybe just to start with and I went back to that in our industrial and construction activity and the macro obviously.
Soft.
You mentioned the soft environment.
Just your thoughts on how those areas what kind of.
Wrestling through the year and into 2006 do you see any sort of.
A rebound or is it kind of too early to tell.
I mean listen it's very hard to tell obviously you know we're in a very sort of uncertain environment, just politically and you know what's.
What's happening sort of globally with tariffs et cetera, and I think from from my perspective, you know I personally believe that you know I don't I don't see C&D volumes recovering anytime.
Too soon I think once we get more clarity on tariffs et cetera, I think the industrial market will pick back up and people will figure out what the new norm is.
And how theyre going to operate.
Now they can operate and what under and over what environment. They will be operating under I think just the uncertainty in the market of today, a 10% tariff tomorrow, 50%, there maybe a 30% tariff I think that's just limiting people's ability to make real capital investments at the moment and I think.
That will reverse and it has the reverse.
It will just be a question of when but I think we are you know.
Months to a year away from that because again once those decisions are finally made I think then it takes time to sort of ramp back up so we're not anticipating anything material to come back.
For the balance of this year and sort of into the beginning of next year, but we'll see how it goes.
It seems like there's some clarity coming forward, but.
I think people just need to get a really good handle on what environment, we're going to be operating under.
That's very helpful. Thank you and just.
Quick one.
Okay.
The new U S administration I'm just curious if you all are seeing any anything around an easier path for M&A.
More of a deregulatory environment.
Sure.
Anything around like a lack of second request, helping that out and.
And I guess long term here over the next three four years do you expect that environment to get easier.
Yeah, I mean, I think under law for large scale M&A.
You know I guess in theory.
You know the process, maybe will get made me.
And maybe a little bit less scrutiny.
But by and large we've never had a real issues getting through the sort of HR HSR process I mean, when we look at M&A opportunities we assess.
Our ability to move through that process relatively quickly just given the number of opportunities we have.
And keep in mind, we're doing 45 to 50 the acquisitions a year, we may have one or two that crossed that threshold. The vaccine eating HSR approval. So you know the line is doing is as well under the.
The HSR cap today of.
I think it's today, it's like $125 million to $127 million of gross purchase price.
And lion's share of what we're doing today is under that so.
Not a huge differentiator today for us given the administration change.
If we were looking at some large scale M&A and maybe the process would be a little bit quicker, but nothing material.
Thank you. The next question is from Charlie <unk> from Jpmorgan you May now.
Yeah.
Okay.
Hey, Good morning is my line on.
Yes, we can hear you.
Oh, Hi, this is tami zakaria from Jpmorgan. Thank you so much for taking my question.
Well just one question given some of the labor strike that.
I'm going to end up she are you considering any scenario where that could be incremental wage pressure maybe in the future at any thoughts.
I heard that you're raising your pricing outlook.
But any comments on what you could expect from a price cost spread perspective in the medium term if there in fact any wage inflation in the industry.
Yeah, So I think.
From where we sit today I mean sub 10% of our employee base is unionized today.
So.
Fairly de Minimis amount of Av.
Workers that being said.
Where we sit today.
We think.
Throughout the book, we're always constantly revisiting it.
Employee wages et cetera.
We don't things strike mandates are you now in.
In the car the G F L a in any material way.
And we think with the ramp in labor costs between late 'twenty, one and through 'twenty four.
Thank you.
Divers.
<unk> are a fairly compensating today in <unk>.
<unk> market.
For where we're operating so we don't see a material risk within the existing book today, but obviously, we're always constantly reevaluating it.
And we continue to do that on a sort of one quarter.
But.
I think we feel pretty good at it and I think the turnover sites amongst all of the majors.
I think we sort of reinforced that you don't have drivers hopping around going and looking for an extra dollar here or there you have turnover rates coming down to more normalized level that you would've seen pre COVID-19. So.
Voluntary turnover rate in the high teens today.
At <unk>, we think that is.
Now that is a comfortable place to be is to have your balance obviously want to continue pushing them.
<unk>, but.
That's a very good indicator in terms of where we are on wages.
For the environment that we're operating in today.
I missed the wonderful thank you.
Thank you so much.
Thank you there are no questions waiting at this time I will pass the conference back over to Patrick for any additional remarks.
Thank you very much everyone and we look forward to.
Speaking to everyone.
Our Q3 results.
Thanks for joining.
This concludes the <unk> second quarter 25 earnings call. Thank you for your participation you may now.