GFL Environmental Inc. Q3 FY2021 Earnings Call

Hello, everyone, and welcome to the GFL Environmental Third Quarter Earnings Call. My name is Myrna, and I will be coordinating the call today. With that, I have the pleasure of handing over to your host, Founder and CEO of GFL Environmental, Patrick Dovigi. Please go ahead, 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 updating our outlook for the remainder of 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 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. We have prepared a presentation to accompany this call that is also available on our website. During this call, we’ll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators. Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today’s date, and we do not assume any obligation to update these statements, whether as a result of new information, future events and developments or otherwise. This call will include a discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. securities regulators. I will now turn the call back over to Patrick, who will start off on Page 3 of the presentation.

Thank you, Luke. Once again, the tremendous strength of our business and the effectiveness of our growth strategy drove performance beyond expectations. The capabilities of our leading asset base, combined with our rigorous discipline in capital deployment, continue to foster exceptional high-quality growth that we believe will result in industry-leading free cash flow generation and equity value creation. The headline numbers for the quarter were revenue up 43%, adjusted EBITDA up 48%, and solid waste adjusted EBITDA margins increased by 110 basis points. Even more impressive than the headline numbers are the underlying driving factors. Solid waste pricing continued to accelerate, achieving 4.3% for the quarter, which was 20 basis points ahead of plan. As we mentioned in Q2, our proactive approach to pricing earlier in the year has allowed us to stay ahead of the broad-based contemplation we’re seeing in the business. There has been much discussion about labor pressures in the market. While this is indeed a reality, our job is to manage through it. We believe several factors have aided us in this regard. The majority of our operations are in secondary markets, where labor pressures have not been as sharp as in urban areas, and wage inflation, particularly in Canada, has been more manageable with lower impacts in many pockets. Additionally, our brand holds significant value. Employees want to be part of a company like GFL, allowing us to attract a strong talent pool. Operating in the current labor market has come with increased costs, which we have addressed through proactive pricing to cover these incremental pressures. While our results thus far have been exceptional, we are even more optimistic about the pricing opportunities ahead, particularly related to CPI-linked revenue resets and the return of pricing on attractive commercial volume in various Canadian markets that have been slow to reopen. Solid waste volume growth was also better than expected at 2.4%. U.S. volumes experienced high single-digit growth, particularly strong in our Midwest markets. Canadian volumes increased by 2%, despite ongoing restrictions throughout much of Q3. We believe these delayed dynamics in Canada will provide a tailwind going into 2022, as lifting restrictions should lead to volume recoveries similar to those observed in the U.S. in 2021. Commodity values again provided favorable support, and the overall strength of our recycling business, alongside the changing regulatory landscape, reinforces our positive outlook for this segment. Solid waste adjusted EBITDA margins reached 31.7%, reflecting a 110 basis point increase over the prior period, despite a drag from recent acquisitions. Luke will discuss the margin components, but significant margin expansion has been primarily organic. We have realized pricing above our internal cost inflation, maintained a strong focus on cost controls and productivity, and leveraged our tuck-in M&A program to support margin growth. We remain optimistic about our ability to achieve stated margin targets swiftly. Additionally, the liquid and infrastructure segments showed recovery during the quarter, despite slower-than-expected reopening activity in Canada, where most of this revenue is generated. Both segments experienced substantial sequential margin improvements over the second quarter due to operating leverage tied to volume recovery. The earlier-than-planned closure of tariff years led to increased liquid waste revenue during the quarter, although at a dilutive adjusted EBITDA margin, which offset the substantial organic margin growth from our core business. The third quarter also saw us continuing to explore other strategies for value creation. So far this year, we have invested around $2.2 billion in 37 acquisitions to secure about $735 million in annualized revenues, which is more than 2.5 times the amount we initially projected. Our acquisition pipeline remains strong, and we expect to complete additional transactions before the year ends. We believe our M&A strategy positions us as a preferred acquirer in specific markets. Coupled with our rigorous focus on returns on invested capital, this will create significant value opportunities moving forward. Additionally, we have been active in our capital redeployment strategy, generating approximately $95 million from the sale of non-core low-contribution solid waste assets in the Midwest, bringing total proceeds for the year to around $155 million, nearly double our initial target. We have identified numerous high-return opportunities for deploying this capital and expect to reinvest more than half of these proceeds before the end of the year. Our capital deployment strategy includes investments that support our sustainability initiatives, such as advanced sorting technology at our MRFs to enhance operational efficiencies and recovery rates. Continued investments in automated side loaders and safe driving technology support our goals to attract and retain drivers. These early-stage investments are expected to yield benefits in the long run and help achieve our targeted margin growth. Lastly, we are focused on strengthening our balance sheet. Our successful notes offering and a 50 basis point improvement in our credit facility during the quarter highlight the ongoing support from our institutional debt investors, a trust we have built over the years through successful execution. We will continue to enhance our credit quality to lower our cost of capital, generate additional free cash flow, and create equity value. In summary, the strong performance this quarter, along with our positive outlook, allows us to raise our guidance for the second time this year. I will now pass it to Luke to go over the financial results in detail, after which I will share some closing thoughts before we open the floor for questions.

Thanks, Patrick. I’ll pick up on Page 4 of the presentation. Revenue increased over 43% compared to the prior year period. This was ahead of our July guidance and driven by outperformance across solid waste pricing, volume, commodity prices and contribution from M&A. Infrastructure organic growth turned positive for the first time since the second quarter of 2020. And liquid waste benefited from the Terrapure acquisition effectively closing 2 months earlier than anticipated. Similar to our comments on the recovery of solid waste volumes in Canada, we expect improving strength in the recovery of both of these segments as restrictions in Canada continue to ease. On Page 5, you’ll see adjusted EBITDA for Q3 of $415.8 million at a margin of 28%, an increase of 90 basis points over the prior period and up 110 basis points sequentially over Q2. We’re particularly pleased with this result when considering the backdrop of rising labor and input cost inflation as well as the reintroduction of certain discretionary costs such as travel and entertainment, incentive compensation and certain professional fees that were all a headwind to margin. Solid waste margins of 31.7% were 110 basis points ahead of the prior comparable period and 80 basis points up sequentially over Q2. 100 basis points of the margin expansion was organic and driven by our pricing programs and operating leverage and volume recovery. Commodity pricing was a 90 basis point tailwind, but this was substantially offset by a 70 basis point drag from fuel prices and a 10 basis point headwind from M&A. Liquid waste margins increased 50 basis points sequentially over Q2 and nearly 300 basis points organically over the prior year period before considering the margin dilutive impact of the contribution from Terrapure in the quarter. Over 85% of Terrapure revenue is currently reported in our liquid waste segment with allocations between the segments to be revised in 2022. Terrapure’s liquid waste revenue came in just below mid-20s margin, but we continue to see a path to bring that up to the segment average. Infrastructure and soil margins improved 190 basis points sequentially from Q2 and 90 basis points period-over-period as volumes turn positive, and we’re able to leverage the relatively fixed cost structure of the segment. On Page 6, you can see adjusted cash flow from operating activities of $250 million, inclusive of $95 million of proceeds from our asset sale. Once again, we’re including these excess proceeds in our adjusted free cash flow rec as we intend to redeploy most of these dollars before the end of the year. And therefore, these proceeds or a portion thereof will be used to offset the over and above growth capital we expect to deploy before year-end. While there will be some lumpiness from quarter-to-quarter, the annual free cash flow reconciliation will include a normalized level of capital expenditures for the business. During the quarter, we’ve normalized for $35 million of working capital related to recent M&A, which we believe is better characterized as part of the purchase price. Note that an inaugural holiday in Canada on September 30 impacted working capital by approximately $15 million as compared to the prior year. Turning to Page 7. As previously announced, we were once again successful in accessing the debt capital markets to raise capital at attractive coupons and amended our credit facility to, among other things, tighten the borrowing rate by 50 basis points, all consistent with our strategy of leveraging our ever-improving credit quality to drive the lower cost of debt. During the quarter, we deployed approximately $1.1 billion into 14 acquisitions. And post quarter end, we deployed an incremental $900 million for another 8 acquisitions. Net of the contribution of one business sold as part of a divestiture, we expect to generate annualized revenues of approximately $735 million from these acquisitions. We anticipate approximately $450 million of this rolling over into 2022, and this amount would further increase to the extent there’s any incremental M&A completed before the end of the year. As anticipated, net leverage at quarter end modestly stepped up with the acquisition of Terrapure. The cash on hand at quarter end was largely used to fund the M&A in October, and we continue to have ample liquidity to support our growth goals. Additionally, during the quarter, we entered a definitive agreement, which gives us the right to issue up to an aggregate amount of USD 300 million of preferred shares before the end of the year. We will draw on this equity commitment as needed to allow us to continue executing our growth strategy while maintaining our previously stated leverage targets. On Page 8, we’re showing the drivers of our updated guidance. For the year, we’re now expecting revenue of $5.4 billion, a $150 million increase over the guidance we provided in July when measuring midpoint to midpoint. The components are laid out on the page, but the growth comes from price, volume and M&A contribution, all exceeding our previously communicated expectations. For the year, we’re now expecting pricing at 4.25 and volume in the mid-2s, both about 25 basis points higher than our July guidance and an encouraging launch-off point for 2022. From this revenue, we expect adjusted EBITDA of $1,440 million to $1,450 million, a $37.5 million increase over July’s guidance, again, measured midpoint to midpoint. In terms of CapEx, recall the guide at the beginning of the year was a base CapEx of $510 million. With the first half growth of the business, we increased this to $525 million in July and are now increasing to $540 million, in line with the outsized growth of the business. On top of this number, we guided on the opportunity to redeploy proceeds from asset disposals into attractive growth opportunities. Our original guidance for this opportunity was $50 million to $100 million of incremental spend. As of today, we think we’ll be at the high end or more of this range, a terrific outcome as this investment will drive high-quality incremental growth in 2022. Now all of this incremental spend was being covered by the proceeds from asset disposals. So although there would be a gross CapEx number of $640 million, the $540 million plus $100 million, the net CapEx would remain at $540 million. We have been extremely successful in our portfolio rationalization program, realizing $170 million of proceeds to date from asset disposals and asset divestitures with the possibility to realize more before the year is done. Including 100% of these proceeds in our year-end adjusted free cash flow reconciliation would yield a net CapEx number of $470 million and effectively overstate our free cash flow for the year. So at year-end, we will include an adjustment to exclude excess proceeds from disposal and normalize the net CapEx number to somewhere around $540 million. On working capital, the new guide has us going to a use of approximately $35 million to $40 million as compared to nil in the original July guide. This is over and above the M&A-related working capital investment. And all of this yields an adjusted free cash flow of $525 million to $530 million, a $10 million to $15 million increase over July’s guide despite the incremental $50 million investment in CapEx and working capital. We’re not going to specifically walk through Q4, but you can do the math and see the implied results at the midpoint is approximately $1.415 billion of revenue, a 26.1% adjusted EBITDA margin, a 90 basis point increase over the prior year. This is based on pricing of low 4s and volume of 0.5 point to 1 point, both above our July guidance. From a modeling perspective, I think many continue to underestimate the expensive seasonality in the business. And therefore, there’s a recalibration of dollars between Q3 and Q4. For Q4 implied free cash flow, the normalized CapEx dynamic I just spoke to complicates the simple full year less year-to-date math. The Q3 year-to-date adjusted free cash flow number of $512 million is inclusive of excess proceeds from disposal. Excluding $70 million of these proceeds from the $512 million and then bridge into the full year number will give a better picture of Q4 on a stand-alone basis. And lastly, while not going to provide our guidance for 2022 until we meet again in February, where we’re already sitting with nearly 8.5% top line growth from rollover, and we anticipate the constructive macro backdrop to support organic price and volume of better than 6. So as Patrick mentioned, there’s a clear path to 15% plus top line growth before considering anything incremental to what we have today. With that, I will turn the call back over to Patrick.

Thanks, Luke. As we continue to deliver on the road map, we’ve laid out for the business since the IPO, we are also focused on advancing our sustainability initiatives. Consistent with the commitment that we made in Q1 last year to improve the diversity of our Board, we announced today that our second female Director, Jessica McDonald, will be joining the Board as our seventh Independent Director in February of next year. Jessica’s appointment to our Board is part of our broader commitment to promote greater participation of women across our organization through our Women in Waste program. With the COP26 Summit this week focusing the world’s attention on the need to move to a lower carbon future, we have never been better positioned to provide the services that will help us achieve that goal, including through our recycling initiatives and the development of renewable natural gas projects at our landfill. On our last call, we told you that we had set up GFL Renewables as our vehicle to unlock significant value in landfill gas to energy projects and to accelerate the conversion of our fleet to CNG. We continue to make significant progress on this initiative and in the quarter, expect to announce projects at a number of our landfills prior to year-end. Demonstrating our growth recognition as a leader in sustainability, next week, GFL will be participating in Vision 2045 to share our vision for a greener future with 50 other business leaders from around the world. All of GFL achievements that Luke and I have talked about today are a reflection of the incredible hard work and dedication of all of our employees. It is our employees’ dedication and passion to achieve our vision to be green for life that allows us to continue to deliver quarter-over-quarter on our commitment to build long-term value for all of our stakeholders. I will now turn the call over to the operator to open up the line for questions.

Our first question comes from Tyler Brown of Raymond James.

Can you guys hear me? Sorry. Hey, just real quick, can you guys just reset us on how much of your new $5.4 billion revenue base is tied to CPI? And just any color on how that breaks down between the U.S. and Canada?

Yes. So round numbers, Tyler, if you think today, there’s about $1 billion now that all the recent M&A is sort of rolling into base, that’s what a CPI linked. And that’s roughly 85%, 90% is in your residential line, and the rest is on post-collection. So roughly $1 billion that about 40% of which will reset in Q1 then Q2 is pretty low, sort of 10%. And then Q3 is another big reset. So from a cadence through the year, that’s how you think about the timing of which that hits. And then when you look, that’s about roughly, I’d say, 75% in the U.S. and balance of Canada, maybe 70-30.

Okay. Okay. Yes, very helpful. And then I know it’s a little early. Pricing has been strong. I think it accelerated sequentially. But when you think about that ’22 6% price plus volume organic revenue expectation, how do you kind of envision that being composed? Is it just 4% price, 2% volume? Or does it feel that the price could be a bigger part of that mix?

I mean, pre-COVID, as you know, we were saying where the sort of 3.5% to 4% price, and we’re going to migrate to the top end of the range. I think when you look at the backdrop today and with CPI, I mean, if you’re moving that $1 billion from the typical sort of 2%, you’re moving that up to 3, 4, somewhere higher with a little bit of incremental support on the commercial and post-collection lines, I think you can add 100 basis points to that pricing number pretty easy. So maybe you’re now in that sort of 4.5 to 5 range going into next year. So I think as the quarter and year plays out and we see those resets and the overall continued acceleration of pricing, we’ll have a better view in February. But I think it’s something better than 4. And just how much better, you’ll have to give us a couple of months before we come back to you.

Okay. All right. I can do that. And then just my last one here. So Patrick, I mean, obviously, acquiring revenues has been a big part of the story, but it is interesting to see all the divestitures. Obviously, it happens time to time for everybody. But how should we think about your divestiture program? Is this something that’s a bit more one-off? Or do you have a process where we’re going to see this kind of year in and year out and just kind of churning the assets? I’m just kind of curious big picture there.

No. I think when we acquired some of these businesses, we realized they weren't strategically important to us. Those assets were likely to be used more effectively by local players who could do better with them than we could. From our perspective, if something doesn't work strategically, we won't enter a specific market just to try to build presence there. My focus has been primarily on the urban markets we've divested from, as there tends to be a lot of competition. In some of these areas, I don't believe the market requires another player. With three major strategic companies and a significant regional player already present, I'm not sure what GFL would contribute. So, it makes sense for us to exit those markets and redirect our resources into more promising areas. Overall, I believe that within the next 12 months, we should have our entire portfolio refined to a level where we feel confident about our foundation.

Our next question comes from Walter Spracklin of RBC Capital Markets.

Perhaps we could start. I think it was Luke, maybe Patrick that mentioned Terrapure on the margins of 20%, certainly lower than what you’ve done before. But you indicated that you hope to get it up to the average. Can you give us some indication as to what type of initiatives are you going to do to get that up to the average and how quickly that would occur? Do you think it will be front-end loaded or whether it’s a little longer duration?

Yes, it's Luke speaking. My earlier comment was focused on the liquid waste aspect of Terrapure. To clarify, Terrapure consists of both liquid and solid waste components, with the solid parts generating very high margins. The projected margin for Terrapure was around 28%. When analyzed separately, the liquid business, represented by a large landfill, had margins in the high 30s, approaching 40%, while the liquid waste portion was in the lower 20s. In my prepared remarks, I noted that the liquid waste revenue was slightly below mid-20s, aligning with our expectations. The solid waste segment, which contributes about 15% to our total revenues, saw margins in the high 30s, positively impacting the Canadian solid waste margins. Overall, Terrapure is performing as we had anticipated. I believe as we optimize our facilities and leverage synergies, the liquid waste portion will shift to being neutral or even beneficial to our current liquid waste segment, while the solid component is already adding value.

Okay. That’s great. And in terms of your capital plan, obviously, you’ve done a lot of acquisitions so far. And you’re getting a better sense of the condition of some of the assets you’re buying. Can you give us a bit of a peek into next year’s capital program? Is there any reason based on now that you’ve had a chance to review that we would see any major change in cadence for CapEx in 2022? Or would you consider it kind of consistent with the growth in your business and the growth in the acquisitions that you’ve seen historically?

I believe we will maintain a consistent approach. We will look for opportunities as we discussed earlier. There are some proceeds we plan to rationalize and reinvest in areas where we can develop post-collection operations or convert to CNG, as well as redeploy capital into new municipal contracts across the Midwest in business units we recently acquired, which mainly focused on commercial front-load businesses in landfills. Overall, this plan aligns well with what you've observed this year.

Okay. Perfect. And just last question here. When we look at free cash flow and the cadence there, we kind of looked at high 600s into next year. Anything that would change that now that we’re a little closer to 2022? Or is that the kind of ballpark that you’d indicated before, is that the kind of ballpark that we should be considering for next year?

Yes. I think that’s the right zip code. I mean, I think from our expectations of today, most likely, I think from our perspective, we’ll be working on making that number better. But I think from where we sit today, that’s the right zip code to be.

My first question is about the renewables and landfill gas strategy. Can you remind us how significant that could be? I believe you provided some quantification earlier, but could you share more details? Will these be equity stakes you are taking? Are you planning to own the entire project? How will the projects progress? Is it entirely dependent on RIN exposure or fixed price offtake? It may be a bit early to discuss, but could you provide a bit more insight into that strategy?

Yes. So I think we’ve mentioned previously, Hamzah, that we have about 18 landfills that will perform part of this program. Our initial focus is on the first 5 to 6. Our expectation is that we will sign definitive agreements on 5 of them prior to year-end and then on the sixth one sometime in early Q1. I think when you look at it, the number we put out initially was sort of in the $75 million to $100 million of free cash flow that will get generated from the 18 projects. I think that number is conservative from what we’re seeing today. We’ll stick by that. But I think from our perspective, it is. I think we expect we’ll probably sign right around this time. It’s taken a little bit longer. I mean, these are 20-year agreements that we’re committing to. And I think we’re just taking the time to make sure we effectively get them right.

Great. And my follow-up question is really around operating leverage. You talked about labor inflation. You managed through that pretty well with price adjustments. But maybe if you could talk about labor availability. There’s been a lot of service businesses where labor availability has been an issue to capture demand or it’s hurt operating leverage. So as you look forward, how are you going to manage through labor availability issues in some of your markets? Maybe some of the secondary markets is less of a concern. But just talk through that. And then can you continue to adjust pricing as inflation ramps?

Yes, there were a lot of questions there. Currently, labor issues and challenges are very real. When discussing pricing and labor, it's all interconnected because our business is straightforward: we are paid to collect waste. If we don't collect it, we can't implement price increases, and we are experiencing a lot of turnover in that area. So, these aspects are linked. However, if we consistently collect the waste, we can generally charge what we want. For residential or commercial subscriptions, customers often don't mind whether they're paying $17 or $25 a month. Ultimately, they just want the service to be reliable, and providing that predictability allows us to set our prices. Yes, labor is tight, but that's our responsibility. I remind our team often that people typically don’t leave a company; they leave their boss. Therefore, it's crucial for our management to ensure our employees are engaged and retained. You are correct that we must be selective about new business, especially since the labor market isn't favorable for attracting talent. When winning new business or municipal contracts, it's essential to secure them at the right price, given the wage adjustments involved. We are a for-profit organization, and that is our current focus.

Last question, I’ll turn it over. Patrick, where do you see the business much longer term? I know you’ve given free cash flow numbers out there. I don’t expect you to update those here. But just where do you see the business longer term? There’s been a ton of M&A. You’re growing organically mid-single digits plus delevering the balance sheet. You’re integrating those assets. Are you going to grow at the same pace? How should we think about this business longer term? Just answer that; however, you want.

Yes, I believe we will continue to see more of the same in the future. I don't anticipate any major changes. When we look back at our IPO in March 2020, our straightforward plan was to increase EBITDA from around $1 billion to $2 billion over five years. We aimed to raise free cash flow from $300 million to approximately $700 million to $800 million during that time while increasing our margins by about 200 to 250 basis points from where we were in 2020. From our viewpoint, we expect to exceed all those targets. Our new objective is to push free cash flow closer to $1 billion. Considering the RNG opportunity that will start taking off in 2023, along with recent developments over the past 18 months, we have internally adjusted our targets, and the goal is now to reach $1 billion in free cash flow. I believe we can achieve this conservatively in the next 2.5 to 3 years. In terms of M&A, looking at the organic opportunities, the industry has never been more robust in terms of prices and volumes. Our M&A prospects remain promising. Currently, our footprint in the U.S. and Canada has evolved. Previously, we completed about 15 to 20 deals a year; now we're doing 20 to 25, and this year, we’re on track to execute over 40 deals. When you combine all of this with the refinancing of our balance sheet, it will generate additional free cash flow for the business. We are in a strong position, and I believe we will continue with our current successful strategies.

Our next question comes from Mark Neville of Scotiabank.

Great quarter here. Maybe just to wrap up the conversation on free cash flow, you’re guiding to 525, 530. But if we were to fully sort of account for the divestitures, you’re probably going to be printing something closer to 600. Is my math correct?

Yes, that’s exactly right, Mark. As I said in the prepared remarks, look, the rationalization program has been extremely successful, and there’s excess proceeds. So if you take where we end the year, the net CapEx number could be as low as 450 or 460 with all the proceeds. So I’m normalizing by excluding a portion of those to sort of 540. If you were to include all the proceeds, to your point, you’d be at a number sort of 600 to 620.

Okay. And on the GFL Renewable opportunity, I’m just curious when I’m thinking about CapEx for next year. Is there a big capital requirement next year for these first 5, 6 projects?

No, I believe looking back at our structure, it shouldn't require a large capital expenditure. If we proceed with some of the off-take agreements we are considering, it will need very little equity to support the project’s build-out.

Okay. And regarding pricing for next year, with Canada starting to reopen, there appears to be a good opportunity to increase prices in the commercial sector. Considering the resets expected next year, will pricing potentially increase throughout the year compared to the start of the year?

Yes. I think that’s what we’ve seen throughout 2021, which I think is atypical. The normal industry would be Q1 being the peak and then steps down. But Mark, I think that’s right. With the dynamic of the CPI resets coupled with recovery of attractive price-centric commercial volumes, I think that upends the typical cadence. And so certainly, I think the first couple of quarters and then again with our sort of roughly 30% of the book resetting in Q3, that will provide support to Q3 pricing as well. So I do think similar to 2021, 2022 has the opportunity for continued acceleration of pricing as opposed to the Q1 peak that you might normally see.

Right. And sorry, just in terms of the Q4 guide, while we’re talking about Canada, does that assume sort of better kind of volume acceleration in Canada sort of just given certain reopening in commercial and stadiums and the like?

It was really based on the end of Q3. If we look ahead, we're in places like Toronto. I attended a hockey game. Things are starting to return to normal. We're still not back in the offices, but it's starting to resemble normality again. This reflects the current situation. If everyone suddenly returned to the offices tomorrow, that would be a positive development. However, I think the likelihood of that happening before 2022 is quite low.

Good quarter.

Thanks, Mark.

We have a question from Michael Hoffman of Stifel.

If the run rate is 59 at year-end based on your current data, you've indicated that you expect to achieve 6% or better in organic growth, considering that we operate in modeling and we cannot wait until February for results. This would position us without any mergers and acquisitions at around $1.7 billion in EBITDA, which would maintain flat margins year-over-year. This does not factor in any margin expansion, with an estimated $700 million in free cash flow. Are these figures appropriate to begin with, and then we can evaluate your potential outcomes?

Yes, Michael, I’d say you have 5.4. So if you add 6% to that along with the 8.5 or 9 of rollover, you end up in the vicinity of 6.2. The math you mentioned is accurate. In reality, we hope to maintain our current margin expansion without pushing it too far. The story of free cash flow conversion is genuine; last year it was in the low 30s as a percentage of EBITDA, and this year we are guiding for the high 30s. For next year, based on your calculations, I believe it will be around 40. Going forward, with continued M&A and other initiatives that Patrick mentioned, it could exceed that. That’s how the numbers will work out. I think your estimate for the top line is in the right range, but feel free to refine your model now, and I will provide updates in February.

Great. And then given all the changes in the mix, can you walk us through how to think about seasonality now and what we should be doing in our models? What’s the way to think about a step down seasonality in 4Q and then into 1Q?

Yes, that's a great question, Michael. We are currently finalizing our budgets for next year, taking into account our recent mergers and acquisitions. As we continue to increase our revenues in the southern regions, it affects the seasonality curve we had before. The growth in the Midwest is also contributing to this change. Terrapure experiences a significant seasonality curve due to the nature of its business. Historically, we've seen about 20% of our revenue in the first quarter, rising to the mid-20s in the second quarter. The third quarter typically sees the peak, reaching 26, 27, or even 28 percent this year, while the fourth quarter usually drops to the low 20s. This has been our historical pattern. I believe this modeling is fairly accurate, and I can provide more details in February.

Okay. That’s fair enough. And then in liquids, were you a net beneficiary of what’s going on in the used oil market that helped some of the performance of the 4% organic?

No, I believe we often choose the wrong index. Historically, we were affiliated with Motiva, but due to the volatility associated with it and the market not fully grasping Motiva, we switched to a WTI index about 2.5 to 3 years ago. When examining our spread, we haven’t seen any significant expansion over the past couple of years; it has remained relatively flat year-over-year.

Okay. So the importance of that is that you did it the old-fashioned way, with many small customers experiencing a modest increase in business.

Yes. Motiva's price increased from $1 to $2 at its lowest, and now it is between $4 and $4.25. The rebates to the market haven't significantly changed. The refiners are benefiting from those margins, which is positive for them. However, we have not participated in that sector; our focus has been on providing a service that complements our other environmental services. We are content with maintaining the same spread we had before.

Right, right. And my point was the 4% reflects that lots of small non-oil customers showed some incremental improvement. That’s the positive message that didn’t get carried on the back.

Our next question comes from Jerry Revich of Goldman Sachs.

I’m wondering if you folks wouldn’t mind just talking about the opportunity that you see in recycling, either from a greenfield or M&A standpoint? Can you talk about what your pipeline looks like there?

Yes. From our perspective, we are focused on building new facilities in markets where we have significant volume. In the Southeast and the Midwest, including Michigan, there are real opportunities for us to establish new sites. With the introduction of extended producer responsibility in Canada, we expect to see capital investments in new recycling facilities over the next 16 to 18 months, particularly in specific markets in Ontario, where we already own some facilities. The business model remains attractive, and our revenue-sharing agreements with producers, municipalities, and customers continue to be effective. We are committed to investing in these opportunities. Looking at greenfield options, we plan to build 4 to 5 facilities in the next 18 months.

And then, Jerry, I’d just add, retrofitting the existing facilities, another area, retrofitting, adding latest technology, whether it’s robots or more and more optical eyes. The ability to improve recovery and what that does to rates, particularly at today’s levels, coupled with the labor efficiencies, there are very attractive returns from those types of investments. And so that’s also another area that we’re actively pursuing across our existing facility base, in addition to the greenfield opportunities that Patrick referenced.

Terrific. And then separately, I’m wondering, can you just flesh out for us your M&A pipeline in a little bit more detail? What’s the pipeline look like today? What’s the mix of assets that you’re looking at within that pipeline and your level of optimism about getting enough activity in the fourth quarter to essentially issue the preferred shares that you gave yourself the option to do?

Yes, the pipeline remains strong between Canada and the U.S. From our perspective, in our base case, we likely acquired around $50 million in revenue. It could potentially reach up to $100 million in revenue, which would continue into next year on an annual basis. We have significant confidence in ongoing M&A in the second half of the year.

Okay. And lastly, Patrick, you mentioned the various mechanisms to monetize landfill gas. It looks at least optically that the economics are most attractive to pipeline that gas. And I’m wondering if you could just comment on what the returns look like for the other monetization options that you folks laid out and the option to not connected to the pipeline, I guess, suggest limited pipeline infrastructure in those areas, I would guess. But maybe you could flesh that out for us.

Yes. So I mean, different ways, the pipeline, obviously, whether we put in the transportation market or when we put it into the industrial manufacturing facilities that are sort of looking to buy this or in the pipeline that are looking to put a portion of gas in other pipes that’s green gas. I think what you’ll see is there’ll be a hybrid of all of those different agreements. I think when you look at it very simply, obviously, extremely attractive returns on invested capital profile. I mean, I think when you look at them today at today’s pricing, you’re probably in a 2- to 2.5-year paybacks on those facilities on 20-year agreements. So they will be very accretive to the sort of overall structure that we currently have today.

Our next question comes from Kevin Chiang of CIBC.

Can you clarify the 2022 organic growth figure of over 6 percent? You mentioned that some markets are still lagging in their recovery, and it seems we might be in one of those markets. Does this organic growth figure take into account that the volume discrepancies between fully recovered markets and those lagging will close? Or are you expecting continued lag into 2022? If you do anticipate a convergence, what potential increase in volume are you expecting if all markets return to normal next year?

Yes. So Kevin, it’s Luke. I want to reiterate that we’re not providing specific guidance today. What we're indicating is that the situation suggests an outcome better than six. I’m trying to convey that we are very optimistic about what 2022 will look like. We don’t yet know what the exact figure will be. As each month passes, we gain a clearer perspective. When we meet in February, we’ll share a number that will be better than six. Just how much better is still uncertain. The intent is to express that it’s looking positive, and we’re very optimistic. Even if we use six as a baseline, based on our progress, we are already projecting a 15% growth for next year. That was the main point, rather than trying to tie us strictly to six. The figure will be better than six.

It’s good to leave a little meat on the bone.

Yes, Kevin, I think, look, the simple math is the pricing, if pricing is almost 3.5 to 4 for us, with the backlog cannot go to 4.5 to 5 and then if all that volume comes back, you could have a couple of points of volume on top. And you put that together, you can get to a number of 7 or 7 or better. But we’re going to get back to you with exactly the way we think that’s going to be shaking out at that time.

That's a valid point and very informative. For my second question, could you provide details on the U.S. solid waste margin? I've noticed it's increased both sequentially and year-over-year. There has been a significant amount of M&A activity, yet it appears the margin is lower. I'm curious about your legacy U.S. margin—if we exclude the recent acquisition in the third quarter, what would your baseline run rate for U.S. solid waste margins be? They seem unexpectedly high compared to last year. Additionally, does this influence your long-term consolidated margin expectations, even when considering the mix?

Yes, Kevin. There’s a lot to unpack here. If we consider our U.S. margin business, M&A has impacted the baseline negatively. The base margins are in the low 30s, around 32%. It’s important to note that Q3 typically represents the peak and isn’t indicative of the entire year. However, we’ve adjusted our expectations, and that business is now performing at over 30% margin. Looking ahead, as we leverage our asset base organically, we expect significant operating leverage. We have underutilized post-collection assets, which present a strong flow-through opportunity as we expand and enhance our collection networks. When we analyze all these factors, we shared previously that we see a 24% margin business, with the potential for an increase of 200 to 250 basis points, leading to a blended margin in the range of 27 to 27.5%. We now believe that we can elevate this business to the high 20s. The operating leverage in solid waste will play a significant role in this evolution. We expect to improve the blended solid waste segment to the low 30s, while liquid and infrastructure will also meet their targets. It’s not only about solid waste in the U.S.; we are also enhancing the Canadian segment along with liquid and infrastructure, all contributing to reaching that new goal in the high 20s.

That’s very helpful color. Congrats on a good quarter there.

Thanks, Kevin.

Our next question comes from Tim James of TD Securities.

Just wondering if you could comment or update us a little bit on plans and the opportunity around the Terrapure, the Stoney Creek landfill facility in particular. I know that was kind of an exciting opportunity to get your hands on that. Just talk about sort of where that stands and what the opportunity is there as you look at it today?

Yes. I think from our perspective, with the GTA being sort of slow to recovery, I think there’s real opportunities as a bunch of the industrial manufacturers generated this waste come back online, not to mention a pretty large internalization opportunity for us to be able to internalize certain waste and soil that historically have been going to landfills other than that. But we’ve been using other third parties. So that process has started, but I think as we roll into 2022, we think there’s material upside coming from that side for us.

Okay. That’s helpful. My second question, I mean, just your execution, it seems like it’s going so well here overall. You’re securing M&A opportunities. You’ve now got this R&D initiative underway. I mean, things look very promising, obviously, as you’ve identified. I mean, if you were forced to say where the greatest challenges are in the business today, what would you or could you point to?

We have been in this business for 15 years, and while it might appear overwhelming to outsiders now that we are a public company, it is deeply ingrained in our operations. The main challenge we face is around integration, particularly managing it from both a regional and functional standpoint. This often acts as a bottleneck as we continue to expand in the M&A space. The advantage we have now is our presence in 9 provinces in Canada and 27 states in the U.S. We have regional management teams familiar with GFL systems, which is a significant improvement compared to our situation a decade ago. With those systems in place, our M&A efforts are more efficient since we can integrate new acquisitions into existing markets. However, I continue to emphasize that the biggest risk to our operations is cybersecurity. We've been under cyberattacks since 2016 and still face daily threats. It’s essential that we remain vigilant against these risks. Overall, I feel confident about our position. We're also monitoring inflation, labor, and supply chain issues to ensure we have the necessary parts and equipment to operate effectively. Our procurement team has been exceptional in this regard, keeping us well-supplied to maintain our trucks. Overall, our company and the industry are in a solid position today.

Our next question comes from Michael Feniger of Bank of America.

Just on that last comment, Patrick, I’m just curious on the labor side and supply constraints. Clearly, you guys managed it well. I’m just curious, as you’ve moved into Q4, have you seen any signs of that easing? Or is it just not getting incrementally worse at least when you think about some of those labor and supply constraints?

Yes, labor conditions have definitely improved. I would say the peak was in the spring and summer. It's just the way businesses operate; they typically require fewer staff in the winter and as spring approaches. So, that situation has certainly relaxed. However, with many government programs beginning to wind down, we have observed this easing more clearly. Our current focus is to ensure that as we approach spring 2022, we have the right staffing in place with the right people in the right roles. Regarding supply constraints, the issue primarily concerns lead times. Our team has done a commendable job managing this, and I must acknowledge their expertise in these specific areas. Thanks to our relationships with various OEMs and suppliers, we've received clear communication about appropriate lead times for essential items like brake pads and hoses, which are critical for our daily operations. They were open about potential delays, which we are seeing extend to 6 to 10 weeks for some components, where previously we could obtain these in 24 hours. Our team acted proactively by bulk purchasing what was necessary for the ongoing business, and thus far, we've managed to navigate through these challenges. As for the future, I wish I had a crystal ball to offer insights, but I honestly don’t know how the situation has become so complicated over the last year. However, I remain hopeful that we are starting to see some progress and that things will stabilize over the next six months.

It makes sense, Patrick. Regarding pricing, you mentioned the CPI reset. I’m interested in your overall approach to pricing as we move into 2022. If you implement a price increase for a commercial customer in March, April, or May, will you consider a second price increase, or will you allow the CPI resets to happen and stick to your regular annual price increase? I'm curious about your strategy as you enter 2022.

There is a significant distinction between the open market and the annual contractual CPI adjustments seen in municipal contracts. Unfortunately, with municipal contracts, you have to wait a year for adjustments, leaving no other option. However, regarding the open business, if conditions change significantly and you are delivering excellent service, I believe customers recognize that they may need to pay more. We aim to collaborate with our customers as much as possible. Ultimately, we are all facing genuine cost pressures. Therefore, we would not hesitate to implement a price increase if there is a real necessity to address extraordinary inflation impacts that were not anticipated when we executed the initial price increase earlier in the year.

That’s great. And just lastly, can you just remind us the sensitivity to your earnings from recycling in those commodity prices? I believe contracts are a bit different than your peers or maybe it’s a bit different when you say Canada and U.S. Can you just flesh that out? That would be great.

Yes, Michael, this is Luke. We have roughly 800,000 tons that we have some volatility on in terms of the back end. Now more and more the change in the dollars we’re getting, we’re rebating back to the customer. But if you think about it today, a good math is $0.60 on the dollar we are keeping. Of those 800,000 tons, if the blended basket is going up $1, I’m getting $0.60 for that. That’s the rough math, although I would say it continues to migrate. And when we talk in February, we’ll give you the latest sort of view as to where we are at, at that time.

Our final question today comes from Rupert Merer of National Bank Financial.

Just a couple of quick follow-ups on RNG to start. Patrick, you mentioned the first 5 or 6 RNG assets you’re looking at $75 million to $100 million of free cash. Can you confirm that’s your 50% share? And when you talk about the time frame for these to come online in 2023, how quickly should we expect this? Is that staggered through the year? Or we sort of earlier or later in...

I believe the $75 million to $100 million figure is accurate. Most of that revenue will come in at different points throughout 2023, and you'll see a full run rate then. I also expect the number to increase by 2024 as we add more landfills, beyond the initial 5 to 6 mentioned earlier. We anticipate around $8 million to $10 million impacting 2022, a significant amount in 2023, and then a full run rate in 2024, reflecting the majority of the projects.

Okay. Great. And I imagine the first 5 or 6 are the best projects opportunities you have. What are the next 5 or 6 look like after that as far as...

I’m not sure they are the easiest to implement. Some of these have electrical contracts that need to be addressed, some need additional infrastructure, and some need expanded pipelines to access the site. However, if you consider the first five or six, we’re discussing approximately 25,000 SCFM of gas per day. I believe that, at a minimum, the others would add up to the same. Therefore, the potential could be twice as large if we can successfully implement them all.

And then the follow-on opportunities, are those 2024 story? Can you bring them on that quickly?

I think we will sign up some of the others for sure over the course of 2022, right? So they would also come online sometime in 2023 with the full run rate in 2024.

Thank you. That concludes our Q&A session. This concludes today’s call. Thank you all for joining. We hope you have a great rest of your day. You may now disconnect your lines.