GFL Environmental Inc.

Good morning and thank you all for attending the GFL third quarter 2024 earnings call. My name is Brica and I will be your moderator for today. All lines were 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 Avigee, founder and CEO at GFL Environmental. Thank you. You may proceed,

Patrick. Thank you and good morning. I would like to welcome everyone to today's call and thank you for joining us. This morning we will be reviewing our results for the third quarter and providing updates on other items. I am joined this morning by Luke Pelosi, our CFO, who will take us through the forward looking disclaimer before we get into details.

Thank you, Patrick. Good morning everyone and thank you for joining. We have filed our earnings press release which includes important information. The press release is available on our website. During this call we will be making some forward looking statements within the meaning of applicable Canadian and U.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.

Thank you, Luke. The momentum from our exceptional first half of the year continues through the third quarter, resulting in nearly 20% adjusted EBITDA growth and another quarter of industry-leading margin expansion. The strength of our ongoing operational and financial performance this year once again demonstrates the dedication of our employees, the quality of our asset base and the effectiveness of our overall value creation strategies. The impact of the commitment we see every day from our employees cannot be understated. Our employees' handling of the two hurricanes that hit within a two-week period is just one example. Given our extensive operations in the U.S. LCEs, the hurricanes had the potential to be severely disruptive to our operations. The extensive preparation and exceptional execution of our teams ensured that we were able to keep everyone safe while continuing to provide essential services to our customers. Once again, I am humbled by the more than 20,000 men and women on Team Green. Consistent with our guide, the third quarter saw the highest adjusted EBITDA margin in a 300 basis point margin expansion over the prior year. This margin expansion has driven us using all the levers that we have talked about in the prior quarters. Our disciplined approach to pricing generating higher price cost spread against moderating cost inflation, the accretive margin benefits of shedding low quality revenue and the exiting of non-core service offerings, improved productivity, onboarding efficiency and low cost of risk associated with improving employee turnover, and an M&A strategy synergy realization as the businesses we have acquired continue to mature within our existing footprint. Luke will walk through more of the specifics on the margin bridge, but we are extremely pleased with how things are working. This quarter's results once again demonstrate the highly predictable and recurring nature of our business model and further enforce our conviction in our near-term roadmap that we believe will continue to drive industry-leading financial performance. In the quarter, we continue to execute on our capital allocation strategy exactly in line with the framework we provided at the end of last year. We are on track to deploy approximately $900 million on both M&A and incremental growth investments this year as previously announced. During the third quarter, we deployed $96 million into these incremental growth investments primarily related to recycling and R&G infrastructure. We have commissioned two new MERPs so far this year and expect two more to come online in early 2025. Some of our EPR-related collection contracts started up in the third quarter, and we will see more start up between now and 2026. The contribution from EPR will be a growth tailwind over the next 24 months, and we remain optimistic about incremental contract wins above and beyond the $130 million of EBITDA we have already talked about. As anticipated, two new R&G plants were commissioned in Q3, and we expect a third to come online before year end. All three of these projects will drive incremental contribution in 2025 and beyond. We also deployed $47 million into three Tuck-in acquisitions and continue to have a robust pipeline of attractive M&A opportunities in our markets. We ended the quarter with net leverage of $4.05, the lowest in GFL's history, demonstrating our absolute commitment to the capital allocation and deleveraging targets that we previously shared. As we previewed in August, we officially launched a robust process to evaluate the sale of our environmental services segment in September. As anticipated, the best in class quality of this asset, coupled with its near-term growth opportunities, has attracted a significant number of highly credible potential buyers from diverse backgrounds. Based on the first round bid that we received last week, we are highly confident that a transaction at a valuation equal to or greater than we have previously suggested can be signed and announced before we report our full year results in February. We have conviction that the transaction should net a minimum of $6 billion in an after-tax proceeds. We expect to repay at least $3.5 billion of debt with the remainder available to buyback stocks and for general corporate purposes. Before I hand the call over to Luke, I want to take a minute to talk about the security incidents that you may have read about in recent media reports in the context of where GFL is today. I started this business in 2007 with one solid waste transfer station and four old roll-off trucks and $250,000 in startup capital. This December will be GFL's 17th anniversary as a company, and today we are the fourth largest diversified environmental services company in North America. We have operations across 10 Canadian provinces and 25 U.S. states, and this year we are approaching $8 billion in annual revenue. We have millions of customers who trust us to provide them with their essential environmental services, including the over 5 million households that we service across Canada and the United States weekly. We have achieved this level of success by providing high-quality service at a fair price and through the more than 250 acquisitions we have completed to date, with many of those owner-operators staying on with us post-acquisition to continue to contribute to the integration of their businesses into GFL. We have a reputation in the industry of doing what we say we are going to do, and we are very proud of that reputation. Investors in GFL now include the highest quality institutions, from private equity funds to pension funds, sovereign wealth funds, and leading financial institutions around the world. Many of our investors have been with GFL since our early days and have done extensive due diligence on GFL, our leadership team, and the industry. All of our long-term investors have earned significant returns on their capital that they have invested with us. They have and continue to put their confidence in us to be the stewards of their capital and create long-term value for them. We do not take that trust lightly. Regarding the recent events, we are not going to comment on any specifics because the police are investigating these incidents and the investigations are ongoing. While the media likes to speculate, we would encourage everyone to allow the authorities to do their work. We are cooperating in the investigations and trust that the authorities will bring them to a successful resolution, hopefully in the near term. We are also working with third-party security consultants to review our security measures and any additional precautions we should be taking. While the authorities continue to do their work, we also remain focused on the safety and well-being of our employees who, as I said before, are the core to everything we do. The results we've achieved this quarter and throughout our history are a reflection of all of the hard work and dedication of GFL's more than 20,000 employees. We have hundreds of facilities across our platform and these incidents are not going to distract us from continuing to drive the business forward. I will now turn the call over to Luke for additional color on the quarter and I will then have some closing remarks before we open it up for Q&A.

Thanks, Patrick. Consolidated revenue for the quarter of $2.015 billion was right in line with our guidance after giving effect to FX and commodity prices. The third quarter saw .3% revenue growth and solid waste when excluding the impact of the divestitures, driven by stronger than expected solid waste pricing of 6% and volume of minus 0.8%, a 90 basis point sequential improvement over Q2, despite initial storm-related impacts at the end of the quarter. We expect volume to turn positive in the fourth quarter and as we anniversary most of the impacts of our targeted volume shedding initiatives. Decreases in commodity and energy prices reduced third quarter revenues derived from the sale of commodities as well as fuel surcharges compared to our guidance, a trend we expect to continue in the fourth quarter. Environmental services revenue was up 3% compared to the prior year, inclusive of the impact of lower UMO pricing and a tough comp arising from a large scale event driven revenue realized in the prior year period. Excluding the impact of these two items, segment revenue was up 9% versus the prior year, demonstrating the strength of our price led growth strategy to offset this lower level of event driven activity that we continue to see in certain markets. Adjusted EBITDA margins were .1% for the quarter, 300 basis points over the prior year and the first time in our history that we've reported adjusted EBITDA margins of over 30%. For context, adjusted EBITDA margins in Q3 2019, the first publicly reported third quarter results we have, were 25.1%. This quarter representing 600 basis points of margin expansion over those past five years. Solid waste adjusted EBITDA margins were up 340 basis points, inclusive of tailwinds from commodity and fuel prices, the impact of recent divestitures and the impact of the results of our R&G joint ventures flowing through our P&L, which overcame headwinds from M&A that came in a decreed of EBITDA margins, the dilutive margin impact of the increased cost of risk, as well as the impact of reclassification of certain costs that had been recognized in the corporate segment in the prior period. Environmental services adjusted EBITDA margins were 32.2%, 110 basis points ahead of the prior year, despite headwinds from used motor oil pricing and increased cost of risk. Adjusted pre-cash flow and adjusted net income were 225 million and 126 million respectively, both exactly in line with expectations, and another data point illustrating the highly predictable nature of our financial results. Net leverage at the end of the quarter was 4.05, ahead of expectations, largely on account of translational FX. But when looking through the FX impact, this result is consistent with the quarterly cadence on which our year-end net leverage target is based. As you all know, it is difficult to predict where FX rates will be in the future, but on a constant currency basis, we continue to track towards the net leverage range outlined in our 2024 capital allocation framework. After quarter end, we were successful in issuing our first industrial revenue bond, a tax-efficient financing instrument commonly used by all of our public company peers. The US dollar 210 million bond was issued with a .375% coupon rate, approximately 100 basis points lower than the current weighted average effective interest rate on our other long-term debt. Our initial foray into the tax-exempt bond market is another example of the incremental financing opportunities we expect to become available with our increasing credit quality profile. We have one additional secured bond in our current debt stack that becomes callable at par in the third quarter of next year. The debt markets remain highly constructive, and we expect to address these notes in advance of the maturity through cash on hand, proceeds from Devestitures, or opportunistically accessing the debt markets when a window presents itself. During the quarter, we also converted approximately 14.5 million of our Series A perpetual convertible preferred shares into 16 million common shares. The conversion had no impact on our total diluted shares outstanding. Given our robust Q3 results and our expectations for the fourth quarter, we now expect revenue of approximately $7.82 to .8.5 billion for the year. All other aspects of our previously provided guidance remain unchanged. As a result, our expectation for fiscal 2024 adjusted EBITDA margin increases for the third time this year to approximately 28.6%, representing an industry-leading 200 basis point margin expansion over the prior year. Specifically, as it relates to the fourth quarter, we expect consolidated revenue of approximately $1.94 to $1.97 billion at just over 29% adjusted EBITDA margin, representing another quarter of 300 basis points of -over-year margin expansion. Q4 adjusted pre-cash flow and adjusted net income are expected to be approximately $350 million and $75 to $80 million respectively. Due to the significant impact the potential sale of our environmental services segment would have on our financial outlook, we're going to wait until February to provide our Fulsome 2025 framework and guidance. In addition, we plan to have an investor day in early 2024, details of which will be announced soon. However, where we sit today, we have strong line of sight to a -single-digit top-line organic growth, double-digit adjusted EBITDA growth, and another year of more than 100 basis point margin expansion. Layering in the potential contribution from completing even a portion of our current M&A pipeline, we could see 2025 adjusted EBITDA grow in the low to mid-teens. I will now pass the call back to Patrick who will provide some closing comments before Q&A.

Thank you, Luke. The value creation opportunity at GFL has never been better. We have laid out the foundation for long-term growth and we believe that we are uniquely positioned for industry-leading financial performance over the near term. This year's performance demonstrates the strength of what we have built and moving into 2025, the setup is very clear. Continue to advance the ES sale process, giving us the opportunity to accelerate our deleveraging plan and explore options to buy back our stock. Continue to focus on generating industry-leading organic margin expansion in our solid waste business. Benefit from the ramping contributions from both extended producer responsibility in our R&G facilities and execute on our robust M&A pipeline while maintaining leverage targets and continue progressing towards an investment grade credit rating. As I said many times before, all that we have achieved is a testament to the hard work and dedication of all of our employees. On behalf of all of GFL's management team, I want to thank each and every one of our employees and our investors as well as our customers and our communities for the continued loyalty and support. This quarter also sees us announcing the change of our leadership team. In a long planned succession, effective January 1st, Greg Yorston will transition the COO role to Billy Safara, our current EVP of our solid waste operations. Greg has had a distinguished career in the waste industry of nearly 40 years. Starting in Western Canada in 1986, Greg and his family moved eight times throughout the US before he settled that waste industries in 2013. Greg's Canadian roots came full circle when he took on the role of COO following GFL's 2018 merger with waste industries. Since then, Greg has been instrumental in executing our growth strategy across our solid waste platform and instilling operational disciplines across all of these operations. I know that we would not be where we are today if it weren't for Greg's leadership and dedication to GFL over the last six years. I am personally very grateful for all of his contributions and feel very fortunate to know that GFL will continue to benefit from his expertise through 2025. Billy has been a key member of our operational leadership team since he joined us in 2021. Billy should be familiar to many of you who with his more than 30 years of experience in the solid waste industry, including at Republic Services and most recently before he joined GFL at advanced disposal. Billy has worked with Greg's right hand since 2021 and with his decades of industry and GFL experience, Billy is uniquely positioned to take on the leadership of our solid waste operations. This succession has been extensively planned and we are highly confident in the seamless transition. I will now turn the call over to the operator to open the line for Q&A.

Thank you, Patrick. 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 keypad. And we do ask that you please limit yourself to one question and one follow up. And if you have any further, you will need to press star one and get back in the queue. And again, that is star followed by one to ask any questions. We have the first question on the line from Patrick Brown with Raymond James. Your line is open.

Hey, good morning, guys. Morning, guys. Can you hear me? Hey, sorry. Hey, Patrick, I just want to kind of thanks for all the details on the ESL, but I just want to be clear. So the six billion is net of any tax leakage. And I don't necessarily want to go down a big rabbit hole here on taxes paid or how a deal might be structured. But kind of regardless of those taxes, I mean, the implied multiple on this deal is still very attractive. It's fully consistent with the multiples that you guys had talked about last quarter. Would that be correct?

Yeah, that's correct. I think, Tyler, what we meant to sort of illustrate with this is, you know, I mean, there's been lots of media attention on what the actual value of this business is. I think what we tried to articulate is that we have a very, very high degree of confidence that we will deliver a minimum amount of six billion in cash proceeds. Obviously, as enterprise values continue to increase, so does the tax bill. And I think from our perspective, we are looking to find the most efficient structure from a tax perspective, given as increased enterprise value equals increased taxes. And I think what you can underwrite is that there's going to be a minimum of six billion of cash proceeds. Three and a half billion of that is going to get, you know, a minimum of three and a half billion that's going to get these reposts get to repay debt. And then the balance will be used for general corporate purposes in share buybacks. But, you know, I think that was clearly meant to demonstrate we have a very high degree of confidence in that today.

Yeah, OK, excellent. And then big picture, Luke, as we as we kind of look to 25, can we talk about some of the breadcrumbs roll just at a very high level, specifically around EPR and RNG? I mean, right now, how much incremental EBITDA would you expect from both of those buckets? Would it be something like 30 to 40 million incrementally for each in 25? And then the contribution kind of steps up into 26.

Yeah, so, Tyler, I think you're thinking about it right in terms of the ramp. I mean, if you take EPR this year, and as we said, the minimum impact is five to 10 million of EBITDA in your results. That number is going to go up to call it a sort of 40 to 50 million next year. So you have that sort of incremental 35, 45 million from EPR on the RNG side. You know, this year, the one facility, Arbor Hills, you know, roughly 25, 30 million dollars of EBITDA. And I think that number should look to sort of double into next year. Obviously, on the RNG side, ring pricing can play a factor of that. I think we're being pretty conservative with our expectations on rents that's keeping it well below today's levels. So, you know, we're basically doubling up the MMBTUs with the new plants that have come on. New plants that will come on later in 25 and into 26 will have the minimum impact in here. So I'd say the RNG number in that sort of 35 to 45 incremental and sorry, EPR 35, 45 incremental and RNG in that sort of 25 to 30 range.

Yeah, perfect. And then just to be clear, there's no, at this point, based on deals done to date, there's really no M&A impact in 25 as of right now.

No, but what I will say on M&A for 25, obviously, you know, with the high degree of confidence that ES, you know, we're going to get something done in relatively short order, we've been building our pipeline. So I think next year we have, you know, we'll have a very good setup from an M&A perspective, you know, across all Canada in the US. So, you know, Luke's earlier comments on just the setup for 2025 and the potential impact from incremental M&A. Well, again, you know, sort of maintaining levered targets that we have with the focus on the investment grid credit rating. We're going to have a very good setup with the proceeds that we receive from ES to be able to sort of double down on the solid waste businesses in our markets that are going to be sort of highly accretive to be both from a free cash flow perspective and just an operational perspective.

And Tyler, I mean, to Patrick's point, like M&A is really this kicker to what's an extremely attractive organic setup because, you know, as I said in the prepared remarks, like mid single digit top line, I think of it and that will come out with the specifics. But, you know, I think there's a path where you have another, you know, 100 basis points of spread of price over your sort of cost inflation. So if you think at the margin level, you've got a mid single digit on the top line, 100 basis points of spread, that should give you 60, 70 basis points of margin coming out of the spread. You got R&G and EPR that we just talked about that's additive to that. The Michigan divestitures, the M&A anniversary next year, you pick up another sort of 20 basis points there. So you don't need to believe a lot to see 100 basis points with a margin expansion. And so just natural organically, you know, EBITDA would be up 8%. The R&G and EPR contributions, another two, that puts it at a 10% EBITDA increase before considering M&A. And, you know, we're feeling like really confident in those numbers. So we think it's just a very attractive setup as we're getting into next year.

Yep. No, perfect. Sounds great. Appreciate it so much. Thank you guys.

And so.

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

Great. Thanks and good morning. Maybe just continuing on the margin discussion. And it sounds like you'll probably provide a bit of a medium-term outlook here at Investor Day. But, you know, if you put the ES business aside, can you maybe just give us maybe just rehash kind of the margin journey, obviously a peak margin this quarter. How should we think about the margins over the next two, three, four years and maybe the bigger bucket drivers over the medium term specifically for the solid waste business?

Thanks. Yeah, it sounds like you're trying to steal our thunder from Investor Day. But at a high level, look, I think you have the base algorithm of price-cost spread. I think what you're seeing this year and, you know, industry-wide you're hearing the conviction going to 25 and beyond that I think that's here to stay. And we can debate, you know, what the new norm is. But I think you're going to be seeing this ongoing base margin expansion coming out of that dynamic. And I think where we're at is in the relatively sort of infancy of some of our price discovery, we probably have some runway of that above and beyond what the industry peers are. Then in addition, you know, we have the whole discovery of ancillary pricing charges, right, which is just net-newer in our book, less mature in our application of that. And that's going to provide us what we perceive to be an incremental tailwind as we just catch up to where the industry already is. So you have a very attractive sort of price-cost spread driver of annual margin expansion. You take EPR and RNG. I mean, Tyler was asking about the 25 amounts, but take them all the way to fruition. And over the next couple of years, you're going to get at least $130 million of EPR coming in at accretive margins. And you have RNG that from this year's $25, $30 million is going to ramp up to $175 million plus, right, which is highly marginary accretive. And you should realize all the benefit of that in the next two to three years as well. And then, you know, Patrick's prepared remarks spoke to what's happening within the base business of the continued maturation of our optimization sort of processes within, whether that's procurement or it's asset utilization, everything we've been doing to optimize the business we have, and the continued maturation of synergy realization from recent M&A. And so when you put this all together on the remaining solid waste business, you know, I think there's a very clear path to what should be industry leading margin expansion taking us to a place where we should be sort of, you know, very close to best in class on our sort of solid waste margin. So we're feeling really good. The exact bread crumbs we'll provide at Investor Day, but that's the broad sort of strokes of the outlook.

Great. Appreciate that. And then, you know, I think the commentary around $3.5 billion at least of debt pay down, you know, just that high level numbers gets you to a very low three times leverage. Is that sort of the, you know, the leverage ratio, I guess, would that be a happy place to kind of continue to do M&A and maintain leverage? Is that how we should sort of read into that low three times leverage pro forma of the sale? Just any thoughts you could share there?

Yeah, obviously the cash flow is going to continue to ramp. And obviously with the organic growth, we're going to continue to organically grow the business, which is going to continue pushing leverage down. I think, you know, from a rating agency perspective, you want to maintain leverage between sort of three and three and a half to get to that investment grade rate credit rating. Again, we're moving all the way down there, so we might as well, we're going to stay down there. So, you know, I think depending on sort of what M&A and timing of M&A could step up a little bit for a quarter to sure, but we're going to maintain leverage between the three and three and a half.

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

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

Hi, thanks for taking my question. Maybe I should just ask on EPR. It seems like as you brought on this journey, it seems like you kind of pointed to the thing just more upside relative to the original opportunities you saw in front of you and kind of mentioning the prepared remarks, Patrick. You know, you could see upside to 130 million. I'm just wondering, based on the investment you're putting forward, is there a way to think about, I guess, the blue sky earnings potential based on the capacity that you'll be putting into the market or when you think about the excess of 130, does that require more investment and more facility to service those new contracts?

Yeah, like we said, Ontario was basically done and that's, you know, the numbers that Luke's referencing coupled together with an incremental opportunity in Quebec. What's still out there on the table is the Maritimes as well as Alberta and Saskatchewan and sort of Manitoba. Those are the sort of next big ones to fall. I think blue sky scenario, you'd be pushing closer to 200 million if you put it out, right? I would say that's the blue sky scenario. Could we potentially get to the blue sky scenario? The answer is probably yes. Are we underwriting that? The answer is no. But it's certainly going to be more than 130 and potentially sort of slightly less than 200. But we're feeling very confident about our asset positioning and our positions in those markets. Again, from an asset positioning perspective, we're in very good shape in a lot of those markets. And obviously with our relationship with Circular Materials and how we sort of built this program and designed the program, I think we're in a good spot to get our fair share. But as those bids continue to move forward, you know, we're certainly at the top of the pile and we're continuing to push forward on all of them.

And Kevin, I mean, as Patrick said, asset positioning, I mean, some of those markets, we can use an existing facility to drive incremental volume and profitability through so-called capex life. In another market, we may need to build a facility, but again, going back, the return profile of these, it's the type of business to win. And we'd like to invest capital in places where we can have long-term visibility on predictable sort of cash flows. And the new contract supports that. And so, you know, I think it will be a combination in the end of that sort of blue sky between using existing and building net new. But both options, you know, I think fit within the overall margin return on the capital framework with which we evaluate all of our capital decisions.

That's helpful. I mentioned my second question. I'm just wondering, like, in a post-ES bail world, and obviously you'll have cash here to deploy towards your capital structure. Does that change how you think about the working capital seasonality you have? It looks like, I guess, in 2024 here, it will be the third year in the world where you have a pretty big capital, a working capital unwinding Q4. So you kind of have a heavier lift in the first three quarters. Does that change in a post-ES world? Is that something you can address as you kind of think of, you know, a pure solid waste business?

Yeah, absolutely, Kevin. I mean, a big component of that working capital seasonality profile you see today is driven by yes, it's the most seasonal of our business. It's a function of the larger Canadian exposure it has, plus just the sort of nature of the work that gets done. I mean, this year, you know, although the -to-date investment in working capital is sort of exactly the same as last year, you can see more muted swings in each of the quarters. And, you know, the guy has, you know, Q4 sort of reflecting back to sort of zero. So again, smaller, more muted swings than what you had historically, excluding ES from that. Today, it's commingled. But when you carve that out, the DSO profile of the business on a blended will improve to sort of a lower number. And the gap of your DPO is going to be more stable and narrower. So I think you will see exactly what you're anticipating. I mean, our Canadian solid waste business will continue to have a seasonality profile, which you can see in like, you know, one of our other sort of peers that has a more sort of northeastern exposure, but more muted than where we are today.

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

Thanks,

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

Yes, hi. Good morning, everyone. And congratulations to Greg and Billy. I want to ask, you know, as a consequence of the divestiture, could you just talk about any benefits from a simplification standpoint? So, Luke, you just spoke about the working capital benefits. What about organizational structure? How much does this simplify the process, create the ability to do more M&A without potentially ramping up overhead from here? Can you just address this on an opportunity?

Well, Jay, you know, what I'd say is, I mean, we've contemplated divesting of ES, you know, sort of several times from a sort of, you know, disintegration perspective. I don't want to say it's standalone, but the thing is sort of, you know, autonomous isn't the right word, but not massively intertwined. And that was giving us the conviction with the speed with which we could do something. And so why I highlight that is, well, obviously not having that segment would simplify certain aspects. Couple less IT systems, you know, a couple less particular administrative functions that, you know, serve to support ES. But, you know, I don't think you're going to have a step function change in our overarching overhead. Most of the ES specific overhead is actually already burdened in the ES segment. So if you think about my corporate cost budget, you know, we have like a 10 to 15 million dollar reduction that comes out of that when ES goes away, as opposed to maybe a pro rata number that you might be thinking of. And again, that's because a lot of the ES specific overhead is already in ES. But certainly, you know, if you look today, we balance our sort of capital allocation amongst, you know, both of the segments. And with the capital allocation constraints, if you will, sometimes we're foregoing opportunities and solid as we're sort of doing something in, you know, ES and there's a sort of balancing coming through of that. But if you think about that corporate bucket, you know, as we start doing the M&A, you get the sort of leverage that's going to sort of come out of that. And you're going to see, you know, we don't need incremental overhead investment. And so with what we have, I think we have the base that's in place. And if you roll forward the model over the next four or five years, you can see what today is a sort of low 3% number, you know, gravitating towards that, you know, close one and a half to 2% number. I think we expect to get meaningful leverage out of that as we grow the business from here.

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

Yeah, I mean, I think it's all of the things that we in the industry have been talking about. I mean, you think about turnover rates and Patrick spoke about the set of, you know, prepared to Mars. Well, there's been a lot of focus on unit cost inflation, like the efficiency and productivity associated with that sort of reducing turnover is real. And you're seeing that come through in your sort of, you know, cost inflation as well. R&M costs, you know, continue to moderate, you know, as anticipated. And we're getting the benefit of that. So, Jerry, I'd say it's not any one thing, but really a combination of all the things in conjunction with, you know, the pricing levels that, you know, we had a high degree of sort of visibility on. So, you know, it's this combination and the recurring nature of it that gives us such sort of conviction on, you know, our expectations as I sort of set out for 2025. Again, not a specific thing, but all of the things together.

And lastly, Luke, the R&G tailwind number that you pointed out, 25 to 30 million, it feels like you're leaving a lot of room for rent price volatility. You know, a $2 D3 rents, I think the incremental earnings could be closer to 50 million from the 4 million. Can you just expand on that? Is that to say we just had a change in the White House? Let's make sure we understand what's happening with the three room prices and room to execute or are there any discrete contract structures that we should be aware of when we talk about just 25 to 30 step up?

Jerry, just to confirm, it's only it's 2 million incremental MMVTU, right? We got 2 million in hand, 2 million coming on. But even with that, you're right, there's some conservatism in there. One on the ring pricing, but two more so just, you know, the two of those facilities of the net new ones are coming online, you know, in Q4 effectively. And there's a ramp up until these facilities actually start contributing at sort of full run rate. So it's a volumetric conservatism, which I think is appropriate in conjunction with, you know, just some conservatism on rent pricing.

Sounds good. Thank you.

Thanks, Jerry.

Your next question comes from Devin Dodge with BMI at the 2 market.

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

Hey, Devin, it's Luke speaking. So the tablet initiative is sort of still in flight, you know, piloting, getting the things in the trucks is one thing, but then changing the sort of driver behavior and making sure we have the process in place to capture is another. So we're, you know, seeing, I'd say, the infant stages of this. And you can certainly see in the markets where it's being employed, the incremental dollars coming in. You know, I want to be clear right now. It's really focusing on blocked bins and overloading recycle contamination fees, which I think, you know, our peers in the industry have brought into would be a sort of phase two for us. I mean, right now we think the low hanging fruit on the, you know, overflowing and blocked bins represents a sort of meaningful opportunity. Exactly what that is. We have a billion and a half, two billion dollars of commercial revenue. And we think about what the incremental sort of surcharge could be coming out of that. You know, even a sort of small percentage is a very attractive number. What we're endeavoring to do, Devin, is use the pilot to gather some intel such that we're going to invest today. We can provide an actual sort of quantification, but, you know, suffice to say we think there's real dollars there, all of which have dropped to the bottom line and, you know, just bring us to par with where our peers already are today. Yeah,

and on the RESI side, obviously, particularly on the backs of EPR in Canada, we're developing, you know, also camera system with AI technology to determine contamination rates, et cetera, that give us the ability to charge back based on those. And that's all in flight. I don't think that's a 2025, you know, possibility. But I think as we move into 2026 and 2027 and beyond, you know, the technology is getting very good and we're piloting a bunch of different initiatives today that we think, again, will just be more value-accretive as we move into 2026 and 2027.

Okay, good call in there. Thank you. And then second question, just based on the EPR contract, contracts that you've seen so far, the current R&G project development pipeline, what should we be expecting in terms of sustainability-related spending in 2025 and is there much carried over into 2026?

Yeah, so Devin, if you could speak, I think 25 on the incremental growth spend probably looks something similar to 24. Again, got to figure out, you know, which from the contracts when actually truck deliveries are going to be happening on some of the pieces. So we need a little bit more time to get that ironed out before we speak to you in February 25. But I would think directionally in line with what 2024 was is probably the right way of thinking about EPR and R&G for 2026. You know.

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

we'll have more

color. We will have more. We'll definitely have more color by our investor day to give, you know, basically an 18th month to 24 month outlook and we'll sort of have the EPR sort of what we believe the revenue and even a contribution to be from EPR at the investor day. But 26 on the pace of it today will definitely be lower than 25.

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

Thanks, David.

We now have corner with Kasia Bank. Please go ahead when you're

ready. Thanks for taking my question. And then Patrick, appreciate you. You're addressing the recent incidents here. Just back to the ESO process. You know, I hear you guys, you know, several potential bits are coming in. So just want to understand like what would narrow down to the final winner, you know, considering all the kind of different sets of bits you are you're receiving, you know, like you talked about tax implications, but are there any other considerations than selecting the final winner? And if there are also a possibility of a call or put option there?

Yeah, so I think where we sort of fit today, you know, we went out, you know, went out to sort of 40 interested parties, you know, really at NDAs out to almost 30 different parties, which then translated into, you know, 10 to 11 different proposals. All sort of varying degrees and that sort of mix of strategic and financial sponsors. And, you know, obviously we have to manage this process now. So we, you know, I think from our perspective, what we're doing is we're going to narrow the field down to four, which we did yesterday. And these are four people that I have, you know, met with personally have relationships with have a high degree of conviction of closing and doing exactly what the savers are going to do. So, you know, we're going to basically run those four to the end. What is important to us? Price is important to us. Structure is important to us. Timeliness to close is obviously very important to us. And, you know, depending on the structure and the tax structuring, just given, you know, the increase in the enterprise value of what we initially thought, you know, structuring is very relevant to us today because as the enterprise goes up, so does the tax bill. And those just, the tax bill goes up exponentially based on sort of increased value. So, you know, I think what was out on the street before historically was that it was a six and a half to seven billion dollar EV. You know, I think comfortably you're materially higher than that and you can definitely move that number up 500 to a billion from where we were. So structure is going to be important to us. So we will arrive there. It's going to play out over the next little while. I think where we sit now, you know, if we do our job, we're going to push and we're going to try and get something done. Obviously, as Luke said, you know, the outside date is having something done by the time we report. You know, but ideally we'd like to get something done, you know, in January and have this closed sometime in Q1 if we could. Now, that would be sort of a blue sky scenario, but from our perspective, we think it's doable and we're going to push to make that happen.

Okay, that's a great filler. And if I can follow up just on housekeeping on solid waste side, if I heard correctly, you guys are expecting volumes turning the corner in Q4. Can you suggest what are some of the puts and takes driving that volume rebound in Q4?

Yeah, hey, Connor, Luke. You got to remember the volume that we're seeing this year is really a function of the shedding activities that in large part took place last year. So if you think about Q3, 90 basis point sequential improvement over Q2, when we're looking at Q4, I think you're going to have 150 basis point, 170 basis point improvement over Q3. And that's less about believing what's going to happen in the market. And that's just more the math versus anniversary and what happened last year, right? Because last year Q4 was the minus 3.6%, which was just the sort of culmination of that sort of anniversary. So I'd say everything is working according to plan. Certainly you're seeing some volume softens in some of the markets as it relates to special waste. And I don't think we're unique in seeing that across the sort of footprint. I believe that is just sort of timing in 25 and beyond. As things start back up, you'll see that coming back. But the underlying fundamentals across our sort of collection and post collection businesses are strong. And you're seeing that laying out in consistent beating of our volume. The other numbers are negative. But again, a function of anniversary in last year's intentional shedding. And then we're feeling really strong that this turns positive in Q4. The 2025 outlook, again, we're going to hold off on that. But it's certainly not going to be the same sort of negative cadence that it had this year. We're feeling sort of confident that will be something significantly better than what we had this year.

Great, Dan. I appreciate the time and all the best for the process.

Thank you. Thank you.

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

Good morning and thanks for taking my questions. So I was curious, are you willing to sell the used motor oil business separately? And what would be the likelihood of that?

No, I don't think it makes any sense. I think it's a very small part of the EF business. And I think from a customer overlap perspective, we provide multiple service to those customers. I don't see any path through I would do that. And given the market structure where we operate those UML businesses, it's a very good business. And we're very easily able to manage spread in that business. And as you saw in Q3, even with the moves in Motiva and demand for base oils, we're able to maintain spread for the most part. Yeah, headline revenue is off a little bit, but by and large, we maintain that spread. And it's been that way since we own that business back since we started in 2008.

Yeah, James, I think it's important to delineate that our business is different than some of the other peers. There's very little sort of on the re-refining around the back end. We are a collector, a service provider. And as Patrick said, it's managing a spread. And yes, revenue can move in this quarter, you know, five, six million bucks. And Q4 is expecting the same at the top line, but you're able to preserve the vast majority of those so they keep it at dollars. When the prices move really quickly, you get an even impact as you saw in Q3. But by and large, you know, you preserve that. So just collection-based, milk-run type businesses that, you know, we've had for a long time and we're a big fan of. And as Patrick said, works very well within our broader gas business.

Okay, great. Thank you. And then for Q4, you mentioned the potential for severe disruptions related to storms. But is it possible that you'll actually get a storm benefit from the prior hurricanes? Just any color you can provide there would be helpful.

Yeah, I think it was Miss Say. I think that it had the potential to be severe disruptions. I think at the end of the day, the management team weathered the storm and we're not expecting any severe disruptions. And yes, I mean, in theory, there should be the potential for some tailwinds of incremental volumes in the southeast around the area. It was where we have operations where the hurricanes appear.

Yeah, James, I think we had some light softness and special waves like some of our peers. And I think now, as Patrick said, absolutely, you'll probably get some benefit from some storm waves and that should sort of offset that special wave. But yes, that was Patrick was highlighting the excellent work of our team to avoid disruption.

Yeah. Okay, got it. Thank you for clarifying. Appreciate it. Thanks, James.

Thank you. We now have Stephanie Yee with JP Morgan. Your line is open.

Hi, good morning. Hi, Stephanie. I just want to ask when you say that you're going to use part of the proceeds from the ES sales to buy back stock, do you mean from your largest shareholders and do you have certain targets in mind?

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

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

Yeah, remember, a big part of the arena we play in is in the, you know, we all reference multiples, et cetera. But at the end of the day, a lot of the companies we are buying where we've sort of, you know, decided to play has been sort of in the one to 10 million of EBITDA range. The lion's share of those business owners don't even really know what multiples are. Generally, a lot of them don't have financing anyway, so they're not overly concerned about being revered to interest rates, et cetera. So we haven't seen, you know, any real material movement. But at the end of the day, those, you know, those acquisitions to us, again, have been sort of in the same zip code. And we believe that, you know, we're going to be able to execute on a very robust pipeline as we move into 2025 as we bring in the proceeds from ES. And I think those acquisitions will become highly creative, get tucked into existing regions where we already own assets and specifically have underutilized post collection assets. So we're expecting 2025 to be a great year from that point.

Okay, understood. Thank you.

We now have Brian Butler with Stiefel on the line.

Good morning. Thanks for taking the question. Go start with maybe on the commodity prices. It was a little bit of a headwind. Can you talk about maybe where commodity prices have averaged year to date and where they are right now and what kind of sensitivity that looks like maybe in third quarter or going into 2025?

Hey, Brian, thanks for the question. You know, when we gave the guy for Q3, coming out of Q2 commodity about 225 Canadian, right on the basket. That's what we're expecting. I think what you saw in Q3 is that it was down more like 210, 215 dollars. Right. So you gave up that sort of 10, 15 dollars at the revenue line as a result of that change. Post Q3, as you know, continue to have downward pressure concerns over the sort of northeastern oversupply with the port strike. I think you're seeing that Canadian dollars south of 200 today. It's maybe more 180, 190 dollars level. I do think folks believe that this is going to come back. But if you line today's pricing up with the average you realized in 2024, 2025 would be a slight headwind. Right. So you'd have a little bit of pressure from that pricing and that would have a little bit of margin impact as well. You know, modest dollars, I think it's more than five, ten million dollars headwind at the revenue line. A little bit of margin on that. And then the offset is diesel pricing today continues to sort of be at a low when compared to prior year, you know, the 2024 average. And so that would be a slight sort of margin tailwind into 2025. So I think, you know, I think of commodities. You know, I think of all those sort of exogenous, you know, price inputs. Those two are probably a bit of a wash if we were to stay at today's levels and any upside on commodity pricing today's levels within the incremental upsides of the guy.

Okay, that's helpful. And then I guess on the industrial revenue bonds that you guys did, you know, how big or how large of a part can that become of the GFL's kind of debt stack and how long does that take? I mean, is that savings, a hundred basis points the right place to kind of model it or is there maybe some additional savings in there?

Well, I mean, a hundred basis points savings is a function of where our current debt is and where the current sort of debt markets are, right? I think that the idea we were showing, we're now accessing insurance previously, you know, save for higher credit quality than we historically were. So we're going to continue to look at it. And it is a very coupon efficient sort of structure, which is, I think, why all of our peers use it. The counter to that is it's typically not the largest sort of component of your cap structure. And that's just because the regulations and requirements for it is you're really tying into specific capex and specific states. Now, landfill spend is typically a great capital deployment where these are used. And, you know, we do spend hundreds of millions of dollars a year into landfill cap. So we're going to be actively looking at it. But when you look at our peers, you know, we assume that that's what normal course looks like individually. I think it's more like 10 to 20 percent of your cap stack as opposed to 50 percent plus.

OK, great. Thanks for taking the question.

Thanks, Brian.

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

Hey, this is Herro Lantau for Stephanie Moore. I guess, you know, labor inflation has been around a four to five percent. We've been here for some of your competitors. I guess, you know, are you seeing is it the same for what you're seeing? And then if you could just provide a little bit more clarity on what you're seeing on the labor front line in terms of turnover and stuff, if you can provide any details that are bigger.

Yeah, thanks for the question, Harold. I mean, the labor dynamics are something near and dear to us that we're watching closely and I think, you know, continues to sort of track favorably. I think that, you know, four to five percent labor inflation number is probably the right overall. As you think about the industry, I do think, as we've said, we have benefited from our secondary market focus, whereby we've seen lower wage pressures in the secondary markets and what we see in the dense urban areas. And I think that allows us to blend to something a little bit better than peers. And so we're probably at that sort of low force level. And we do credit, you know, the secondary market focus to that. On the turnover, look, we're extremely happy with the direction of travel in the turnover. I remember we were as high as in the thirties, came down to high twenties, you know, was down to mid twenties. And now, you know, we're touching 20 percent on the voluntary turnover level. So the trend line is moving in the right direction. And you're seeing that come through in the sort of productivity and as a result of financial performance. So we're going to continue to be actively engaged in managing that. And I think the macro backdrop is supportive. And we look forward to the sort of continued sort of benefits that we'll see as we return back to that sort of, you know, I think the mid teens level, mid high teens is where we're going. And we think you'll continue to see the financial benefit come through in our results and in our safety stats.

Thank you. That's all for me.

We now have KB Somer with Truist on the line.

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

No, I don't think so. I think, you know, I think from again, where we said, again, we operate 10 provinces today, 25 states in the U.S. I think largely what you'll see is it continues buying businesses and identifying those existing markets where we operate typically around markets where, again, we have capacity in post-collection facilities. We think that's where we're going to get the highest returns on invested capital. I do think the opportunity obviously in the U.S. continues to be larger just from a market size and scale perspective. But I don't think you'll see us change the strategy that we've had over the last sort of 17 years. I think it'll just be largely the same. But obviously

more

getting done in the U.S. just given the size of the market that we operate there.

Makes sense. And I know it's fresh, sort of hot off the presses, but does the change in administration in the U.S. impact your thinking potentially on M&A, potentially taxes? Like, what does that mean for the company do you think?

I don't think it means much. We've been able to both as a company and as an industry to basically whether any sort of level of government. I mean, when we started the business, you had the Obama administration, and then that sort of moved to Trump, and then that's moved now to Biden, and now back to Trump. I think the one benefit that I think we're all looking for in the industry, which could be material, is whether the Republicans bring back in bonus appreciation. We know that some of that legislation has been tabled now for a while, sort of sitting there and bonus appreciation has rolled off. Will that sort of come back on? I think the thought is, or at least the hope is, that it will come back, given that was something initially supported by the Democrats and not particularly with the Republicans having the House and the Senate, that that's something that will probably happen. But outside of that, I don't think there'll be much change from us in terms of how we operate or where we operate or what we do with the US.

Thank you for your help.

Thank you.

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

Hey guys, just filling in for Rupert here. I appreciate you taking my questions. So just back on the environmental service segment, thinking about the tax, I think last quarter you said $500-600 million range was a good way to think about it. Is it fair to expect that it's higher now with more visibility on a higher price as you've gotten throughout the process or maybe closer to the top end of that range?

Yeah, I think that's a challenge. Now we're getting into the weeds, we're getting into specifics. And again, as the enterprise value moves up, so does the taxes. So we're looking at the most effective way to structure it that maximizes long-term shareholder value while addressing the issues that we want to address, as we talked about, general corporate purposes, potential share buybacks, and then the $3.5 billion of debt repayment. So we don't have the exact specifics today. We are confident in the $6 billion net cash number. So stay tuned in terms of what that ultimately looks like as we move through the process.

But yes, ultimately that number cited last was tied to a much lower EV than what Patrick's speaking about today. And just very simply, as the EV goes up, that number goes up. And so, you know, I think that would be considered stale and it's a bigger number because the EV is bigger. And that's where all the comments Patrick said is what we're contemplating.

Okay, thank you. And you talked a bit about the corporate overhead impact there. But how does the maintenance capex for the environmental services compared to the solid waste segment?

It's lower capital intensity. So you will see, you know, on a blended basis in theory that increases the intensity. But if you look at GFL as a whole, you know, we've been running in the sort of 100 basis points lower than our peers, you know, when you exclude the growth spend. And that's really been a function of having the sort of yes business there. I think without it, what you see is a gravitation towards the industry mean and that sort of, you know, 10 and a half, 11 and a half percent, depending on where you are in the growth cycle. But, you know, normal course capital intensity for our solid waste business

as we go forward. Okay, thank you. That's it for me.

Thank you. I can confirm that that concludes the Q&A session. And I'd like to hand it back to Patrick Vigie for some final comments.

Thank you, everyone, for attending the call. And we're looking forward to catching back up with you when we have some updates both on ES and certainly with our Q4 results as we move into next year. So thanks for attending and thank you for the support.

Thank you all for joining the GFL Third Quarter 2024. My name is Conference School. I can confirm today's call has now concluded. Please enjoy the rest of your day and you may now disconnect from the call.