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spk01: Good morning all and thank you all for attending the GFL second quarter 2024 earnings call. My name is Prika and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Patrick Davici, founder and CEO at GFL Environmental Thank you. You may proceed, Patrick.
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 second quarter and updating our guidance for the year. I'm 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. Good morning, everyone, and thank you for joining. We have filed our earnings press release, which includes important information. The press release is available on our website. During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in the 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'll now turn the call back over to Patrick.
spk05: Thank you, Luke. Our second quarter financial results continue to prove the highly predictable and recurring nature of our business model. These results are better than we expected and reflect the underlying quality of our asset base and the effectiveness of the value creation strategies that we have put in place over the last few years. Most importantly, these results demonstrate the drive of our employees to deliver consistent, high-quality results quarter over quarter and to make our business better every day. I want to thank each and every one of them for their dedication to Team Green. Both solid waste pricing and volume came in better than expected for the quarter and continue to trend above our initial plan. Operating cost inflation is sequentially moderating, mainly around labor rates and repair and maintenance expenses. The accretive benefits of shedding low-quality revenue and exiting non-core service offerings are also evident in our margins. Luke will walk through more of the details for the quarter that confirm the ongoing operational excellence of the business that we have built. Consistent with our previous guidance, we deployed $89 million into incremental growth investments, primarily related to recycling and R&G infrastructure that we expect will generate significant ROIC for years to come. We remain on track to deploy a total of $250 to $300 million into those investments during 2024 as previously guided. In the quarter, we also accelerated our exit from a portfolio of residential collection contracts in Michigan that no longer met our return thresholds. The sale of this book of business occurred at the end of the second quarter and will be accretive to our margins in the second half. We've seen continued success with the development of our book of business related to EPR in the Canadian markets. New contract awards in Ontario and Quebec have added to the 80 to 100 million of incremental adjusted EBITDA we previously identified related to EPR, and we now expect to generate approximately 130 million of incremental adjusted EBITDA from the contracts awarded to us to date. To reiterate what I said last quarter, the contribution from these contracts is expected to start late in 2024, slowly ramp through 2025, and achieve our expected full contribution in fiscal 2026. The contribution of this work is expected to be highly accretive to the margin profile of our Canadian solid waste segment and to our consolidated margins. We also remain optimistic about opportunities for further upside as EPR programs are rolled out in Quebec, Western Canada, and the Maritimes. On RNG, we continue to expect that two or three more facilities will come online by the end of the year, and 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 the first half of the year, we deploy approximately $500 million into M&A. all of which was completed when we provided our first quarter results in May. We remain absolutely committed to our cap for the aggregate 2024 growth investment of $900 million and the net leverage target that we set out late last year. While we continue to have a robust pipeline of attractive M&A opportunities in our markets, at this stage there will be likely only small transactions in the second half, with the majority of the current pipeline to be executed in 2025 and beyond. The quality of our first half results with the continued strength of our business model supports an increase in our guidance for the second time this year. We are increasing adjusted EBITDA to $2.24 to $2.25 billion and adjusted EBITDA margin to 28.4%, a 70 basis point increase over our original guidance and a 170 basis point increase over the prior year. Luke will walk through the guidance in more detail, but to be able to raise the guide two consecutive quarters and to have line of sight to 170 basis points of annual margin expansion certainly has us feeling very optimistic about the effectiveness of our value creation strategies. I will now turn it over to Luke.
spk10: Thanks, Patrick. Revenue for the quarter of $2.06 billion was 11.1% higher than the prior year, excluding the impact of the solid waste divestitures. Solid waste pricing of 6.5% and minus 1.7% volume were both ahead of plan, and the continued strength in recycled commodity prices also contributed to the year-over-year increase. Our environmental services segment price-led growth strategy advanced and was further supported by increased soil volumes and used motor oil pricing. Large-scale event-driven response work around major spills and fires, the timing of which can be more variable, was lower compared to the prior year. Adjusted EBITDA margins were 28.7% for the quarter, 90 basis points ahead of the prior year and 20 basis points ahead of our guidance. Underlying solid waste margin expansion of 100 basis points reflected the positive impact of price-cost spread, higher commodity prices, plus M&A that came in and accreted EBITDA margins. offset by the dilutive margin impact of the increased cost of risk, as well as the absence of one-time benefits related to the prior divestitures and insurance proceeds received in Q2 2023. Consistent with the first quarter, elevated price-cost spread, the positive margin impact of our deliberate volume strategies, R&G, and favorable commodity price contribution, as well as incremental operating leverage, are all contributing to margin expansion ahead of expectations. Environmental services adjusted EBITDA margins were 29.6%, in line with expectations and inclusive of nearly 100 basis point cost of risk headwind, indicative of the success of our price-led growth strategy. Adjusted pre-cash flow was $185 million in the quarter, $177 million greater than the prior year period, and approximately $20 million better than guidance. The contributions to the outperformance came from CapEx, Working Capital, and other operating items, which are all expected to be timing differences that will normalize by the end of the year. Net leverage at the end of the quarter was 4.29, ahead of expectations, and consistent with the quarterly cadence on which our year-end net leverage target was based. During the quarter, we were successful in refinancing one of our 2025 bonds with a new bond maturing in 2032. After the end of the quarter, we also successfully refinanced our term loan B in a transaction that both reduced the borrowing spread by 50 basis points and extended its maturity to 2031. We have one additional bond that becomes callable at par in the third quarter of this year. The debt markets remain highly constructive and we expect to opportunistically refinance this bond when a market window presents itself. After we complete that expected refinancing, over 90% of our non-revolving long-term debt will have a maturity date of 2028 and beyond. As Patrick said, the success of our first half results sets us up to increase guidance for the second time this year. Revenue is now expected to be approximately $7.9 to $7.925 billion, driven by solid waste pricing of 6.25% to 6.5% and solid waste volumes of negative 1.25%. Incremental revenue from in-year M&A is more than offset by the Q2 asset sale, which is now expected to reduce our original expectations for second-half revenue by just over $110 million on account of seasonality. Additionally, in light of the lower volume of large event-driven work in our ES segment in the first half of the year, we are taking a more conservative view for the back half of the year, and the new guidance assumes this trend continues. If large-scale event-driven work picks up in the back half, there should be upside to the guide. The contribution from any additional M&A completed in the back half of the year will also provide upside to the guide. Adjusted EBITDA guidance increases to $2.24 to $2.25 billion, a $30 million increase over our original guide, a result of the described changes in revenue together with ongoing expansion of adjusted EBITDA margin, which, as Patrick said, increases to 28.4%. Adjusted free cash flow increases to $810 million, a $10 million increase driven by the incremental adjusted EBITDA and partially offset by $25 million of incremental interest costs, which are now expected to be $500 million for the year. So in summary, revenue increases pro forma for the divestitures, adjusted EBITDA increases again, adjusted EBITDA margin expands an additional 70 basis points on top of the original 100 basis points guide, and adjusted free cash flow increases as well. As it relates to the third quarter, we expect consolidated revenue of approximately $2.055 to $2.06 billion with a similar split between solid and ES revenues as what we saw in the second quarter. Keep in mind that the Michigan residential contract sale results in a sequential revenue step down from the second quarter. In terms of margin, we expect consolidated adjusted EBITDA margin of 30.25%, over 200 basis points higher than the prior year and the first time in our history achieving a consolidated margin of over 30%. The guide then contemplates margin stepping down in the fourth quarter as per the typical seasonal cadence of the business. Those revenue and margin expectations equate to approximately $625 million of adjusted EBITDA for the third quarter. Additionally, we expect $230 million of net capital expenditures, $165 million of cash interest, and close to a nil impact from the recovery of working capital offsetting other operating items. For Q3, adjusted free cash flow of approximately $225 million. In terms of net leverage, we expect a reduction of approximately 15 basis points throughout the quarter to end the quarter at just above 4.1 times, and then a larger reduction in the fourth quarter to end the year within the previously stated range of 3.65 to 3.85. Adjusted net income is expected to be $125 million for the third quarter. I will now pass the call back over to Patrick, who will provide some closing comments before Q&A.
spk05: Before we open it up for Q&A, although we don't generally comment on market speculation, I want to address some of the headlines that you have all seen lately. We believe that the business today is significantly undervalued when you consider the quality of our assets, the capabilities and track record of our team, the near-term growth prospects, especially around EPR and RNG, and the deleveraging trajectory we're currently on. In my view, the current valuation does not make sense. With the current disconnect in valuation, we are buyers of GFL, not sellers. Based on the non-core asset sales we completed last year at mid-teens multiples and the recapitalizations we completed in 2014 and 2018 as a private company at 13 to 14 times EBITDA, we have demonstrated that GFL's assets are worth more than was reflected in our current stock price. And since then, publicly traded waste multiples have continued to expand. So while selling the entire business is not on the table today, there could be merit in selling a portion of our business at valuations that are more in line with what we believe is fair value of the business. A sale of high-quality assets such as our ES segment could easily attract mid-teens multiples. We have had significant inbound interest from both strategic and financial sponsors that support this valuation perspective. Such a sale could serve the dual purpose of accelerating our deleveraging and, most importantly, allowing us the opportunity to buy back a significant amount of stock at an attractive valuation. To make a decision around such a significant sale would require a full auction process to ensure we are maximizing shareholder value and achieving the best use of proceeds. We are absolutely exploring all of our options and have begun to implement the steps necessary to prepare for potential transactions. Since we went public, I believe that we have clearly demonstrated that we are dynamic, roll up our sleeves management team that can and will implement the appropriate strategies to ensure that we are maximizing long-term value creation for all of our shareholders. We have no intention of deviating from that strategy with the opportunities we now have in front of us. I will now turn the call over to the operator to open up the line for Q&A.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keyboard. If you change your mind and would like to remove that request, please press star followed by two. And again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, Please remember to pick up your handset before asking a question. You will pause here briefly while questions are registered. We have the first question from Saba Khan with RBC.
spk08: Great. Thanks and good morning. Maybe if we could just start with those closing comments. So I want to maybe give you an opportunity to maybe share a little bit more color on Maybe the type of interest you've seen the type of investor or the type of party that are looking at it, you know, do you have like a lower bound on the multiple you're willing to sell timelines. And just sort of your decision making process anything any additional color you can share on know what the market should expect over the next little while and how you'll you're making maybe arriving at that decision, thank you.
spk05: yeah I think from my perspective, you know again we've spent 17 years building this business right so. Again, it's sort of near and dear to our heart. You know, it was a core portion of the strategy historically. And again, as this sort of came to light over the last little while, and again, as I said, you know, from my perspective, there is a very sort of large valuation gap today. It's not necessarily to the peers, but it's also just in general in terms of what, you know, I would say, you know, private investors are prepared to pay for these assets and the IRR that they can drive out of each and every one of them. So, you know, where I sit today, obviously, you know, I think as we started engaging in this process, you know, there was multiple different avenues available to us on the table and it was sort of narrowed down very specifically. And I think, you know, to get alignment from board and specific sort of large shareholders, You know, it was a process that we sort of had to go through. I think given the amount of inbound interest that we've seen from, you know, investors as well as strategic, you know, I think where we landed is that, you know, we need to run an auction to sell this. And we've been taking the steps over the last couple of months to prepare for that. And I think what you'll see is that a process launched after Labor Day sometime over the month of September to determine what the actual true value of the business is. I have no reason to believe that the business today isn't worth significantly higher than what GFL is sort of trading at today. I think if you look in the market, if you look at, you know, recent trades of Covanta, Sercon, if you look at Heritage Environmental that was, you know, recently sold to EQT, if you look at U.S. Ecology that was sold to Republic, the recent Stericycle trade with Waste Management, I mean, I think you can see that, you know, all of these traded, you know, in that range. And I think when you run a model and you run a private equity model on this business, I mean, I don't care what model you run. It's very sort of simple growth algorithm, right? You have top line growth of sort of high single digits, bottom line, you know, that flows down to EBITDA at sort of just low double digits. Put on sort of five, five and a half turns of leverage. Model in a bit of M&A. I mean, in a base case, you get to sort of a 15% IRR. In an upside case, you can underwrite 23% to 25%. And I mean, again, I go back to this is what GFL did in recaps for a number of years. Go back to our 2014 recap. HPS, when they recapped our business, they paid 14 times for that in 2014. And they left with an equity return of 3.6 times their money in four years. You look at BC Partners. They came in, played close to 14 times for the business in 2018. Look where their equity is marked today. They're at already three times their equity and massive sort of runway in front of us. So there's no reason to believe you know, that, again, a private equity investor wouldn't view this the same way. And with our discussions that we've had with them, you know, we can definitely stand behind those models. But, again, there was significantly more interest than I thought from more parties, and I think that's the only way for sort of us to maximize value. But most importantly, if you look at Remain Co., and, yeah, we can look at, you know, GFL trading around 12, 12.5 times 2024. But the reality is, let's not look at 24. We need to look at 25 and 26. And, you know, you can take conservative views on what 25 and 26 are. We've given you the breadcrumbs of what RNG and EPR are, you know, as you sort of roll out to 26. You know, and we have our existing shareholders. This is solely a trade. You know, for me as the largest shareholder, if I can sell something in mid-teens and buy back a significant amount of our stock, And I can end up owning 12 and a half or 15% more of the company at these values and taking out a lion's share of the overhang that exists from some of our PE partners and not having to come back to the market and sort of by death, by a thousand cuts of them selling every six months, you know, that absolves all of that. So that's how I thought about it. You know, to get those shareholders on, on side took time, but I think, you know, we've made a decision as a board that that's what we're going to do. Those shareholders are on side with that process. And, You know, I think now, you know, there will be limited overhang left in the market. If you want to own GFL stock, you're not going to wait for secondary because there isn't going to be one because we're going to own the stock and we're going to own 50% more of it. And that's simply how I sort of thought about it. And then the secondary aspect of it is, you know, leverage will be reduced. You'll have a war chest of capital to go out and do the things you want to do in your sort of core service offerings. And there will be no impediment to doing the things that we want to do in the markets we want to do while growing the solid waste business. So I think it's a win-win.
spk08: Great. I appreciate that, Culler. Maybe just shifting over to the guidance. I have a question for Luke. There's a few moving pieces in the update to the guidance. I think you called out the environmental services. I think solid waste is doing a little bit better, some effect, benefit. If you can maybe just parse out the puts and the takes in the 24 guidance update, please.
spk10: Yeah, good morning, Saba. You know, great question. It was the one thing that maybe contemplate we should provide a deck. But, you know, we think once you hear the details, it'll be sort of straightforward enough. Look at a high level, the EBITDA line, a starting 2215 guidance number. If I think about that, I think about exogenous factors of FX and commodities, that's giving me a little bit greater than plus 30 to the good. And then you have this ER volume, right, the large-scale event-driven stuff. The new guide assumes about $100 million less of that. So the margin on that effectively offsets the benefit you're getting from FX in commodity. So then we think about M&A, and early in the year we did those couple of deals, and we have the positive contribution of that offset by the Michigan portfolio sale, and the net of those two is roughly about $15 million to the goods. So if you think about those as the broad-based sort of external factors, it leaves you with about sort of 15 to 20 of just pure underlying guidance rays. And it's really coming out of, as you said, solid waste and solid waste margin as we're seeing the effectiveness of our strategies just come through even greater than anticipated.
spk08: Great. Thanks very much. I'll pass it on.
spk01: Thank you. Your next question comes from Stephanie Moore with Jeffrey. You may proceed.
spk00: Hi. Good morning. Thank you. Maybe first touch on the 2024 guidance. Good morning. Maybe just first starting on the 2024 guidance. Your updated guidance has margins expanding 170 basis points year over year. This appears to me the highest margin expansion amongst your peers for the year. Can you comment on what's driving this? How much do you attribute to just the quality of your asset base for self-help initiatives? And then can you update us just on what innings you are in on your self-help initiatives? Thanks.
spk10: Yeah, good morning, Stephanie. It's Luke. You know, we're certainly, you know, impressed with the headline number of 170 as well. But, you know, I think the starting point is exactly what you said. It's the quality of the assets and the market selection in which we've gone on. We've always said that, you know, we have, I think, a best-in-class asset portfolio in the right markets, and that's what's allowing us to now sort of execute on our strategies. And so you think about the price-cost spread that we talked about at the beginning of the year and the ability of that to sort of come in, you know, better than anticipated. You think about the synergy realization of all the pieces that we've put together historically and starting to get the benefit of that. You think about the self-help levers that we're sort of pulling on, and all of these are sort of coming to, you know, fruition, and you're seeing the benefit come through in the margins. And so it's not any just specific one thing. Yes, commodities give a little bit of an incremental impact, and certainly our intentional shedding and those deliberate volume strategies are helping, and the Michigan sale sort of accelerates that even more. But for actual quantify, you think the base guide of 100 basis points, if you recall, that was effectively all organic, right, because the M&A was actually a net drag going into the year. So now with that, we have... new M&A this year and improved commodity pricing, that's adding roughly 35 basis points of incremental. So the 70 basis point raise, half is coming from those two pieces. And then the other half is just the ongoing success of our strategies, both on the volume and just the underlying margin. And so, you know, I think it's a great testament to all of the things we've been saying for the past couple of years as we bring these pieces together and what the opportunities in front of us. And the most exciting part is, you know, we really think this is just getting started.
spk00: Great. Thanks, Luke. Appreciate it. Patrick, you noted in the release and in your prepared remarks today that you believed a sale of certain other high quality assets would be on the table. You obviously called out environmental services. But given the way it's worded, could we assume that there are other assets that could also possibly be for sale? No. Thanks.
spk04: No. It would be limited to. Thank you.
spk01: Thank you, Stephanie. We now have Kevin Chang with CIBC.
spk09: Hey, good morning, everyone. Maybe just looking at your solid waste performance, I guess I've noticed a bit of a divergence. It's more the Canadian solid waste organic growth has been tracking at a decent positive spread versus the U.S. organic growth. I'm just wondering if there's anything you'd call out there that you're seeing in Canada versus the U.S. I'm not sure if it's just the timing of how some of the M&A comes through and it rolls through after year one, or if there's something specifically happening in the Canadian landscape versus the U.S. landscape.
spk10: Yeah, good morning, Kevin. It's a great question. If you think about, you know, solid waste organic growth being price and volume, recall our Canadian business was sort of behind the eight ball on pricing, if you will, you know, when we really sort of embarked on price discovery, call it sort of five, six years ago. And so I think that upside that we've always articulated as the catching up with industry norms in terms of pricing, a lot of that existed in the Canadian book, and you're seeing that sort of come through. I think additionally, we're starting to see some of the benefits of these investments we've made into recycling, EPR, and other initiatives in the Canadian landscape, which are helping support, you know, sort of overall volumes there. And then the offset set is, well, the U.S. pricing discipline has been sort of more mature, certainly have more runway there, but it wasn't as much steep of a ramp as we saw in Canada. Some of our intentional shedding has been more focused in the U.S. market where we've done larger quantity of M&A and therefore inherited larger volumes of books of business that are no longer meeting our return thresholds. So I think it's a combination of those two things. Certainly we're seeing very robust organic growth across both the segments, but you're absolutely right when you sort of pick it apart. You do see a bit of that sort of divergence, but as we go forward, we're feeling – highly confident in the organic growth prospects on both price and volume in both of those segments.
spk09: That makes a ton of sense and I appreciate the color there. I'm sure there'll be a ton of questions through this call on potentially divesting of ES. Maybe I'll just ask one on, it is a portfolio of assets you have within ES. I guess when you think of potentially divesting of this, Do you think of divesting all of it or none of it, or is divesting parts of it also part of the, I guess, the review you're going through today?
spk05: No, beyond block. Okay. For ES, it would just be, you know, you would be selling the entire proposal. I mean, the one piece that's in there is the solar remediation piece. Mm-hmm. So I would say that's the one piece that could potentially not go with it. If we wanted to keep that, just giving the exposure to the GTA and sort of GIP, but everything, you know, it's a small piece of environmental services, but for the most part, it would be on block, both Canada and the U.S. Obviously, as you know, almost 80% of the revenue from the U.S. comes out of Canada, 20% out of the U.S., so yeah. Yeah.
spk09: That makes sense. That makes sense. That's it for me. Thank you for taking my questions.
spk04: Thanks, Devin.
spk01: Thank you. We now have Devin Dodge with PMI Capital Markets.
spk11: Chris, thanks for taking my questions here. I just wanted to come back to the 2024 margin guidance. Look, the pace of increase really steps up in the second half. compared to the first half. I know the sale of the Operation Michigan is part of it, but can you help us better understand that sequential improvement?
spk10: Yeah, Devin, it's Luke speaking. And again, I think it sort of goes back to my sort of prior comments to Stephanie of the overarching margin. And it's sort of all of these things coming together, right? So you continue to have price-cost spread, you know, similar to what we've seen all throughout the year. You know, the cost of risk headwind, that's been a big drag all year. It's moderating as you get to the second half. And the benefits of intentional shedding and other deliberate volume strategies are improving as we sort of go forward. And you're going to have, you know, the M&A contribution as well. So it's not any sort of one thing. I mean, the guide does contemplate solid waste margins, you know, expanding. I think it's roughly 200 basis points over the prior year for terms of Q3. And if you break that apart, you know, the Michigan sale would give you sort of 80 to 90 basis points of that. And commodities give you sort of 70 basis points of that. Cost of risk is going to be, again, not as impactful as the first half. I call that another 30 to 40 basis point headwind against you. So it's still sort of when you take the puts and takes, speaking to this underlying 100 basis points of solid waste margin expansion. which we've been consistently seeing. And, again, I think it's a function of all of those pieces we've said, starting with the market selection and the assets, getting the synergy realization as these businesses are really sort of starting to gel, improved asset utilization, and all of the like. And so I think it's all of those pieces. And, you know, obviously culminating in a 30% consolidated margin for Q3, which is the first time in our history printing that, is something that we're pretty excited about.
spk11: Okay. Okay. Thanks for that. And then another question, you know, we get asked occasionally, corporate costs. You know, we've seen this drift higher as a percentage of sales, you know, over the last, you know, two or three years. Can you speak to some of the drivers behind that? And if you have line of sight into when you could be in a position to start, you know, leveraging those corporate costs and add to the margin expansion of the underlying businesses?
spk10: Yeah, Devin, it's another great question, something we sort of look a lot at. If you look at the last three years, I mean, at a high level, you know, half of that is salaries, which sort of accretes up at, you know, normal course sort of wage inflation. Now, you know, from going to being a public company and doubling our size, we did increase some of the sort of support, particularly around ESG and some of these other sort of departments that weren't sort of full-fledged. So you did have an investment in resource there. Another significant component of the non-solid is IT costs. And as we articulated sort of two years ago, massive investment to move a lot of our infrastructure into the cloud and just sort of prepare for ongoing scalability. Now, some of that IT shows up in CapEx, obviously, but a large portion of it just sort of sits in that sort of corporate bucket. I think the third item to consider is there's actually been, between the divestitures of last year and now Michigan again, some chunkier amounts of revenue dispositions, which obviously is foregoing some of the leverage that you're getting on that number. But when you think about it today, I think the resource investments have been made. I think the IT spend is there. And I think what you now are going to have is leveraging that as you go forward and grow a revenue base off of a corporate cost number that should sort of grow more just at a sort of normal course cost of inflation.
spk11: Okay, thanks for that. I'll turn it over.
spk01: Thank you, Devin. We now have Jerry Revich with Goldman Sachs. You may proceed, Jerry.
spk03: Yes, hi. Good morning, everyone. I want to ask, you know, your margins in the second quarter were up, call it a point and a half ahead of normal seasonality, really strong performance. And You know, the guidance for the third quarter is for another outsized margin move of a point versus normal soonality. Can you just talk about what level of sequential price increase are you folks implementing to deliver that level of outperformance? And, you know, what are the sequential trends in unit costs that you're seeing that drove the beat in 2Q and, again, outperformance in 3Q?
spk10: Yeah, thanks for the question, Jeff. called this is a year that's returning back to a sort of normal cadence of pricing action. What I mean by that is the vast majority of pricing action actually occurred already and so as a result we're seeing a normal course step down you know we started the year sort of high this quarter at six and a half percent and you're going to be at a high fives number in q3 uh and then stepping down a little bit further in sort of q4 so why i give that color and cadence is because that margin is not being achieved by us going out and you know, implementing a whole host of incremental price increases. It's simply all of the things that we have said coming together. So, yes, you're getting price-cost spread, because although Q3 will be high fives, you're going to be against a moderating cost inflation, still probably getting somewhere of 100, 150 basis points of spread, sort of on top of that. But that moderating cost inflation is also accelerating. If you look at, you know, labor rates, last Q2, You know, labor rates, you know, year over year would have been up sort of a mid to high single digit number versus now it's sort of sub 5%. And that's sort of continuing to trend in the right direction. I mean, R&M is obviously, you know, another sort of key cost that's been driving. If you look at R&M as a percentage of revenue, I think we're sort of at, you know, 10 plus in Q1. Well, I'll be in the lower seasonally revenue, but then that's stepped down to a high nines number in Q2. It's going to step down to sort of a low to mid nines as a percentage of revenue in Q3. And so you're going to be getting this sort of torque coming out of that as well. I mean, the commodity prices and the ramp in the first half of the year is certainly helping the Q3 margins, as is, you know, the incremental impact from the exiting the Michigan portfolio, which, as I said, but sort of, you know, 80, 90 bps. It's going to help you in the quarter. But it's not any of these one things, Jerry. It's all of the things coming together. And as I said, it's going to yield the 30% margin for the first time in our history. And we think there's a lot more room to run as we go forward to 25 and 26 and beyond as you really start getting the benefit of EPR, RNG, and all those margin accretive pieces that we've been talking about for the last couple of years.
spk03: Super appreciate the color. And on the RNG point, Luke, can you folks just weigh in on your updated views on the attractiveness of voluntary markets versus D3 RIN markets. Do you view the Chevron ruling as any uncertainty for the D3 RIN market? Can you just weigh in with your updated thoughts on spot versus potentially locking in those volumes longer term?
spk05: Yeah, again, you know, nothing has moved and, you know, all the smarter people that are not definitely on the RINs haven't, uh, you know, certainly don't have that perspective that Chevron decision will affect anything. But, you know, from our perspective, again, market continues to be very stable. You know, being able to push as much as we can sort of in the transportation market, given sort of wind pricing. Voluntary market continues to creep up. So, you know, I think As more volume continues to come online, I think, you know, there's going to be the opportunity to move some of that definitely into the voluntary market. And I think our strategy, long-term strategy, really hasn't changed. So I think we're, you know, again, just highly focused on keeping that balance. Again, longer term, we still have the view that we want to be 60% into the voluntary market and then play the spot market on the other sort of balance of 40%.
spk03: Super. And, you know, last question on ES. You folks have expanded margins significantly from when you folks acquired those businesses. Can you just talk about what the tax position and the tax basis looks like for those assets if you do move towards a sale, anything we should keep in mind on U.S. versus Canadian position?
spk05: Yeah, so you think about the business, I mean, We did a couple of things. I mean, as people know, the Canadian government changed the capital gains rates earlier this year. So we were able to do a reorganization within the existing business to preserve the old capital gains rate in that business unit. So again, you know, we had that, we had the ES business in its own entity. I mean, if you look, I mean, the irony of this, the funny thing about it was, you know, when you look at ES, which sort of mentioned to the board yesterday, is, you know, you look at that business, 2010 we got offered $100 million for our ES business. 2018 we got offered $800 million for our ES business. And, you know, I think you've seen some of the numbers that are out there, you know, today. And, again, we've done, you know, the management team there has done an amazing job. I mean, they printed north of 29% margins in Q2. I mean... you know, it's an amazing business, amazing margin profile, with a lot of sort of runway sort of sitting in front of it. That being said, you know, it would be basically fully taxable in the US for the 20% piece, we do have a significant number of sort of losses that we could use in Canada. So I mean, I think, you know, depending obviously on the purchase price, but You can think about a tax bill sort of in the $500 million to $600 million range.
spk03: Super. I appreciate it. Thank you.
spk01: Thank you, Jerry. We now have James Schnumpf with TD Cowan, Hulani News-Edson.
spk07: Hey, good morning, guys. Nice quarter. Most of my questions have been answered, maybe just one for me. I know it's way too early for 2025 guidance, but just at a high level with, you know, with the price cost spread opportunity, plus some RNG and EPR contributions, could we see another 100 basis points plus improvement to EBITDA margins next year? And then just, you know, thinking longer term about the volumes, what they could do next year. Could those be flat to marginally up next year, or do you still have a lot of shedding ahead of you?
spk10: Hey, James. It's Luke speaking. I mean, I think where we sit today, I'd say it's a definitive yes that we're expecting next year to be another 100-plus. um you know will obviously unveil the full guidance to go forward but i think you're absolutely thinking about that correct and if you do the math you actually don't need to believe a lot to get to a number like that in terms of the deliberate volume strategy look guys we said previously early this year this portfolio of residential contracts in michigan was like the last big chunk i mean there's always going to be pieces and as you do mna there's stuff around the edges but i think the lion's share of the strategy that was actually moving volume and overshadowing actually underlying positive volume is largely sort of behind us. So I think we'll hold until the end of the year or early next before we give a final view on volumes for 2025, but certainly think we're not going to be printing at the minus 3% that we did the beginning half of this year, and it's certainly something sort of closer to flat with a path to being up.
spk07: Great. Thanks, Luke. I'll turn it back. Thanks, James.
spk01: Thank you, James, and thank you, Luke. We now have Brian Butler with CFO.
spk02: Hi, good morning. Thanks for taking my question. First one, just on the ES timeline, I guess, you talked about after Labor Day kind of starting the auction process. I guess, what's what's your thoughts on and maybe appetite on how long that process runs? I mean, does that go through the end of 2024, maybe into 25, or is there an expectation to try to do that sooner rather than later?
spk05: I mean, from our perspective, we want to get it done as soon as we possibly could. Um, you know, again, just, it'll be a question of how fast we can move. I think for most of us that know us, I generally don't think we waste a lot of time. Um, And I think the beauty of this business is this is not a 100-person auction. This is, you know, I would say 8 to 10 sophisticated buyers that have played in this space over and over again. So there's not a typical learning curve about assets, markets, et cetera. So, listen, from our perspective, I think it will move very quick. But, again, you know, you never know, I think. The biggest thing for us is, again, just, you know, getting the cargo financials done, particularly if it's a financial-sponsored buyer. Obviously, we've been a public company. We reported this segment independently. But, you know, for someone to get financing, you know, a part of what we have to do is get cargo financials. So that's in process. But, you know, other than that, I don't see – you know, my goal would be, you know, clearly to get it done versus, you know, when we report, you know, Q4 at the latest, but hopefully – we're able to come up with a path one way or another within calendar year 2024.
spk02: Okay. And then maybe on the M&A spend for the back half and then maybe thinking about the pipeline going into 2025, obviously it's moderating in the back half of 2024 to be at the leverage target. But when you think about the opportunities still in front of you in your pipeline, how should we think about 2025 M&A, and then maybe, you know, if the sale of ES happens, could that be, you know, much, much larger? Just trying to think about where that could go.
spk05: Yeah, so, I mean, again, backdrop is, again, you know, we've committed to keeping leverage in the 3s. I think, you know, the goal is to get sort of leverage. Absent sort of a sale was to get leverage down in the mid-3s. for 25. So I guess you know that would drive you know that would drive the M&A spend. I think when you look at that for next year you could this year if we spend 600 to 650 million on M&A given sort of some of the most recent EPR win that we had and again having the hybrid you know balancing between M&A spends and sort of on the organic growth cap expense. You know I think next year we can step it up for sure. know from 650 probably closer to something you know somewhere between 850 and a billion obviously if we if we obviously if we did something with the es business i mean that would give you ultimate flexibility to do whatever you want um you know i think you could certainly spend more leverage wouldn't really move you know coupled together sort of with the share buybacks i mean i think you'd have a lot of flexibility to pay, you know, even take that M&A spend higher.
spk10: And Brian, it's Luke speaking in reference to the $850 billion that you could potentially be looking at, you know, in a non-ES divestiture sort of scenario. I just want everyone to recall. You know, with this size, you know, roughly every $500 million you deploy in M&A has an impact of leverage of about 10 basis points, round numbers. So if you think about the organic deleveraging model, if you're ending this year in that sort of 365 to 385 range, you know, organically you would delever to something well below three and a half. And, you know, even at spending that billion dollars of a level of M&A, still very sort of comfortably, you know, arriving at the end of 2025 in that sort of mid threes range.
spk02: Okay, that's great color. And if I could flip one last one in there, cutting through kind of maybe on the service, you know, or maybe, sorry, not service, but the shedding of volume. If you look at the service intervals on the commercial business, are you still seeing, you know, upgrades kind of outpacing downgrades in that piece of the business?
spk05: Yes, I mean, you know, it's obviously market specific, but by and large, yes, we continue to see them outpacing the client, so. The market's very healthy. So, you know, we haven't seen anything sort of material. Obviously, special waste volumes continue to sort of just chug sideways, just given, you know, where the interest rates are sort of sitting. But I think other than that, it's been very good.
spk02: Great. Thanks for taking the question.
spk01: Thank you, Brian. We now have Rupert Ferrer with National Bank of Canada.
spk06: Hi, good morning, everyone. Thanks for taking the question. I'd like to start by following up on that last question. If you're looking to deploy capital from the sale of the ES business, what's your view on the optimal level of debt for the remaining companies? Is it still the same? Is it mid-threes? Or if you have the option, could that go lower?
spk05: I think when we ran our models internally with the sale, I think You would basically, I mean, I think comfortably you'd move it to three, and that's to get to IG, to make sure you're definitively square in the view of getting that sort of investment grade rating. I mean, if you're going to be that close, you might as well move to three and definitively get the IG rating. There's no reason to sort of teeter-totter and try to be cute with that number, so I think you would move that target leverage. You know, you're going to move between 275 and sort of three and a quarter,
spk06: know for for a period of time but ultimately sort of target leverage would sit around three post the transaction okay great and then looking at m a potential with any remaining proceeds how do you see the relative price of assets in your pipeline today versus the price of of your stock if you're looking at at buybacks and uh would the pipeline have any Any platform acquisition opportunities, or do you think there's still plenty to do in Tuckins?
spk05: So a couple things in there. I mean, I think, again, from my perspective, to get an asset of this quality at this level to be, you know, again, going back to Luke's comment earlier when he talked about 25 and 26, the business is trading at sort of 12, 12.5 times today, and you run that out to 26, and, you know, you start – in 12 to 14 months from now you're trading off of a 2026 number is businesses you know with epr and rng is trading somewhere around probably 10 times 2026 depending sort of how you modeled it i mean i don't think there's a higher better use of capital than to buy back sort of our own stock at that level that being said you know that would be one that would be one use of capital There is a significant amount of M&A in the markets where we already operate. I mean, again, we have a very large footprint, 10 provinces in Canada, 24, 25 states in the U.S., some high-growth markets with a lot of opportunity. So, again, we feel very comfortable that we could deploy that capital. And, again, from a valuation perspective, again, it's hit and miss. I mean, there's some assets, you know, that are more expensive than others. But by and large, valuations from our perspective, maybe they've ticked down a little bit because of the higher interest rates. But I would say that, again, from the competition for some of the medium-sized assets, you have a little bit on the private equity side that compete with you. And as the leveraged finance markets have come back, even though rates are a little bit higher, this continues. Again, similar to the math I did earlier on the call, you can make the IRRs work. if you believe in the sort of growth trajectory and the stability of the business. So, you know, I think nothing has really changed from the tuck-in side. And, again, there is a significant amount of M&A and white space within the existing footprint that we have.
spk06: Great. Thanks for the call. We'll leave it there.
spk04: Thank you.
spk01: Your next question comes from Toby. Someone with Truist. You may proceed.
spk13: Thanks. How has employee attrition training and safety expense trended year to date? Is there room for improvement from here? And is there a difference in trends if you look at the business geographically between Canada and the US?
spk05: So I think there's a difference between secondary and urban markets. Secondary markets, again, Employee turnover, obviously significantly lower than the urban market, which has been good. I think if you look at trailing 12 months as a business as a whole, um, you know, like I said, last year we were sort of, we were trending sort of mid twenties today. We're just above 20. And we think, you know, that again goes back to sort of where we were pre COVID sort of in the high teens. So. Mike Beaucheneau, Mid to high teens is what the goal is, and we are definitely on a trailing 12 month basis trending down, I mean it turnovers down over sort of four, four and a half percent over the last 12 months, so we are definitely heading in the right direction. Mike Beaucheneau, And the opportunity is still great to continue moving again down sort of mid to high teens.
spk13: Mike Beaucheneau, Thanks, could you discuss any cross selling or historical benefits that we should have in mind. between solid waste and ES that you've generated with those businesses together that might not be a feature of the Romainco?
spk04: Yeah, so I think if you look at it, I mean, the model that had a solid waste need, right?
spk05: Not in the sort of reverse. So, yes, there was cross-selling opportunities, but The way it's structured today is you basically have a solid waste salesman and you have a liquid waste environmental services salesman, right, or saleswoman. And I think when you look at that, we've basically incorporated effectively a buddy-buddy system. So in every region, each of the salespeople on the respective sides of the business has a buddy-buddy that can cross-sell between the two lines. In a transaction, I think that is valuable to both companies. And my inclination today in sort of discussions with certain prospective buyers, that would sort of stay in place. We don't think that that would change in any material way because it's a benefit to sort of both companies. Today, they're getting two separate invoices regardless, one for each service. So, again, that wouldn't be something we have to decouple. So, you know, from our perspective, I think that would be ongoing, and it's beneficial to both of us.
spk13: Thanks. I appreciate that.
spk01: Thank you, Davey. As a reminder, it is staffed if I want to ask any more questions. And we now have Chris Murray from ATB Capital Markets.
spk12: Yeah, thanks, folks. Good morning. Maybe turning around to call the more boring blocking and tackling stuff. We talked in previous calls about some of the margin enhancements and improvements, and we touched a little bit on labor and turnover management, but just wondering how you're making progress on kind of core waste margins and some of the initiatives. I think we talked a little bit about rolling out things like tablets in the trucks and some of the other pricing initiatives that Just wondering if there's any color on kind of the walk into higher margins as you go through the next three quarters.
spk10: Yeah, it's a great question. You know, something that as we look at the margin profile of what we're being able to deliver in the expansion year over year, you know, it's very evident that these strategies we've been talking to are being sort of highly successful. And, you know, again, Chris, I think it's all of the above coming through in the beginning stages of what those ultimate run rates could be. I mean, you mentioned the tablets and the trucks. I mean, that is a new initiative for this year that's in the nascent stages. And, yes, there's a little bit of modest contribution, but nothing compared to once that's fully ramped with the implementation completed, you know, towards, you know, end of Q4 into Q1 of next year. And so that's going to be another lever that's going to be sort of additive. You know, we talked about the RNG, and this year we have a very modest amount of it. But as the, you know, full portfolio comes online, you think about what the margin accretive nature of that is. You know, EPR. You heard Patrick talking about we now have sort of roughly $130 million of EPR contracts in hand. You're going to have, I think we said, $5 million to $10 million of contribution in this year. But then that ramps up to $25 million and $26 million. And we call, you know, that's all accretive margins, which unto itself is going to take our Canadian solid waste margin, you know, up to low 30s and, you know, be accretive to both the consolidated solid margins and the consolidated business as a whole. You know, continuing, you know, with the benefits and the rollover of now this exiting of the Michigan portfolio contracts will be rollover effect into next year. And you have really all of these pieces coming together. I mean, as we start talking to the next layer down of, you know, CNG conversion, improved asset utilization from routing technologies, this is the sort of next leg up. you know that we anticipate being able to see because what i'd say is you know we're actively engaged over on this side you know looking and figuring out how to prioritize all of these you know value add levers in front of us and we hope to do as an investor day later this year uh you know tee this all up and you know articulate you know what the next couple years could look like because you heard it from patrick i mean there's a lot of focus on 2024 but From our perspective, I think we're sort of missing the forest for the trees when you think about what this looks like in sort of 26 and beyond. And so we do look forward at our investor day at the end of the year sort of to piece out and quantify what all those buckets could be.
spk12: Okay, great. Along those lines, though, the other question, just in terms of being able to receive things like new vehicles, technology, things like that, I know there's been some supply chain issues, but it seems like a lot of stuff is starting to feel better. How are you finding, you know, kind of things like truck supply, things like that, in terms of your ability to get kind of newer trucks into the system, you know, help you avoid some maintenance costs, things like that?
spk05: Yeah, so we were sitting at around 70% of what we wanted. If you go back sort of a year and a half, two years ago, I think that's trended sort of like 85 to 90. And I think we could be 100% of where we want to be. You know, absent again, some of these big new EPR contracts that we've had to reallocate, you know, units coming off the floor to these because of the contract start date for those. But I think, yes, the logjam has definitely subsided, and we're moving to a point now where we can get exactly what we want.
spk12: Okay, good. And then one quick one, just to clean up, just in terms of the business, is there any back office systems or anything? I know Patrick, you talked about sort of the sales front end, but is there any back office or common areas that you'd have to split up or anything that would make a kind of a sale complicated from an operational perspective?
spk05: Not really. Obviously there's a little bit in treasury and there's definitely a little bit in HR, the two big sort of overlaps, but by and large, you know, it's, It would be one of the simpler things we've done in our history. So, again, nothing that would be an impediment to making it happen.
spk10: Chris, the divestitures we did last year were more sort of inextricably linked with the business than ES would be. So, you know, just as a point of reference, this would be a cleaner sort of extraction than that was.
spk12: All right. Okay, folks, I'll leave it there. Thank you.
spk08: Thank you.
spk01: Thank you, Chris. I would now like to hand it back to Patrick for some final remarks.
spk05: Thank you, everyone, for joining us this morning, and we look forward to speaking to you after Q3. Thank you very much.
spk01: Thank you all for joining the GFL second quarter 2024 earnings call. Please enjoy the rest of your day, and you may now disconnect from the call.
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