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spk04: As a reminder, this conference call is being recorded. I would like to welcome everyone to the GSL Environmental Inc's results call for the third quarter of 2022. I will now turn the call over to Mr. Patrick DiVigi, the CEO of GSL. Please go ahead, Mr. DiVigi.
spk05: Thank you and good morning. I would like to welcome everyone to today's call and thank you for joining us. This morning, we will be reviewing our results for the third quarter and updating our guidance for this year. I am joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.
spk10: Thank you, Patrick, and good morning, everyone. We have filed our earnings press release, which includes important information. The press release is available on our website. We've prepared a presentation to accompany this call that is also 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 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. securities regulators. I will now turn the call back over to Patrick.
spk05: Thank you, Luke. The quality of our assets and capabilities of our team were once again highlighted in our third quarter results. The success of our pricing strategies and focus on cost efficiencies continue to drive double-digit growth, even with the significant inflationary impacts that have persisted far longer than we originally anticipated. Organic revenue growth is over 15%, with double-digit revenue growth in both our segments for the third quarter in a row. Solid waste pricing accelerated to over 10%, including fuel surcharges. Solid waste volume growth was over 2%, excluding non-recurring MRF revenues. Excluding surcharges, pricing was 8.6%, 130 basis point sequential increase over Q2. We have achieved this result without the full benefit of the significant price increases we expect to realize in our CPI-linked revenue in the coming quarters. Environmental services realized organic revenue growth of 37%, with almost all of our individual market areas exceeding expectations. The continued re-engagement of our customer base that we saw in the first half of the year, the impact of our pricing strategies, and the price of reused motor oil contributed to mid-teens of this organic growth. Significant volume in our emergency response line of business, much of what we subcontracted to third parties, more than offset what we believe is a temporary delay in soil volumes from a few large projects, primarily in our mid-Atlantic soil business. Overall, we're thrilled with the success of our integration of the TerraPure acquisition that we completed last August and are extremely optimistic about the opportunities ahead in this segment. We achieved nearly 20% growth quarter-over-quarter in adjusted EBITDA. We believe that achieving this level of performance in this environment demonstrates the effectiveness of our strategies. Persistent broad-based cost pressures have continued to have significant impact, but our business has responded through the pricing and cost efficiencies to recover sustained substantially all of those excess costs. The extent of this cost recovery, as well as the business, has impacted our adjusted EBITDA margins during the quarter. Local walking through the bridge for our solid waste margins, but at a high level, the impacts were seen primarily come down to fuel prices, and we were continuing to see record cost impacts. This quarter, we also saw significant increases in the pass-through of fuel costs from third-party service providers. As we've said before, we're in the early stages of our fuel cost recovery program. We have begun to see significant benefits this year. As this program continues to mature, we see very significant opportunities to drive more price from our existing book of business and corresponding improvements to our EBITDA margins over the near term. Margins were also impacted by significant cost pressures from the impact of higher cost third party maintenance and increased truck rental costs from delays in spare parts and new truck deliveries. While these non-fuel cost pressures haven't subsided yet, we are beginning to see the signs that unit rate cost inflation is moderating and supply chain disruptions are starting to ease. We expect the impact of our pricing and surcharge strategies together with moderating cost inflation will result in significant opportunities for outside margin expansion through 2023 and beyond. We completed another six acquisitions during the quarter, all smaller tuck-ins that added density to our existing platform. The year to date we've acquired approximately 430 million annualized revenue and continue to manage a robust and attractive M&A pipeline. On the ESG front, we will release our 2021 sustainability report later this month. The report will include our full set of ESG related goals, targets and commitments for the first time, including our commitment to increase our material recovery services through investments in our network of processing facilities for recyclables. Our Arrow Road MRF outside of Toronto, which is one of the most advanced material recovery facilities using the latest sorting technologies, was named the 2022 Recycling Facility of the Year by the National Waste and Recycling Association last month. On RNG, five of our projects are in active development. These first five are amongst the largest RNG projects in our portfolio and are expected to come online starting in mid to late 2023 and produce a total of more than 6 million MMBTUs of RNG. We remain highly confident that we'll see these projects begin to generate cash flow in 2023 and continue to ramp up through 2024 and beyond. Another seven sites, representing approximately 7 million MMBTUs, are under negotiation and have started development. And we have just received positive news that should allow for the development of our Moose Creek landfill in Ontario, which will produce approximately 3 million MMBTUs. We continue to evaluate development partners for the nine other sites that we have identified for development. I will now pass the call back over to Luke to walk us through the investor presentation, and then I'll share some closing perspectives before we wrap up for questions.
spk10: Thanks, Patrick. In our investor presentation, we have provided supplemental analysis to summarize the moving pieces in the quarter. If you turn to page three of that presentation, what we have laid out are bridges between our implied Q3 guidance and our actual Q3 results. Revenue on the top of the page and adjusted EBIT on the bottom. While we hope the components are relatively self-explanatory, I would note the following. Combined solid waste price and surcharges were nearly 30 basis points ahead of expectations in aggregate, but comprised of a different mix, as in certain instances we saw opportunity to first lean in on base price before optimizing our fuel surcharges. The outsized contribution from environmental services, subcontracted revenue was realized at dilutive margins and required investment in working capital, but had no CapEx requirements and will ultimately be free cash flow accretive. Commodity prices averaged $250 in the quarter versus our expectation of $325, and in addition to the pricing impact, we realized some incremental costs in those select markets where we rely on third-party processors for our recycling collection business. A large-scale soil remediation project that we've been awarded was unexpectedly postponed until 2023, together with delays in other soil projects that we believe are supply chain related and temporary in nature. Several of our third-party service providers, mostly long-haul transportation, passed on significant price increases in order to recover their own internal fuel cost inflation. We saw a modest amount of such increases in Q2, but were faced with significant incremental increases in Q3. During the summer, we had fires at two of our MRFs in Canada, which resulted in near-term operating inefficiencies and excess costs. While the disruption will cause temporary cost headwinds, these were two of our older facilities, and these events will act as catalysts to build back better, which will ultimately generate highly attractive returns. Turning to page four, we have presented a bridge for solid waste adjusted to EBITDA margins year over year. As can be seen, fuel prices accounted for 175 basis points of margin impact. net of any benefits from surcharges. Commodity prices were 85 basis points of margin headwind, including 30 basis points from one-time MRF volumes that we knew would not recur. And M&A was another 25 basis points. Everything else was net positive, including overcoming the $5 million cost headwind from the MRF fires, which we believe is a testament to our business model when considering the extent of cost pressures. Page five summarizes the sequential improvements we've made on our fuel cost recovery programs during the year. This was one of the areas of self-help that we identified as a priority at our investor day, and we are very happy with our rate of progress. These improvements are despite our decision to focus on base price instead of surcharges for certain customers, as I previously mentioned. We believe these decisions are right for the long term, but have had the effect of delaying some of the anticipated ramp in fuel cost recovery. We continue to see significant opportunity from surcharges and are focused on optimizing our practices in this area. On page six, we have laid out how we anticipate the balance of the year to play out. On the strength of the third quarter top line results, we are raising our revenue guidance to approximately $6.6 billion. This is largely a result of the Q3 outperformance and the impact of recasting Q4 at today's FX rate of 1.36 versus the 1.28 that was used for the last guidance update. We have assumed commodity prices of $150 for the remainder of the year. We are affirming our previously provided adjusted EBITDA and free cash flow guidance as the strength and outsized pricing, volume, and the impact of FX is expected to be offset by the impact of commodity prices, the two MRF fires, and the indirect fuel pass-throughs from our transportation and other third-party service providers. On the bottom half of page six, we have fleshed out adjusted free cash flow in a bit more depth as there are a few moving pieces. The last row of the first column shows the $318 million of adjusted free cash flow we reported for the first nine months of the year, the reconciliation of which is provided in our filings. Included in the $318 million is a $150 million investment in net working capital for the year-to-date period. The seasonality profile of our business is such that we typically see an investment in working capital over the first nine months of the year and then a reversal by year-end. This year's working capital investment has been also impacted by the acceleration in revenue growth and, to a lesser extent, recent acquisitions. We anticipate the year-to-date net working capital investment to reverse in Q4, providing a significant tailwind to Q4 adjusted free cash flow. Also not shown on the page is that we now expect cash interest expense of approximately $410 million. That's about $10 million higher than the previously anticipated interest expense on account of the higher rates and FX rates. We also expect net capex of approximately $600 to $650 million, or $750 to $800 million when excluding the $150 million normalizing adjustment for the excess proceeds from the divestitures that we received in 2021, but deployed in the current year. The topic of normalizing adjustments is one that we understand to be an area of focus for certain users of our financial reporting. So on page seven, we presented a summary of the components of our adjusted EBITDA from 2018 through today. As can be seen, The relative impact of adjustments has materially decreased over this period. Acquisition transaction integration costs have consistently remained between $60 and $80 million, despite the significant increase in adjusted EBITDA since we went public. We anticipate continuing to incur incremental transaction integration costs as we deploy capital to M&A. We continue to believe that adding these costs back is the best way to accurately depict the earnings potential of our existing business at any given point in time. and will therefore continue to adjust these costs in the future. However, we expect that the relative weighting of these ad backs will continue to decrease consistent with the trend since 2018. Leverage is another area that we know is a focus for many. Reported net leverage at September 30th was 5.19, but the increase was largely the result of the translational impact of the rapid devaluation of the Canadian dollar against the U.S. dollar during the last two weeks of the quarter. While this FX volatility had a significant impact on the Q3 balance sheet, it had minimal impact on our trailing earnings. If FX rates remain at current levels, the FX-related increase in net leverage will largely reverse on a go-forward basis as our US dollar-denominated EBITDA is translated to Canadian dollars at the higher FX rate. To facilitate comparison on a like-for-like basis, page 8 sets out a simplified constant currency presentation of net leverage and illustrates our growth-driven delevering capabilities despite significant unprecedented headwinds and the continued execution of our M&A strategy. While we believe this year once again demonstrates the resiliency and financial strength of the business, we understand the current leverage levels are perceived as suboptimal and we remain committed to reducing leverage over the near term. On page nine, we have summarized our existing debt profile to provide additional context for consideration when thinking about leverage. On the left of the page, we highlight that two thirds of our debt is fixed rate with over five years of average term remaining. On the right, we highlight that we have no significant maturities for three or four years and that the majority of the amounts coming due in 25 and 26 are floating rate debt and therefore already largely priced to current market conditions. Lastly, we highlight our expectation to receive material credit rating upgrades prior to the majority of a significant amount of our debt based on enhancements to our credit quality. So while we remain 100% committed to deleveraging, we're also highly confident in the capacity of the business to support our current debt obligations. If you look at page 10, we've laid out initial perspectives on 2023. When we think about recent price and volume trends together with anticipated CPI resets, we do not see a path where organic price and volume growth is less than high single digits. Add to this the nearly $200 million of M&A rollover already in hand, and the impact of current FX rates, and we're expecting a minimum of 12% top line growth, even after accounting for the assumption that commodity prices stay at today's levels for all of 23. As Patrick said, we believe 23 will be a year of outsized margin expansion opportunity, as the strength of recent pricing, together with the rollout of our surcharge programs, continue against a moderating level of cost inflation. We anticipate at least 100 basis points of margin expansion, inclusive of the headwind created by the decrease in commodity prices, yielding high-teens growth in adjusted EBITDA in 2023. Adjusted free cash flow will be contingent on our finalized CapEx plans, but even in the face of mid-teens headwind from higher interest costs, which are expected to be approximately $490 million in 2023, we anticipate double-digit adjusted free cash flow growth. Consistent with past practice, our future outlook does not contemplate additional M&A. Any contribution from transactions that are completed will be incremental to what we've laid out currently. On page 11, we have illustrated how the potential 2023 performance would impact our leverage profile. This is a carry forward of the slides we presented at our investor day, with the punchline being that the organic growth profile of the business is such that the business is expected to deliver inclusive of any future M&A. With that, I will turn the call back over to Patrick.
spk05: Thanks, Luke. We're obviously really excited about our initial thoughts on 2023, and as Luke said, there are several paths to upside above and beyond what we laid out. We look forward to providing a more definitive guide when we report our Q4 results in February. And to circle back on leverage, I think it's important to remember why and how we got to where we are today. We went public in March of 2020 with leverage in the low fours, with a plan to double the size of the business from a billion of EBITDA to over two billion of EBITDA in five years. As you heard in our 2023 outlook, we believe we've achieved that goal by early 2023, doubling the business in three years. And yes, while leverage has modestly increased in the process, we have consistently said that our elevated leverage would be temporary and we would deliver once the core building blocks were in place. We're doing that just now. Despite all these headwinds we saw this year, and we are committed to continue down this path, organic growth alone will get us there in a couple of years. As much as we feel comfortable with the current balance sheet, as I've often said, we are shareholders first. We fully understand the impact of maintaining leverage at the current levels and are absolutely committed to reducing leverage to a level more consistent with industry norms. I think I say this on every call, but as I watch our business perform quarter over quarter, I have never been more optimistic about our future and the ability of Team Green to continue delivering. I will now turn the call over to the operator to open the line for Q&A.
spk04: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Michael Hoffman with Spiegel. Your line is now open.
spk08: Hey, good morning. It feels like afternoon after five earnings calls in a row. Luke, can you help us with what is the dollar impact in 22 of the total fuel, direct indirect, that you cannot recover yet and that you, to show the power of this, what you could recover on a dollar basis in 23 as you keep making progress?
spk10: Yeah, so Mike, I think that's a great question because that's really the focus of what we're seeing at the margin line. If you think about fuel this year, you know, you probably have around $150 million in increase driven by price and price alone, right? So it's taking out volume growth and taking out the acquisitions. And, you know, you started the year recovering 30 cents of that. By the end, you know, where we're at today, we're closer to 75% on a run rate basis. So, you know, when you blend that all for the year, you're probably going to be recovering through the surcharge mechanism 40% of those dollars, let's say. Now, when you go into next year and we continue to mature the program, I think the industry has clearly demonstrated an ability to recover all of those dollars and perhaps some of the indirect dollars as well. So that's why we're highlighting the magnitude of that opportunity and the margin accretiveness that it will initially be upon first-time recognition. I understand that subsequent to initial recognition, there can be margin impact moving up and down, but the first-time recognition This is all accretive, and I think it's important for folks to understand how much runaway we have in this area.
spk08: And just to be clear, the 150 is just your direct increase in what you have to spend to buy fuel and that of adding new customers and everything?
spk10: So 150 is about 130 of the direct fuel increase, Michael, our direct fuel cost, and then I'm including 20 in there of this indirect that we've highlighted just in relation to the third-party transport haulers where we've had those fuel surcharges passed on to us.
spk08: Right, and ultimately, like you've said, the industry has shown its ability to recover all of its fuel cost incremental, and that's your goal, and that's the power of this is that
spk10: 90 million of it's not being covered and that alone can you so you think you can cover that 90 million all else being equal in 2023 i think what the guys would want me to tell you is by exiting 2023 we could be at that level uh but it will be a ramp throughout the year as we've demonstrated the ramp during this year okay um
spk08: Leverage is something everybody wants to talk about. I have two questions on it. On a constant currency basis, will your leverage at the end of the year be less than it was in 2021?
spk10: You know, Michael, when we said that, you asked us that same question on the Q2 call. And at that time, we were looking at the plan for the balance of the year and not included with the commodity prices and not included was, you know, the impact of more fires and, you know, the incremental fuel costs. And so I think today when we look at these incremental headwinds that have arisen subsequent to that, on a constant currency basis, we will be aiming to maintain leverage in those stated levels. And I just highlight that because I don't want to at this point say it's going to be exactly 4.74 or something lower than last year because of the existence of the multitude of headwinds. So I think we're going to be in that zip code. You know, there's a path, but with the incremental headwinds since last time, you know, I think it will remain to be seen exactly where it ends on the year.
spk08: Okay, fair enough. And then to your comment about the credit rating opportunity, in the refinancing during 25, which means you need to have the balance sheet in place by 24 to get the credit rating adjustment, because they kind of do that once or twice a year. Are you looking to be investment grade or just a one-move shift on the two that you have? I'm just trying to understand your expectations.
spk10: Michael, I think that comment there and that bubble on the page over the later stuff, the 27s and 28s, the maturities for 25 and 26, that's substantially all floating rate debt today. And what we're trying to highlight is the refinancing of those currently carrying them at largely market rates, and the expectation is you'd refinance those at something comparable. The comment was really more in respect of this portion of the debt stack that has those longer tails in the 27, 28, 29 range. That is the point at which we think we would have material credit rating upgrades.
spk08: Okay. That helps. Thank you very much.
spk10: Thank you, Michael.
spk04: Thank you, Mr. Hoffman. Our next question comes from the line of Walter Spracklin with RBC. Your line is now open.
spk12: Thanks very much, operator. Good morning, everyone. Yeah, so I was wondering, Luke, you gave us some margin indication for improvement for next year. Can you repeat the number that you mentioned? But when you do, could you unpack it based on the headwind and tailwinds? particularly what would be the headwind from OCC based on current prices, what you're assuming is acquisition headwinds on a normal, based on what you're looking at for next year, and then obviously net it off with what you would typically look for in terms of annual margin improvement from efficiency gains to get to the net number that you mentioned.
spk10: Yeah, so thanks, Walter. So, To start, we would assume no further M&A into next year, right? So our guide is always just reflective of what we own today. So anything we do incremental to today's businesses that we own would be additive. From a margin perspective, you saw even in this quarter, the ability of the M&A that we're doing to dilute or impact the margins is becoming less and less. So we think any impact from what we have or what we will do would probably be de minimis. So what you're really left with is the biggest headwind that we're seeing today is obviously with the recycling pricing. We're assuming next year stays at this year's levels of $150 for our basket of goods. That's Canadian per metric ton. So if you're comparing to our peers, a little bit different there. But that's about a $50 million headwind going into next year. And that's top line and, as you know, all flows to the bottom. So it's real. But I think the major offset to that is really the power of the pricing that we're realizing and we think is going to continue to accelerate into Q4. And then in the next year is finally the CPI-related revenue start getting the proper catch-up price increases that we have been going without all of this year. And if you do the math of lining that up against what we expect to be a moderating cost inflation. I think you'll see that if normal course organic margin expansion in this business is 20 to 40 bps or something to that, we expect to be able to do multiples of that. So I think when you put that together, there's a path to get to what we said in the press release of that 100 basis point of margin expansion. The other point you need to remember is we're anticipating the RNG coming online. next year, which although the commodity has a significant decremental flow through, there's a similar reverse on the RNG, and that's net new for us, right? So that's going to be quite margin of creative, and we're excited about that coming into the fold.
spk12: I just want to confirm on the price. You mentioned that it's coming through, and that's going to be a big offset or a good way to overcome some of those headwinds and I guess, you know, based on what we're hearing from others, fourth quarter looks like it's going to remain at an elevated level similar to third. And then if I understand you correctly, Luke, you're pointing to high single digit for next year, but perhaps, correct me if I'm wrong, coming off a high year over year at Q1 and then kind of tapering down to some level at the end of next year. And what would you say is the long-term outlook You spoke about the industry long-term on a pricing growth basis. Exiting 2023 and then going out on a long-term basis, how would you characterize your view on pricing?
spk10: Well, I think it's important to step back and know that our pricing is in response to the environment in which we're operating in. I mean, the cost inflation there is real. And I mean, we talk about the sort of operating costs, but layer in interest rates, talk about what's happening at CapEx, et cetera. I mean, the cost inflation is real. And I think you need to be, I think our peer who reported earlier said something similar, that you need to be in high single digits. It's not sort of low double digits in this environment. And if this environment persists, then that's where you're going to continue to see us be, because I think that's the math you need to earn the appropriate return on the capital that we're investing into this business. Obviously, if inflation materially moderates and starts going back down, then you have an ability to sort of take your foot off the gas on the pricing level. But we're going to be responsive to what we're seeing, and I think you need to be at these levels in this environment. I think the reality is The unit cost inflation should start to moderate on the basis that I think all of the call it one time catch ups have happened. I could be wrong, but I don't think you have another equal leg up from here as we go into next year. So, you know, the pricing is going to be pretty baked by the end of Q1. If you think about the strength with which we're exiting this year and you should now be lining that up with, you know, an easing unit cost inflation. Where does the industry ultimately go? Again, I think it's constantly going to be responding to the costs of providing the services that we do and allowing us to generate and earn a sort of appropriate return. So it's hard to say, but I think the continued consolidation and the continued focus and discipline along pricing obviously are constructive in ensuring that we as a company are able to earn those returns.
spk12: Appreciate it. Thanks for the time. Thanks, Walter.
spk04: Thank you, Mr. Spracklin. Our next question comes from the line of Jerry Ravitch with Goldman Sachs. Your line is now open.
spk01: Hi. Good morning. This is Adam Bubis on for Jerry Ravitch today. Thanks for taking my question. Had another question on how you're thinking about pricing in 2023. Just conceptually, do you feel like with the headwinds in recycling, we now need to push pricing even more on the collection and disposal side?
spk10: Well, look, I think, you know, as we've articulated, $50 million, $60 million headwind at sort of 100% flow-through margins from recycling is a real number. And so, yeah, you're going to need a lever to sort of pull and offset that. I think what also needs to be understood is that, you know, we are and continue to be actively engaged in in the renegotiation of the sort of contract that generate a lot of that material, right? You've heard the industry talking about it and moving those away from commodity price-driven returns to more fixed processing fee models. And we've been actively engaged in those discussions even before the, you know, recent sort of crash in the OCC pricing. And, you know, we anticipate fruitful benefits coming out of those. You know, somewhere sitting here in Toronto, it's one of the areas where the whole dynamic on sort of recycling is going to be changing. So short answer is yes. I think you'll look at other levers to pull to offset that headwind. But even within that line of business, I think you'll see incremental dollars coming from the continued sort of renegotiation and restructuring of those contracts to the new model of the fee-for-service approach.
spk01: Got it. That's helpful. And then really impressive organic growth and environmental services. You know, it looks like a lot of that may be coming from higher UMO selling prices. So I'm just, can you help us think about how you're thinking about the sustainability of revenues in this business as we enter 2023?
spk10: Yeah, Adam, I think that's a bit of a misnomer. I think it's important to understand that the business has grown, you know, through TerraPure and organically where the used motor oil side of it sort of has remained relatively static. You think about used motor oil in a given quarter, you know, we're probably selling 50 to 60 million liters of used motor oil and we're probably up in Q3, nine or 10 cents per liter. You know, so it's $6 million incremental revenue sort of coming out of that. The real growth and the real success of that was, as we had anticipated in our thesis of bringing the two businesses together, was creating a one-stop shop for environmental services needs that large customers could reach out to in all of their various markets. And that's really where we're seeing tremendous success. It comes in a whole swath of industrial services, but this quarter, one of the was just even an emergency response. There was a large spill in the sort of southern U.S. and called upon us as one of many subs. And within a couple of days, we were appointed as the sort of main provider on that site and that being sort of $30 million plus of revenue. And I think it's a testament to the quality of the service that we're providing and now the recognition of the capabilities of the GFL names. You got to remember, we're also still benefiting from the reopening effect and that environmental services lagged in 2021. So we are getting some of that benefit as well. But really, this is broad-based strength across our, you know, densified and expanded platform, you know, amongst all of our service offerings and used motor oil and that sort of external commodity-based component is actually a de minimis contributor to what we're achieving.
spk01: Great. Thanks so much. Thanks, Adam.
spk04: Thank you, Mr. Avich. Our next question comes from the line of Tim James with TD Securities. Your line is now open. Mr. James, your line is now open.
spk07: Thank you. Good morning, everyone. I'm just wondering if you could maybe talk about how you manage base pricing versus surcharges. Luke, you mentioned earlier on that you were able to kind of lean into base pricing more in the third quarter. How do you think about the trade-off between the two, or is there one?
spk10: Yeah, Tim, I think you always want to get your base pricing right on the notion that surcharges will sort of fluctuate in response to the macro energy cost environment, but your base price should be appropriate to cover your cost and generate the return that you need. We've said for years of how we have an opportunity in our existing customer portfolio to sort of right-size the pricing of many of the sort of customers that have come through acquisition, and we're doing exactly that. You know, someone made a comment that we should just flick the switch and do all the surcharges. The reality is it's not that easy and requires some mining of the contracts. And as we're doing that, in certain instances, we're realizing that, you know, that specific customer is not where the pricing needs to be. And we're focusing on that price increase first because, again, the base price will stick and we need that to be an appropriate level for the service that we're providing. In Q3, it resulted in a little bit less acceleration of our surcharge program than we initially anticipated, but the trade-off is we got more in base than we previously wanted, and we'll take that outcome all day long. I think that base is what's going to drive the durability of the pricing, where the surcharge is more just a mechanism to respond to a changing sort of volatile component of overall service offerings.
spk07: Okay, that's very helpful. My second question, I just want to return to an earlier topic about environmental services and very strong performance there. You talked about it a little bit. Is it possible to dig into more how much of that is, and maybe backing out the kind of spill that you referred to, but how much of the growth and strength is overall market versus sort of GFL specific opportunities and maybe taking market share because of the platform that you've assembled there. And any comments specifically on how TerraPure is fitting into that would be helpful.
spk05: Yeah, so it's practice speaking. I think when you look at the business, I mean, the thesis played out exactly the way we thought it would. Remember, we bought that business in the middle of COVID. A lot of that business is obviously levered to Canada. Canada was in, you know, rolling shutdowns for effectively a couple of years. So when we looked at buying that business, we bought it off an LTM number, you know, that had significant sort of COVID impact. So I think when now it's come back, COVID's over, that business, obviously with the size, scale, platform, market positions we have in Canada has led to this outsized organic growth. When you look at continued opportunities, we think those opportunities are going to persist sort of into 2023 and beyond. And we still think, you know, we're not even... The synergy expectations we had on that acquisition is, you know, they basically... far outweighed sort of what our expectations were initially. And I think there's still a significant amount of continued opportunity that we're going to have. I mean, we underwrote almost 20 million of synergies. We're through almost 25 of those today. And we think there's significantly more to come. And there's still a large pricing opportunity in that business. So, We think pricing and volume are going to be very strong. If you look at that business compared to the industry, today that business is running at mid-20s, 26% margins. We articulated that we think there's a path to get that business to high 20s to 30% margins, similar to our solid waste business, and that thesis hasn't changed. So that opportunity continues to be there, and I think just with our market position, particularly in Canada, it's going to get us there.
spk07: Great. Thank you very much, Patrick.
spk04: Thank you, Mr. James. Our next question comes from the line of Stephanie Moore with Jefferies. Your line is now open.
spk03: Hi. Good morning. Good morning. I appreciate the incremental color and just the margin expectations as we look to 2023. Could you maybe talk about how some of your efforts and investments, whether it's around route optimization, fleet automation, fleet enhancements, and any other more company-specific actions and how those fit into your margin expectations for 2023.
spk10: Yes, Stephanie, this is Luke speaking. I'd say the guide that we've sort of given is really just relying on the singular lever of the fuel surcharge initiative. as being one of those core self-help items we've identified. The fleet optimization, as you said, from alternative fuel conversion, from automation, route optimization, that's obviously all ongoing in response to the inflationary environment and just you know, our desire to optimize the business that we have. But I would think of that as being all incremental upside to what we are talking about today. I mean, we'll come out with a specific guide when we talk in February. But I think where we're sitting today, we have a high degree of conviction that we're going to achieve what we've laid out just simply with, you know, the algorithm of our pricing versus our costs and giving consideration to the sort of externalities of commodity and FX. So I think those opportunity sets that we articulate at Investor Day and continue to focus on remain there, will be additive and incremental to what we're talking about, and will be sort of realized through 2023 and the years to follow.
spk03: Great, thank you. And then maybe you can just touch a little bit on just the M&A environment, what you're seeing, any change in activity or willingness from the sellers or competitiveness on the buyer side as well.
spk05: no i mean i think obviously the market really hasn't reacted i mean typically the arena we're playing is in smaller acquisitions so you know valuations really haven't moved they're still in sort of the same stated ranges of sort of five to seven times on the little stuff um you know the bigger stuff is where you might see a little bit of movement but you know we haven't seen much i mean the pipeline continues to be very robust um you know if anything it sort of worked in the opposite where we've had you know We talk about sort of the leverage issue, you know, sometimes I think people think we're just sitting around here not thinking about anything, but, you know, me as the largest sort of shareholder of this business, we're always thinking about ways of creating value and putting our shareholder hat on first. And, you know, we've had, you know, people have approached us about buying certain assets that we have that we, you know, always contemplate. We're not going to make any rash decisions, but, you know, there's, you know, call it almost $150 to $200 million of EBITDA that could be sold at, you know, mid-teens type multiples. So, you know, we could easily generate $2.5 to $3 billion of cash if we wanted to and sell off some of these little assets throughout the existing business at very high multiples. So, if anything, it's been the opposite. We've had people approaching us to pay significantly higher multiples than we're currently trading at for our existing business. So, Not a lot's really changed on that front, but we'll see what happens as we continue moving on and the feds continue to take an approach that they've taken so far.
spk03: Right. And then just, I guess, a follow-up to that comment. As you guys evaluate whether you should sell or some of those assets, what's kind of kept you to retain those where you stand today?
spk05: Yeah, I think from our perspective, it's always something you weigh and it goes into when you're building your plan and your strategic outlook. My perspective is we can't control the stock price, but what I can control is building a great business. And you build a great business, you're going to get paid for it. You may not get paid for it this month or this quarter. Last year, levered growth was great. This year, levered growth is not great, so we can't really make We can't make decisions based on what a computer wants to tell us for the day because the algorithms are saying this is what you should do or you shouldn't do. My perspective is just continue building a great business. That being said, you know, we have assets and we have a business that's worth significantly more than it's valued at today. That's the reality. You can't buy these businesses for 10 times today. You couldn't buy our business. We couldn't buy high-quality business for 10 times. And we have assets that are worth significantly less. So, yes, if you want to stay a public company – You know, it's interesting. We came under private equity world where today we'd be under levered in private equity world. In the public markets, you know, people think leverage is too high because the industry comps, you know, use significantly lower leverage. So we can always have a philosophical discussion about leverage. But, you know, the reality is people want to see leverage lower. And then you have a decision to make if you want to stay a public company. Do you go private or do you stay public? If you want to stay public, you know, you can look at selling, you know, some of these assets at 15 plus times. And, you know, just use round numbers. If you sold $200 billion of EBITDA that people have expressed interest on and you generate $3 billion of cash and you repaid some of your most expensive debt... you know, if you'd say that average cost of debt today, the most expensive debt in our cap structure is sort of six and a half to seven percent, you basically get rid of 200 million of EBITDA, but you'd also get rid of 200 million of interest costs, right? And that's just sort of the flow through. So, and then you move to investment grade really quickly, obviously, because you'd be levered in the low threes and, you know, you'd significantly change the credit profile of the business, which then will yield a pretty good result on financing. I mean, if you look at our term loan today, Our term loan today is priced at, you know, sold for plus 300. If you look at Waste Connections, that is investment grade. They just issued a new term loan last week, you know, at a range of plus 75 to 125, right? So, you know, there's 225 to 250 basis points of, you know, of upside that you can sort of see on that. So, you know, these are all things we're thinking about. We're certainly not sitting here thinking about nothing, right? We're sitting here thinking about building a great business, but we're also sitting here thinking about how we can make the business better and how we can drive higher free cash flow margins, et cetera. So all things are on the table at the moment, and we'll watch. We're not going to make a rash decision based on what the Fed says from week to week, but we know our business is exceptional, and we know it's worth a lot more than it's valued at today.
spk04: Great. Thank you so much. Thank you, Ms. Moore. Our next question comes from the line of Rupert Mayer with National Bank. Your line is now open.
spk06: Good morning. So, Luca Filling here for Rupert today. So, at what level of interest rates does the tradeoff between pursuing M&A versus deleveraging your balance sheet start favoring more the side of deleveraging?
spk10: I think it's important to understand that all of our deleveraging anticipated is really through growth in EBITDA, more so than the debt repayment. We're not entering into a mode in the next couple of years where we're anticipating material debt repayments. It's rather the deleveraging is coming from sort of growth. We are put out on the page where we show the impact of M&A and deploying X million dollars at reasonable valuations. And more and more, that tuck-in M&A is a de minimis impact to your overall sort of deleveraging path. So, you know, if you took that $400 million that we're contemplating in that slide and put that to sort of deleveraging, you know, you could take another sort of 20 bps out that much quicker. But I think in the long run, you'll continue to see the deleveraging coming from growth in EBITDA as opposed to actually interest pay down. If rates went up into double digits, would that be a different conversation? Perhaps. But I think when you think about the vast majority of our debt being fixed, the floating rate debt today priced in for yesterday's decision going to be in high sevens. At this level, I don't think it changes our M&A strategy. If we go materially higher from here, perhaps you'd have a different perspective, but we don't anticipate that in the modeling that we're doing.
spk06: All right. Thank you very much. And coming back to the environmental services, so you mentioned earlier that the recovery in Canada led to a good portion of it. Where do you see industrial collection and processing activity levels versus where they were pre-COVID or more like in a normalized state?
spk10: Yeah, I think the reality is anyone who has anything to do with the energy sector today is actually amping up a lot of their sort of work because they, you know, want to make sure that they are up and running on a continuous basis, you know, as much as sort of possible. So we're seeing, you know, in Western Canada and some of our stuff in the U.S. that, you know, there is, just broad-based tie-in to that economy, you know, or that market. We don't service directly, you know, oilfield customers, but you think about Western Canada, pockets of Atlantic Canada just have that broad-based exposure. You're seeing a lot of activity. So, you know, we think obviously in Canada, sort of strong energy environment is good for the sort of market as a whole. And, you know, we're well-positioned to benefit from that. All right.
spk06: Thank you very much. I'll leave it there.
spk04: Thank you, Mr. Mayor. Our next question is a follow-up from the line of Michael Hoffman with Stiefel. Your line is now open.
spk08: So an interesting thread on leverage and the idea of maybe divesting through asset sales. I mean, one of the issues you have is your interest cost is 6% of your revenues. your peers are in the twos. So if you're not going to do it through asset sales, do you do it through equity? Does BCP let you raise equity and you get this there faster? Because clearly that's the hangover on your multiple. It's your leverage down fast, your multiple goes up.
spk05: Yeah, I think, I mean, what I said, we, you know, contemplate all of these different things. I think the reality is BCP The short answer is you get there anyways, and do you want to wait to get there in two or two and a half years, or do you want to expedite that, right? And I think some of that is some of the consideration you have to factor in with what the feds are doing and where rates are going, et cetera, and you look at sort of debt maturities. The reality is we don't really have any real material maturities for another sort of five-plus years. The term loan is the term loan, which is floating today anyways. there's no concern for me as the largest shareholder so putting my equity hat on and my own so so you get there in two and two and a half years do you want to expedite that if you want to expedite that would i sell equity at these levels absolutely not i mean there's under no circumstance would i sell equity at these levels why would i sell equities at these levels if i can sell some assets that i have for 15 or 16 times to expedite that um Because that's sort of the true reflective value of the business today, right? So that's what you would do. People have expressed interest, like I said, in a couple hundred million dollars of EBITDA that we have. Yeah, sure. You would, instead of, you know, you get rid of a couple hundred million of EBITDA, we'd also get rid of a couple hundred million dollars of interest costs. So, you know, not the worst outcome, and you get, you de-lever into the low threes, and you get moved to investment grade sort of relatively quickly. So that's a path. Is it the best path? I don't know that answer today, but it's certainly an option that is on the table today. And I think for any investors that have a question about returns on invested capital, I think that would clearly quash that thesis about returns on invested capital because there would be material upside that come from some of those. But it's all things we have on the table. Issuing equity at 10 times 2023 just doesn't seem like a very smart or good use of capital. but selling some assets in the meetings could be. So if we decide that that's a path that we want to go down. But, you know, all options are on the table at this point, but we'll watch to see what happens, you know, with the rate increases in the Fed sort of over the next couple of months, and then we'll sort of make a decision on that.
spk02: Okay.
spk04: Thank you. Thank you, Mr. Hoffman. Our next question comes from the line of Chris Murray with AT&T Capital Markets. Your line is now open.
spk09: Yeah, thanks folks. So just maybe taking a different tack, thinking about margins next year, you did mention the fact that you're looking for about 100 basis points year over year, but Luke, you kind of alluded to the fact that you might have some of the impact from RNG. Can you just talk about your best guess at this point about when the RNG projects might start working their way into the program? And what could the possible magnitude of some of those contributions look like over 23 or 24?
spk10: Yeah, so what we said is by mid-next year, we expect the first one to sort of be up and running, you know, from a contributing basis. I think, you know, the first couple months there's a ramp, and so you put – and then the second one to be up and running, you know, Q3, Q4 of next year. and potentially another couple in Q4. So we've always articulated, I think, the in-year contribution for next year is a small dollars. Maybe there's sort of $20 to $40 million of contribution in-year next year, depending on that ramp. But it's what you can be having as a sort of launch-off point for 2024, which is what we've articulated as being those sort of first five projects in that first bucket. as being the prize that we think to be entering 2024 with, which is roughly close to $100 million. The in-year contribution, though, again, will have better visibility when we give the official guide in early next year, but it's going to be in the order of magnitude as I just described.
spk09: Okay, that's fair. And I know there's been lots of questions about the puts and takes around the balance sheet, but I'll go back to Investor Day, and I think you laid out a case for about the balance between the pace of deleveraging versus free cash flow growth. But just really a question, when we look at your acquisition sort of in the quarter, again, I think you really talked about optimizing the footprint, saw some tuck-ins here. So I guess a couple of questions about this. One, is this really how we should be thinking about acquisitions on a go-forward basis, which is really around optimizing the footprint, and over time, you should be able to drive margins that way. And so we shouldn't be expecting larger levels. And then again, back to that, if you think about what you've done so far, can you get away with the lower end of maybe those different scenarios you described and still kind of maybe accelerate the deleveraging if you so chose to?
spk10: Yeah, there's a lot in there, Chris. I think it's important to go back. Our strategy has always been to buy a platform or buy platforms and use that as the base for both organic and inorganic growth to drive margin expansion. And if you look at the 200-plus acquisitions we've done, it's exactly what there's been. There's been 15 to 20 larger businesses. Three of those came since we've gone public in reality, and that's where the modestly elevated leverage levels are a result of. We saw these pieces to put together to create what we believe to be now an industry-leading growth platform in North America. And the model and the expectation always was now focusing on densifying tuck-in acquisitions as that's what's going to drive the highest return on equity and return on investment capital. And truthfully, that's what we do. I mean, that's been our MO since the beginning. And that is, you know, I think where we have a differentiated sort of ability to go out and do that in the markets where we are. It's another, you know, another peer that also does this sort of very well, but there's a lot of markets where we do not overlap with one another and it provides a bunch of white space for us both to execute on that strategy. So, I mean, your comment about the level of M&A in a given year, look, it's always difficult to forecast exactly where that's going to be because, you know, opportunities arise. And if it makes sense, we want to be able to capitalize on it. Do we have anything in our pipeline today that is multi-billion dollar acquisitions? No. The vast majority of everything is focused will be densifying tuck-ins. But we always just save or caveat that we don't know what tomorrow holds. And if one of these leading businesses was to sort of come for sale and it made sense for our model and footprint, then we'd want to sort of look at it. But I think, suffice to say, you know, the commitment to deleveraging is there. You heard it from Patrick. Whether you do it organically, inclusive of M&A, or you accelerate that through, you know, potential sort of raising of proceeds, as Patrick described, remains to be seen. The ability or the likelihood that our M&A of what we're acquiring materially impacts our deleveraging is unlikely. So I think there will be some. It does temper it, but not to a material degree.
spk09: That's helpful. Thank you.
spk04: Thank you, Mr. Murray. Our next question comes from the line of Stephanie Yee with JPMorgan Chase. Your line is now open.
spk00: Hi, good morning. I wanted to ask about the free cash flow for 2023. I know there is a caveat about it depending on the CapEx needs of the business. I was wondering if you can elaborate on what you are considering. Perhaps, you know, do we anticipate higher spending on trucks or perhaps the rebuilding of some of those MRFs? Just pay us directionally, would you expect CapEx to be about the same level as 22 or what are some of the things that are under consideration?
spk10: Yeah, I mean, trucks spend, you know, normal course, the rebuilding of the MRFs, you know, insurance proceeds. So it's something like that. It's really, as we continue to develop some, particularly some of our net newer markets, we're just seeing more and more opportunities for investment in, you know, foundational CapEx that could then serve for years of, you know, growth thereafter. I mean, MRFs, So we look across our footprint and the continuing sort of evolving dynamic of recycling in different markets. And there's a significant opportunity to build recycling facilities in many of our markets that are currently underserved by capacity. And that's something that's very interesting to us, particularly as you move to the better sort of service-based model that allows you to underwrite very attractive returns in that business. So looking at items like that. R&G, you know, there may be some opportunities for us to augment the current partnership dynamics on certain of the sites and maybe take on something, you know, where we have a larger capital component of it and spend more dollars but then generate more returns. So I would ring fence the opportunities in, you know, above and beyond growth-oriented projects with the sort of ESG-type slant that we see a whole host of. Obviously, we're mindful of this conversation that we're having about leverage at the sort of same time and sort of taking that into consideration. But that's what we're contemplating. We'll have a better view on when we report in February. Because really, I mean, if you think about the normal course maintenance capex for this business, you know, with normal course growth, there's a sort of 10.5%, 11% number, right? That's where we've been. The question is, do we make the decision to deploy incremental dollars into some of the growth opportunities above and beyond that?
spk00: Okay, that's very helpful, Color. And then just on the soil remediation business, with some of the delays and the projects being pushed out to 23, do you see that as the customer being more cautious in this economic environment? I guess in your outlook, are you assuming that those projects would start up next year or you haven't baked that in?
spk10: I mean, the vast majority of that is a singular site that they've built half of, and I think everyone fully expects them to continue with the other half, a large Fortune 500 sort of company in the mid-Atlantic area building a second headquarters. So, you know, we see that as continuing, but I think the broader base comment is probably fair, in that if we're entering into sort of a period of unknown, will there be a potential sort of softening in some of that? And that's possible. I think it's important to understand that the actual dollars from that line of business is relatively big, particularly with the growth of our industrial business, is becoming smaller and smaller. We highlighted it in the quarter as it was baked into our guidance, and because the margin flow through was so meaningful, it moved the needle in that regard, which is really the basis of the call-out. But in reality, that business, particularly on the U.S. side, is becoming a smaller and smaller contributor. So I think we have a base level of that business that's tied to maintenance-type activities, and we don't see that sort of going away. To the extent there is a downturn greater than what we're currently seeing, is there potentially some exposure in that business? Sure. But I think the broader base strength of our other offerings are more going to offset in which we look in 2023, the contributions that would potentially be lost.
spk00: Okay, that's a helpful perspective. Thank you. Thanks.
spk04: Thank you, Missy. Our next question is from the line of Mark Neville with Scotiabank. Your line is now open.
spk11: Hey, good morning, guys. Thanks for squeezing me in. I just want to follow up on the path of disposition conversation. I mean, you talked about potentially selling $200 million of EBITDA with $3 billion at a free cash flow neutral basis. I mean, that sounds great to me. I'm just, if we're debating this, what would be the reasons sort of not to do something like that and just keep those assets?
spk05: There are assets that you've assembled that are, you know, clearly high quality assets like the rest of our business. The reality is, what's your view? Are you a long-term holder or are you a short-term holder? If you're concerned about short-term stock price, sure. But the reality is our business plan gets us to that leverage level in two to two and a half years anyways. So that would be the, that's the trade-off, right? Obviously, like Luke said, if rates ran up higher, then discussion changes, right? But, you know, These are real things that we've put on the table. We're not just sitting around here just hoping for the best and hoping for Mr. Powell to say he's not raising rates anymore. That's not what we're thinking. We obviously have every sort of option on the table. That's a real option. That's one of the real options. There's other options, but that's one of the real options. When you say, oh, should you raise equity to de-lever a bit? No, I would not sell equity at these levels. I'd sell some assets before I did that at very high sort of multiples that people have expressed interest in over the last sort of three to four months. So that's really just a debate. Do you wait two and a half years? Again, like we said, we can't control the stock price. We can only control building a great business. Or do you expedite that and then use that extra firepower to go double down on the markets that you keep? Those are the debates. the debates that we have sort of internally.
spk10: Yeah, Mark, I think, you know, as Patrick said, if you own this business yourself and you were a long-term private owner, you wouldn't sell high-quality assets because you have such conviction in the ability to de-lever regardless. Now, if you're putting on a different hat, the shareholder hat in the public equity market, that may drive a different decision.
spk11: Yeah, no, I appreciate that. Just had to ask the question.
spk05: That's what I think, but when you look at it, it certainly crystallizes the value of what you think. I mean, from our perspective, you wouldn't be giving up very much, but you'd crystallize the value of what GFL is worth in sort of a base case. And if the real mock is solely just leverage... then that resolves all those issues, and there's sort of nothing left. And you move to IG, and you can refinance the rest of your balance sheet at IG-type rates like everybody else, and you've expedited that. You did it in a few months versus a few years, right? So anyways, we're thinking about all these things. It's not something we've made a decision on today, but we're thinking about all of them, and we'll continue to think about them and update people as we sort of move forward in our decision and thought process.
spk11: Yeah, no, no. Again, I appreciate the difference between short-term, long-term. So I understand all that. So I appreciate that. Maybe just a last question. Just on the interest expense, I think if I do the math, it's sort of $115 million for Q4 cash interest. If I annualize that, I get to like $460. And then I think Luke, you said $490. So you're building something in for higher rates. Is that sort of roughly how we're thinking about interest next year?
spk10: Yeah, I like the cash interest because of the way we lock in and roll three-month BAs. You're not necessarily Q4. You're absolutely right. It's in that 115 zip code, but you're not actually feeling the full brunt of all the recent rate increases. So if you take that into next year at the current prevailing rates for next year, you have an annual, you know, you have a $490 million expense. It's just more a function of the delay in which our cash payments are based on the prevailing rates from a few months prior.
spk11: Thanks again, guys. Appreciate it. Thanks, Mark. Thank you.
spk04: Thank you, Mr. Neville. There are currently no additional questions waiting at this time, so I will pass the conference over to Patrick DiVigi for closing remarks.
spk05: Thank you, everyone. Much appreciated for joining us this morning. We look forward to speaking to you in February when we report our year-end results and our guidance for 2023. Thank you.
spk04: That concludes the GFL Environmental Inc's results call for the third quarter of 2022. Thank you for your participation. You may now disconnect your line.
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