This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Good morning, ladies and gentlemen, and welcome to the GFL Environmental 2024 First Quarter Earnings Call. My name is Glen Albee, the operator for today's call. At this time, all participants will be in a listen-only mode. If you would like to ask a question during the presentation, you may do so by pressing star 1 on the telephone keypad. I will now hand you over to your host, Patrick DaVinci, founder and CEO of GFL Environmental. Patrick, you may now begin.
spk01: 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 quarter. I am joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into details.
spk00: 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, as well as a presentation to accompany this call, 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 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.
spk01: Thank you, Luke. Once again, we started the year with the strength of our high-quality employees and asset-based driving performance ahead of expectations. This is our fifth year of being a public company, and I continue to be humbled by the capacity of more than our 20,000 employees to consistently deliver results ahead of our plans. On our last call, in what has become our usual practice, we provided our 2024 guidance with an industry-leading degree of transparency and the details of the moving pieces that we anticipated this year. including what we expected to be industry-leading organic margin expansion in our base business. We also outlined the specifics of our planned M&A and growth investments. Our first quarter results are better than we guided, and we fully expect this positive momentum to continue for the balance of the year. Luke will walk us through the details, but I wanted to first highlight a few key metrics. First quarter pricing was 7.7% on a like-for-like basis. Our pricing strategies continue to outperform expectations, and we remain optimistic about our ability to realize incremental pricing opportunities as we replicate the pricing playbook that our public company peers have already successfully employed. With the strength of our first quarter pricing, we are highly confident that we will be able to meet or exceed our price guidance for the year. We expect the recent strength in commodity prices to continue to be upside versus our guidance. On the cost side, labor turnover is sequentially improving and is yielding efficiencies in onboarding cost productivity and the overall cost of risk. R&M costs are also improving as the unit cost inflation moderates and fleet replacement rates improve. The result is the realization of outsized price-cost spread that supports ongoing margin expansion. Volume growth in the quarter was negative 3%. This was significantly better than our expectations as the negative impact on volume of the unusually cold January weather in our southern markets was offset by the positive impact of milder weather in most of our northern markets in February and March. We expect some of this could be a pull forward of second quarter volumes. However, we remain confident in our full year volume expectations, including our guidance. We also remain confident in the effectiveness of our deliberate volume strategies. As we've discussed, our industry-leading growth has provided us outside opportunities to improve asset utilization and drive margin expansion through the intentional shedding of lower-quality revenues. We believe the benefits of these strategies are evident in our margin performance. As we highlighted on our year-end call, we are also actively deploying growth capital across a variety of initiatives that we expect will generate significant ROIC for years to come. In the first quarter, we deployed $62 million into incremental growth investments, primarily related to recycling and RNG infrastructure. For the full year 2024, we remain on track to deploy $250 to $300 million into these investments, as we previously guided. The EPR landscape in our Canadian markets continues to evolve, and we remain confident that we will see upside to the $80 to $100 million of incremental adjusted EBITDA we previously identified associated with these initiatives. As we said earlier, the contribution from these contracts is expected to start late this year, ramp up through 2025, and achieve our expected full contribution in fiscal 2026. On RNG, our first facility at the Arbor Hills Landfill is continuing to ramp up its operations, generating cash flow in line with our expectations. We have two or three more facilities that we'll expect to come online by the end of the year. We remain confident that we will realize the $175 million of adjusted EBITDA previously disclosed once our portfolio of landfill gas energy facilities is fully operational in the coming years. In addition to organic growth initiatives, we have deployed approximately $500 million into six acquisitions since the beginning of this year. All these acquisitions were in solid waste within our existing geographies. The largest of the six acquisitions we discussed in our last earnings call is a vertically integrated asset in central Florida. one of the fastest growing markets in the U.S. This asset is highly complementary to our existing network, and we expect that it will act as a driver for significant organic growth for us in this market for years to come. Like most acquisitions of this caliber, the M&A process commenced over six months before closing, and the consummation of this transaction was fully anticipated when we provided our capital allocation framework in November of last year. While we continue to maintain a robust acquisition pipeline, we remain absolutely committed to the guidance for our total 2024 growth investments and net leverage that we set out at the beginning of the year. As we have consistently demonstrated, the predictable recurring nature of the revenues and cash flows generated by our business allow us to forecast the full year's results with a high degree of accuracy. Within a given year, weather-driven timing differences between the first and second quarters can impact comparability on a year-over-year basis, and therefore, we typically have waited until the first half of the year to give updated guidance for the year. While we believe there could be some revenue pulled forward from the second quarter because of weather-related impacts, based on the quality of the margin performance in the first quarter, we're increasing our guidance for 2024 adjusted EBITDA to $2.23 billion. We will provide a more fulsome guidance update when we report our second quarter results. I'll now pass the call to Luke who will walk us through the quarter in more detail, and then I'll share some closing comments before we open it up for Q&A.
spk00: Thanks, Patrick. Our accompanying investor presentation provides supplemental analysis to summarize performance in the quarter in a consistent format to what we've previously provided. Revenue for the quarter of $1.8 billion was 6.5% higher than the prior year, excluding the impact of the solid waste divestitures. Stronger than anticipated, pricing and volume were the primary drivers of this result that was $25 million ahead of internal expectations. While the January cold weather in our southern markets negatively impacted volumes, the above-average temperatures later in the quarter in many of our northern U.S. and Canadian markets partially offset the January impacts. As Patrick said, the strength of our first quarter pricing activities is highly encouraging for the achievement or exceedance of our pricing expectations for the year, with over 80% of our full-year pricing impact already locked in based on the contracted nature of our business. Page 3 shows the bridge for solid waste adjusted EBITDA margins compared to the first quarter of 2023. As anticipated, the change in commodity and fuel prices from the prior year served as a margin tailwind, whereas the net contribution of M&A and divestitures was a 20 basis point margin headwind versus the first quarter of 2023. Underlying solid waste margins expanded by 100 basis points, 50 basis points better than planned, a result that would have been even greater without the weather-related impacts. The flow-through benefits of the outsized price-cost spread are intentional volume-shedding initiatives, RNG contribution, and incremental operating leverage coming from improving employee turnover and asset utilization are exceeding expectations and reinforce our optimism and our ability to exceed the industry-leading organic margin expansion we included in our base guide for this year. Page 4 highlights the performance of our environmental services segment in the quarter. To contextualize this year's performance, it is important to recall the prior year comparable period saw an unseasonably high level of activity, resulting in 25% organic revenue growth in that quarter. We had called out this outsized performance in our Q1 2023 reporting. Normalizing the prior period for this outperformance, we saw over 10% top line revenue growth in this segment. Unusually cold weather in the south in January, as well as the imposition of earlier spring road weight restrictions because of warmer weather in our northern markets that are typically implemented in the second quarter, negatively impacted volumes. The impacts on our southern markets alone impacted margins by over 100 basis points. The rollover impact of the fire we had at one of our facilities in late Q4 was a 20 basis point drag on ES margins. The timing of event-driven work and the sale of used motor oil also resulted in reduced revenue versus the prior year. The fact that we are exceeding our margin expectations in the face of these headwinds serves to highlight the quality of the underlying portfolio and our overall growth strategy for this segment. Adjusted pre-cash flow for the quarter was $49 million, an increase of nearly $100 million over the prior year period and ahead of our internal expectations. The outperformance of adjusted EBITDA, a lower seasonal investment in working capital, and capital expenditures that were $25 million less than the plan all contributed to the significant outperformance versus expectations. We expect the working capital and CapEx variances to be timing differences and remain confident in our full-year expectations for both of these line items. Page 5 summarizes reported net leverage. which was 4.3 times on March 31st, reflecting the impact of normal course seasonality and the change in FX rates from the start to the end of the quarter. During the quarter, we received a credit rating upgrade from S&P and remain on positive credit watch from both the rating agencies, reflecting the material improvement in our credit quality and the expectation for further improvement in the near term. As we previously said, we anticipate material credit rating upgrades prior to the maturity of most of our existing debt, providing an opportunity for near-term lower borrowing costs and improved free cash flow conversion. As Patrick said, we remain absolutely committed to our previously stated leverage targets, and with the strength of the first quarter performance, we are confident in our ability to achieve these targets exiting 2024 with net leverage between 3.65 and 3.85. In terms of guidance, with the strength of this year's start, we're feeling highly confident in our ability to exceed our previously communicated targets. As Patrick said, the strength of the first quarter's margin performance allows us the confidence to increase our adjusted EBITDA guidance to 2.23 billion. However, as Patrick noted and we've consistently said, there can often be timing shifts between the first and second quarters, so we will maintain our normal course practice of waiting until July before we formally update our full set of guidance for the year. Specifically related to the second quarter, we note the following. Consolidated revenue is expected to be approximately $2.055 billion. Solid waste revenues are expected to be $1.56 billion to $1.57 billion, driven by pricing just over 6%, and volume that's anticipated to improve approximately 50 basis points sequentially from the first quarter, or approximately negative 2.5%. For environmental services, we expect to realize between $475 and $500 million of revenue, representing another quarter of 10% growth over the prior year. The wider than typical revenue ranges within the segments are to account for the potential weather-driven pull forward of revenue into the first quarter from Q2. In terms of margin, we expect consolidated adjusted EBITDA margins to accelerate over 300 basis points sequentially over the first quarter to just under 28.5%, or nearly 70 basis points over Q2 2023. At the segment level, this assumes solid waste margins of 32.25% to 32.5%, ES margins of almost flat with the prior year, around 29.6%, and corporate margins of negative 3.2%. The guide then contemplates further margin expansion in the third quarter before stepping down in the fourth quarter as per the typical cadence of the business. Putting that together yields between $585 and $590 million of adjusted EBITDA for the second quarter. Additionally, we expect $220 to $230 million of net capital expenditures, $105 million of cash interest, an investment in working capital between $65 and $75 million, and other operating items of approximately $25 million for Q2 adjusted free cash flow of approximately $160 to $170 million. In terms of net leverage, we expect a modest step up in Q2 as a result of seasonality and completed M&A, and then to ratably step down in Q3 and Q4. Adjusted net income is expected to be approximately $100 million for the second quarter. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.
spk01: Thanks, Luke. The drive of our employees to make our business better every day is evident in what we have achieved this quarter and the opportunities we are creating for steadily improving performance in the near and longer term. I want to thank each and every one of them for their dedicated contribution to Team Green. As I've said on many of our calls, our focus has always been on delivering what we say we're going to do. This quarter is no exception. Our results for the quarter continue to demonstrate the underlying quality of our asset base and the impact of the effective and consistent implementation of our key value creation strategies. At the same time, the discipline-targeted growth investments we are making today are setting us up to deliver strong organic growth for many years to come. We have provided comprehensive, easy-to-follow guidance for the year, and we started off 2024 delivering on exactly what we said we were going to do. We intend to continue to do more of the same in the coming quarters. I will now turn the call over to the operator to open the line for Q&A.
spk08: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by 1 on the telephone keypad now. If you change your mind, please press star followed by 2 to answer the questions. When preparing to ask your question, please ensure your phone is emailed locally. With our first question comes from Stephanie Moore from Jefferies. Stephanie, your line is now open.
spk05: Hi, good morning. Thank you.
spk01: Good morning.
spk05: You know, to start, could you give us an update on this EPR? You know, Patrick, you mentioned upside to the 80 to 100 million of EBITDA. You know, where are you seeing the additional opportunities and what is the timing? Thanks.
spk01: Yeah, so I think, you know, as we discussed, the $80 to $100 million of incremental EBITDA is, you know, in the bag today, signed, contracted, et cetera. As we said, there was, you know, there's a few large... particularly hauling and transfer contracts that were out for bid late last year. We have been notified that we have been selected as a preferred vendor for the entire city of Toronto on the recycling side. It's not done as of yet, but we are in contract negotiations to finalize that and hope to have a very good update for you on our Q2 call. As well, there's a multitude of other sort of residential contracts. Mostly the ones we're focused on is one that we actually already currently do. And we expect that those will be awarded over the next sort of three to four months. So again, pretty good opportunity and upside from those. And as we look at the other provinces, you know, Quebec and the Maritimes continue to release incremental bids and legislation continues to go through in Western Canada. But I think on the Q2 call, we'll give you sort of very good update on where we stand with EPR. But, you know, very good news on our side that we were notified of being the preferred vendor for contract negotiations for the entire city of Toronto.
spk05: Got it. And that's helpful. And this is a follow-up. You know, maybe, Luke, free cash flow is much better than expected for the quarter, and it looks like you are seeing some improvements in working capital management. Where are you in that process and kind of what are your expectations for working capital cadence for the remainder of the year? Thanks.
spk00: Yeah, thanks, Stephanie. It's a great question and certainly an area where we do see continued opportunity. I mean, for context, you've got to remember, I mean, working capital with the levels of M&A we've done historically, sometimes you can have impacts of that that, you know, manifest in the working capital line and therefore harder to sort of smooth that out over the four quarters as we now have the stability of the base business, it allows for more sort of regular cadence. So with the seasonality profile of our business, primarily the northern markets, we're going to continue to see investments in the first half that then reverse in the second half. However, as you can see in this quarter, the magnitude of the swing is becoming more and more muted. So it's going to allow for much more predictable and stable pre-cash flow generation on sort of quarter-over-quarter basis. And you're seeing that in this quarter's results. So we do think this year's cadence will be similar. Q2 will see another investment, albeit at a lower level than historically. And then the reversals that we've customarily realized in Q3 and Q4 are expected as well.
spk05: Great. Thanks so much.
spk08: Thank you. With our next question, it comes from from CIBC . Calvin, your line is now open.
spk09: Thanks for taking my questions. Maybe just on the rest of the M&A spend this year, I just want to make sure I have this correctly. So it looks like you spent just over $111 million. in Q1, which doesn't look like it includes the Angelo acquisition, which I think on the last call you suggested a sizable acquisition would be about half the expected spend this year. So it looks like about two-thirds, if my math is correct, about two-thirds of the way through the $600 to $650 million of M&A spend this year, just Just wondering, one is my math correct, and then two, just the visibility on spending the rest of that capital, is that something we should expect in the second quarter here, or does that kind of smooth out through the rest of the year, just given how active we've been through the first four months of this year?
spk01: Yeah, so I think we spent year-to-date about $500 million, so it leaves somewhere between $100 and $150 spent for the sort of rest of the year. I think you'll see some of that trickle in in later Q2 and spread out through Q3 and early Q4. But, you know, I wouldn't expect it all to sort of be spent by the end of Q2. It's going to trickle into the next couple of quarters.
spk00: Yeah, and Kevin, in terms of the financial statements, you have it right. Q1 saw four acquisitions closed, but Angelo's, the largest, and another were closed actually the beginning of April. So it's in that year-to-date number that Patrick said, but within the quarter proper, you had the lower spend on just those four smaller acquisitions.
spk09: That's helpful. And maybe, Jeff, second one for me and I appreciate you know you'll provide a more full sum update on the full year guide when you report Q2 and you know you talked about some of the you know wanting to see some of the impact maybe on volumes shifting between Q1 and the second quarter here but I guess if I look at it simplistically you know you assume the level of seasonality in Q1 in your previous guidance you know if I apply that seasonality to what you actually printed in Q1 Plus, you know, adding in some of this M&A, which you haven't included in your guidance, you know, plus maybe a more favorable commodity price environment than you had assumed because you're pretty conservative. It feels like it's a pretty sizable increase versus where you're sitting now. I'm sure you won't confirm this, but, you know, north of $2.3 billion of EBITDA, this doesn't feel out of the realm of possibility when I look at the puts and takes. Maybe broad strokes, if there's anything you would comment on that in terms of maybe what might be wrong or maybe where we might be right?
spk01: Without giving sort of formally updated guidance, you're heading in the right direction, I would say. But, you know, we're going to come out at the end of Q2 and we'll give updated guidance, you know, for the full year, including sort of the contribution from M&A and any other things that sort of pop up along the way, particularly, you know, as we get through the first half of the year. and get a real trajectory of sort of volumes and where pricing is going to lie. But yeah, I think Kevin, you're on the right path.
spk10: I appreciate you taking the time to answer that question. Good results there. Thank you very much.
spk08: Thanks, Kevin. Thank you. We have our next question comes from Sabaha Khan from RBC Capital. Your line is now open.
spk06: Great. Thanks, and good morning. I think you noted in the prepared remarks that labor turnover is trending lower and some of the other costs trending lower. Improving EBITDA margins seem to be a bit of a trend. We've seen this reporting cycle. If you can maybe give a bit more detail on how much the labor turnover has improved, how you expect that to trend through maybe the rest of the year, and maybe a bit more color on the repair and maintenance costs, et cetera, as well. Thanks.
spk01: Yeah, so I'll give it to Luke on a couple of others, but on the, on the labor front, you know, basically, like we said, in sort of the, you know, the peak of, of COVID, you know, jobs market was really tight. Um, you know, labor voluntary turnover, you know, particularly in the residential book of business was, was trending sort of closer to 30%. That dropped to sort of mid twenties last year and has trended to low twenties this year. You know, pre-COVID, we were in the high teens range, so, you know, we're getting significantly closer. Still some room to go, but, you know, it's certainly heading in the right direction, and, you know, you're seeing that flow through to the P&L, and you're definitely seeing that on the margin front.
spk00: Yeah, and then Sabah's Luke speaking on R&M. I think it's a similar story and trend line that things are moving in the right direction. I mean, if you look for the quarter, R&M was about 10.3% of revenue. Now, that was flat with Q4, but being achieved on the seasonally lower Q1 revenues. So if you think of how that then rolls forward with the revenue upticks and the improved efficiency in R&M, we see a path to that going back into the sort of single digit as you get into the middle of the year and probably ending the year in the mid to higher nines level. So I think there's still some conservatism in that number, and the improvements that we're seeing across the business should drive incremental opportunity there. So we're feeling really good with how that trend line is moving.
spk06: Okay, great. And then maybe if I can tease out on Patrick's comments around that Toronto recycling contract. I know you said you're still in contract negotiations, but any big picture parameters around kind of the scale, directional margins for this business versus a base business under the PR regime, just anything you can share even at a high level to give us perspective on what this could mean or what it could look like. Thanks.
spk01: Yeah, I mean, you know, it'll be, it'll be, Keep in mind, we do 60% of the work already today. 40% of the work is being done by others, mostly city workers. The contract value will be in excess of $50 million a year. I think that sort of margins accretive to what our blended margin is today for solid waste. That's $50 million to EBITDA? No, $50 million of revenue. In excess of $50 million of revenue.
spk06: Great.
spk01: Thanks very much. It's a 10-year contract, so it's going to be over half a billion dollars a year, or half a billion dollars in aggregate. Over 10 years. Thank you. Thank you.
spk08: With our next question, it comes from Jerry Ravage from Goldman Sachs. Jerry, your line is now open.
spk07: Yes, hi. Good morning, everyone. I'm wondering if you could just talk about the acquisitions that you've completed year-to-date since they're all within your footprint. Can you just give us a flavor for the extent of route consolidation opportunities? How many more stops per truck do you expect post-integration? Just give us a feel for it. how accretive these opportunities are versus the existing route base in your markets, if you don't mind.
spk00: Yeah, thanks, Jerry. It's, you know, a key component of our whole sort of M&A strategy as you're doing these densifying tuck-ins, getting the efficiency that you're speaking to. You know, unfortunately, the small population, you know, there's... Six transactions, one larger, one Angelo's, you've got five little small tuck, and it's going to be widely varied by market and by region what that opportunity sort of looks like. But you're thinking about it the exact right way, that if I'm buying a business today that's operating eight or nine trucks in a market where we're operating significantly more than that, there's probably an opportunity to park one, two, three trucks, depending on the sort of density. So what we've historically said is on these smaller acquisitions that may be on the face of it, If you're paying somewhere between sort of six to eight times for a small one on a pre-synergy basis, post the synergies, you might be able to take anywhere from two to three turns of cost out of that business by virtue of those cost savings from the route consolidation, facility consolidation, headcount consolidation, et cetera. So it does vary for these specific deals. I'd say they're no different than typical. So you're probably going to be in that range. But that's how we typically think about the M&A on the tuck-in nature.
spk07: And in terms of the additional acquisitions that you have in the pipeline for the balance of the year, it sounds like it's the same opportunity where we're going to have an outsized benefit from It's all going to be within the existing footprint, so the M&A pipeline sounds like it's going to come with higher synergies. Obviously, in the past, it's been a combination of these types of acquisitions and building out the footprint. Correct me if I'm wrong, but it sounds like we're going to see outside synergy opportunities with the pipeline that you have planned.
spk01: Yeah, they're all in the existing footprint. Again, going back to opportunities, like Luke said, to consolidate sort of SG&A costs, consolidate hauling facilities, move those trucks onto our existing routes, and really focus around markets where we have underutilized post-collection assets. whether that's recycling facilities, transfer stations, landfills, to drive incremental volumes for those facilities that we're not getting, which is going to just, you know, yield, you know, exceptional sort of ROI fees on those investments that we're making.
spk00: And, Jerry, just in terms of the specific modeling, we typically think and see that initially these businesses are getting incorporated at margin decretive levels. just the normal core sort of pre-synergies. And then it's with over those first sort of 6, 9 to 12 months, depending on the market and the business, where you then take them up to the accretive margins for the reasons you articulated.
spk07: Can I ask you on a separate topic? Landfill gas, heading into the election, I'm wondering, are you folks thinking about locking in any of the gas that you have coming online on long-term contracts or Are you happy to bring it online with the written market structures? Any updated thoughts on what the voluntary market looks like as well, if you don't mind?
spk01: Yeah, I mean, things keep continuing, you know, to trend in the right direction. You know, from our perspective, you know, we're still selling into the transportation market today. You know, particularly our partners at BP and Opal continue to see that the best way to maximize value today. Although we are seeing the voluntary market prices continue to trend up to the point now where they're exceeding mid-20s per MMBTU and heading closer to $30 per MMBTU. So I think you will see that some of our facilities come online. We're going to start looking to enter into those, you know, longer-term contracts for a portion of the gas.
spk07: I appreciate the update. Thank you.
spk08: Thanks, Jerry. Thank you. Our next question comes from Michael Hoffman from Stable. Michael, your line is now open.
spk02: Thank you very much. Good morning, Patrick, Luke. Just so maybe we prevent everybody from getting your numbers too high. If you spent $500 million, you probably bought between $160 and $170 million of revenues at 25% margins. You've got to layer it in for eight or nine months, and then you walk them up into 2025, but that's the walk-up, just so we don't get ahead of ourselves.
spk01: Well, before we start, Michael, first I want to say thank you to you, because I know this is going to be your last call with us. And I think, you know, you've done this industry, you know, a great service for a long number of years. And you've certainly been a very big help to watch the company, particularly as we navigated going public over the last, you know, number of years. So I wanted to say thank you, not only from GFL, but for the rest of the industry for, you know, everything you've done for the industry. Because, you know, you've been a very big champion of the industry. for each and every one of us as companies, and I think we owe you a big thank you for all you've done for the industry over the last number of years. And with that, I'll turn it over to Luke to walk you through.
spk00: Michael, I echo everything that Patrick just said, so thank you and wishing you all the best of luck in your future endeavors, but look forward to catching up next week as well. On the specific M&A, What I'd say, Michael, is while the math you suggested would be normal in a typical GFL year, this year with Angelo's, it's a little bit sort of skewed because the disproportionate amount of dollars go into one large vertically integrated asset. So what we said is for the 500, we actually got $100 million of revenue. Now, the margin profile, because so much of it is coming out of a large vertically integrated, is much greater than the typical, and so that's closer to a 40% number. And, you know, with that, though, the, you know, basis of what the math you're doing is absolutely right. So if you bought, call it $40 million of EBITDA, and you got that sort of three quarters of the way through the year, the contribution in year would be in that sort of 30 kind of range. And that is the building block as it relates to M&A. And then incremental M&A will have incremental contribution. And then other points Kevin was highlighting of commodity and other tailwinds are real. But as we all know, there will be headwinds. So we can't only count the good guys. But you're absolutely right. It's more the 2025 that you'll get the full year benefit of all of that M&A spend plus the synergies.
spk02: Okay. So, Juan, thank you very much for those kind comments. That was unexpected and very kind of you. Thank you. Following up, working capital, we should still presume it's a use because you're still growing the company. It's just going to be a less of a use than it has been because you're getting better at managing it. Is that the right way to think?
spk00: I think that's right. But you've got to remember, Michael, like the volumetric shedding that's been done of what we call bad revenue. Sometimes bad revenue is coming from bad customers. And so around the edges, that helps. And then just the broader improvement. It's been hard to optimize the ship as you were growing at the rate at which we were. And as we now have stability, we're able to pull the levers that our peers have already done to optimize in those areas. And so we still think there is opportunity, for instance, within our DSO.
spk02: and we will continue to drive after that which will see a recovery of that investment and will help offset what the normal course growth would be associated with organic growth but you're thinking about it exactly right okay and then to that end you have had a lot of self-help opportunities just because where you are in your life cycle whether it's automation and residential or cng on the trucks or digital in the cab can we talk about what inning you are at and how that kind of reflects back to your comments you made about your working capital.
spk01: Yeah, I think, you know, where we're sort of sitting today, you know, we do have a lot of self-help opportunities. I mean, for 2024, again, rolling out 3,500 tablets into our commercial trucks, being able to capture all sort of incremental charges from blocked bins to overweight bins is a big thing that we're focused on. I think that's the biggest piece of the sort of low-hanging fruit, and we're in process of doing that. Again, continued fleet conversion to CNG, I would say, is going to be the next biggest wave over the next couple of years, particularly on the backs of a bunch of the EPR contracts that we're sort of looking to execute on, and the lion's share of those trucks will be converted over to CNG. Um, you know, what I think we were sort of low teens previously. Now, if you look at the fleet sort of high teens on CNG and, you know, as we said, we have a goal stated goal of getting that to sort of 45 to 50% of the overall fleet. And then again, you know, as we said on a previous call, we, we are, you know, there, we still have about $150 million of revenue that's in sort of low margin residential contracts for the most part. And, you know, as we said, we're looking to, to, you know, exit some of that revenue or you sell it to a local competitor in a local market that will do better for it. And I think all of those together help sort of with the capital allocation program, will help with the margin profile, and just continue with putting us on the right trajectory to continue moving forward.
spk02: Okay, last one for me is, and I applaud that you're giving a level of detail in the 90-day view. But I back up and go, that means you are having a much greater confidence and ability to see where the model's going. What can you attribute over the last year or two that has given you, one, the confidence to do it as you turn this consolidation story into an ongoing operating company? What would you point to specifically that gives you that confidence to be able to do that 90-day deal?
spk01: If you look at the business and how it's come together, right, like, there hasn't been a, there wasn't a year for the first sort of 14 or 15 years of our founding that we weren't growing at north of a sort of 30 to 40 percent CAGR. Obviously, with the higher rates for longer narrative, leverage, particularly in the public markets, became sort of a myopic focus of ours. And again, with, you know, the committed goal of us and stated goal of moving leverage into the sort of mid threes. Again, that's allowed us to take our foot off the M&A gas pedal. And I think if you look historically at what the business has done, I mean, you know, we've been pretty sort of muted on the M&A front for the last sort of year and a half. And I think you get the true picture of what the operating power is of this business because there hasn't been a huge amount of M&A. So the story has been pretty easy to follow. Our operators are sort of just managing their existing book of businesses without M&A. So the confidence we have in the forecasting, et cetera, you know, is what you're seeing today and I think you're going to continue to see for the future. even as we sort of get that leverage to the level where, you know, the lion's share of investors want it, particularly in an interest rate environment like we're in today, you know, I think the business is just now of a size and scale that M&A is really just a modest contribution and just, you know, a real part of sort of the growth algorithm, but it's not going to be the part of the growth algorithm that's front and center.
spk02: Okay. Thank you very much. Thank you again for the kind words, and I'll see you Sunday.
spk01: Thanks, Michael.
spk08: Thank you, Michael. Our next question comes from Patrick Tyler Brown from Raymond James. Patrick, your line is now open.
spk13: Yes, a very formal introduction. Good morning, guys.
spk00: Good morning, Patrick Tyler.
spk13: Can you hear me? So I think you guys have a debt tower that's coming up next year. I know your credit quality is improving, but just based on where you are today, do you think that refinancing that 25 power is going to prove a cash interest headwind next year?
spk00: Yeah, so, Tyler, you're right. There's about $1.2 billion across two bonds that come up next summer. They currently carry a blended coupon of about sort of 4.25% to 4.3%. If you're redoing that today, you're probably more in the mid to high sixes, is what you're seeing. So there's certainly an incremental headline cash interest cost on that. However... where we have an opportunity from some structuring perspectives, the existing bonds that you would be refinancing are domiciled in Canada, whereas you'd be issuing the new ones out of a U.S. entity, thereby providing meaningful cash tax shields, right, because we're becoming a bigger cash taxpayer in the U.S. And so net-net in the free cash flow line, the cash tax savings would largely offset the interest costs. And so you'd have a reclass or gross up on the actual line items, but net-net your free cash number would be a pretty de minimis impact.
spk13: Yes, okay, excellent. That's very, very helpful. And then, Patrick, can we get some high-level thoughts on GIP? Can you maybe run down some of the end-year financials, just how it was tracking in terms of EBITDA and leverage, and just any thoughts about monetization there?
spk01: Yeah, I mean, as we stated, you know, last year, again, that business experienced headwinds just from, you know, the run up and sort of the inflationary environment. As we're coming on the backside of that, you know, which, you know, largely through this year will be through. and we'll be getting sort of back to where we, you know, anticipated that business would be. But, you know, I would say this year, low 200s from an EBITDA level without M&A. You know, that business, again, today is sort of running, you know, 12.5 to 13% margins. We expect it to go to sort of 15 over the coming, you know, over the course of the next year. You know, leverage sort of in the mid-fives as a private company. But again, you know, we have a couple interesting sort of M&A opportunities that will get done in that business as well. But again, nothing has changed from, you know, what I believe the thesis to be. We'll grow that business and, you know, expected sort of, you know, a billion dollars of equity value that will come out of that. You know, I would assume... As we can, we'll just look at market opportunities. As you know, there's been a real run-up in valuations in that sector, particularly with, you know, CRH sort of listing now in the U.S., coupled together with Lafarge separating their European and their North American business. You know, other comps like Rode, all of those have had pretty good runs over the last little while. So, you know, I think the thesis is only getting better and, you know, Time has been our friend and will continue to be our friend, but we want to optimize the value of that. But I think that's a late 25, 26 type event where we look at that. And again, I'm not wed to any sort of exit in that. I mean, from our perspective, it's really a triple track process, whether it's an IPO, whether that's a financial sponsor, just given the perfect size of that for financial sponsors today. or whether that's strategic, but I think there's a lot of opportunity for exits in that. We want to get it to the right number and get the equity value where we want it.
spk13: Okay, perfect. And then my last one here. So there's been a lot of movement on PFAS in the U.S., but I'm just curious, has anything happened in Canada similar? I just don't really know, and I'm just curious, how you view PFAS in your ES lens. Is that something that, you know, is within or outside of the scope of your ES business, and could that be an opportunity longer term? Thanks, guys.
spk01: Lots of, I would say lots of chatter as the chatter picks up in the U.S., but nothing specific in Canada at the moment. Obviously, the legislation that, you know, is being proposed was actually, you know, I think in line with, you know, what we believed was going to happen. I think there's still some more room to go, but at the end of the day, landfills are not the generator of this. They're, you know, they're a solution to the problem or passive receivers of this material. So I think, you know, that's going to continue to play out, you know, in our ES business. Yes, a big part of what we're looking at is different technologies. As we know, everybody thinks they have the solution to PFAS, but, you know, at the end of the day, what solution is going to work and how economically is it going to work and etc. So we are in discussions with a multitude of companies that I think we're either sort of looking to acquire or partner with to create a sort of solution to the PFAS issue that everyone's going to be happy to be dealing with in the near future.
spk00: But fundamentally, Tyler, I mean, our perspective would be in the long run, PFAS will be a tailwind for price and volume for our business. And so the exact sort of form in which that shakes out remains to be seen. But we're feeling optimistic that this is ultimately going to be an opportunity for us across both our solid and liquid waste segments on a price and volume perspective.
spk13: Okay. All right. Thanks, guys.
spk08: Thanks, Tyler. Thank you. With our next question comes from Michael Dolman from Scotiabank. Michael, your line is now open.
spk12: Hey, good morning, guys. I wanted to get back to the guidance. Correct me if I'm wrong, but I believe the initial expectation was that margin expansion would increase as the year progressed. So can you comment on whether that margin cadence still stands, obviously outside the comments regarding the pull forward?
spk00: Yeah, I think that's absolutely right, Michael. It's a first half, second half story. I mean, within H1, as we're articulating, the outperformance in Q1 may sort of eat into what was the otherwise expansion expected in Q2. But absolutely. I mean, if you look at the sort of cadence that's being expected in the original guide, I don't think that has changed. And with the strength of Q1 performance, we think maybe that gets a little bit better. And so, you know, we set out this year with a guide that, you know, from our perspective, I think had industry-leading organic growth as the impact of M&A was muted and was therefore all organic. And where we're sitting today, you know, if you're reading the tea leaves, I think we're teeing up that it's going to be better than initially anticipated. Exactly how much remains to be seen, and we look forward to updating you on that in July. But that cadence, everything is looking as expected, just perhaps a little bit better.
spk12: Makes sense. And then you talked about the sustainability of the strong start to price in a year. You know, how are unit costs tracking versus your initial expectation?
spk00: I'd say they're right in line. I mean, when we look at labor, I mean, labor is still, you know, 5% plus number and you're putting it all together. You've got cost inflation in the sort of mid to high fives. But it's stepping down as you're as you're comping the tougher quarters and as all of the other disruption, whether it be fleet replacement, et cetera, is getting better. so we're feeling you know that price cost spread that we articulated in the year that could be upwards of 150 basis points you know we're feeling good on that look i don't think this is going to be a year with the way cost inflation is moderating that we're going to have to go back to the pricing lever as frequently as we've done maybe in the past 24 months and therefore yield a materially different pricing outcome I think, you know, the cost, unit cost inflation appears to be moving as anticipated and therefore a pricing guide will be as anticipated. And then you got to remember, I mean, I said in the prepared remarks, like 80% plus of this year's pricing activity is already done, right? And that's just a function of, you know, the rollover from prior year and the weighted average of Q1 pricing activity being the lion's share for the year. So we're feeling really good on the spread, which is ultimately what we're trying to manage. As we've demonstrated before, if the unit cost changes for expectations, we'll revisit the pricing initiatives. But right now, we're feeling really good on how those trends are playing out.
spk12: Perfect. Thanks, Luke. And then maybe just to sneak one in, just on the working capital management, I think I understand the improvement there. It doesn't sound so much Structural in the sense that you're getting less working cap, more that you're smoothing things out from a seasonal perspective. But, you know, as we look to kind of future years as well, that's smoothing out, that doesn't go away. It might actually even get better.
spk00: Yeah, I think that's right. I mean, if you look at the extent of the swings that we've historically had, like I think last year, the H1 investment was just under $200 million. And then you recover all of that in H2, right? And that's just with the seasonal profile and ramp of the revenues. This year, the way we're teeing it up now is that the H1 investment is going to be just over $100 million, right? So I think 120 is what we've sort of alluded to in the guide there. So material improvement over last year. Again, for the year as a whole, you're still netting out to roughly the sort of same place. but just tempering the volatility, if you will, of the investments. Part of it is by the changing business mix. More and more business in the southeastern U.S. where they have a different seasonality profile is certainly sort of helpful. And then part of it is just continuing to sort of optimize our processes and the information coming out of our systems to manage this appropriately. So we continue to see it as an opportunity. I think it will always be an H1 investment, H2 recovery. although the quantum of changes from quarter to quarter will temper and be more muted than historically.
spk12: Perfect. Thanks very much.
spk08: Thank you. We have our next question from Toby Summer from Truers. Toby, your line is now open.
spk04: Thanks. How does the 80% of pricing activity for the year already being done compare to last year at this time and the historic experiences kind of want to dimensionalize that comment.
spk00: Yeah, so Toby, it's Luke speaking. I think the last couple of years have been unique from pricing because they've deviated from the historical norm that majority of your pricing activity happened in the first quarter. And that was really in response to the cost inflation we saw in 22 and 23 that had you pulling on the price lever more frequently throughout the year than you customarily do. So as a result, what happened was 22s and 23s price cadence was very off. Now, by the second half of 23, we started to more approach normal. And so 24 is set up. in what I'd call a more typical year. And what is a more typical year? You roughly have anywhere from 25 to 35% of your in-year pricing rolling forward from last year's pricing activities. So you think about Q2, Q3, Q4 pricing actions in 2023 roll over into 2024. That accounts for roughly 25 to 35% of this year's price. Q1 activities is roughly sort of 50, 55% of your overall sort of pricing activity for the year. And then that rate really steps down from Q2, Q3, Q4. Q2 is like 10%, Q3 is like 5%, and Q4 is de minimis. And so I'd say it's the last couple years that have been atypical. This year is returning to a more typical cadence, and I think 2025 should be very typical. But again, it's one of the very attractive attributes of our business that allows us this early in the year to already have the confidence and the contribution from that aspect of our top-line revenue growth.
spk04: Thank you. Environmental services, I'm curious about the outlook for growth over the balance of the year. You talked about about 10% on an adjusted basis. Is that a good trend line, and are there any other adjustments that you could remind us, or do you need to call anything out?
spk00: No, so the adjustments really, if you recall in the Q1 presentation, I mean, it was a perfect storm of opportunity in Q1 of last year and everything just came together and the business exceeded top line, even our internal by about $40 million. So we normalized for that. If you think about the guide for this year, ES growth is supposed to be sort of mid-single digits organically. The Q1 and Q2 normalized growth is inclusive of M&A. But so really, if you think about X M&A for the year, we're anticipating this mid-single-digit top line growth. This is really a price-led growth strategy that's probably offsetting some shedding of lower quality volume. You know, I think that will pick up in Q2 and Q3. And for the year as a whole, we're feeling good at that mid-single-digit number. But, you know, what's exciting us the most is the effectiveness of our top-line growth strategy as measured by the sort of margin expansion, right? And if we look at the Q1 result, despite some of the headwinds, to see the margin coming in, you know, 70 basis points better than planned, you know, that I think is a testament to the effectiveness of this chasing quality over quantity on the top line. And that's going to be something we sort of continue to do. I mean, our business, unlike some of our peers, you know, one of the benefits of our ES business is sort of 80% plus of it's this recurring maintenance sort of type nature. And, you know, there is a small component that is, you know, more event sort of driven. But it's the quality of that sort of underlying recurring business that allows us to sort of drive that margin expansion. So I think for the year, you know, that mid-single digit holds. And, you know, we're encouraged by the margin expansion that we've seen in Q1.
spk04: Great. Last one for me. You mentioned negative weather impact at the beginning of the quarter. Clearly it was very cold in lots of places and then a little bit unseasonably warm towards the end. If you net that out, what sort of impact did weather have on the quarter?
spk00: I mean, it's hard to say, to just measure just the bad guys. I think on your sort of volume and solid waste, you know, it was probably pretty close to offset by virtue of the pull forward of the, you know, warmer weather. Think about it in Ontario and Quebec and Michigan, solid waste benefit. I mean, it was really the ES business that felt it on both sides because the warm weather in a lot of our Michigan and other areas where they introduced half-load season earlier, the nature of that business is large full-size tankers just won't run in that sort of road conditions. So I think, you know, you probably saw 100 basis points plus of margin impact. I think I said that in prepared remarks from the weather on sort of ES businesses. Solid, you know, I think it's probably a wash. We had anticipated with the January to be negative 4.5, and we ended up at, you know, that negative 3% number, which I think you largely sort of offset by the benefit of the warmer weather and the end of the quarter.
spk04: Thank you very much.
spk08: Thank you. With our next question, it's from Chris Murray from ATB Capital Markets. Chris, your line is now open.
spk03: Yeah, thanks, guys. Good morning. Luke, you know, it was interesting looking at the chart, and one of the things you did pull out and didn't talk about a little bit was some of the surcharge pricing and getting that into the system. And then you've also sort of talked about, you know, some of the system things you've been doing, maybe putting, I think you said you were going to put some tablets in the trucks to capture maybe some better pricing opportunities. Can you just talk a little bit about what's left to do structurally and kind of catching up your pricing to what you think your peers have been doing over the years?
spk01: Yeah, it's Patrick speaking. I think, again, structurally, if you look at the margins sort of independently of the two sort of LOBs, I mean, if you look at environmental services, You know, that business sort of on a like-for-like basis is sort of running at three to four basis points higher than the rest of the sector after sort of SG&A allocation. So, you know, I think we still have a lot to do. I think there's still fuel surcharges, environmental surcharges. There's a bunch of other charges that we think we can implement in that business to push that business on a like-for-like basis to that sort of high 20s. You know, our solid waste business today, again, you know, post sort of SG&A allocation sort of running in the high 20s today. If you look at the implementation of the repricing of sort of the EPR contracts, municipal hauling contracts that continue to come over, plus the implementation of the fuel surcharges, environmental surcharges, the level set that we've been through over the last couple of years, that's what's allowed that sort of outsized margin expansion. Coupled together now with, again, the implementation of the tablets in our trucks, again, to allow us to capture charges that we're able to charge contractually that we may be sort of missing today. And I said, you know, the role of those 3,500 tablets is going to be very meaningful. And again, sort of catch up on that. So I think when you sort of put that all together, plus EPR, plus, you know, RNG in the solid waste book of business, which we have very little of today, you know, that is going to push us, you know, I would say, you know, industry-leading margins in solid waste. So all that together, you know, we think over the next two to three years, all of that happens. And I'd say by 2026, you have a real sort of turning point on margins and the free cash flow profile of the entire business, the free cash flow conversion, as we sort of move there.
spk03: Okay, that's helpful. I'll leave it there. Thanks, guys.
spk08: Thank you. Thank you. We have our last question for today from James Strong from TD Core. James, your line is now open.
spk11: Hey, guys. Good morning. Nice quarter. Patrick, maybe just to follow up on that last point. So by 26, do you think that your margin-free cash flow profile will sort of equal your larger peers? Do you think you can fully catch up?
spk01: I think the free cash flow conversion will still continue to lag a little, but that's just solely from the capital structure perspective. I think from a margin perspective, you're definitely going to be there, and I think you still have a little bit of a lag just in terms of the way our RNG portfolio is structured, right? Because you're going to get even a contribution from the RNG portfolio, but the first dollars out of the RNG project actually go to repay a portion of the debt. That's the way they're sort of structured today. you're going to have a year, a year and a half basically payback on those, and then you get the ramp of the free cash flow in that. But from a margin perspective, again, you look at EPR, you look at RNG, you look at all the self-help opportunities internally, I think headline margin numbers certainly are going to be there. Free cash flow conversion, and we'll get there, just might be sort of a year, a year and a half behind.
spk11: Right. Right. Right. Great. Thanks for that. And then just on the M&A front, as you noted, you're around $500 million of M&A, so tracking ahead there for the year. How do you think about that strategically going forward for the rest of the year? Do you continue to bid on tuck-in work? Do you put more low-ball bids out there and I'm just trying to think about how you strategically handle as you get closer to your target 600 to 650. Do you put in some low bids and if you win them and exceed your guidance, so be it because it's a great opportunity? Or is that 600 to 650 a hard cap that you're definitely not going to surpass?
spk01: The $600 to $650 is definitely a hard cap. We've committed to that in the capital allocation framework. That's what drives where we're going to end up on a leverage level. So all of that is what we are going to do. Again, acquisitions just don't happen in a week, right? So we have very good visibility on where the pipeline sits, what we're going to close over the next couple of quarters, And then, you know, we're getting to a point in the year where, again, acquisitions, like I said, don't happen in a week. You know, generally take six to eight months between, you know, negotiations with sellers, implementation. Sometimes they take years. But we feel very comfortable in that number. Obviously, they'll be rolled over. We're getting to the point where, you know, we're getting now where we can start pushing stuff until 2025. But for 2024, we're definitely committed to the framework. We're definitely committed to the leverage levels. And I think if that rolls into 2025, you know, I think we got a question from someone, you know, over the course of the night saying, you know, are you just going to honor this for 2024 and then drive leverage back up in 2025 with an influx of deals? And the answer to that is no. I think if you look at the free cash flow generation, the organic margin expansion, the organic growth in the base business, how much capacity that gives us for M&A while still driving down leverage, I mean, that puts us squarely sort of sub-mid threes for 2025. So, you know, that's the model we're working towards. So, no, I feel very comfortable with what we put out. And, you know, we are going to stick to that hard cap.
spk11: Okay, great. Thanks for the answers, guys. Appreciate it. Thank you.
spk08: Thank you.
spk01: Without you.
spk08: We have no further questions on the line. I will now hand back to the management team for closing remarks.
spk01: Thank you, everyone. Much appreciated. We look forward to speaking to everyone after our Q2 results in July. Thank you very much.
spk08: Thank you. Ladies and gentlemen, this concludes today's call.
Disclaimer