GFL Environmental Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 14 speakers on the call.

Operator

Good morning, and thank you all for attending the GFL Third Quarter 2024 Earnings Call. My name is Brica, and I will be your moderator for today. All lines will be 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 Davidge, Founder and CEO at GFL Environmental. Thank you.

Operator

You may proceed, Patrick.

Speaker 1

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 Q1 and providing updates on other items. I'm joined this morning by Luc Pelosi, our CFO, who will take us through the forward looking disclaimer before we get into details.

Speaker 2

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. During this call, we will be making some forward looking statements within the meaning of applicable Canadian and U.

Speaker 2

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.

Speaker 2

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 IFRS measures. A reconciliation of these non IFRS measures can be found in our filings with the Canadian and U. S.

Speaker 2

Securities regulators. I will now turn the call back over to Patrick.

Speaker 1

Thank you, Lou. The momentum from our exceptional first half of the year continued through the 3rd quarter, resulting in nearly 20% adjusted EBITDA growth and another quarter of industry leading margin expansion. 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. The impact of the commitment we see every day from our employees cannot be understated. Our employees handling of the 2 hurricanes that hit within a 2 week period is just one example.

Speaker 1

Given our extensive operations in the U. S. Southeast, the hurricane has the potential to be severely disruptive to our operations. The extensive preparation and exceptional execution of our teams ensured that we were able to keep everyone safe while continuing to provide essential services to our customers. Once again, I'm humbled by the more than 20,000 men and women on Team Green.

Speaker 1

Consistent with our guide, the 3rd quarter saw the highest adjusted EBITDA margin in GFL's history at 31.1%, a 300 basis point margin expansion over the prior year. This margin expansion is driven us using all the levers that we have talked about in the prior quarters. Our discipline approach to pricing generating higher price cost spread against moderating cost inflation, the accretive margin benefits of shedding low quality revenue and the exiting of non core service offerings improved productivity, onboarding efficiency and low cost of risk associated with improving employee turnover and an M and A strategy synergy realization as the businesses we have acquired continue to mature within our existing footprint. 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.

Speaker 1

In the quarter, we continued 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 $900,000,000 on both M and A and incremental growth investments this year as previously announced. During the Q3, we deployed $96,000,000 into these incremental growth investments primarily related to recycling and R and G infrastructure. We have commissioned 2 new MRFs so far this year and expect 2 more to come online in early 2025. Some of our EPR related collection contracts started up in the Q3 and we will see more start up between now and 2026.

Speaker 1

The contribution from EPR will be a growth tailwind over the 24 months and we remain optimistic about incremental contract wins above and beyond the $130,000,000 of EBITDA we have already talked about. As anticipated, 2 new RNG plants were commissioned in Q3 and we expect a third to come online before year end. All three of these projects will drive incremental contribution in 2025 and beyond. We also deployed $47,000,000 into 3 tuck in acquisitions and continue to have a robust pipeline of attractive M and A opportunities in our markets. 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.

Speaker 1

We previewed in August, we officially launched a robust process to evaluate the sale of our Environmental Services segment in September. 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. Based on the 1st 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. We have conviction that the transaction should net a minimum of $6,000,000,000 in after tax proceeds. We expect to repay at least $3,500,000,000 of debt with the remainder available to buy back stock and for general corporate purposes.

Speaker 1

Before I hand the call over to Luc, I want to take a minute to talk about the security incident that you may have read about in recent media reports in the context of where GFL is today. I started this business in 2007 with 1 solid waste transfer station and 4 old roll off trucks and $250,000 in start up capital. This December will be GFL's 17th anniversary as a company. And today, we are the 4th largest diversified environmental services company in North America. We have operations across 10 Canadian provinces in 25 U.

Speaker 1

S. States. And this year, we are approaching $8,000,000,000 in annual revenue. We have millions of customers who trust us to provide them with their essential environmental services including the over 5,000,000 households that we service across Canada and the United States weekly. We have achieved this level of success by providing high quality service at fair price and through the more than 250 acquisitions we have completed to date.

Speaker 1

With many of those owner operators staying on with us post acquisition to continue to contribute to the integration of their businesses into GSL. 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. 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. 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. All of our long term investors have earned significant returns on their capital that they've invested with us.

Speaker 1

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. 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. 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.

Speaker 1

We are also working with 3rd party security consultants to review our security measures and any additional precautions we should be taking. 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 reflection of all of the hard work and dedication of GFL's more than 20,000 employees. We have hundreds of facilities across our platform and these incidents are not quite the de riel to distract us from continuing to drive the business forward. 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 and A.

Speaker 2

Thanks, Patrick. Consolidated revenue for the quarter of $2,015,000,000 was right in line with our guidance after giving effect to FX and commodity prices. The 3rd quarter saw 11.3% revenue growth in solid waste when excluding the impact of the divestitures, 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. We expect volumes to turn positive in the Q4 and as we anniversary most of the impacts of our targeted volume shedding initiatives. Decreases in commodity and energy prices reduced 3rd 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 Q4.

Speaker 2

Environmental Services revenue was up 3% compared to the prior year, inclusive of the impact of lower Yumo pricing and a tough comp arising from a large scale event driven revenue realized in the prior year period. Excluding the impact of these two items, segment revenue was up 9% 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. Adjusted EBITDA margins were 31.1 percent for the quarter, 300 basis points over the prior year and the first time in our history that we've reported adjusted EBITDA margins of over 30%. For context, adjusted EBITDA margins in Q3 2019, the first publicly reported 3rd quarter results we have, were 25.1%. This quarter representing 600 basis points of margin expansion over those past 5 years.

Speaker 2

Solid waste adjusted EBITDA margins were up 3.40 basis points inclusive of tailwinds from commodity and fuel prices, the impact of recent divestitures and the impact of the results of our RNG joint ventures flowing through our P and L, which overcame headwinds from M and A that came in at the accretive EBITDA margins, the dilutive margin impact of the increased cost of risk as well as the impact of reclassification of certain costs that have been recognized in the corporate segment in the prior period. Environmental Services adjusted 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. Adjusted free cash flow and adjusted net income were $225,000,000 $126,000,000 respectively, both exactly in line with expectations and another data point illustrating the highly predictable nature of our financial results. 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.

Speaker 2

As you all know, it's 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. After quarter end, we were successful in issuing our 1st industrial revenue bond, a tax efficient financing instrument commonly used by all of our public company peers. The US210 $1,000,000 bond was issued with a 4.375 percent coupon rate, approximately 100 basis points lower than the current weighted average effective interest rate on our other long term debt. 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. We have one additional secured bond in our current debt stack that becomes callable at par in the Q3 of next year.

Speaker 2

The debt remain 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. During the quarter, we also converted approximately $14,500,000 of our Series A perpetual convertible preferred shares into 16,000,000 common shares. The conversion had no impact on our total diluted shares outstanding. Given our robust Q3 results and our expectations for the Q4, we now expect revenue of approximately $7,820,000,000 to $78,500,000,000 for the year. All other aspects of our previously provided guidance remain unchanged.

Speaker 2

As a result, expectation for fiscal 2024 adjusted EBITDA margin increases for the 3rd time this year to approximately 28.6%, representing an industry leading 200 basis point margin expansion over the prior year. Specifically, as it relates to the Q4, we expect consolidated revenue of approximately $1,940,000,000 to $1,970,000,000 at just over 29% adjusted EBITDA margin, representing another quarter of 300 basis points of year over year margin expansion. Q4 adjusted free cash flow and adjusted net income are expected to be approximately $350,000,000 $75,000,000 to $80,000,000 respectively. 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 fulsome 2025 framework and guidance. In addition, we plan to have an Investor Day in early 2024, details of which will be announced soon.

Speaker 2

However, where we sit today, we have strong line of sight to a mid single digit top line organic growth, double digit adjusted EBITDA growth and another year of more than 100 basis point margin expansion, Layering in the potential contribution from completing even a portion of our current M and A pipeline, we could see 2025 adjusted EBITDA grow in the low to mid teens. I will now pass the call back to Patrick, who will provide some closing comments before Q and A.

Speaker 1

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. This year's performance demonstrates the strength of what we have built and moving into 2025 the setup is very clear. Continue to advance the ES sale 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, benefit from the ramping contributions from both extended producer responsibility and our R and G facilities and execute on our robust M and A pipeline while maintaining leverage targets and continue progressing towards an investment grade credit rating.

Speaker 1

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. This quarter also sees us announcing the change of our leadership team. In a long planned succession, effective January 1, Greg Yorkson will transition the COO role to Billy Saffara, our current EVP of our solid waste operations. Greg has had a distinguished career in the waste industry of nearly 40 years.

Speaker 1

Starting in Western Canada in 1986, Greg and his family moved 8 times throughout the U. S. Before he settled that waste industries in 2013. Greg's Canadian roots came full circle when he took on the role of COO following GFL's 2018 merger with Waste Industries. Since then, Greg has been instrumental in executing our growth strategy across our solid waste platform and instilling operational disciplines across all of these operations.

Speaker 1

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 6 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. Billy has been a key member of our operational leadership team since he joined us in 2021. 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 Advanced Disposal. 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.

Speaker 1

This succession has been extensively planned and we are highly confident in the seamless transition. I will now turn the call over to the operator to open the line for Q and A.

Operator

Thank you, Patrick. We will now begin the question and answer session. We have the first question on the line from Patrick Brown with Raymond James. Your line is open.

Speaker 3

Hey, good morning guys.

Speaker 1

Good morning, Tyler.

Speaker 4

Can you

Speaker 3

hear me?

Speaker 5

Yes. Hey,

Speaker 3

sorry. Hey, Patrick, I just want to kind of thanks for all the details on the ES sale, but I just want to be clear. So the $6,000,000,000 is net of any tax leakage. And I don't necessarily want to go down a big rabbit hole here on taxes paid or how a deal might be structured. But kind of regardless of those taxes, I mean the implied multiple on this deal is still very attractive.

Speaker 3

It's fully consistent with the multiples that you guys had talked about last quarter. Would that be correct?

Speaker 1

Yes, that's correct. I think Tyler, what we meant to sort of illustrate with this is, 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 we have a very, very high degree of confidence that we will deliver a minimum amount of $6,000,000,000 in cash proceeds. Obviously, as enterprise values 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 that increased enterprise value equals increased taxes.

Speaker 1

And I think but what you can underwrite is that there's going to be a minimum of $6,000,000,000 of cash proceeds, $3,500,000,000 of that is going to get a minimum of $3,500,000,000 that's going to get these reposts, get to repay debt. And then the balance will be used for general corporate purposes in share buybacks. But I think that was clearly meant to demonstrate we have very high degree of confidence in that today.

Speaker 3

Yes. Okay. Excellent. And then big picture, Luke, as we kind of look to 2025, can we about some of the breadcrumbs just at a very high level specifically around EPR and RNG? I mean right now how much incremental EBITDA would you expect from both of those buckets?

Speaker 3

Would it be something like $30,000,000 to $40,000,000 incrementally for each in 2025 and then the contribution kind of steps up into 20 26?

Speaker 2

Yes. So, Todd, I think you're thinking about it right in terms of the ramp. I mean, if you take EPR this year, as we said, de minimis impact, I think, $5,000,000 to $10,000,000 of EBITDA in your results. That number is going to go up to call it sort of $40,000,000 to $50,000,000 next year. So you have that sort of incremental $35,000,000 $45,000,000 from EPR.

Speaker 2

On the RNG side, this year, the one facility Arbor Hills, roughly $25,000,000 $30,000,000 of EBITDA and I think that number should look to sort of double into next year. Obviously, on the RNG side, RIN pricing can play a factor of that. I think we're being pretty conservative with our expectations on RINs. That's keeping it well below today's levels. So we're basically doubling up the MMBTUs with the new plants that have come on.

Speaker 2

New plants that will come on later in 2025 and into 2026 will have de minimis impact in year. So I'd say the RNG number in that sort of 35% to 45% incremental and sorry, EPR 35%, 45% incremental and RNG in that sort of 25% to 30% range.

Speaker 3

Yes, perfect. And then just to be clear, there's no at this point based on deals done to date, there's really no M and A impact in 2025 as of right now?

Speaker 1

No. But what I will say on M and A for 2025%, obviously with a high degree of confidence that ES, we're going to get something done relatively short order. We've been building our pipeline. And so I think next year, we have we'll have a very good setup from an M and A perspective across both Canada and the U. S.

Speaker 1

So turn to Luke's earlier comments on just the setup for 2025 and the potential impact from incremental M and A. Well, again, sort of maintaining leverage targets that we have with the focus on the investment grade credit rating, we're going to have a very good setup with the proceeds that we received from the S and we had sort of double down on the solid waste businesses in our markets that are going to be sort of highly accretive to be both from a free cash flow perspective and just an operational perspective.

Speaker 2

And Tyler, I mean to Patrick's point, like M and A is really this kicker to what's an extremely attractive organic setup because as I said in the prepared remarks, like mid single digit top line, I think of it and that will come out with the specifics. But I think there's a path where you have another 100 basis points of spread of price over year sort of cost inflation. So if you think at the margin level, if you 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 got RNG and EPR that we just talked to that's additive to that. The Michigan divestitures, you and anniversary Nectar, you pick up another sort of 20 basis points there.

Speaker 2

So you don't need to believe a lot to see 100 basis points with a margin expansion. And so this natural organically, EBITDA would be up 8%, the RNG and EPR contributions another 2%. That puts you at a 10% EBITDA increase before considering M and A. And 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 3

Yes. Perfect. Sounds great. Appreciate it so much. Thank you, guys.

Speaker 1

Thanks, Alex.

Operator

Your next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Speaker 4

Great. Thanks and good morning. Maybe just continuing on the margin discussion and it sounds like you'll probably provide a bit of a medium term outlook at Investor Day. But if you put the ES business aside, can you maybe just give us maybe or just rehash kind of the margin journey? Obviously, a peak margin this quarter.

Speaker 4

How should we think about the margins over the next 2, 3, 4 years and maybe the bigger bucket drivers over the medium term specifically for the solid waste business? Thanks.

Speaker 2

Yes. So it sounds like you're trying to steal our thunder from Investor Day. But at a high level, look, I think you have the base algorithm of price cost spread. I think what you're seeing this year and industry wide, you're hearing the conviction going to 25 and beyond that I think that's here to stay. We can debate 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 2

And I think where we're at just in the relatively sort of infancy of some of our price discovery, probably have some runway of that above and beyond what the industry peers are. Then in addition, we have the whole discovery of ancillary pricing charges, right, which is just net newer in our book, less mature in our application of that. And that's going to provide us what we foresee to be an incremental tailwind as we just catch up to where the industry already is. So you have a very attractive sort of price cost spread driver of annual margin expansion. You take EPR and RNG, I mean Tyler was asking about the 25 amounts, but take them all the way to fruition.

Speaker 2

And over the next couple of years, you're going to get at least $130,000,000 of EPR coming in at accretive margins. And you have RNG that from this year's $25,000,000 $30,000,000 is going to ramp up to $175,000,000 plus, right, which is highly a margin accretive. And you should realize all the benefit of that in the next 2 to 3 years as well. And then Patrick's prepared remarks spoke to what's happening within the base business of the continued maturation of our optimization sort of processes within, whether that's procurement or it's asset utilization, everything we've been doing to optimize the business we have and the continued maturation of synergy realization from recent M and A. And so when you put this all together on the remaining solid waste business, I think there's a very clear path to what should be industry leading margin expansion taking us to a place where we should be sort of very close to best in class on our sort of solid waste margin.

Speaker 2

So we're feeling really good. The exact bread crumbs we'll provide at Investor Day, but that's the broad sort of strokes of the outlook.

Speaker 4

Great. Appreciate that. And then I think the commentary around $3,500,000,000 at least of debt pay down, just that high level numbers gets you to a very low three times leverage. Is that sort of the leverage ratio, I guess, would that be a happy place to kind of continue to do M and A and maintain leverage? Is that how we should sort of breathe into that low three times leverage pro form a the sale?

Speaker 4

Just any thoughts you could share there?

Speaker 1

Yes. Obviously, the cash flow is going to continue to ramp. And obviously, with the organic growth, we're going to continue to organically grow the business, which is again, continue pushing leverage down. I think from a rating agency perspective, you all want to maintain leverage between sort of 3% and 3.5% to get to that investment grade rate credit rating. And again, we're moving all the way down there, so we want to we're going to stay down there.

Speaker 1

So I think depending on sort of what M and A and timing of M and A could step up a little bit for a quarter too, sure. But we're going to maintain leverage between the 3% and 3 point

Speaker 4

Great. Thanks very much. I'll pass the line.

Operator

Thank you. We now have Kevin Chiang with CIBC. Please go ahead Kevin.

Speaker 6

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've kind of pointed to there being just more upside relative to the original opportunities you saw in front of you and you kind of mentioned in your prepared remarks, Patrick, you could see upside to $130,000,000 I'm just wondering based on the investment you're putting forward, is there a way to think about, 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, does that require more investment and more facilities to service those new contracts?

Speaker 1

Yes. Like we said, Ontario was basically done. And that's the number 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 and Saskatchewan and sort of Manitoba. Those are the sort of next big ones to fall.

Speaker 1

I think blue sky scenario, you'd be pushing closer to $200,000,000 of EBITDA, right? I would say that's the blue sky scenario. Could we potentially get to the blue sky scenario? The answer is probably yes. Are we underwriting that?

Speaker 1

The answer is no. But it's certainly going to be more than $130,000,000 and potentially sort of slightly less than $200,000,000 But we're feeling very confident about our asset positioning and our positions in those markets. Again, just from an asset positioning perspective, we're in very good shape in a lot of those markets. So and obviously with our relationship with Circular Materials and 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, we're certainly at the top of the pile and we're continuing to push forward of all of them.

Speaker 2

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 to an so called CapEx line. In another market, we may need to build a facility. But again, going back, 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 of these contracts supports that.

Speaker 2

And so 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, I think, fit within the overall overarching return on invested capital framework with which we evaluate all of our capital decisions.

Speaker 6

That's helpful. And then to my second question, I'm just wondering like in a post ES sale world and obviously you'll have cash here to deploy towards your capital structure. Does that change how you think about the working capital seasonality you have? It looks like I guess, in 2024 here, it will be the 3rd year in a row where you have a pretty big capital a working capital unwind in Q4. So you kind of have a it's a heavier lift in the 1st 3 quarters.

Speaker 6

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?

Speaker 2

Yes, absolutely, Kevin. I mean, a big component of that working capital seasonality profile you see today is driven by ES. It's the most seasonal of our business. It's a function of the larger Canadian exposure it has plus just the sort of nature of the work that gets done. I mean this year, 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 2

And the guide has Q4 sort of reflecting back to sort of 0. So again, smaller, more muted swings than what you had historically. Excluding ES from that, today it's commingled. But when you carve that out, the DSO profile of the business on a blended will improve to sort of a lower number and the GAAP of versus DPO is going to be more stable and narrower. So I think you will see exactly what you're anticipating.

Speaker 2

Our Canadian solid waste business will continue to have a seasonality profile, which you can see in like one of our other sort of peers that has a more sort of Northeastern exposure, but more muted than where we are today.

Speaker 6

Perfect. That's super helpful. Thanks for taking my questions.

Speaker 2

Thanks, Kevin.

Operator

We now have Jay Revich with Goldman Sachs. Please go ahead.

Speaker 5

Yes. Hi, good morning, everyone, and congratulations to Greg and Billy. I wanted to ask, as a consequence of the divestiture, could you just talk about any benefits from a simplification standpoint? So, Luke, you just spoke about the working capital benefits. What about organizational structure?

Speaker 5

How much does this simplify the process, create the ability to do more M and A without potentially ramping up overhead from here? Can you just address, is that an opportunity?

Speaker 2

Look, Jerry, what I'd say is, I mean, we've contemplated divesting of ES sort of several times and from a sort of disintegration perspective, I don't want to say it's standalone, but the thing is sort of autonomous isn't the right word, but not massively intertwined. And that's what's given us the conviction with the speed with which we can do something. And so why I highlight that is, look, obviously not having that segment would simplify certain aspects, couple less IT systems, couple less particular administrative functions that serve to support ES. But 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.

Speaker 2

So if you think about my corporate cost bucket, we have like a $10,000,000 to $15,000,000 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. But certainly,

Speaker 1

if

Speaker 2

you look today, we balance our sort of capital allocation amongst both of the segments. And with the capital allocation constraints, if you will, sometimes we're foregoing, opportunities in solid as we're sort of doing something in, yes, and there's a sort of balancing coming through of that. But if you think about that corporate bucket, as we start doing the M and A, you get the sort of leverage that's going to sort of come out of that. And you're going to see, we don't need incremental overhead investment. And so with what we have, I think we have the base that's in place.

Speaker 2

And if you roll forward the model over the next 4 or 5 years, you can see what today is a sort of low 3% number gravitating towards that, call it 1.5% to 2% number. And I think we expect to get meaningful leverage out of that as we grow the business from here.

Speaker 5

Got it. And shifting gears, your inflation was really impressive this quarter, good pricing and inflation actually slowed from last quarter. Can you just talk about what's driving that and sustainability based on what you're seeing into October?

Speaker 2

Yes. I mean, 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. While 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. You're seeing that come through in your sort of cost inflation as well.

Speaker 2

R and M costs continue to moderate as anticipated and we're getting the benefit of that. So Jerry, I'd say it's not any one thing, but really a combination of all the things in conjunction with the pricing levels that we had a high degree of sort of visibility on. So it's this combination 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.

Speaker 5

Great. And lastly, Luke, the RNG tailwind number that you pointed out $25,000,000 to $30,000,000 it feels like you're leaving a lot of room for RIN price volatility. At $2 D3 RINs, I think the incremental earnings could be closer to $50,000,000 from the $4,000,000 MMBtu. Can you just expand on that? Is that just say we just had a change in the White House, let's make sure understand what's happening with D3 room prices and room to execute?

Speaker 5

Or are there any discrete contract structures that we should be aware of when we talk about just $25,000,000 to $30,000,000 step up?

Speaker 2

Jerry, just to confirm, it's only it's $2,000,000 incremental MMBtu, right? We got $2,000,000 in hand, dollars 2,000,000 coming on. But even with that, you're right, there's some conservatism in there. 1 on the RIN pricing, but 2 more so just the 2 of those facilities of the net new ones are coming online in Q4 effectively. And there's a ramp up until these facilities actually start contributing at sort of full run rate.

Speaker 2

So it's a volumetric conservatism, which I think is appropriate in conjunction with just some conservatism on rent pricing.

Speaker 5

Okay. Sounds good. Thank you.

Speaker 2

Thanks, Jerry.

Operator

Your next question comes from Devin Dodge with BMO Capital Markets.

Speaker 7

Thanks. Good morning. Nice margin expansion in the quarter. Just wondering, have you started to realize some benefit from the investment in camera technology for non conforming pickup conditions or recycling contamination? And then could you just remind us how meaningful that opportunity could be for you over time?

Speaker 2

Devin, it's Luke speaking. So the tablet initiative is sort of still in flight, piloting, 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 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. I want to be clear right now, it's really focusing on block bins and overloading, recycled contamination fees, which I think our peers in the industry have brought into would be a sort of Phase 2 for us. I mean, right now, we think the low hanging fruit on the overflowing and blocked bins represents a sort of meaningful opportunity.

Speaker 2

Exactly what that is, we have $1,500,000,000 $2,000,000,000 of commercial revenue when you think about what the incremental sort of surcharge would be coming out of that, even a sort of small percentage is a very attractive number. What we're endeavoring to do, Devin, is use the pilot to gather some intel such as Lunar Investor Day. We can provide an actual sort of quantification. But suffice to say, we think there's real dollars there, all of which should drop to the bottom line and just bring us to par with where our peers already are today.

Speaker 1

Yes. And on the resi side, obviously, particularly on the back of EPR in Canada, we're developing also camera system with AI technology to determine contamination rates, etcetera, that give us the ability to charge back based on those. And that's all in flight. I don't think that's a 2025 possibility. But I think as we move into 2026 and 2027 beyond, 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 7

Okay.

Speaker 8

Good color there. Thank you.

Speaker 7

And then second question, just based on the EPR contract that you've seen so far, the current RNG 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 2

Yes. So Devin, it's Lucy. I think 25% on the incremental growth spend probably looks something similar to 24%. Again, got to figure out which from the contracts when actually truck deliveries are going to be happening on some of the pieces. So we need a little bit more time to get that ironed out before we speak to you in Feb 25.

Speaker 2

But I would think directionally in line with what 2024 was, is probably the right way of thinking about EPR and RNG for 2025. 2026,

Speaker 1

Unknown because there's still a bunch of collection contracts that are sort of influx. So I think that's still a bit of a moving target, but

Speaker 2

we'll have more color.

Speaker 1

We will have more we'll definitely have more color by our Investor Day to give basically an 18 month to 24 month outlook. And we'll sort of have the EPR, sort of what we believe the revenue and EBITDA contribution to be from EPR at the Investor Day. But 26 on the pace of it today will definitely be lower than 25. Yes.

Speaker 7

Okay, makes sense. I'll turn it over. Thank

Speaker 1

you. Thanks, Devin.

Operator

We now have Konark Gupta with Scotiabank. Please go ahead when you're ready.

Speaker 9

Thanks for taking my question. And Patrick, appreciate you addressing the recent incident here. Just back to the ES sales process, I hear you guys several potential bids are coming in. So just want to understand like what would narrow down to the final winner considering all the kind of different sets of bids you are receiving? Like you talked about tax implications, but are there any other considerations than selecting the final winner?

Speaker 9

And is there also a possibility of a call or put option there?

Speaker 1

Yes. So I think where we sort of sit today, we went out to sort of 40 interested parties, really had NDAs out to almost 30 different parties, which then translated into 10 to 11 different proposals, all sort of varying degrees and that's sort of a mix of strategic and financial sponsors. And obviously, we have to manage this process now. So I think from our perspective, what we're doing is we're going to narrow the field down to 4, which we did yesterday. And these are 4 people that I have met with personally, have relationships with, have a high degree of conviction of closing and doing exactly what they say they're going to do.

Speaker 1

So we're going to basically run those forward to the end. What is important to us? Price is important to us. Structure is important to us. Timeliness to close is obviously very important to us.

Speaker 1

And depending on the structure and the tax structuring just given the increase in the enterprise value of what we initially thought, structuring is very relevant to us today because as the enterprise value goes up, so does the tax bill. And those just the tax bill goes up exponentially based on sort of increased value. So I think what was over in the street before historically was that it was a $6,500,000,000 to $7,000,000,000 EV. I think comfortably you're materially higher than that and you definitely move that number up $500,000,000 to $1,000,000,000 from where we were. So structure is going to be important to us.

Speaker 1

So we will arrive there. It's going to play out over the next while. I think where we sit now, we if we do our job, we're going to push it. We're going to try and get something done. Obviously, as Luke said, the outside date is having something done by the time we report.

Speaker 1

But ideally, we'd like to get something done 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 5

Okay.

Speaker 9

That's a great color. 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 suggest what are some of the puts and takes driving that volume rebound in Q4, please? Thanks.

Speaker 2

Yes. Hey, Connor, it's Luke. You got to remember the volume that we're seeing this year is really a function of the shedding activities that in large part took place last year. So if you think about the Q3 90 basis points sequential improvement over Q2, if we're looking at Q4, I think you're going to have 150 basis point 170 basis point improvement over Q3. And that's less about believing what's going to happen in the market and that's just more the math versus anniversarying what happened last year, right?

Speaker 2

Because last year Q4 was the minus 3.6%, which was just the sort of combination of that sort of anniversary. So I'd say everything is working according to plan. Certainly, you're seeing some volume softness in some of the markets as it relates to special waste. And I don't think we're unique in seeing that across the sort of footprint. Believe that is just sort of timing in 2025 and beyond as things start back up, you'll see that coming back.

Speaker 2

But the underlying fundamentals across our sort of collection and post collection businesses are strong. And you're seeing that playing out in consistent beating of our volume. Yes, the numbers are negative. But again, a function of anniversarying last year's intentional shedding. And then we're feeling really strong that this turns positive in Q4.

Speaker 2

The 2025 outlook, again, we're going to hold off on that, but it's certainly not going to be the same sort of negative cadence that it had this year. We're feeling sort of confident that will be something significantly better than what we had this year.

Speaker 9

Okay, great. I appreciate the time and all

Speaker 2

the best for the process. Thank you.

Speaker 1

Thank you.

Operator

We now have James Shum with TD Cowen. Please go ahead when you're ready.

Speaker 10

Hey, good morning and thanks for taking my questions. So I was curious, are you willing to sell the used motor oil business separately? And what would be the likelihood of that? No.

Speaker 1

I don't think it makes any sense. I think it's a very small part of the ES business. And I think from a customer overlap perspective, we provide multiple service to those customers. And I don't see any path to why we do that. And given the market structure where we operate those UMO businesses, it's a very good business and we're very easily able to manage spread in that business.

Speaker 1

And as you saw in Q3, even with the moves in Motiva and demand for base oils, we're able to maintain some spread for the most part. Yes, headline revenue is off a little bit, but by and large we maintain that spread. And it's been that way since we own that business back since we started in 2,008.

Speaker 2

Yes, James, I think it's important to delineate that our business is different than some of the other peers, very little sort of on the re refining on the back end. We are a collector or service provider. And as Patrick said, it's managing a spread. And yes, revenue can move in this quarter, dollars 5,000,000 $6,000,000 in Q4 is expecting the same at the top line, but you're able

Speaker 1

to preserve the vast majority of those sort of EBITDA dollars.

Speaker 2

When the prices move really quickly, you get an EBITDA impact as you saw in Q3, but by and large, you preserve that. So just collection based milk run type businesses that we've had for a long time and we're a big fan of and as Patrick said, works very well within our broader gas business.

Speaker 10

Okay, great. Thank you. And then for Q4, you mentioned the potential for severe disruptions related to storms. 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 1

Yes. I think I was going to say, I think that it has the potential to be severe disruptions. I think at the end of the day, the management team weathered the storm, and we're not expecting any severe disruptions. And yes, I mean, in theory, there should be the potential for some tailwinds of incremental volumes in the southeast around the area, which is where we have operations where the hurricanes come through. Yes.

Speaker 2

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 some benefit from some storm waste and that should sort of offset that special waste. But yes, that was Patrick was highlighting the excellent work of our team to avoid disruption.

Speaker 10

Okay. Got it. Thank you for clarifying. Appreciate it.

Speaker 2

Thanks, James. Thanks, James.

Operator

We now have Stephanie Yih with JPMorgan. Your line is open.

Speaker 11

Hi, good morning.

Speaker 1

Hi, good morning. Good

Speaker 11

morning. When you say that you're going to use part of the proceeds from the ES sale to buy back stock, do you mean from your largest shareholders? And do you have certain targets in mind?

Speaker 1

Mechanism to be the, and that is an ongoing discussion obviously. But I think as the process continues to evolve, we'll have a clear answer on that in time. But I think from our perspective, we just we have to figure that out and we will over the next little while.

Speaker 11

Okay, understood. And just on M and A, as you're thinking about M and A into next year, have you seen any changes in the valuation levels given just people's interest rate expectations?

Speaker 1

Yes. Remember, a big part of the arena we play in is in the we all reference multiples, etcetera. But at the end of the day, a lot of these companies we are buying where we've sort of decided to play has been sort of in the $1,000,000 to $10,000,000 of EBITDA range. The lion's share of those 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, etcetera.

Speaker 1

So we haven't seen any real material movement. But at the end of the day, those acquisitions to us, again, have been sort of in the same zip code. And we believe that 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 ES. And I think those acquisitions will become highly accretive, get tucked into existing regions where we already own assets and specifically have underutilized post collection assets. So we're expecting 2025 to be a great year from that front.

Speaker 11

Okay, understood. Thank you.

Operator

We now have Brian Butler with Stifel on the line.

Speaker 8

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 Q3 or going into 2025?

Speaker 2

Yes. Hey, Brian, thanks for the question. When we gave the guide for Q3 coming out of Q2 commodity about CAD225, right on the basket and that's what we're expecting. I think what you saw in Q3 is that it was down more like $2.10 $2.15 right. And so you gave up that sort of $10 $15 at the revenue line as a result of that change.

Speaker 2

Post Q3, as you know, continued to have downward pressure concerns over the sort of Northeastern oversupply with the pork strike. I think you're seeing that in Canadian dollars south of $200 today, it's maybe more $180 $190 level. I do think folks believe that this is going to come back. But if you line today's pricing up with the average you realized in 2024, 2025 would be a slight headwind, 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.

Speaker 2

Modest dollars, I think it's more than $5,000,000 to $10,000,000 headwind at the revenue line, a little bit of margin on that. And then but the offset is diesel pricing today continues to sort of be at a low when compared to prior year, the 2024 average. And so that would be a slight sort of margin tailwind into 2025. So I think when I think of commodities, I think of all those sort of exogenous price inputs, those 2 are probably a bit of a wash if we were to stay at today's levels and any upside on commodity price in today's levels would then be incremental upside to the guide.

Speaker 8

Okay. That's helpful. And then I guess on the industrial revenue bonds that you guys did, how big or how large of a part can that become of the GFL's 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?

Speaker 8

Or is there maybe some additional savings in there?

Speaker 2

Look, 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 the idea we were showing we're now accessing instruments previously, say for higher credit quality than we historically were. So we're going to continue to look at it and it is a very coupon efficient sort of structure, which is I think why all of our peers use it. The counter to that is, 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 into specific CapEx in specific states.

Speaker 2

Now landfill spend is typically a great capital deployment where these are used. We do spend 100 of 1,000,000 of dollars a year into landfill CapEx. So we're going to be actively looking at it. But when you look at our peers, we assume that that's what normal course looks like in the future. I think it's more like 10% to 20% of your cap stack as opposed to 50% plus.

Speaker 8

Okay, great. Thanks for taking the question.

Speaker 2

Thanks, Brian.

Operator

We now have a question from Stephanie Moore with Jefferies. Your line is now open.

Speaker 12

This is Harold Lonta on for Stephanie Moore. I guess labor inflation has been around 4% to 5%. We've been there for some of your competitors. I guess, 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, you can provide any details that are bigger, Harold?

Speaker 2

Yes. 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 continues to sort of track favorably. I think that 4% to 5% labor inflation number is probably the right overall as you think about the industry. I do think as we've said, we have benefited from our secondary market focus whereby we've seen lower wage pressures in the secondary markets than what we see in the dense urban areas.

Speaker 2

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 fours level. And we do credit the secondary market focus to that. On the turnover, look, we're extremely happy with the direction of travel and the turnover. Again, remember, we were as high as in the 30s, came down to high 20s, and it was down to mid-20s, and now we're touching 20% on the voluntary turnover level.

Speaker 2

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. So we're going to continue to be actively engaged in managing that And I think the macro backdrop is supportive and we look forward to sort of continued sort of benefits that we'll see as we return back to that sort of I think the mid teens level, mid to high teens is where we're going and we think you'll continue to see the financial benefit come through in our results and in our safety stats.

Speaker 12

Thank you. That's all for me.

Operator

We now have Toby Sommer with Truist on the line.

Speaker 13

Thank you. Post divestiture, do you intend to change or see opportunities maybe informed by your M and A pipeline to change the mix between the U. S. And Canada in any appreciable way?

Speaker 1

No, I don't think so. I think from again, where we sit, again, we operate 10 provinces today, 25 states in the U. S. I think largely what you'll see is this continued buying businesses identifying those existing markets where we operate typically around markets where, 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 1

I do think the opportunity obviously in the U. S. Continues to be larger just from a market size and scale perspective. 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.

Speaker 1

S. Just given the size of the market that we operate there.

Speaker 13

Makes sense. And I know it's fresh, sort of hot off the presses, but does the change in administration in the U. S. Impact your thinking potentially

Speaker 6

on M and A, potentially taxes? What does that mean for the company, do you think?

Speaker 1

I don't think it means much as we've been able to both as a company and as an industry to basically weather any sort of level of government. I mean when we started the business, you had the Obama administration and then that sort of moved to Trump and then that's moved now to Biden and now back to Trump. I think the one benefit that I think we're all looking for is an industry which could be material is whether the Republicans bring back in bonus depreciation. We know that some of that legislation has been tabled now for a while, sort of sitting there as bonus depreciation is rolled off. Will that sort of come back on?

Speaker 1

I think the thought is that or at least the hope is that it will come back, given that was something initially supported by the Democrats and not particularly with, the Republicans having the House and the Senate that that's something that will probably happen. But 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 with the U. S.

Speaker 13

Thanks for your help.

Speaker 1

Thank you.

Operator

We now have a question from Buddy Weismann Barker with National Bank of Canada. Please go ahead.

Speaker 8

Hey, guys. Just filling in for Rupert here. I appreciate you taking my questions. So just back on the Environmental Service segment, thinking about the tax. I think last quarter you said $500,000,000 to $600,000,000 range was a good way to think about it.

Speaker 8

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 1

Yes. I think that's a challenge. Now we're getting into the weeds. We're getting into specifics. And again, now as the enterprise value moves up, so is the taxes.

Speaker 1

So we're looking at the most effective way to structure it that maximizes long term shareholder value while addressing the issues that we want to address both as we talked about general corporate purposes, potential share buybacks and then the $3,500,000,000 of debt repayment. So we don't have those exact specifics today. We are confident in the $6,000,000,000 net cash number. So stay tuned in terms of what that ultimately looks like as we move through the process.

Speaker 2

Yes, ultimately that number that was cited last was tied to a much lower EV than what Patrick is speaking of today. Just very simply, as the EV goes up, that number goes up. And so 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 8

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?

Speaker 2

It's lower capital intensity. So you will see on a blended basis in theory that increases the intensity. But if you look at GFL as a whole, we've been running in the sort of 100 basis points lower than our peers when you exclude the growth spend. And that's really been a function of having the sort of ES business there. I think without it, what you see is a gravitation towards the industry mean and that sort of 10.5%, 11.5%, depending on where you are in the growth cycle.

Speaker 2

But normal course capital intensity for our solid waste business as we go forward.

Speaker 8

Okay. Thank you. That's it for me.

Operator

Thank you. As time as we plan, that does conclude the Q and A session. And I'd like to hand it back to Patrick Davidge for some final comments.

Speaker 1

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.

Operator

Thank you all for joining the GFL Q3 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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Key Takeaways

  • The momentum continued in Q3 with a record adjusted EBITDA margin of 31.1%, up 300 basis points year-over-year, driven by disciplined pricing, cost management, portfolio optimization and M&A synergy realization.
  • GFL invested $96 million in incremental growth projects—primarily recycling and RNG infrastructure—commissioned two new MRFs and two RNG plants, and remains on track to deploy approximately $900 million in 2024, while achieving the lowest net leverage in company history at 4.05x.
  • The process to sell the Environmental Services segment is underway with first-round bids received; management is confident of securing at least $6 billion in after-tax proceeds to repay $3.5 billion of debt and potentially fund share buybacks, with a transaction expected by February.
  • Full-year 2024 guidance was updated to forecast revenue of roughly $7.82–7.85 billion and an adjusted EBITDA margin of about 28.6%, with Q4 expected at ~29% margin and $1.94–1.97 billion in revenue; a 2025 outlook will be provided at an upcoming Investor Day.
  • A long-planned leadership transition was announced, as COO Greg Yorkson will hand over to solid waste EVP Billy Saffara effective January 1 to ensure operational continuity.
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Earnings Conference Call
GFL Environmental Q3 2024
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