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spk00: Welcome to the GFL Environmental Q1 Earnings Call. My name is Ruby, and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press Start, followed by 1 on your telephone keypad. I'll now hand over to our host, Patrick DiVigi, founder and CEO, to begin.
spk02: 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 first quarter. This morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.
spk09: 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'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators. 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 statement. 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 the discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. securities regulators. I will now turn the call back over to Patrick.
spk01: Thank you, Luke.
spk02: Once again, we started this year with an impressive first quarter results that set us up for another exceptional year. The positive impacts of price, volume, acquisitions, and portfolio rationalization are all surpassing our expectation and positioning us to continue to exceed our industry-leading growth objectives. Organic revenue growth for the quarter was over 11%, with double-digit growth in both our solid waste and environmental services segments. Solid waste pricing accelerated to the mid-sixes, the highest in our history and ahead of our own expectations. Our ability to adjust our pricing strategies to reflect the changing operational landscape in real time is a testament to both the quality of our business model and the capabilities of our team. We continue to see our opportunity for price and surcharges as we optimize our book of business, and we'll be focused on that for the rest of the year. With the strength of the first quarter and our expectations for the balance of the year, we feel confident in our ability to exceed the high end of the guidance for our base business that we previously provided. Volume trends were also up across all of our geographies and business lines in the first quarter, excluding one time more volumes from the prior year that we knew were not going to recur. This increase in volume is impressive because we achieved it even with the acute impacts from Omicron at the start of the year and the severe winter weather conditions that we experienced in many of our Canadian and northern US markets. Given that backdrop, we think that there is a positive read-through of this trend for the rest of the year. We've been anticipating the full recovery of our environmental services sector that we saw this quarter. We saw our customers re-engage services that have been deferred or reduced during the pandemic with the result that revenues in this segment were ahead of our own expectations by over 15%. As a result, we think we're going to be able to prove out the thesis in this segment faster than previously expected. Adjusted EBITDA margin was 25.3% for the quarter. a result we're really proud of considering the inflationary factors at play. You'll recall our previous comments that a year-over-year margin comparison would be less relevant this quarter because of the uniqueness of the prior period. Luke will unpack the puts and takes, but when you peel all back, the results demonstrate the exceptional foundation of our business model that allowed us to leverage price to more than cover the cost of inflation while driving operating leverage through our improved asset utilization. The significant and sudden spike in fuel costs was the headwind for the quarter, but we think we should be able to recover most of that lost margin by the end of the year. With Canada finally moving on from its COVID-related restrictions by the end of Q1, we're also very optimistic about the positive impact that this lifting of restrictions will have on our Canadian business for the balance of the year. Complementing our strong base business performance was the continued implementation of our portfolio rationalization. In April, we finalized the spin-off of GFL Infrastructure into Green Infrastructure Partners. GIP then acquired the Cocoa Paving business to create a leading Canadian provider of vertically integrated infrastructure services. As we said last quarter, this transaction demonstrates GFL's commitment to rationalizing our balance sheet to maximize the value of our asset base. We think that the brand recognition of GIP, together with a highly supportive macro backdrop of infrastructure projects over the near, mid, and longer terms will create a compelling organic growth opportunity. We also see consolidation opportunities in the fragmented Canadian infrastructure services market, and we believe that our investment in GIP will result in meaningful value creations for our shareholders. We also continue to execute on our M&A strategy, completing 21 acquisitions year-to-date, representing approximately $300 million of incremental annualized revenue. As we announced earlier this week, one of our acquisitions we completed was Sprint Waste Services. Sprint, a vertically integrated regional solid waste business based in Texas with a footprint that strongly complements GFL's existing footprint, Sprint has achieved industry-leading margins for over 15 years under the ownership of Joseph Swinbank and his family. And we're excited that Joseph and his sons, Will and Regan, are showing their support for the combined GFL opportunity through their continuing their investment as a shareholder of GFL and as consultants to the business. In addition to Sprint, we closed 20 smaller tuck-in acquisitions, nine in the quarter, and 11 subsequent to the quarter. 13 of those acquisitions were less than $5 million in enterprise value and all contribute to further densifying our footprint. Our pipeline remains robust, And with the strength of our start to the year, we see another year of continued outsized M&A opportunities. On R&G, we continue to progress on the development opportunities that we highlighted to you earlier in the year. The projects expected to start to come online mid to late next year in Q1, we deployed around 12 million of capital into these projects and are encouraged by the pace of development. We continue to expect that our share of incremental free cash flow from these sites to be in the range of $115 to $125 million per year. On the ESG front, we continue to focus on biodiversity with a new pollinator project at one of our landfills in Canada. On Earth Day, our employee engagement activities across GFL centered around increased awareness of local at-risk species. On the governance front, we appointed Jessica McGaugh to our board in the quarter and have committed to increase female representation on our board to 30% by the time of our 2023 AGM. I will now pass the call back over to Luke who will walk us through the details of the financial results and I will share some holding perspectives before we wrap up.
spk09: Thanks Patrick. Before I start, to frame the discussion, we have excluded the contribution of the now divested GFL infrastructure division from the discussion analysis of our results. All period-over-period comparisons that I reference are on a like-for-like basis. As Patrick said, we started the year exceptionally strong with solid waste organic revenue growth of 10.3%, driven by 6.6% price and surcharges, 1.1% from commodity prices, and 2.6% from volume. Volumes were 3.1% when excluding the non-recurring MERC volumes that we anticipated in our original guidance. The broad-based outperformance came from both price and volume, with organic growth exceeding expectations in both of our geographies. Our outperformance on price was a function of higher price increases, better retention, and a pull forward of price increases in certain markets. Compared to our guidance, incremental fuel surcharges recovered approximately 20% of the increase we saw in fuel costs during the quarter. Part of this is a timing lag that will be recovered, but on balance, this is an area where we see significant opportunity within our existing customer books. Many of our industry peers have done a great job at mitigating rising fuel costs, and we see meaningful upside as we migrate our practices in this area closer to the industry norm. On volumes, as I said, we were pleased to see growth in both geographies. Solid waste collection volumes were positive across all service lines, with the strength of commercial being impacted by headwinds on roll-off bulls in certain of our northern markets that were contending with the acute wave of Omicron at the beginning of the year and significantly more severe winter weather conditions compared to the first quarter of the prior year. Post-collection volumes were strong across most geographies, particularly in some of our newer market areas. While volumes may have started a little slower in the quarter, momentum started accelerating as we exited March. This was particularly true in the Canadian markets, where as Patrick mentioned, we've just recently emerged from COVID restrictions. Nowhere was this more apparent than the phenomenal results in our environmental services segment, where we realized nearly 20% organic revenue growth as our customer base began to restart or increase service level intervals. Again, we think the impact of all these government-mandated market openings and closings has been to rewrite the normal seasonality cadence for our Canadian business. And with that, we definitely think we had some pull forward of work into the first quarter, but nonetheless, the read-through of these results forms a highly favorable outlook for the balance of the year. Contribution from M&A was 16.2%. A result was ahead of plan and largely attributable to the ongoing strength in the performances of businesses acquired in the second half of 2021. In terms of profitability, adjusted EBITDA margins were 29.9% for solid waste, 20% for environmental services, and 25.3% for the company as a whole. Although this is a decrease from the prior year, as communicated when we provided our guidance for 2022, the quarter over quarter margin comparison was going to be less relevant this quarter based on the somewhat anomalous strength of the first quarter of 2021. To recall, Q1 2021 saw solid waste margins in Canada increase sequentially over Q4 2020 and the highest solid waste margins of the year in our U.S. business, both of which were atypical outcomes and attributable to various impacts of organic and inorganic factors. Looking at our guidance at the beginning of the year, we expected solid waste margins to decrease, environmental service margins to increase, and the company as a whole to end the quarter in the high 25s. Considering the impact of diesel costs and the change in segment mix alone, combined to a 70 basis point headwind versus our guide, we view the performance of Q1 ahead of our expectations, excluding the impact of these two items. Although cost inflation was higher than anticipated, we respond with incremental price and see a path to continue to do so for the balance of the year. The quarter over quarter margin comparisons are expected to moderate as we go through the year, and we remain confident in our ability to drive margin expansion across both segments and for the company as a whole by the end of the year. Adjusted free cash flow was $119 million compared to $117 million in the prior year period. Note that the comparable period was only burdened by $42 million of cash interest. An outcome tied to refinancing activities around that time that skewed the cadence of cash interest payments during the individual quarters of 2021. Included in adjusted pre-cash flow reconciliation is approximately $90 million in proceeds received from additional asset disposals completed during the quarter. As you'll recall, our strategy with these disposals is to redeploy these proceeds into attractive organic investment opportunities within our core markets, effectively manning towards a net CapEx number. But the inflows and outflows don't happen in the same period and therefore timing differences and the net number may be elevated or lower in any given period. We started this process last year and expect to be complete by the end of this year or early 2023 and we remain confident that we'll be in balance of a net capex number by the end of the program. We've also included our investments in joint ventures, which at this point effectively represent our capital contributions to RNG projects, as a CapEx-like item in our free cash flow reconciliation. It appears our partners on the development of these projects may be able to deploy capital faster than originally anticipated, and as such, we may have a pull forward of $2023 into 2022. But this is an outcome we're thrilled with, and we'll be able to cover any incremental investment with disposal proceeds we received during the first quarter. As Patrick said, we deployed $67 million into nine tuck-in acquisitions in the quarter. After quarter end, we deployed incremental dollars into the 11 additional acquisitions, including the acquisition of Sprintway Services. A portion of Sprint's consideration was equity that served the dual purpose of including the twin banks in our shareholder base while continuing to demonstrate our commitment to leverage levels. The in-year revenue contribution for 2022 is expected to be approximately $200 million of the total anticipated contribution of $300 million acquired on an annualized basis. These amounts are before the impact of any divestitures during the year. As we guided, GFL infrastructure was classified as held for sale to quarter end and was divested of at the end of April. Consideration received was comprised of $224 million in cash and approximately 45% equity interest in GIP. As a result of the transaction structure and GFL's historical approach to financing the acquisitions that constitute GFL infrastructure, a charge was taken to reduce the carrying amount of the net assets divested from GFL's balance sheet to equal the proceeds received from the spinoff. Going forward, GFL's interest in GIP will be accounted for under the equity method of accounting. Regarding the $224 million cash proceeds received from the spinoff, these proceeds have been reinvested into M&A and therefore will not be included within our adjusted free cash flow reconciliation as we go forward. net leverage at quarter end improves slightly over Q4 2021 pro forma for the post quarter and M&A leverage slightly increases, we still expect the business to deliver by the end of the year, albeit at a tempered pace on account of M&A. Finally, before I turn the call back to Patrick for closing remarks you'll see in our press release that we're raising our guidance for fiscal 2022. On this point, I want to clarify that we're not providing any updates with respect to our base business, the business for which we provided guidance at the beginning of the year. We're not saying an increase on the base business isn't warranted because we expect that there'll be one, but we want the benefit of another quarter before we update our views there. The strength of the M&A in the beginning of the year solidifies that we should do better than the guidance by at least the incremental M&A contribution, so we've updated revenue, adjusted EBIT, and free cash flow for only that impact. The updated amount is net impact of new M&A, less the contribution or the lost contribution from the $90 million of divested assets. With that, I'll now turn the call back over to Patrick.
spk02: Again, this quarter, our more than 18,000 employees deserve all the credit for our exceptionally strong start to this year. The dedication and capabilities of this team couldn't make me prouder, and a big catalyst for our upcoming investor day is to showcase to you the exceptional talent that drives GFL. You've all heard me say it before, Luke and I may be the face of GFL for most of you, but here fronting a best-in-class management team that continue to deliver our industry-leading results. We're excited for you to see firsthand the quality of Team Green and hope to see you all in New York later this month. I will now turn the call over to the operator to open the line for Q&A.
spk00: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad now. When preparing to ask your question, please ensure you are unmuted locally. If you change your mind, please press star followed by 2. Our first question is from Michael Hoffman of Stiefel. Your line is now open. Please go ahead.
spk05: Thank you very much. Good morning, Patrick, Luke. If I could dig into growth and kind of walk through the pieces just to feel like I understand where we are at cadence. So really good place, I get it, you made a comment in your script. What's the exit momentum? If you did 6-3 as an average, what did you exit the quarter? How do I think about what I'm entering 2Q with?
spk09: Michael, so a lot of our base Q1 surcharges and pricing happens on Jan 1, right? So you really have a big January number that's starting that. And then if you looked at the guide on the normal cadence of what we were anticipating, you would have been ratably stepping down through the year just by virtue of the math. Now, as we commented and intend to do, we think there's incremental pricing and surcharges that we need to go out and get after. And so if the normal cadence would have been a step down from the Q1 level to Q2 of sort of 50 to 70 basis points, I think the incremental price and surcharge that we're now going after is going to temper that stepping down. Still, the expectation today, absent, you know, material net new pricing, is going to be a step down, but at a lower cadence than we would have previously anticipated.
spk05: So it's got a six handle on it or a very high five, low six?
spk09: I think that's exactly right with where we sit today, Michael.
spk05: Okay. Yeah, you know why we're both laughing. So volume 3.1, Exeter, Murph, I get that. You alluded a little bit to regional. Is there a little bit of a lag to the pace at which solid waste Canada is recovering? Not to be dismissive, but to look at a harsh winter, it's almost summer. I'll come back to the office in the fall instead of, given that some are so short up there. And therefore, some of that leverage is still in front of us. So the 3-1 is even more powerful.
spk02: Yeah, I think that is so. I mean, you have to bifurcate between the urban markets and the secondary markets. I think secondary markets are, you know, getting back to sort of family or, you know, normalized levels. I would say certainly in the large urban markets, when you sort of look across Canada, I mean, the big eight primary markets, when you're thinking about Vancouver, Edmonton, Calgary, Winnipeg, you know, Toronto, Ottawa, Montreal, Halifax, those markets, you know, are still, I would say for the most part, you know, still way off pre-pandemic levels. And a lot of that's driven by exactly what you said, people getting back to offices and getting back to a normal work schedule. So, Listen, there's been, I mean, these results that we presented here are in the face of a full January shutdown in Canada again, right, with Omicron. And I think, you know, that took some time from February to start to come back online. Most restrictions came off at the end of March. Now you actually are back to fairly normal living for the most part in Canada. Restaurants, sporting events, et cetera, all happening. But I think you're 100% right as we fully get back over the summer into the fall and Assuming no other ways and assuming the Canadian government sticks on the moves off of their COVID zero strategy, which I think they've done, you know, we're going to be, we're going to have some upside here on the volume side for sure. And you're seeing that a lot on the environmental services side, obviously. We knew it was going to come. It was just a question of when. And, you know, it came with a vengeance in sort of late February and March, post the Omicron shutdown in January. So I think we're, Yeah, I think we're positioned really well here, and we're pretty bullish about what that looks like. Obviously, we like to temper that expectation because we never know. I think we've said this five or six times now, but I think now we're on the other side of it, and we've finally moved on.
spk09: Michael, the other point on that that I'd highlight is if you think about Q1 over Q1, Q1 2021 was negative 3.2% volume. And so here we are printing the 3.1% positive ex-MIRF. If you think about Q2 of 2021, it was plus five or plus five and change. So arguably a much tougher comp there. Our original guide contemplated being close to flat by virtue of that tougher comp. I think for all the reasons Patrick just said, we see upside to that number. But because of the math on the comp, I think it's going to be something less than what the print was in Q1.
spk05: Right. Fair enough. And that's very helpful. So if I could touch on the M&A, 21 deals, you thought you'd do 25 to 30. I'm assuming of the 21... Sprint's big. So of the 300 million of revenues sort of 200 of Sprint 100 of it is the other 20. And you even frame 13 of them are really little. So can you talk a little bit sort of about the sizes inside that portfolio that you've acquired? And then where are we? I'm imagining all the little ones? Are you fully integrated already? And Sprint maybe takes 90 days, but can you talk about the integration?
spk02: Yeah, so I think that's a good question because it's certainly important to unpack the M&A. I mean, if you look at the 21 deals, like you said, Sprint, Large, will be integrated between now, fully integrated between now and sort of August 1st-ish. You know, that's the timeline we had laid out. I mean, obviously certain parts of it, accounting, HR, that stuff's moving over quicker, but fully integrated sort of by August 1st. And then you had 15 deals that were smaller than 10 million of enterprise value, right? So very small, just little regional tuck-ins, generally hauling only that tuck into our existing facilities, leverage our fixed cost base of, you know, transfer stations, recycling facilities, landfills. And then you had five between 10 and 30. But that group of 20 acquisitions will be fully integrated over the next 30 to 60 days. So it'll be fully on our platform. And, you know, it'll just run in the normal course. But nothing out of the ordinary. Very simple, you know, spread through, you know, nine provinces in Canada, 26 states in the U.S. So not a lot for the teams to take on.
spk05: And of the $300 million, how much of it's U.S. versus Canada?
spk02: So, well, I mean, of the total $300, you're, About 240 of it is in the U.S.
spk05: Okay. So it keeps the mix, it's not shifting the mix at all as well.
spk04: No.
spk05: And then lastly, on the RNG, there are so many developers now playing in this game. What are the chances, since you, I think, wisely are partnering, what are the chances you can negotiate where you put less capital up but get equal or better economics?
spk02: So that is certainly something that's available to us. I mean, you know, as the developers are sitting with a lot of capital on their balance sheets, they're looking at finding ways to differentiate themselves. And one way to differentiate themselves is by putting up capital. Obviously, we have the asset, which is the gas. So, you know, they have to find a way other than just saying, hey, we know to develop a site. to be able to move forward with that. So I think you'll see some of that as we share more details over the next couple of quarters. You know, reaffirming that, you know, $115 to $125 million of gas in the base case. Obviously, as the incremental sites come on, that number's going to go up. You know, we think internally the opportunity there to probably grow that to somewhere between $150 and $200 million. But, you know, what we're communicating today is sort of $115 to $125, which we feel we have in hand. And that's using, you know, fairly conservative numbers on the actual sale of the gas. And so all of that is, you know, well on track. It's coming online. Listen, it's coming online 2023 and 2024. You know, we feel very comfortable in, you know, what we previously communicated. There's been no changes. So all that will progress nicely over the course of the next sort of 12 to 18 months.
spk05: Okay, and last one for me. Given the data you shared on your script, Luke, it feels like there's about $8 million of real cost impact from fuel. Will the fuel surcharge cover everything from this point forward, and then the rest of the year you'll work at making up the $8 million?
spk09: Yeah, so, Mike, I... That's right for Q1. And I think, you know, you do have a timing lag. When you look at the spike in diesel, March was the majority of it, and then the pace at which you can sort of recover. But when you peel it all back, I mean, we're viewing fuel as a meaningful opportunity for GFL. I think when you look at the industry, the mechanisms that are in place and tried, tested, and true for recovering increased fuel costs, they exist. And we just have opportunity within our book to implement incremental quantum of that amongst our sort of customer base. Today, we're probably recovering 40% to 50%. And if you look at what best in class looks like, it's a much sort of higher number than that. And then in addition, the actual fuel cost itself, like managing the consumption. I mean, if you look, our fuel cost, I think, in the P&L was sort of a mid-5% to 6% number. I think we have some of our peers in the industry that that number is sub-3%. and that's a function of C&G and other sort of measures that, again, are opportunities available to us. So we foresee the fuel in totality, while there may be some noise from sort of quarter to quarter this year, is ultimately to be a great tailwind for GFL as we look towards what the profitability of this business can become. So yes, this year there's a bit of a go-get that we're chasing after, and if prices were to stay where they are today, You probably have a $25 to $35 million hole that you would have to get through incremental open market pricing or incremental surcharges that aren't there. Now, we're confident in our ability to go out and execute that. When we give our updated guide at Q2, we'll have incremental perspective on what we think any hold would be, but I think on the dollars per side, you're covered. And then the question is, how much of that margin impact can you overcome? And we're feeling quite bullish about what our opportunity set looks like.
spk05: Okay. Thank you very much for taking the question. See you in Vegas next week.
spk03: Thanks, Michael. Thanks, Michael.
spk00: Our next question is from Walter Spracklin of RBC Capsules. Your line is now open. Please go ahead.
spk07: Thanks very much. Good morning, everyone. So I just want to come back on volume but a little bit further out and noted in the U.S., we're past the reopening part. So to the point, Patrick, that you said it's behind us in Canada, it's way behind in the U.S., but still volume has accelerated. And I asked that to one of your peers, and they mentioned that there was, despite the view out there that volume for the industry is flat, the larger players have an opportunity to gain share through investment in technology and just simply offer better service. Is that something you ascribe to as well? Can we see sustainably higher volume on a go-forward basis longer term by virtue of size and service compared to your smaller peers?
spk02: I think it's possible. I think you're seeing some uptake particularly on the municipal side. uh you know as new tenders come out and municipalities have had uh you know some interesting experience is with some of the smaller players that probably haven't performed and have had labor challenges and have had equipment challenges so you know we're seeing some opportunities certainly on that side obviously on the ic and i side there's still recoveries to come in both canada and the us i mean i don't think we're fully recovered so yes i think There is certainly some opportunity. What that level is, I don't think it really moves much in the models, whether that's 50 basis points, whether that's 100 basis points. I don't think it's a material needle mover, but yes, I think there's opportunity certainly for the short term here that we're going to see some elevated levels on the volume side.
spk07: Okay. And on the green infrastructure partners, obviously that's a great opportunity for you. There's a nice interest that your shareholders have in that venture. How will we follow the progress of that roll-up strategy? Is that something you'll be – will you be updating on? Have they started out of the gate now, or is this something that's going to ramp toward you know, more toward the end of the year? You know, what would be the cadence of the progress of that roll-up strategy, and how will you, how do you envision updating us on the success of that strategy?
spk02: Yeah, so I think most likely we'll give semi-annual updates on just what the, you know, what's happening with the business. Probably we won't do it every quarter, but we'll, you know, have a brief update on the semi-annual basis. Obviously, the annual basis will give you the sort of full update. Listen, there's a lot of opportunity available in that business. There was a lot of opportunity when we owned it. Obviously, we chose to allocate capital to other opportunities we had within, you know, the environmental services space and our solid waste space, as you're seeing the amount of dollars we're deploying. But, you know, I think it's going to be a very favorable outcome for our shareholders. And we're starting right away. I mean, the team is active. We're in active dialogue on six opportunities in that LOB. And I think, again, all of those things that were in the pipe, just that we opted not to allocate capital to because of all the opportunities we had. And obviously, being cognizant of leverage and other things, we opted not to deploy those dollars. But now, In the private vehicle, those dollars will be deployed. And obviously, as a private company, there's different financing structures available to us through that. So it would minimize the equity need within that business. But eventually, like we said, we will take that business. Our plan is to take that business and create another public company out of it. So we put the wheels in motion already to start drafting prospectuses and other things. and, you know, it'll go on in the normal course.
spk09: Walter, just to clarify a point that Patrick made, you know, while the company is private, we'll be reporting under the equity method accounting. So on a quarterly basis, there will be certain disclosure, but based on the materiality of that to GFL as a whole, it's probably not going to give the color that folks might be looking for. So what we've contemplated, what Patrick alluded to, is on a semi-annual basis, provide a more robust sort of update in one of our type investor decks. so individuals can get the information above and beyond the financial statement disclosure, because while private, that disclosure unto itself probably won't provide all the color that folks are looking for.
spk07: That's perfect. And just the final one here for me, Luke, you updated the guidance to reflect the kind of mark-to-market of the M&A activity to date, but you didn't, now the net debt guide for year-end, does that hold even with the updated M&A guidance? In other words, the fact that you didn't change it does consider and contemplate the M&A pace you've done, or is that net debt also to be updated when you do your more formal update later on?
spk09: Yeah, Walter, the net debt number, the leverage, will need to get updated to reflect the M&A. Recall the guide, I think, said deleveraging of 50 basis points from 4.75 to 4.25 with no incremental M&A. And to the extent there was incremental M&A, that would temper the pace of delevering, although delevering is still capable because of the power of the free cash flow. So in light of the quantum of M&A that we've been able to achieve so early in the year, I think this will be another outsized year of M&A, it looks like. And so with that, the ending leverage level will be different than that guide that contemplated no M&A, although we still are sort of committed to the overall direction from the levering that we've communicated. So, again, by the time we get to Q2 and we speak, we'll have better visibility on how the year as a whole plays out with some of those base business considerations. And at that time, we'll refresh our views as to where we think the year-end leverage could end.
spk07: Got it. Okay, that's all my questions. Thanks very much.
spk09: Thanks, Walter.
spk00: Our next question is from Kevin Chang of CIBC. Your line is now open. Please go ahead.
spk04: Hi, thanks for answering my question. I just have a question on pricing, and more specifically, when you acquire these businesses, what's the delta between the pricing they're getting in the market versus maybe what you find acceptable? Are you finding that their pricing is similar to what you would be doing? Is there a a negative delta there, and if it is the latter, how quickly can you reprice that book so that margins or the return on investment capital is where you want it to be? Sure.
spk02: Yeah, I mean, typically the smaller ones, put the larger ones away. I think it's obviously bifurcated by customer base and what the contract structure is of the contracts that they have. But know what history tells us that we tell most is that the lion's share of the smaller ones particularly you know these call it 20 acquisitions that we did between you know a million and 30 million of enterprise value typically don't have you know fuel escalators that work properly typically aren't don't have proper environmental surcharges so there's definitely a you know a good pricing opportunity within those books of business and You know, with our model, obviously, of integrating these within 30 days of close and putting them on our platform, that pricing will effectively take place within the first 60 days of the acquisition. So, I mean, obviously it's subject to the contract, but generally that's what we're seeing today, that there is a very large pricing opportunity within those books, you know, just based on bringing the surcharge levels to where they should be.
spk04: Okay. And actually, that was my follow-on question. Luke, you talked about kind of the opportunity there to kind of reset some of these surcharge programs. You know, where do you see the hole? Is it primarily from recent deals you've made and to the extent that those small players weren't proactively implementing these surcharges? Is that really where you see the opportunity or is that part of your legacy book that you think you could also clean up here just given the inflationary environment?
spk09: Kevin, it's across both those buckets. I mean, we were talking, you know, pre-COVID about the latent pricing opportunity in the legacy book, and a big component of that was tied to the surcharge program. And then, as Patrick just alluded to, some of the, you know, recent M&A, while the biz books may be priced well, many don't have the surcharges at the levels to which is more sort of customary in the industry. So, I mean, when you look at what the art of the possible is here, I think there's some peers that are well-established in this that cover dollar for dollar or maybe even more in certain respects. And we're probably at a position today where we're covering 45, 50 cents on the dollar and with a timing lag. So I think there's a real opportunity as we move forward to not reinvent the wheel, but simply just to get to the place where a lot of our peers already are. And I think that's a... important consideration when you think about where the path for us as we go forward versus those that perhaps have already optimized, you know, their profitability in this regard.
spk04: Okay, that's helpful. And then just last one for me, and I know you're not going to give me all your update on the second quarter, but can you remind us again, when you set your base outlook for 2022, you know, you're obviously tracking ahead on pricing, but can you remind us what you would assume in terms of where the underlying recovery would be. I guess maybe this is a more Canadian question because we're facing more challenging times back in January and February. But are we through what your base level of recovery assumption would have been as we sit here today? And is there a way to level set, I guess, what you would have assumed in terms of, I guess, what the economy would look like post-Omicron, just to give us a sense of maybe what the potential upside could be, I guess, when we update that base business?
spk09: Yeah, so Kevin, I think certainly Q1 played out better than anticipated from a volume perspective in Canada, and that was most prevalent in the environmental services segment, and we're delighted to see that recovery starting to materialize. I think it was Michael often earlier making the comment, well, Canada, now it's May, it's summer, should we therefore continue to sort of drag our feet until September? And that's the sort of one unknown that we have, because as much as we had this momentum, and clearly last night at the hockey game, people are out and enjoying the freedom once again. Is there going to continue to be just a delayed draw because we're finally entering into summer? So I think going back to my comment about desire to reserve our update timing to when we speak in late July, you know, the next couple months will tell. We do think it is something better than what the guide was based on what we've seen thus far and what the next couple months look like. How much that upside may be, you know, remains to be seen. What I'd say for Q2, Specifically, and I alluded to this earlier, originally because of the strength of Q2 2021, we thought of this Q2 as sort of flattish, where now I think there's a path for Q2 to be sort of plus 100, 125 basis points, right, on volume. So, you know, that's the near-term look, but how it plays out for the year as a whole, I think we're asking to wait until we come back in July and we'll have better visibility at that time.
spk02: We're feeling pretty bullish about what the rest of 2022 looks like from our perspective, so I think it'll be a favorable outcome given the trends we're seeing today.
spk04: Obviously, you're starting to get off on a strong note there. Congrats on a good Q1, and I'll leave it there. Thank you. Thank you, Kevin.
spk00: Our next question is from Tyler Brown of Raymond James. Your line is now open. Please go ahead.
spk06: Hey, good morning, guys. Hey, I just want to make sure that I've got it. So number one, Luke, to be crystal clear, only 40% of your book has a surcharge mechanism on it today.
spk09: Patrick alluded to this. Sometimes what happens when you have a new sort of customer that's coming on that has no surcharge at all will introduce a surcharge, but it just starts at a fixed amount. a low fixed amount to recover, and it doesn't properly have the flex mechanism. So earlier days and all through 2021, you saw we were reporting price and surcharges together as a number because much of that we were going out and getting that initial base level surcharge was effectively just like a base PI. What we now need to do, and I give credit to Greg Yorston and the team that are actively doing this, is now pivoting those to the proper flex model that you recover incremental as the price moves. So the starting point is getting something in there, and then you move from there. So when you look at it all today, we're covering 45 cents on the dollar by virtue of those in the solid waste business alone. Our environmental services has a bit of a natural sort of hedge. But that's where the opportunity set lies. It's to now take a bunch of those surcharges that exist and get them to the proper sort of ones that pivot in response to market pricing.
spk06: Right. going to wildly oversimplify this, but isn't this a pretty easy, quick fix? I mean, this is a very common practice. Couldn't you just kind of code it in pretty quickly?
spk09: yes it's you know i think you have wildly oversimplified it but yes and you know that's why when i'm talking about the opportunity here it's not like we need to go out and do something as you said this is a common practice it just you know takes some coordination to get that all sort of in place and so you know that that is what the effort but i think the pace at which we'll be able to pivot and recover incremental dollars um will will be impressive so
spk06: and you know that's why let's see how we can you know execute over the next couple months and then hopefully come back with some good news when we speak in the near you know next couple months okay that's helpful and then on gip i just want to make sure that i have it all here so number one that transaction has fully closed that happened in april you got 225 million canadian for your contribution and you retain about a 45 percent uh stake in the new entity. Is all that correct? Correct. Okay. So now that GIP is fully funded and that COCO deal is closed, what is the pro forma EBITDA? And more importantly, what is the pro forma leverage so that we can kind of ascribe value back based on whatever multiple we think is appropriate, et cetera, et cetera?
spk02: Yeah, so the round numbers are $190 million of EBITDA on a pro forma basis for 2022. Pro forma leverage on the business today is roughly four, well, you can pick.
spk06: High fours?
spk02: Yeah, I would say mid fours. Okay.
spk06: Okay, mid fours of EBITDA.
spk02: Leverage, right? So we're just roughly, there's like $859 million of debt on it today. Okay, okay.
spk06: All right, that's extremely helpful.
spk02: And then, Luke, can you just kind of give the high-level... Tyler, if you look at the industry, I mean, those things trade anywhere between 10 and 14 times, depending on what the asset is and where it is. This business, on a performer basis, will be the gold standard in terms of industry-leading margin profile, industry-leading free cash flow profile for that business. This is a mid- to high-teens margin business when the industry is at 10% to 13% margin. And there's a significant amount of M&A opportunity that's going to come behind that.
spk06: Yeah, okay. All right, yeah. And updates will be... I appreciate it as time goes on. So my last one here, just can you kind of give the high-level pieces through the solid waste margin walk from 31 to 29.9, just thinking about things like fuel, M&A, commodities, et cetera?
spk09: Yeah, so Tyler, the walk this quarter is a little unique just based on what I'd call the anomalous margin profile of the prior period. And for the reasons I articulated in the prepared notes, the 31% was arguably 100, 150 basis points higher than it ought to be when you think about the normal seasonality cadence. And that was a whole confluence of factors that benefited the margin profile of the Q1 2021. So if you think about it in the context that there's this sort of roughly 150 basis points of this anomaly component, you then walk through and you have a 100 to 105 basis point drag from fuel pricing. You're offsetting that by commodities to the tune of sort of roughly 85 basis points. And you have a sort of, I think we were saying, 30 basis point drag from acquisitions. So if you just look at those three pieces, you then are left with this delta of what I call the normal course underlying margin expansion you know, from the overall operating leverage and pricing strategies of the business.
spk06: Yeah, that's kind of my point. So at a core level, margins were slightly up.
spk09: Yeah, and I think, you know, in this inflationary environment, to be able to do that is a real testament, you know, I think it's a testament to the industry, because again, like, I know everyone's reporting, and there might be some slight sort of pressure, but overall, I think it's a testament that the industry and the pricing available to it can more than cover the cost of inflation. There may be a temporary timing difference in a quarter when fuel runs up in the last 30 days to sky-high levels. On balance, when you peel it all back, the operating model and the operating leverage is there, driving underlying margin expansion by the strength and quality of pricing that's available.
spk06: Okay, perfect.
spk09: Appreciate the time, guys.
spk06: Thanks, guys.
spk00: Our next question is from Jerry Rivich of Goldman Sachs. Your line is now open. Please go ahead.
spk10: Yes, hi. Good morning, everyone. Hi, Jerry. Hi. I'm wondering if you could just expand on your comments, Luke, on the landfill gas investments being ahead of plan. That's nice to hear. I think you had spoke about One plan starting up in the first quarter of 23, another one in the second quarter. You know, what's the updated timeline and, you know, how quickly do we get to the full earnings run rate in those operations once they do commence?
spk09: Yeah, so Jerry, I think the, you know, original guide in Complay that we said that the capital deployment would be mostly in 2023. And it looks like, you know, the pace at which these guys are moving, there'll be more opportunity to deploy that capital earlier in 2022. So if there was originally going to be 20, $25 million, that number could be upwards of 75 to 100 within this year. Now, that incremental CapEx with the incremental 90 million proceeds of disposal, we're still covered from a net CapEx number for this year, so no change there, but it would just be sort of accelerating that path. So your comment about the first projects coming online in the first half of 2023, that remains accurate where we sit today. suggested that everyone just think about that as coming online late 2023, just so we, you know, build in a little bit of buffer. But I think where we sit, there's a path for that to be earlier in the year and we'll therefore enjoy the benefit of that free cash flow within 2023, as opposed to it just being a 2024 number.
spk02: Yeah, they were saying, you know, commission the first few, I mean, we obviously targeted the biggest, you know, SCFM site today, you know, to come online first, so those The plan is to have those sort of up and online by April. And then, you know, from their perspective, there's like a three-month commissioning, you know, timeframe that gets them, you know, fully sort of optimized in their models by sort of mid to late June.
spk10: Super. And then can you update us with your thoughts on spot market versus, Contract rates, you know, Opal spoke about having some European off-take agreements in the mid-30s, which was nice to hear. I'm wondering how the off-take market's developing in your view. And, you know, it's been a nice move in the spot market for both RINs and Henry Hub gas prices since you originally made the investment decisions. Any thoughts to what you intend to hedge versus term out?
spk02: Yeah, I mean, again, we're not an energy company, so we're still of the mindset that we are going to enter into some long-term offtake agreements. You know, we're being a little bit patient at the moment, just given the, you know, material moves in the voluntary market. And what I mean by the voluntary market is really just sort of large corporations that are focused on ESG-type initiatives that are looking to significantly reduce their carbon footprint. So, you know, we're in negotiations and in talks with a lot of the voluntary market. You know, we will float a certain amount, so we'll have some volatility with the RINs, but, you know, our model still internally is to fix 60% to 70% of the revenue stream coming out of those facilities so we don't get the quarter-to-quarter volatility and have to explain to investors about why our, you know, cash flow estimates, et cetera, changed based on sort of where the RINs are. I mean, this is a material amount of money. You know, like I said, we said with the initial one, there's $115 to $125 million of incremental, you know, sort of free cash flow. The reality is when you look at all the sites combined, that number could grow to easily $150 to $200, and, you know, that's a material amount of money. From our perspective, you buy this for the stability of the industry, not to be energy traders. We plan on locking in a significant amount of that gas in terms of long-term contracts.
spk10: Patrick, is that market developing? I think it's been in the early stages of ramping, at least people's willingness to take long-term deals. Can you comment on how that market's developing?
spk02: Yeah, the markets, I mean, it's changed so much even in the last eight to nine months since we started talking about it, right? So, I mean, I think from our perspective, the rates have moved up, which they should have, obviously, as RINs moved up. You know, when you look at what RINs are forecasted for next year, they're forecast to come down a bit, but that doesn't change much. It's really just, again, protecting yourself from the downside and sharing in some of the upside. So, you know, the way these new longer-term agreements are, We'll have a floor price, but then we will share in the upside beyond a certain price, and that's what's being negotiated today.
spk10: Super. And then just to shift gears, Luke, I know with your accounting systems, you have really good visibility on inflation and real-time basis. I'm wondering if you can comment on what was the inflation cadence year-to-date and any differences between U.S. and Canada and any signs of potential in moderation based on what you're hearing from your purchasing teams? Outside of diesel, of course.
spk09: Yeah, I mean, obviously the diesel component, Jerry, has really skewed everyone in sort of Q1. But if you take that out of the mix, I mean, at the end of the day, labor is really what's sort of driving. And as we've said previously, throughout last year and remains true today, we've seen it less in Canada versus US as much as the secondary market versus the primary market, right? In the dense urban areas, we've seen greater wage inflation than we have in our sort of secondary markets. And I think that's tempered the impacts on our business versus what it otherwise may have been. So as expected, Q1 was a high number. I think all in, it was low sixes in terms of the wage inflation. But that is based on the comp of Q1 2021. I think more telling is the rate of acceleration sequentially from the prior quarter, which was sub 50 basis points. Right. So if you look through our 2021 quarter over quarter, you had two to 300 basis point increases as we were feeling the pinch. And now we're starting to lap all of that. So I think Q1 was the peak. Q2 will still be elevated. But as you get into Q3 and beyond, I think at the current pace, you're going to see those sequential decreases significantly reduced. and therefore be on a path where, you know, we could end the year where, you know, probably a little bit higher if the original guide for the year was sort of four low fours. You're probably a little bit higher than that, but you're going to see the pricing respond to, again, more than cover.
spk10: I appreciate the discussions. Thanks.
spk03: Thank you.
spk00: Our next question is from Hamza Mazari of Jefferies. Your line is now open. Please go ahead.
spk08: Hi, this is Hans Hoffman for Lean for Hamza. Can you just comment specifically how much of your book of business is CPI indexed and sort of how those contracts are structured and then what CPI book is running versus open market?
spk09: Yeah, so about a billion one, a billion two of the book of business in terms of revenue is tied to CPI links that spread across just 800, 900 contracts. Most of which are in residential collection. We also have other post-collection ones linked to that. The resets of that book of business happen roughly 40-45% in Q1, 25-30% in Q3, and then the balance is sort of spread between Q2 and Q4. The reset mechanisms can be based at point in time. Many of them are based on reading sometime before the contract reset. So a January 1 pricing may actually be based on what the levels were at June 30th of the prior year, for example. And that's often set up like that way. So municipalities have visibility into what their sort of upcoming budgets look like. Do you think about that book normally running at a sort of blended sort of 2% number? You're seeing that book today more at a sort of 4% to 5% number. Certain contracts are now resetting that are tied to meaningful components on diesel at much higher rates than that, but a lot of it is still lagging in the current inflationary environment. So I think in reality, the real benefit on that book of business will only be realized in earnest by 2023. So we're happy with where it's going. There's still a lag, but we just view that as opportunity and upside as we go forward from here.
spk08: Okay, got it. Yeah, that's helpful. And then could you just comment a bit on, you know, labor turnover, like sort of what you're seeing there, I guess, you know, the assumption on labor inflation for the year?
spk09: Yeah, so the labor turnover in Q1, you got to remember there's a meaningful seasonality component than what we're seeing. And versus the comps of last year, there's been meaningful improvements for sure. So, you know, I think Q2 and Q3 is really where the story will be told. I think the Material friction that was being experienced in the sort of peak of last year has definitely subsided. We're going into the busiest season with a much better turnover rate and a complement of drivers that we think. you know, positions us far better for success than what we experienced in the second half of last year. But, you know, as we've said, it's really sort of May through July that will really sort of tell the tale. So we're feeling good, but when we come back and speak to you at the end of Q2, we'll have a sort of better perspective on exactly how it's playing out. On the labor inflation rate, you know, I think I just provided that color in the previous question. Got it.
spk08: Thank you. Thank you.
spk00: We have no further questions, so I'll hand back to our hosts for their closing remarks.
spk02: Well, thank you, everyone, for joining the call. I'm looking forward to seeing everybody at Investor Day in New York. And for those not attending, I look forward to speaking to you after our second quarter. Thanks very much for joining.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your line.
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