GFL Environmental Inc. Q4 FY2022 Earnings Call

Good morning or good afternoon everyone, and welcome to the GFL Environmental Fourth Quarter 2022 Earnings Call. My name is Adam, and I'll be your operator today. I will now pass it over to Founder and CEO Patrick Dovigi to begin. Patrick, please go ahead when you are ready.

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 fourth quarter and providing our guidance for 2023. I'm joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.

Thank you, Patrick. Good morning, everyone, and thank you for joining. We 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 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. 2022 was yet another exceptional year for GFL. We once again achieved double-digit industry-leading growth, an accomplishment even more impressive considering the economic uncertainty and cost headwinds that we experienced for most of the year. We believe that the resilience of our growth, despite the challenges over the last few years, demonstrates the effectiveness of our strategies, the quality of our asset base, and our team's exceptional focus on value creation. Organic revenue growth was nearly 14% in Q4, topping a year of double-digit revenue growth in the prior three quarters in both our Solid Waste and Environmental Services segments. Solid Waste pricing was 11.5%, including fuel surcharges with core price of 9.9%, the highest in GFL's history. Core price accelerated 130 basis points over the record pricing we achieved in the third quarter and was 8.2% for the year as a whole, over 300 basis points better than our original guidance for the year. This outcome sets us up for an even more attractive launch point for 2023 than we previously anticipated. We also realized Solid Waste volume growth during the quarter and the year, which we believe is a testament to the quality of both our market selection and our customer service. Environmental Services continued to materially outperform our internal expectations and substantially defied the seasonality we typically see in the fourth quarter for this segment. Our thesis underlying the Terrapure acquisition has clearly proven, and recent tuck-in M&A further bolsters our competitive asset positioning. We believe our Environmental Services platform is already best-in-class with margins in the mid-20% range, materially ahead of the industry peers. Longer term, we see potential for the Environmental Services segment to reach high 20% margin levels based on our significant scale in Canada and a greater focus on pricing and quality of customers. As we continue to focus on quality of revenue and asset utilization, we remain extremely optimistic about the segment's growth prospects and operating leverage opportunities. We grew adjusted EBITDA by 17% for the fourth quarter. Our relentless focus on optimizing our pricing strategies and cost efficiencies is yielding the expected outcome. And you can see this in the margin results. Luke will walk through the margin bridge in detail, but the improvement over Q3 is significant. Our record-setting price growth drove 125 basis points of organic Solid Waste margin expansion in the quarter, when excluding the impact of fuel and commodity prices. Our fuel cost recovery program, which is still ongoing in development, continues to mitigate the margin impact of higher energy costs and allows our price increases to drive operating leverage. We are highly encouraged by the improving trends that we're seeing in our labor costs going into 2023. Although cost inflation still remains exceedingly high, repair and maintenance cost headwinds continue to linger, we believe that the worst is now behind us. Going into 2023 and beyond, we have high visibility that the impact of our pricing and surcharge strategies together with the expected moderation of cost inflation will result in significant opportunities for outsized margin expansion. Luke will speak to this in more detail. Because of our greater visibility into 2023, we are excited to be able to increase the preliminary outlook that we provided just a couple of months ago. We now expect to generate adjusted EBITDA between $2 billion and $2.05 billion in 2023, representing almost a 20% increase over our 2022 results. Adjusted EBITDA margins are anticipated to expand over 100 basis points, a level we expect to be industry-leading, inclusive of headwinds from commodity pricing. Our guidance assumes approximately 8% Solid Waste price, flat Solid Waste volumes given some macroeconomic uncertainty going into 2023 and mid-single-digit top line growth for our Environmental Services segment. Our guidance assumes commodity and RIN prices based at current levels, with any improvement over today's levels providing incremental upside to our guidance. The guide also does not factor in the impact of any additional M&A in 2023. We acquired approximately $480 million of revenue in 2022 and another $100 million in January, primarily consisting of a highly strategic asset for our Environmental Services segment in the U.S. Midwest. We've included the expected contribution from this asset in our guide, since the acquisition occurred so early in the year. Our M&A pipeline remains robust, and we expect that we will continue to have opportunities to deploy capital into value-creating acquisitions, although we expect our total M&A spend in 2023 to be more tempered than the last few years, which I'll discuss more in detail later in the call. Any contribution of M&A in 2023 will be upside to our base guidance. December 2022 marked the 15th anniversary of the founding of GFL. I could not have imagined when I started this business that we would have achieved so much in the last 15 years. I believe that we have the best employees in the waste industry. It's their hard work and dedication that allowed GFL to grow into the solid sustainable platform that produced industry-leading results in 2022 and still has so much more room to grow in the coming years. I'll now pass the call to Luke, who will walk through the particulars of Q4 and the 2023 guide, and then I'll share some closing comments before we open it up for Q&A.

Thanks, Patrick. Consistent with prior quarters, our accompanying investor presentation provides supplemental analysis to summarize performance in the quarter and lays out the building blocks of our 2023 guidance. To provide more color on the fourth quarter, Page 5 identifies the drivers of $100 million of revenue outperformance versus our guidance, with the substantial majority derived from ongoing strength in our Environmental Services business, where we saw activity levels far in excess of seasonal norms. The quality of the Environmental Services platform we have built is clearly demonstrated by our customers' demand for our services, and we remain highly optimistic about our opportunities for high-quality organic growth in this segment. Rounding out the revenue bridge, continued outperformance of core price and recent M&A also contributed to the over $1.8 billion of revenue recognized in the quarter. As Patrick said, core Solid Waste price accelerated 130 basis points from Q3 to 9.9% in the quarter, and as a result, provides us with significant confidence that 2023 pricing will be at least 8%. The bottom of Page 5 shows the adjusted EBITDA walk for the quarter, which includes incremental IT costs to support our shift to the cloud and ongoing higher costs related to repair and maintenance expenses. Page 6 bridges Solid Waste adjusted EBITDA margins year-over-year. As anticipated, fuel and commodity prices remained a margin headwind compared to the prior year. We were able to achieve a 45 basis point sequential reduction to the net impact from fuel prices, as the effectiveness of our fuel cost recovery strategies continues to improve. Excluding commodities and fuel, organic Solid Waste margins expanded 125 basis points on a same-store basis, an 85 basis point improvement over Q3 and an indication of the strong operating leverage occurring in the base business. Page 7 summarizes the ongoing improvements we have made in our fuel surcharge initiatives during the year. We are tremendously proud of the pace with which we have been able to ramp up this program. With the success we've had to date, we are confident in our ability to conclude the first phase of this initiative in early 2023, two quarters earlier than initially planned. As we see significant opportunity beyond the first phase, an opportunity we will continue to pursue throughout 2023 and beyond. As we've said on our previous calls, the industry has demonstrated the effectiveness of a mature fuel surcharge program. Our initiatives in this area are not breaking new ground. We are simply catching up to the industry standard. In Q4, we estimate the net impact of fuel was a 70 basis point tailwind to some of our industry peers' margins, a result 200 basis points better than the 130 basis point headwind we had in the quarter. We expect that the stability and quality of our margins will continue to improve as we close this gap. Adjusted free cash flow for the year was $691 million, more than the high end of our updated guidance range and more than 8% above our original guidance despite the significant headwind from fuel prices and interest rates that have risen since the beginning of the year. As anticipated, the $150 million invested in working capital during the first nine months of the year largely reversed during Q4. Partially offsetting this recovery was incremental working capital investment to support the revenue outperformance and recent M&A. On CapEx, recall our guide plan about $750 million to $800 million of net CapEx, excluding the $150 million normalization adjustment. At the low end or at $750 million, that assumed about $880 million of gross spend across both our base business and RNG, offset by a $130 million in asset sale proceeds. In the end, gross spend was $830 million, as $50 million of planned CapEx was unintentionally shifted into 2023. Reported net leverage was 5 times at the end of the year. The increase over where we ended the prior year was mostly the result of the translational impact of FX. On Page 8, we have provided a simplified constant currency presentation on net leverage. That slide shows the year ending one point below the prior year, again an illustration of our growth-driven delevering capabilities despite significant unprecedented headwinds and continued execution of our M&A strategy in the year. As we've said before, we are committed to deleveraging. As part of our 2023 outlook, we will lay out a path to ending the year with leverage that starts with a three, the achievement of which would further improve our financial strength and provide a basis for accelerated free cash flow growth. On Page 9, we have summarized our current debt profile to provide additional context when thinking about leverage. Subsequent to year-end, we amended our $1.7 billion term loan B extending the maturity of our nearest term debt by two years. As a result, we've materially reduced the amount of debt maturity occurring in the next four years. We remain highly confident in the likelihood of receiving material credit rating upgrades prior to the maturity of most of our existing debt, providing opportunities for lower borrowing costs and improved free cash flow conversion. Looking ahead to 2023, Page 11 outlines the revenue bridge. Thanks to the strength of our finish to 2022, we're expecting at least 12% top line growth, inclusive of an expected 100 basis point headwind from commodity prices. Anchoring the double-digit increase is 8% Solid Waste price and surcharge growth, coupled with 3.5% to 4% rollover of already completed M&A. Given where we landed at the end of 2022, we have great visibility in realizing double-digit price in the first quarter and are highly confident in the path to achieve 8% for the year as a whole at a minimum. The guide assumes relatively flat volumes across both segments given the potential for some macroeconomic uncertainty and the tough comp for Environmental Services in 2022. It also assumes no recovery of commodity prices and no incremental M&A. With the quality of our anticipated top line growth, we're expecting over 100 basis points of EBITDA margin expansion in 2023, over 200 basis points of organic expansion when factoring in the headwind from commodity prices and the impact of acquisition rollover. With our significantly improved ability to manage the margin impact of any changes in fuel prices through our fuel recovery program, we expect a substantial underlying operating leverage within our platform to shine through. Our guide does not assume the cost inflation reverses but moderates on a year-over-year basis by virtue of lapping the tough comps, particularly in the second half of 2023. The margin expansion is anticipated in both of our segments, partially offset by a 50 basis point increase in corporate cost margin primarily related to incremental IT investments to support the migration of our systems to the cloud and provide added security and support the growth of the business. All of this translates to mid to high-teens EBITDA growth, or $2.025 billion at the midpoint of the guide. The guidance assumes an FX rate of 1.34, 2 basis points lower than the 1.36 that was used for our initial 2023 thoughts provided last November. Recall that every $0.01 of FX impacts revenue by $36 million. At the free cash flow line, the biggest piece of the story in 2023 is cash interest, which increases $100 million to just over $510 million for the year, representing a 15% headwind year-over-year at the free cash flow line. Patrick will speak in a moment about how we expect to materially reduce our annual cash interest, which we expect will support over 20% growth in free cash flow in 2024, but 2023 is a recalibration year at this line item, as the full impact of the 2022 rate increase is realized. We also have the $50 million of delayed CapEx shifting from 2022 to 2023. Excluding this CapEx amount, the net free cash flow growth would have been 17%, inclusive of the 15% interest headwind. Total net CapEx included in the guide is approximately $810 million to $815 million, inclusive of approximately $40 million in incremental equity investment into our RNG projects. Our current expectation is that the availability of project level financing, combined with available investment tax credits under the Inflation Reduction Act, will significantly reduce the equity we need to contribute to these projects, further improving the return profile. The net result of the planned growth in adjusted EBITDA and free cash flow is for net leverage to reduce to low-4s before considering the potential acceleration of deleveraging through asset sales that Patrick will speak to. That's the math for the 2023 guide. When you think about the quarterly cadence, we typically realize 22% to 23% of planned annual Solid Waste revenues in Q1 and 18% to 20% of the plan for Environmental Services, which translates to just under $1.7 billion of total revenue in Q1. In terms of margin, we expect the first quarter will be the toughest comp. We're expecting a similar consolidated margin profile as Q4 around 24%, representing a 130 basis point compression to Q1 2022. At the segment level, Solid Waste margins are expected to sequentially improve over 100 basis points versus Q4, and Environmental Services margins are expected to be in the high teens with corporate costs at sort of 3% to 5% of revenue. Subsequent to Q1, we expect margin expansion over the prior year growing sequentially from Q2 through Q4. I will now pass the call back to Patrick, who will provide some additional perspective on the priorities for 2023 and beyond.

Thanks, Luke. On Page 13, it summarizes our priorities for 2023. Driving operating leverage through our continued focus on pricing, improved asset utilization, and cost optimization is first and foremost. Luke walked you through how we see a clear path over 100 basis points of margin expansion as a result of our ongoing efforts in these areas, and we think the longer-term opportunity is significantly greater than that. When you consider the amount of M&A we've successfully undertaken over the past two years, there is a built-in next leg up that can be realized as all these pieces gel together. All of the assets have been integrated into our systems and processes, but we know from our experiences over the years that there's still another layer of opportunity as the platform continues to solidify. We see 2023 as a year to allow all of the businesses we've absorbed into our platform to mature and to ensure that we're capturing all of the opportunities that present, including implementing our pricing strategies in addition to the other self-help levers available to us. We, therefore, anticipate a more tempered level of M&A compared to prior years, deploying somewhere between $300 million and $500 million into true tuck-in acquisitions that will continue to densify our platform and leverage our relatively fixed cost post-collection assets. We have a pipeline as robust as ever and would anticipate 2024 returning to more historical levels of M&A, but in 2023, we expect a more moderate level of M&A activity, while we focus on our other value creation initiatives. It is important to remember that we, like the industry, are coming off a number of banner M&A years, with COVID also pulling the timing of some of those deals forward. Bringing our first large-scale RNG plant online is one of our main priorities and initiatives, and Page 14 illustrates the expected cadence of the 20 plus projects we are actively working on. While the in-year contribution to revenue and EBITDA for 2023 is relatively immaterial, you can see the significant ramp through 2024 and 2025. These projections have been updated to reflect today's pricing environment of approximately $2 to $2.50 natural gas. Any improvements from these levels would be additive to the amount shown on the page. Even using these historic low levels, this opportunity would increase our consolidated margins by approximately 140 basis points. In addition, the evolving financing structures and tax incentives that are available for these projects have made the economic returns even more compelling than originally estimated. Another key initiative is the potential for the further rationalization of our portfolio, as we focus on maximizing our return on invested capital. Through some of the larger acquisitions completed in the past few years, we've acquired assets and operations in markets, given their specific market dynamics and geographic positioning, that were never going to represent key growth opportunities for us. We've identified three distinct markets. Since our Q3 call, we have run a process and have now signed LOIs to divest these businesses for at least $1.5 billion in gross proceeds. We expect to have definitive agreements for each of these three businesses signed by Q2 with the sales to be completed by the end of Q3. We believe that selling these assets and using the proceeds to pay down our floating rate debt best positions us for sustainable industry-leading free cash flow growth over the mid-term. Additionally, as shown on Page 15, the proceeds of these asset sales would delever the balance sheet to below four times, be immediately free cash flow accretive, and materially accelerate the improvement in our free cash flow conversion and overall credit quality. As Luke mentioned, we expect these improvements will be reflected in improved credit ratings and lower cost of borrowing. We will provide updates on these asset sales as we progress. On ESG, as most of you know, we issued our 2021 Sustainability Report in late November that includes our full set of sustainability goals and targets for the first time. RNG is a big part of our achieving our near-term GHG reduction targets, and as I've already highlighted how we are well on our way to implementing that as part of our plan. We've been saying since we went public in 2020 that we were going to follow certain fundamental priorities to continue to successfully grow our business and that the impact following these priorities would be to get us to industry-leading metrics. That's where we are today on the back of our outperformance in 2022. The business is set up for what we think is a once-in-a-generation opportunity for outsized organic operating leverage, supported by momentum in our pricing initiatives, and the upside potential for additional contribution from our demonstrated ability to do highly-accretive densifying tuck-in M&A. Bringing our RNG projects online in 2024 and 2025 and the impact of these asset divestitures I just described, we think there is a clear path to achieving our best-in-class EBITDA margins and driving materially higher free cash flow and generating free cash flow of over $1.1 billion by 2025. I want to again recognize and thank our close to 20,000 employees for their exceptional commitment to GFL. It is their focus on building a sustainable company on providing these services for our customers with strong market pricing and above all, value creation for all of our stakeholders that has gotten us to where we are today. I want to thank each and every one of them for their efforts. I will now turn the call over to our operator to open the line for Q&A.

Thank you. Our first question today comes from Walter Spracklin from RBC Capital Markets. Walter, please go ahead. Your line is open.

Thanks very much, operator. Good morning, everyone. Just on the pricing, you've got some good trends. Can you hear me, okay?

Yeah. We can hear you.

Excellent. Okay. So just on the pricing, just looking at your book going into 2023. I know a lot of the contracts are tied to rates that reset at certain times. Can you talk to us a little bit about how much of your current projected 8% pricing is locked in for 2023 to give an indication of the certainty around that?

Hey. Walter. Good morning. It's Luke. I think we're really excited about our probability of achieving that when you think about 2022 and the abnormality of the pricing that happened throughout that year. And what I mean by that is if you think a normal annual pricing happens at the beginning of the year at ratably steps down, well 2022 in response to the headwinds that we're seeing, you saw continued pricing activities throughout the back half of the year. And what that does is set us up for an unusual amount of pricing rollover that you have virtual certainty on. And so we're entering 2023 with about 55% of that price already baked purely from rollover. Then you have about another 30% of your planned pricing that happens in January. So you basically where you sit today have great line of sight of 85%, 90% of what that total price number is going to be in 2023. I think that further bolsters our confidence that we're setting that as a minimum level.

That's fantastic. Moving over to mergers and acquisitions, I know in previous years you've provided a target. Last year, it was around $500 million, but you actually deployed $1.2 billion, significantly exceeding your initial target for the year. However, Patrick, you mentioned that this time you're aiming for $300 million to $500 million, and it seems you believe this year will be more cautious. Could you explain the reasoning behind this? Is this a deliberate approach to delivering results, or is it primarily influenced by the availability of acquisition opportunities? Perhaps you could shed some light on why you expect a much more measured year in terms of M&A activity?

Sure. I believe this aligns with our historical patterns, Walter. When you review GFL's growth over the past 15 years, we've experienced significant increases over two to 2.5 years, followed by a year of consolidation before ramping up again. After going public in March 2020, we saw substantial M&A opportunities, especially on a large scale, and we knew we needed to reduce our debt to capitalize on that. Our initial plan was to double the size of the business within five to six years, but we actually achieved that in just 2.5 years, growing from $1 billion to over $2 billion in EBITDA in less than three years. Given current market conditions, including high inflation and rising interest costs, we're focused on driving organic growth. We're incorporating pricing initiatives into the core business and allowing time for our procurement programs to stabilize, which we believe will result in strong organic growth. We're planning to spend between $300 million and $500 million this year, with an intention to increase that in 2024. All of this strategically positions us to grow over 20% in free cash flow annually over the next three to four years by putting in place the necessary components. We are confident about this. Of course, if a compelling opportunity arises, we won't hesitate to act, but for now, our focus remains on maintaining our spending within the $300 million to $500 million range unless an attractive opportunity presents itself.

Excellent. That makes a lot of sense. And just a last quick one. The divestitures, the three LOIs, does that cover the entire $1.5 billion you're projecting, or are you expecting more agreements to get up to the $1.5 billion?

No. As we've mentioned previously, there are three market areas. I can provide an update: one of the transactions was signed last night. Now we have two letters of intent and one definitive agreement, which accounts for nearly 50% of the proceeds. The other two agreements will make up the remaining 50%. I believe the $1.5 billion estimate is conservative. As you know, we tend to be cautious with our projections. The actual amount will likely exceed $1.5 billion, but we are taking a prudent approach. From our standpoint, we now have one signed agreement that represents over 50%, and we anticipate the proceeds will surpass $1.5 billion.

The next question comes from Michael Hoffman from Stifel. Michael, please go ahead. Your line is open.

Thank you, Luke. I was writing and missed the numbers. What is the CapEx number you're guiding to? How does that compare to the $780 million? I want to ensure I understand the CapEx correctly. The $780 million is in your 2022 cash flow statement. What will be in the cash flow statement for 2023?

$780 million in the 2022 CapEx is excluding RNG, Michael. We've been talking about the numbers together. So we have $830 million in the 2022 statement, including RNG sort of spend on that. What we're saying for this year is that number will be comparable in that $830 million range. You're expecting about $20 million of proceeds from asset small little asset sales, so you would have a net CapEx number of $810 million. And the comment about $830 million in both years being comparable, recall that 2022 had outsized spend because of the $150 million we received in late 2021 that we employed at the beginning of 2022.

And cash flow from ops is forecast at what for 2022?

Well, with $810 million to $815 million of net CapEx, that would imply cash flow from ops, about $1.5 billion before any adjustments.

Okay. So there are no adjustments then in the 2023 free cash flow then?

Well, we don't forecast end of year transaction cost that roughly what's been running $60 million to $70 million of transaction costs a year. We never include the forecast due to the uncertainty of the timing and quantum of those amounts. As Patrick said, with $300 million to $500 million spend, there would be a certain degree of that. But none of that is included in our forecast. So that would be a reduction to that financial statement presented cash flow from ops, the extent and magnitude of any transaction costs that we add back.

It's a strong statement that your simple free cash flow in 2022 was about $350 million. You are doubling the simple cash flow from operations after all capital spending, without adjustments. That's quite a significant statement.

I would agree, and I think when you consider being achieved in the construct of the inflation interest rate environment, I mean, you have a $100 million interest rate headwind. Now it's a very meaningful headwind of that cash flow number, and you're still achieving those results. So yes, we're very excited about watching the free cash flow sort of come through as we had articulated it would.

Okay. And just to be clear, and I don't want to belabor this, if you had been able to spend everything you wanted to spend, you would have done $640 million, but this year would have been $750 million. It's as simple as that. It's not any more complicated, right?

Yeah, correct. I think there may have been a different opportunity on working capital. If you were going to come in that light than maybe you would have been a little bit more aggressive and been able to make that $640 million something a little bit better in 2022, but you're thinking about that exactly right, Michael.

Okay. And then bridging to the $700 million is working capital a source or a use in '23?

Simplifying assumption, working capital is a modest source that offsets the modest use for cash taxes and landfill closure, post closure.

Okay. And then interest, we know, recycling is a headwind?

Recycling is a material headwind in 2023. We have assumed...

Right. And then fuel is... Sorry, I've probably been talking over you. What were you saying?

Recycling is a significant challenge as we enter 2023, and we have assumed that there will be no improvement in the current levels.

Fuel costs have been a significant burden, not just a simple pass-through impact in 2022. Therefore, we expect it to be a benefit in 2023 as we recover from that.

Yeah. So fuel using the end of 2022 rates, I think the price was roughly 8% below what your average fuel cost was in 2022. So that will be a modest tailwind at the cost line.

And then price and organic growth makes up the difference to get flat. So I mean they've got a couple of hundred million dollars of the headwinds getting offset by a couple of hundred million with a positive, most of which is organic growth?

Correct.

Right. That's the other part. Okay. And then on your cash interest, Patrick, you're currently at 6.7% of revenues. Your peers are at 2.5% to 3%. You plan to reduce that by $100 million going into 2024 based on these asset sales. Essentially, if I align with peers on a revenue percentage, I have $250 million to work with. What are your thoughts on when the next $150 million will be taken out?

I think we'll gradually adjust as our EBITDA increases, allowing us to improve our leverage ratio. Our goal is to finish 2023 with a three in front of our leverage number. We're currently positioning our platform to mature similarly to other public companies. We aim to achieve investment grade status, which puts us on a quicker path to reach that goal. Although it might take a couple of years post-deleveraging since rating agencies typically consider trailing statistics, we are confident in reaching that target. We've extended our term loan refinancing to 2027, addressing any concerns regarding the 2025 maturity, and secured a lower rate compared to our previous terms. As we move forward, we anticipate substantial savings from refinancing our capital structure over the next two to three years, lowering our leverage closer to 3 to 3.5 turns from the high-3s we expect to end this year with. Over the next few years, we expect to see this align more closely with industry standards, ultimately transferring value from debt holders to equity holders, which will significantly enhance equity value creation.

From a modeling perspective, once you achieve investment grade status, as you refinance in 2027 and later, the cash interest payments should decrease even with the same level of debt due to improved borrowing costs. This will enhance both your financial leverage affecting free cash flow and operational leverage.

Correct.

Okay. All right. That’s all I needed. Thank you.

Thanks, Michael.

The next question comes from Kevin Chiang from CIBC. Kevin, your line is open. Please go ahead.

Good morning. Thanks for taking my question. Maybe just a clarification on Walter's earlier question. So if I look at the $1.5 billion of gross proceeds and the adjusted EBITDA that would be removed from the consolidated results. It sounds like you're transacting these about 12.5 times to 15 times that $1.5 billion includes the full, I guess, divestiture amounts that you've laid out on Slide 15 here.

Yes, Kevin, it's Luke. So I think on Slide 15, we're saying $100 million to $110 million of EBITDA potentially. So if you take the midpoint of that range at $1.5 billion, that's a 14 times forward number, right, because that's our 2023 guidance on those. It's probably 1.5 turns higher on a trailing number. And as Patrick said, there's probably an opportunity for proceeds slightly in excess of this, which would yield a multiple right in the middle of that mid-teens fairway that we had articulated that are possible as being.

That's great to hear. The gross proceeds are indeed substantial. It appears that the assets being sold may have had a slightly higher potential for EBITDA when compared to the estimates from November. Does this indicate that there are still opportunities to divest noncore assets, even after completing this more extensive portfolio rationalization? Or have you already addressed all the assets you plan to divest or the markets you are choosing not to invest in for growth?

I think the comment about November stems from the numerous inquiries we received over the past year regarding various aspects of our business. When we discussed this with our operators, we decided to approach it comprehensively in one major effort. We believe these assets are valuable, but they would be better utilized by others, particularly in regions where we aren't well-positioned or where there are competing strategies. As I evaluate where we can wisely invest additional capital in mergers and acquisitions or organic growth initiatives, my focus is on markets where we can achieve faster growth and better returns on our investments. Therefore, we believe these assets will be better suited for companies with a stronger presence in those areas, and they will likely succeed with them. However, for us, these assets aren't a priority in the markets where we plan to focus our efforts. This decision allows us to streamline our portfolio while also freeing up significant capital to invest in the markets where we truly want to expand.

I agree with you. Just one last question from me. Your organic growth in the U.S. Solid Waste business is doing better than what you’re observing in Canada. Is there anything specific to mention about that? Is it mainly because you've had a longer presence in Canada, leading to more easy growth opportunities in the U.S., or are there different factors at play regarding volume or pricing between the two countries?

Kevin, it's Luke speaking. I think it has more to do with our mix. If you think about when we talk about our CTI linked revenue, we have a greater proportion of that in our Canadian book of business in the U.S. And that has obviously been the tranche of revenue that has been the anchor to your blended price. So actually, I think when you roll into 2023 and you finally get those CPI resets breaking that mid-single digit level, you're going to start to see more price acceleration in Canada as we finally get that sort of catch up. So the pricing environment in Canada, we think is equally attractive on a like-for-like basis from service levels. I think it is the revenue mix that is driving that delta more than anything.

That makes sense. Thank you very much. Thank you for taking my question. Best of luck in ‘23

Thank you.

The next question comes from Jerry Revich from Goldman Sachs. Jerry, your line is open. Please go ahead.

Yes. Hi. Good morning, everyone.

Good morning, Jerry.

Can we talk about price cost, just the cadence over the course of the year? You are obviously offsetting all of the inflation. So it looks like you're starting out with something like 10 points pricing, 10 points of inflation. And based on the margin guidance, it looks like you're planning to exit with 7 points of price, 3 points of inflation just directionally. But I'm wondering if we might be able to put a finer point on that and see how you folks are anticipating that spread as the year progresses?

Jerry, you did my work for me. You summarized it quite well. It is very much a tale of sort of two halves on the cost side where you start the year are I think Q1 is a double-digit number. Then it steps down sort of ratably throughout the year and it will really be an H1 versus H2. I think it's important to understand, in addition to the pure unit cost inflation, we're also just looking at removal or absence of some of these one-time costs that we incurred this year, like truck rentals, as being an example. So when you're getting to that lower single-digit number in the back end of the year at cost, it's not just unit cost, but it's also just cost avoidance for some of these one-time costs we had, particularly in the back half of this year. At the pricing level, I think we're anticipating in the guide a more normal course pricing cadence what that is, is Q1 being the highest, and you're right, we're expecting double-digit number there. Then that ratably steps down, call it, 100 basis points, 125 basis points a quarter as you move through the year, which is the more typical pricing cadence. Obviously, if our assessment or expectations or cost inflation are different than what we just said, we are demonstrated an openness to go after more price in the year, and we will continue to do so to the extent, and that's what's necessary to drive our appropriate return. But the guide today is predicated on that cadence I just described.

Super. And can we shift gears and talk about the divested asset where you have a definitive agreement. I'm wondering, Patrick, if you wouldn't mind sharing what the market position was of that asset? And what's the anticipated gain? Is it similar to the transactions that you folks did a year or so ago?

It wasn't a significant matter, and we are not going to let that market slip away. Once we get everyone to sign the definitive agreements, it will be more clear. We have non-disclosure agreements with everyone involved. From that perspective, we had three markets which were Colorado, Pennsylvania, Maryland, and Delaware, and there was also a market we were considering divesting. Regarding your other question about what we acquired in recent years, what was that?

No. So you had a significant gain on your last sort of divestitures and you were something like number four or number five in the markets you divested. So I'm wondering if you could give us a...

We are currently ranked third or lower in all of our assets, with two competitors larger than us in the market, which have various strategies. Our preference has been to operate in markets that have a duopoly or are secondary markets. In these specific markets where we are in third and fourth place, we did not identify a viable way to invest additional funds to significantly grow our position from where we currently stand.

Got it. Could you shift gears and talk about landfill gas? Thank you for the update on the earnings cadence. Can you just talk about the off-take agreements and how those are trending? We're hearing that for voluntary markets, the market has remained in the 20s, even though Henry Hub has gas has obviously come in. I'm wondering if you could just comment on if you're seeing that as well? And just give us an update on your contracted status relative to the pipeline?

Yeah. So we haven't locked in anything sort of long-term yet. Obviously, we've been sort of watching the tough settle, particularly around the E-RINs, et cetera, and then what was going to happen sort of the long-term pricing around RINs. We knew there was going to be some compression for sure this year. I don't think people expected $2 RINs, but I think $2.50 to $2.70 RINs was a lot of people were hoping. I think, again, as the voluntary market, demand continues to come on. We think, like you said, there's a lot of demand for having a long-term supply agreement. So as we move into getting these projects online in the near term, we will then look at sort of entering into somewhere between seven and 20-year agreements for a good portion of the fuel. But as of this minute, we haven't locked into anything yet. But you are correct, that pricing still exists, and people are taking a longer-term view versus taking a view of the shorter-term movements.

And can I show you for your views on e-RIN, so it looks like the subsidy is going to have something like $0.30 to $0.40 per kilowatt hour free subsidies. I'm wondering with your footprint as it stands today, how much electricity do you folks generate from gas to electric? And how are you thinking about that opportunity? I know it's early stages, but we would love to get your thoughts.

Yes. Hey, Jerry. It's Luke. Look, we're excited with e-RINs as we view it as another incremental opportunity that's not sort of in our portfolio. I mean today, we have five landfills that have existing landfill gas electricity operating. Now those are under royalty agreements with third parties, but all those sort of roll off, and at which time we can sort of revisit those under the sort of e-RIN landscape. And then there's other landfills. I mean, as you know, the electricity build-out is much less capital intensive than RNG. So we have some other sites that we're evaluating that may also be good potential sort of host sites. And so we've yet to quantify the benefits. As you know, we need to understand a little bit more where it's all going to sort of shake out. But this would be additive to our current sort of RNG and landfill gas related economics, and we're excited to monitor the progress, and we'll provide updates as we get more certainty there.

Appreciate the discussion. Thank you.

Thanks, Jerry.

The next question comes from Tyler Brown from Raymond James. Tyler, your line is open. Please go ahead.

Hi. Good morning, guys.

Good morning, Tyler.

Thanks for the detail. On the 100 basis points on EBITDA for new guidance, can you just talk about some of those moving pieces, specifically how much is commodities, M&A? And do you expect it to be an actual tailwind on this sales target range?

Tyler, we're having some trouble hearing you. I believe you asked about the 100 basis point margin expansion. I'll address that now. Considering the 100 basis points, if we break it down by segment, let's start with our Solid Waste segment. We're actually expecting an increase of over 200 basis points in Solid Waste, even with the commodity headwind taken into account. Currently, the commodity prices present about a $50 million headwind from our sales, equating to roughly 60 basis points against the Solid Waste margin. There's also additional pressure from locations using third-party disposal, contributing another 15 to 20 basis points of headwind. Thus, Solid Waste is anticipating a margin close to 200 basis points when factoring in the commodity impact. For Environmental Services, we're also looking at a margin expansion exceeding 200 basis points, likely in the mid-200 range. This improvement is largely due to prioritizing revenue quality over quantity and leveraging the fixed cost structure we have. In terms of overall margin expansion, we also need to consider corporate costs. We expect to see increased investment in IT within the corporate segment, amounting to an additional $30 to $45 million as we enhance our transition to the cloud and related security measures. This corporate cost could represent about 325 to 330 basis points of revenue, somewhat offsetting the strong organic EBITDA margin growth we've observed in both solid and liquid M&A, the latter of which is seeing a 3.5% to 4% top line rollover. This would create a slight drag, roughly 25 basis points, as outlined in our current plan related to M&A. Regarding fuel costs, direct fuel pass-through is not a major concern since our surcharge is well established and fuel prices are slightly decreasing, providing a minor benefit. However, we are facing challenges from indirect fuel pass-through that was significant in the latter half of 2022. This involves increased costs imposed by third-party transport and disposal providers to recover their energy expenses, which will present a notable headwind going into next year as we compare against those rising costs. We'll have to monitor how this trend unfolds if energy prices continue to stabilize. Overall, taking all these factors into account, the organic margin expansion driven by our pricing strategies and operational leverage is quite substantial.

Yes. Okay. Can you guys hear me better?

Yes.

Yes, much better.

Okay. Good. Yes. Sorry about that. I do want to switch gears just a little bit. Given that it's year-end, can you guys update us on where GIPI EBITDA came in for the year? If you have any expectations for '23 and what that leverage profile looks like on that entity. It's kind of hard to ascribe value for it without some of those financials. So could you just give us any help there?

Sure. This year, that business is expected to generate between $165 million and $170 million in EBITDA, with approximately five turns of leverage. Looking at our plans for that business, it has faced cost inflation due to contracts bid in 2021 that had to be executed in 2022. For 2023, we anticipate EBITDA will be around $195 million to $200 million. We expect to acquire between $65 million and $70 million of EBITDA this year, as last year was primarily focused on integration without any mergers and acquisitions. Currently, we have three targets under letter of intent. By the end of 2023, we expect that business to reach around $270 million to $275 million in EBITDA, with a goal of growing to $300 million. Our original plan was to exceed $300 million. When considering comparable companies and what they are worth to private equity, these businesses generally trade between 11 and 12 times, suggesting an enterprise value of about $3.5 billion. Net debt is estimated at $1.5 billion, resulting in a combined equity of around $2 billion, with GFL loans just under 50%. From our perspective, this aligns with our goal of creating $1 billion in equity. While we aren't there yet, I am confident that GFL shareholders will eventually receive a check closer to $1 billion, and that is the calculation behind it.

That is extremely helpful. Now, for my last question, when I review the pro forma schedule on the proposed divestitures, it appears they have around 25% margins. The CapEx is 7% to 8% of sales. Based on that information, does this suggest that they are likely hauling operations, or are there some vertically integrated markets?

It's a mixture of both. Some of the markets are focused on hauling and transfer, some are just hauling, and there is also a market that is vertically integrated but has a smaller land base. You're correct that it is primarily centered on the hauling and transfer side.

Okay. Cool. Appreciate it. Thank you.

Thanks, Tyler.

The next question comes from Tim James at TD Securities. Tim, your line is open. Please go ahead.

Thanks very much. Good morning. I'm wondering if you could talk a little bit about the moving parts by market as you think about your volume expectations, your guidance for '23. Just thinking about different kinds of expectations within commercial, industrial, residential and maybe any differences you see in the U.S. market versus Canada?

Yeah. Hey, Tim. It's Luke. Look, as presented in the prepared remarks, we're taking a conservative view on volumes, just in light of uncertainty. The reality is, as you can see throughout even the second half of 2022, our volume growth remains strong. I think it's a testament to our market selection as well as the sort of quality of service that we're seeing. I mean in a typical recessionary type environment, it's the C&D related volume that drives up first, you see that the landfills and your sort of roll-off business. So the guide does assume a more tempered sort of landfill volumes and fee collection. Although I would say that together, it constitutes sort of a single-digit percentage of our total revenue fees. So it's not a material number. I think really what we're anticipating is broad-based across both of the markets, a general slowdown in the commercial industrial type volume. Residential remains strong and sort of a little bit more cycle agnostic. So it's really in those areas, but I would highlight, it is a conservative perspective based on the uncertainty versus indication based on what we're seeing in the current data.

Okay. That's really helpful. The Environmental Services business, the growth that you've reported last year, I mean, just a great performance. Can you comment, and I don't know if it's possible to talk about how much of that performance was overall market strength versus GFL-specific market share gains or opportunities that maybe you capitalized to outgrow the market?

From the Environmental Services sector, we were strategic when we made our recent acquisition. We chose that opportunity when other companies were hesitant due to COVID and other factors. We acquired the business at a reasonable valuation that was influenced by the pandemic. Looking at our current market position, synergy opportunities, and the broader range of services we can now offer, we're in a strong position to serve existing customers better. The exit from COVID in Canada around spring 2022 created significant pent-up demand. With the scale we have in Canada and the facilities we've acquired, we can enhance our service offerings and leverage our fixed cost structure to increase pricing among other benefits. This is paving the way for growth. Our business already has industry-leading margins in the mid-20s, and I aim to increase that to nearly 30% over the next two to three years. We believe we can achieve this by being selective with our market entries and focusing on revenue from our current customers, which will lead to outstanding results.

Okay. That's really helpful, Patrick. And then just a final question. I just want to confirm my thinking just doing some simple math here. The asset sales plan for this year, they would be effectively slightly accretive once those sales are done to your Solid Waste margin percentage but really have no material impact on the consolidated. Is that the right way to think about it?

That's right, Tim.

We have no further questions at this time. So I'll hand back to the management team for any concluding remarks.

Thank you very much, everyone. I'm sorry the call dragged on a little longer, but we look forward to speaking to you after our Q1 results and appreciate all your support over the last number of years. Thank you.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.