GFL Environmental Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the GFL Environmental Inc. 2024 First Quarter Earnings Call. My name is Glenn. I will be the operator for today's call. I will now hand you over to your host, Patrick Dovigi, Founder and CEO of GFL Environmental, Patrick, you may now begin.

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

Thank you, Patrick. Good morning, everyone, and thank you for joining. We have filed our earnings press release, which includes important information. The press release as well as a presentation to accompany this call is available on our website. During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. Securities regulators. Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date and we do not assume any obligation to update these statements, whether as a result of new information, future events and developments, or otherwise. This call will include a discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. Securities regulators. I will now turn the call back over to Patrick.

Thank you, Luke. Once again, we started the year with the strength of our high-quality employees and asset base driving performance ahead of expectations. This is our fifth year of being a public company, and I continue to be humbled by the capacity of more than our 20,000 employees to consistently deliver results ahead of our plans. On our last call, in what has become our usual practice, we provided our 2024 guidance with an industry-leading degree of transparency and the details of the moving pieces that we anticipated this year, including what we expected to be industry-leading organic margin expansion in our base business. We also outlined the specifics of our planned M&A and growth investments. Our first quarter results are better than we guided, and we fully expect this positive momentum to continue for the balance of the year. Luke will walk us through the details, but I wanted to first highlight a few key metrics. First quarter pricing was 7.7% on a like-for-like basis. Our pricing strategies continue to outperform expectations, and we remain optimistic about our ability to realize incremental pricing opportunities as we replicate the pricing playbook that our public company peers have already successfully employed. With the strength of our first quarter pricing, we are highly confident that we will be able to meet or exceed our price guidance for the year. We expect the recent strength in commodity prices that continue to be upside versus our guidance. On the cost side, labor turnover is sequentially improving and is yielding efficiencies and onboarding cost productivity and the overall cost of risk. R&M costs are also improving as the unit cost inflation moderates and fleet replacement rates improve. The result is the realization of an outsized price-cost spread that supports ongoing margin expansion. Volume growth in the quarter was negative 3%. This was significantly better than our expectations as the negative impact on volume of the unusually cold January weather in our southern markets was offset by the positive impact of milder weather in most of our northern markets in February and March. We expect some of this could be a pull forward of second quarter volumes. However, we remain confident in our full-year volume expectations included in our guidance. We also remain confident in the effectiveness of our deliberate volume strategies. As we've discussed, our industry-leading growth has provided us outsized opportunities to improve asset utilization and drive margin expansion through the intentional shedding of lower-quality revenues. We believe the benefits of these strategies are evident in our margin performance. As we highlighted on our year-end call, we are also actively deploying growth capital across a variety of initiatives that we expect will generate significant ROIC for years to come. In the first quarter, we deployed $62 million into incremental growth investments primarily related to recycling and RNG infrastructure. For the full year 2024, we remain on track to deploy $250 million to $300 million into these investments as we previously guided. The EPR landscape in our Canadian market continues to evolve, and we remain confident that we will see upside to the $80 million to $100 million of incremental adjusted EBITDA we previously identified associated with these initiatives. As we said earlier, the contribution from these contracts is expected to start late this year, ramp up through 2025, and achieve our expected full contribution in fiscal 2026. On RNG, our first facility at Arbor Hills landfill is continuing to ramp up its operations, generating cash flow in line with our expectations. We have 2 or 3 more facilities that we expect to come online by the end of the year. We remain confident that we will realize the $175 million of adjusted EBITDA previously disclosed once our portfolio of landfill gas to energy facilities is fully operational in the coming years. In addition to organic growth initiatives, we have deployed approximately $500 million into 6 acquisitions since the beginning of this year. All these acquisitions were in Solid Waste within our existing geographies. The largest of the 6 acquisitions we discussed at our last earnings call is a vertically integrated asset in Central Florida, one of the fastest-growing markets in the U.S. This asset is highly complementary to our existing network, and we expect that it will act as a driver for significant organic growth for us in this market for years to come. Like most acquisitions of this caliber, the M&A process commenced over 6 months before closing, and the consummation of this transaction was fully anticipated when we provided our capital allocation framework in November of last year. While we continue to maintain a robust acquisition pipeline, we remain absolutely committed to the guidance for our total 2024 growth investments and net leverage that we set out at the beginning of the year. As we have consistently demonstrated, the predictable recurring nature of the revenues and cash flows generated by our business allow us to forecast the full year's results with a high degree of accuracy. Within a given year, weather-driven timing differences between the first and second quarters can impact comparability on a year-over-year basis, and therefore, we typically have waited until the first half of the year to give updated guidance for the year. While we believe there could be some revenue pulled forward from the second quarter because of weather-related impacts, based on the quality of the margin performance in the first quarter, we are increasing our guidance for 2024 adjusted EBITDA to $2.23 billion. We will provide a more fulsome guidance update when we report our second quarter results. I'll now pass the call to Luke, who will walk us through the quarter in more detail, and then I'll share some closing comments before we open it up for Q&A.

Thanks, Patrick. Our accompanying investor presentation provides supplemental analysis to summarize performance in the quarter and a consistent format to what we've previously provided. Revenue for the quarter of $1.8 billion was 6.5% higher than the prior year, excluding the impact of the Solid Waste divestitures. Stronger-than-anticipated pricing and volume were the primary drivers of this result that was $25 million ahead of internal expectations. While the January cold weather in our southern markets negatively impacted volumes, the above-average temperatures later in the quarter in many of our northern U.S. and Canadian markets partially offset the January impacts. As Patrick said, the strength of our first quarter pricing activities is highly encouraging for the achievement or exceedance of our pricing expectations for the year, with over 80% of our full-year pricing impact already locked in based on the contracted nature of our business. Page 3 shows the bridge for Solid Waste adjusted EBITDA margins compared to the first quarter of 2023. As anticipated, the change in commodity and fuel prices from the prior year served as a margin tailwind, whereas the net contribution of M&A and divestitures was a 20 basis point margin headwind versus the first quarter of 2023. Underlying solid waste margins expanded by 100 basis points, 50 basis points better than planned, a result that would have been even greater without the weather-related impacts. The flow-through benefits of the outsized price-cost spread or intentional volume shedding initiatives, RNG contribution, and incremental operating leverage coming from improving employee turnover and asset utilization are exceeding expectations and reinforce our optimism in our ability to exceed the industry-leading organic margin expansion we included in our base guide for this year. Page 4 highlights the performance of our Environmental Services segment in the quarter. To contextualize this year's performance, it is important to recall the prior year comparable periods of unseasonably high levels of activity resulting in 25% organic revenue growth in that quarter. We had called out this outsized performance in our Q1 2023 reporting. Normalizing the prior period for this outperformance, we saw over 10% top-line revenue growth in this segment. Unusually cold weather in the south in January, as well as the imposition of earlier spring road weight restrictions because of warmer weather in our northern markets that are typically implemented in the second quarter, negatively impacted volumes. The impacts on our southern markets alone impacted margins by over 100 basis points. The rollover impact of the fire we had at one of our facilities in late Q4 was a 20 basis point drag on ES margins. The timing of event-driven work and the sale of used motor oil also resulted in reduced revenue versus the prior year. The fact that we are exceeding our margin expectations in the face of these headwinds serves to highlight the quality of the underlying portfolio and our overall growth strategy for this segment. Adjusted free cash flow for the quarter was $49 million, an increase of nearly $100 million over the prior year period and ahead of our internal expectations. The outperformance of adjusted EBITDA, a lower seasonal investment in working capital, and capital expenditures that were $25 million less than the plan all contributed to the significant outperformance versus expectations. We expect the working capital and CapEx variances to be timing differences and remain confident in our full-year expectations for both of these line items. Page 5 summarizes reported net leverage, which was 4.3x on March 31, reflecting the impact of normal core seasonality and the change in FX rates from the start to the end of the quarter. During the quarter, we received a credit rating upgrade from S&P and remain on positive credit watch from both rating agencies, reflecting the material improvement in our credit quality and the expectation for further improvement in the near term. As we previously said, we anticipate material credit rating upgrades prior to the maturity of most of our existing debt, providing an opportunity for near-term lower borrowing costs and improved free cash flow conversion. As Patrick said, we remain absolutely committed to our previously stated leverage targets. And with the strength of the first quarter performance, we are confident in our ability to achieve these targets exiting 2024 with net leverage between 3.65x and 3.85x. In terms of guidance, with the strength of this year's start, we're feeling highly confident in our ability to exceed our previously communicated targets. As Patrick said, the strength of the first quarter's margin performance allows us confidence to increase our adjusted EBITDA guidance to $2.23 billion. However, as Patrick noted and we've consistently said, there can often be timing shifts between the first and second quarters, so we will maintain our normal course practice of waiting until July before we formally update our full set of guidance for the year. Specifically related to the second quarter, we note the following: Consolidated revenue is expected to be approximately $2.055 billion, Solid waste revenues are expected to be $1.56 billion to $1.57 billion, driven by pricing just over 6% and volume is anticipated to improve approximately 50 basis points sequentially from the first quarter or approximately negative 2.5%. For Environmental Services, we expect to realize between $475 million and $500 million of revenue, representing another quarter of 10% growth over the prior year. The wider-than-typical revenue ranges within the segments are to account for the potential weather-driven pull forward of revenue into the first quarter from Q2. In terms of margin, we expect consolidated adjusted EBITDA margins to accelerate over 300 basis points sequentially over the first quarter to just under 28.5% or nearly 70 basis points over Q2 2023. At the segment level, this assumes solid waste margins of 32% in the quarter to 32.5% and ES margins of almost flat with the prior year, around 29.6% and corporate margins of negative 3.2%. The guide then contemplates further margin expansion in the third quarter before stepping down in the fourth quarter as per the typical cadence of the business. Putting that together yields between $585 million and $590 million of adjusted EBITDA for the second quarter. Additionally, we expect $220 million to $230 million of net capital expenditures, $105 million of cash interest, and investment in working capital between $65 million and $75 million, and other operating items of approximately $25 million for Q2 adjusted free cash flow of approximately $160 million to $170 million. In terms of net leverage, we expect a modest step up in Q2 as a result of seasonality and completed M&A and then to ratably step down in Q3 and Q4. Adjusted net income is expected to be approximately $100 million for the second quarter.

I will now pass the call back to Luke, who will provide some closing comments before Q&A.

Thanks, Patrick. The drive of our employees to make our business better every day is evident in what we have achieved this quarter and the opportunities we are creating for steadily improving performance in the near and longer term. I want to thank each and every one of them for their dedicated contribution to Team Green. As I've said on many of our calls, our focus has always been on delivering what we say we're going to do. This quarter is no exception. Our results for the quarter continue to demonstrate the underlying quality of our asset base and the impact of the effective and consistent implementation of our key value creation strategies. At the same time, the disciplined targeted growth investments we are making today are setting us up to deliver strong organic growth for many years to come. We have provided comprehensive, easy-to-follow guidance for the year, and we started off 2024 delivering on exactly what we said we were going to do. We intend to continue to do more of the same in the coming quarters. I will now turn the call over to the operator to open the line for Q&A.

Our first question comes from Stephanie Moore from Jefferies.

Good morning. Thank you. To start, could you give us an update on this EPR? Patrick, you mentioned upside to the $80 million to $100 million of EBITDA. Where are you seeing the additional opportunities? And then what is the timing?

Yes. So I think as we discussed, the $80 million to $100 million of incremental EBITDA is in the bag today, signed, contracted, et cetera. As we said, there are a few large particularly hauling and transfer contracts that were up for bid through late last year. We have been notified that we have been selected as a preferred vendor for the entire city of Toronto on the recycling side. It's not done as of yet, but we are in contract negotiations to finalize that and hope to have a very good update for you on our Q2 call. As well, there's a multitude of other residential contracts; mostly the ones we're focused on are ones we actually currently do. We expect that those will be awarded over the next sort of 3 to 4 months. So again, pretty good opportunity and upside from those. And as we look at the other provinces, Quebec and the Maritimes continue to release incremental bids and legislation continues to go through in Western Canada. But I think on the Q2 call, we'll give you a very good update on where we stand with EPR. But very good news on our side that we would notify of being the preferred vendor for contract negotiations for the entire city of Toronto.

Got it. And that's helpful. And then as a follow-up, maybe Luke, free cash flow is much better than expected for the quarter, and it looks like you are seeing some improvements in working capital management. Where are you in that process? And what are your expectations for working capital cadence for the remainder of the year?

Yes. Thanks, Stephanie. It's a great question and certainly an area where we do see continued opportunity. I mean, for context, you have to remember, working capital with the levels of M&A we've done historically, sometimes you get impacts of that, that manifest in the working capital line and therefore it's harder to sort of smooth that out over the 4 quarters. As we now have the stability of the base business it allows for a more regular cadence. So with the seasonality profile of our business, primarily in the northern markets, we're going to continue to see investments in the first half that have been reversed in the second half. However, as you can see in this quarter, the magnitude of the swing is becoming more and more muted. So it's going to allow for a much more predictable and stable free cash flow generation on a quarter-over-quarter basis, and you're seeing that in this quarter's results. So we do think this year's cadence will be similar. Q2, we'll see another investment, albeit at a lower level than historically, and then the reversals that we had customarily realized in Q3 and Q4 are expected as well.

We have our next question comes from Kevin Chiang from CIBC Wood Gundy.

I want to clarify the M&A spending for this year. It seems like you spent just over $111 million in the first quarter, which doesn't seem to include the Angelo acquisition that you mentioned in the last call as a significant purchase, potentially accounting for about half of this year's expected spending. If my calculations are right, that suggests you have used about two-thirds of the planned $600 million to $650 million for M&A this year. Is my understanding correct? Also, can you provide some insight on how you plan to allocate the remaining capital? Should we expect to see that in the second quarter, or will the spending be more evenly distributed throughout the year, considering how active you’ve been in the first four months?

Yes. So I think we spent year-to-date about $500 million. So it leaves somewhere between $100 million, $150 million spend for the rest of the year. I think you'll see some of that trickle in, in later Q2, and spread out through Q3 and early Q4, but I wouldn't expect it all to be spent by the end of Q2; it's going to trickle into the next couple of quarters.

And Kevin, in terms of the financial statements, you have it right. Q1 saw 4 acquisitions closed, but Angelo is the largest, and another one was closed actually at the beginning of April. So it's in that year-to-date number that Patrick said. But within the quarter proper, you had the lower spend on just those 4 smaller acquisitions.

That's helpful. I appreciate that you'll provide a more detailed update on the full-year guidance when you report Q2, and you mentioned wanting to observe some of the impact on volumes shifting from Q1 to the second quarter. Looking at it simply, you had factored in a level of seasonality for Q1 in your prior guidance. If I take that seasonality and apply it to what you've actually reported for Q1, along with some of this M&A that hasn't been included in your guidance and perhaps a more favorable commodity price environment than you initially assumed, I see a potentially significant increase compared to your current position. While I'm aware you won't confirm it, an EBITDA exceeding $2.3 billion doesn't seem outside the realm of possibility when considering these factors. If there's anything you can comment on regarding this estimate, it would be appreciated.

Without giving certainly formally updated guidance, you're heading in the right direction, I would say. But we're going to come out at the end of Q2, and we'll give updated guidance for the full year including the contribution from M&A and any other things that sort of pop up along the way, particularly as we get through the first half of the year and get a real trajectory of sort of volumes and where pricing is going to lie. But I think, Kevin, you're on the right path.

I appreciate that we are seeing good results there.

Our next question comes from Sabahat Khan from RBC Capital.

I think you noted in the prepared remarks that labor turnover is trending lower and some of the other costs trending lower, improving EBITDA margin seems to be a bit of a trend we see in this reporting side, but you can maybe give a bit more detail on how much the labor turnover has improved. How do you expect that to turn to maybe the rest of the year? And maybe a bit more color on the repair and maintenance costs, et cetera, as well.

Yes. So I'll give it to Luke on a couple of others. But on the labor front, basically, like we said in sort of the peak of COVID, the job market was really tight; labor voluntary turnover, particularly in the residential book of business, was trending sort of closer to 30%. That dropped to sort of mid-20s last year and has trended to low 20s this year. Pre-COVID, we were in the high teens range. So we're getting significantly closer. Still some room to go, but it's certainly heading in the right direction, and you're seeing that flow through to the P&L, and you're definitely seeing that on the margin front.

Yes. And then, Sabahat, it's Luke speaking. On R&M, I think it's a similar story in trend line that things are moving in the right direction. I mean, if you look for the quarter, R&M was about 10.3% of revenue. Now that was flat with Q4, but being achieved on the seasonally lower Q1 revenues, right? So if you think of how that then rolls forward with the revenue upticks and the improved efficiency in R&M, we see a path to that going back into the sort of single digits as you get into the middle of the year and probably ending the year in the mid- to higher 9s level. So I think there's still some conservatism in that number and the improvements that we're seeing across the business should drive incremental opportunity there. So we're feeling really good with how that trend line is moving.

Okay. Great. And then maybe if I can tease out on Patrick's comments around the Toronto recycling contract. I know you said you're still in contract negotiations. But any big picture parameters around kind of the scale, directional margins for this business versus the base business under the EPR regime. Just anything you can share even at a high level to give us a perspective on what this could mean or what it could look like.

Yes. Keep in mind, we currently handle 60% of the work, while 40% is managed by others, primarily city workers. The contract value will exceed $50 million per year. I anticipate margins that will enhance our current blended margin for solid waste.

No. $50 million of revenue, in excess of $50 million of revenue. It's a 10-year contract. So it's going to be over $0.5 billion in aggregate over 10 years.

Our next question comes from Jerry Revich from Goldman Sachs.

I'm wondering if you could just talk about the acquisitions that you completed year-to-date, since they're all within your footprint. Can you just give us a flavor for the extent of route consolidation opportunities? How many more stops per truck do you expect post integration? Just give us a feel for how accretive these opportunities are to the existing route base in your markets, if you don't mind?

Yes. Thanks, Jerry. It's a key component of our whole sort of M&A strategy as you're doing these densifying tuck-ins, getting the efficiency that you're speaking to. Unfortunately, the small population; there are 6 transactions, 1 larger one, Angelo. You've got 5 small tuck-ins. It's going to be widely varied by market and by region what that opportunity sort of looks like. But you're thinking about it the exact right way that from buying a business today that's operating 8 or 9 trucks in a market where we're operating significantly more than that, there's probably an opportunity to park 1, 2, or 3 trucks depending on the sort of density. So what we've historically said is on these smaller acquisitions that may be on the face of it, if you're paying somewhere between sort of 6 to 8x for a small one on a pre-synergy basis, post the synergies, you might be able to take anywhere from 2 to 3 turns of cost out of that business by virtue of those cost savings from the reconsolidation facility consolidation, headcount consolidation, etc. So it does vary for these specific deals. I'd say they're no different than typical. So you're probably going to be in that range. But that's how we typically think about the M&A on the tuck-in nature.

And in terms of the additional acquisitions that you have in the pipeline for the balance of the year, it sounds like it's the same opportunity; we're going to have an outsized benefit from consolidation since it's all going to be within the existing footprint. So the M&A pipeline sounds like it's going to come with higher synergies. And obviously, in the past, it's been a combination of these type of acquisition engine building up the footprint, but correct me if I'm wrong, but it sounds like we're going to see outsized synergy opportunities with the pipeline that you have planned.

Yes. They're all in the existing footprint. Again, going back to opportunities, like Luke said, the consolidate sort of SG&A costs, consolidate hauling facilities, move those trucks onto our existing routes and really focus around markets where we have underutilized post-collection assets, whether that's recycling, facilities, transportation, landfills, to drive incremental volumes for those facilities that we're not getting, which is going to just yield exceptional sort of ROIC investments that we're making.

And Jerry, just in terms of the specific modeling, we typically think and see that initially, these businesses are getting incorporated at margin-decretive levels, right, just the normal course sort of pre-synergies. And then it's over the first sort of 6, 9 to 12 months, depending on the market and the business where you then take them up to the accretive margins for the reasons you articulated.

Super. Can I ask you on a separate topic, Landfill gas heading into the election, I'm wondering are you folks thinking about locking in any of the gas that you have coming online on long-term contracts? Or are you happy to bring it online with the RIN market structures? Any updated thoughts on what the voluntary market looks like as well, if you wouldn't mind.

Yes. I mean, things keep continuing to trend in the right direction. From our perspective, we're still selling into the transportation market today; particularly, our partners at BP and OPAL continue to see that the best way to maximize value today. Although we are seeing the voluntary market prices continue to trend up to the point now where they're exceeding mid-20s per MMBtu and heading closer to $30 per MMBtu. So I think you will see that some of our facilities come online; we're going to start looking to enter into those longer-term contracts for a portion of the gas.

Our next question comes from Michael Hoffman from Stifel.

Thank you very much. Good morning, Patrick, Luke, just so we prevent everybody from getting your numbers too high. If you spend $500 million, you probably bought between $160 million and $170 million of revenues at 25% margins. You got to layer it in for 8 or 9 months and then you walk them up into 2025, but that's the walk up just so we don't get ahead of ourselves.

Before we start, I want to express my gratitude to you, Michael, as this is going to be your final call with us. You've provided invaluable service to this industry over many years, and your support has been critical for the company, particularly during our transition to going public. I want to thank you not only on behalf of GFL but also for the entire industry for everything you've accomplished. You've been a strong advocate for all of us as companies, and we truly appreciate all you've done for the industry over the years. Now, I’ll hand it over to Luke to provide further details.

Michael, I echo everything that Patrick just said. So thank you and wishing you all the best of luck in your future endeavors, but look forward to catching up next week as well. On the specific M&A, what I'd say, Michael, is while the math you suggested would be normal in a typical GFL year this year with Angelo's, it's a little bit skewed because a disproportionate amount of the dollars are going to one large vertically integrated asset. So what we said is for the $500 million, we actually got $100 million of revenue. Now the margin profile, because so much of it is coming out of a large vertically integrated, is much greater than typical. And so that's closer to a 40% number. And with that, though, the basis of what the math you are doing is absolutely right. So if you bought call it, $40 million of EBITDA, and you got that sort of 3 quarters of the way through the year. The contribution in the year would be in that sort of 30% kind of range, and that is the building block as it relates to M&A. And then incremental M&A will have incremental contribution. And then other points Kevin was highlighting, commodity and other tailwinds are real. But as we all know, there will be headwinds, so we can't only count the good guys. But you're absolutely right; it's more of the 2025 that you'll get the full year benefit of all of that M&A spend plus the synergies.

Okay. So thank you very much for those kind comments, that was unexpected and very kind of you. Following up, working capital, we should still presume it to use because you're still growing the company. It's just going to be less of the use than it has been because you're getting better at managing it. Is that the right way to think?

I think that's right. You got to remember, like the volumetric shedding that's been done on some what we call bad revenue, right? And so around the edges, that helps. And then just the broader improvement. It's been hard to optimize the shift as you were growing at the rate at which we were. And as we now have stability, we're able to pull the levers that our peers have already done to optimize in those areas. And so we still think there is opportunity, for instance, within our DSO and we will continue to drive after that, which we'll see a recovery of that investment and will help offset what the normal course growth would be associated with the organic growth. But you're thinking about it exactly right.

Okay. And then to that end, you have had a lot of self-help opportunities just because of where you are in your life cycle, whether it's automation in residential or CNG on the trucks or digital in the cab. Can we talk about what inning you are in that and how that kind of reflects back to your comments you made about your working capital?

Yes. Currently, we have numerous self-help opportunities ahead of us. For 2024, we're planning to roll out 3,500 tablets into our commercial trucks, which will allow us to capture additional revenue from locked bins and overweight bins. This is a key focus for us. Another important initiative is the continued conversion of our fleet to CNG, which we expect to gain momentum over the next few years, especially with several EPR contracts we’re aiming to execute, the majority of which will involve converting trucks to CNG. Previously, our CNG fleet was in the low teens, but now it has increased to the high teens. We aim to raise that to approximately 45% to 50% of the entire fleet. Additionally, we still have around $150 million in revenue mainly from low-margin residential contracts, and we are looking to exit some of this revenue or sell it to local competitors who can manage it better. All these efforts will support our capital allocation program, improve our margin profile, and keep us on the right path for future growth.

I appreciate the detailed insight you've provided regarding the 90-day outlook. However, I would like to take a step back and recognize that this reflects a significant increase in your confidence regarding the model's direction. What factors from the past year or two have contributed to this newfound confidence as you transition from a consolidation phase to a fully operational company? Specifically, what elements would you highlight that empower you to adopt this 90-day perspective?

If you look at our business and its development over the years, we've consistently seen growth of over 30% to 40% CAGR for the first 14 or 15 years. With the current narrative of prolonged higher interest rates, we've become more focused on leverage, particularly in public markets. We aim to reduce our leverage to the mid 3s, which has led us to slow down on M&A activities. Historically, we've been quite reserved in pursuing M&A for the past year and a half. This has allowed us to demonstrate the true operating capabilities of our business without the influence of M&A. Our operators are successfully managing their existing portfolios without needing M&A. The confidence we have in our forecasts is reflected in our current performance, and I believe this will continue into the future. As we achieve our targeted leverage levels, especially in the current interest rate environment, our business has reached a size where M&A will only play a modest role in our growth strategy, rather than being a primary focus.

Okay. Thank you very much. And thank you again for the kind words, and I'll see you Sunday.

Our next question comes from Patrick Tyler Brown from Raymond James.

Yes, very formal introduction. So I think you guys have a debt tower that's coming up next year. I know your credit quality is improving, but just based on where you are today, do you think that refinancing that $1.2 billion debt tower is going to improve cash interest headwind next year?

Yes. So Tyler, you're right. There's about $1.2 billion across 2 bonds that come up next summer; they currently carry a blended coupon of about sort of 4.25%, 4.3%. If you're redoing that today, you're probably more in the mid- to high 6s is what you've been seeing. So there's certainly an incremental headline cash interest cost on that. However, where we have an opportunity from some structuring perspectives, the existing bonds that you would be refinancing are domiciled in Canada, whereas you'd be issuing the new ones out of a U.S. entity, thereby providing meaningful cash tax shield, right, because we're becoming a bigger cash taxpayer in the U.S. And so net-net, on the free cash flow line, the cash tax savings would largely offset the interest cost; so you have a reclass or gross up on the actual line items, but net-net, your free cash number would be a pretty de minimis impact.

Yes. Okay. Excellent. That's very, very helpful. And then, Patrick, can we get some high-level thoughts on GIP? Can you maybe run down some of the end-year financials, just how it was tracking in terms of EBITDA and leverage? And just any thoughts about monetization there?

Yes. As we mentioned last year, that business faced challenges due to the inflationary environment. As we move past that, we expect to return to our anticipated levels for that business. This year, we are projecting low 200s for EBITDA without considering M&A. Currently, that business operates at margins of 12.5% to 13%, which we expect to increase to around 15% over the next year. Leverage is expected to remain in the mid-5s for a private company. We have several promising M&A opportunities in that business as well. Our goal remains the same: to grow the business and reach about $1 billion in equity value. We will be monitoring market opportunities closely, especially given the recent increases in valuations in the sector, like CRA's listing in the U.S. and Lafarge's separation of their European and North American operations. Other comparable companies have also seen positive trends recently. I believe our strategy is strengthening, and time is advantageous for us as we aim to enhance the value of the business. We're looking at a potential event around late '25 or '26. From our viewpoint, we are considering multiple avenues for exit, whether through an IPO, financial sponsorship, or strategic options. There are plenty of opportunities for exit; we just want to ensure we achieve the right equity value.

Perfect. And then my last question is about PFAS in the U.S., which has seen a lot of movement. I'm curious if anything similar has happened in Canada. I don't really have the information and would like to understand how you see PFAS within your environmental and social framework. Is it part of your environmental and social business, or could it represent a longer-term opportunity?

There has been a lot of discussion in the U.S. regarding PFAS, but currently, nothing significant is happening in Canada. The proposed legislation seems to align with our expectations, although there is still progress to be made. It's important to note that landfills are not the source of this issue; rather, they serve as passive recipients of materials. This situation will likely continue to evolve in our Environmental Services business. We are exploring various technologies, as many believe they have the solution to PFAS. Ultimately, the effectiveness and economic viability of these solutions remain to be seen. We are engaged in discussions with a number of companies to explore potential acquisitions or partnerships aimed at addressing the PFAS challenge that everyone will face in the near future.

But fundamentally, Tyler, I mean our perspective would be in the long run, PFAS will be a tailwind for price and volume for our business. And so the exact sort of form in which that shapes out remains to be seen, but we're feeling optimistic that this is ultimately going to be an opportunity for us across both our solid and liquid waste segments on a price and volume perspective.

Our next question comes from Michael Doumet from Scotiabank.

I wanted to get back to the guidance. Correct me if I'm wrong, but I believe the initial expectation was that margin expansion would increase as the year progressed. So can you comment on whether that margin cadence still stands? Obviously, outside the comments regarding the pull forward.

Yes. I think that's absolutely right, Michael. It's a first half, second half story. I mean, within H1, as we're articulating, the outperformance in Q1 may sort of eat into what was the otherwise expansion expected in Q2. But absolutely, I mean if you look at the sort of cadence that's being expected in the original guide, I don't think that has changed. And with the strength of Q1 performance, we think maybe that gets a little bit better. And so we set out this year with a guide that from our perspective, I think, had industry-leading organic growth as the impact from M&A was muted and was therefore all organic. And where we're sitting today, if you're reading the tea leaves, I think we're teeing up that's going to be better than initially anticipated; exactly how much remains to be seen, and we look forward to updating you on that in July. But that cadence, everything is looking as expected, just perhaps a little bit better.

Makes sense. And then you talked about the sustainability of the strong start to price in a year. How are unit costs tracking versus your initial expectation?

I would say they're right on target. When we examine labor, it's still over 5%, and if you consider everything combined, cost inflation is in the mid to high 5s, but it's beginning to decrease as we compare against tougher quarters. Additionally, disruptions like fleet replacement are improving. We're optimistic about the price/cost spread we projected for the year, which could reach up to 150 basis points. Given the way cost inflation is easing, I don't anticipate needing to adjust pricing as often as we have in the past two years, which should lead to a stable pricing outcome. Unit cost inflation seems to be proceeding as expected, so our pricing guidance should also align with that. It’s important to note that over 80% of this year's pricing decisions have already been made, primarily due to the influence of the previous year and the significant Q1 pricing activity. We're feeling positive about the spread, which is our main focus. If unit cost expectations shift, we will reconsider our pricing strategies, but at this moment, we're satisfied with the current trends.

Perfect, and then maybe just to sneak one in. Just on the working capital management. I think I understand the improvement there. It doesn't sound so much structural in the sense that you're getting less working capital and more that you're smoothing things out from a seasonal perspective. But as we look to future years as well, that's smoothing out. That doesn't go away; it might actually even get better.

Yes, I think that's right. I mean if you look at the extent of the swings that we've historically had, like I think last year, the H1 investment was just under $200 million, and then you recover all of that in H2 right? And that's just with the seasonal profile and ramp of the revenues. This year, the way we're teeing it up now is that each one investment is going to be just over $100 million. So I think $120 million is what we've sort of alluded to in the guide there. So material improvement over last year. Again, for the year as a whole, you're still netting out to roughly the same place, but just tempering the volatility, if you will, of the investments. Part of it is by the changing business mix, more and more business in the Southeastern U.S. where they have a different seasonality profile that's certainly sort of helpful. And then part of it is just continuing to sort of optimize our processes and the information coming out of our systems to manage this appropriately. So we continue to see it as an opportunity. I think it will always be an H1 investment, H2 recovery, although the quantum of changes from quarter to quarter will temper and be more muted than historically.

Our next question is from Tobey Sommer from Truist.

How does the 80% of pricing activity for the year already being done compare to last year at this time and the historic experiences? I just want to dimensionalize that comment.

Yes. So Tobey, it's Luke speaking. I think the last couple of years have been unique from pricing because they've deviated from the historical norm that the majority of your pricing activity happened in the first quarter. And that was really in response to the cost inflation we saw in '22 and '23 that had you pulling on the price lever more frequently throughout the year than you customarily do. So as a result, what happened was '22's and '23's price cadence was very off. Now, by the second half of '23, we started to do more approach normal. And so '24 is set up in what I'd call a more typical year. And what is a more typical year? You roughly have anywhere from 25% to 35% of your in-year pricing rolling forward from last year's pricing activities. So you think about Q2, Q3, Q4 pricing actions in 2023 roll over into 2024. That accounts for roughly 25% to 35% of this year's price. Q1 activities are roughly sort of 50% to 55% of your overall pricing activity for the year. And then that readily steps down from Q2, Q3, to Q4. Q2 is like 10%, Q3 is like 5% and Q4 is de minimis. And so I'd say in the last couple of years that have been atypical, this year is returning to a more typical cadence. And I think 2025 should be very typical, but again, it's one of the very attractive attributes of our business that allows us this early in the year to already have the confidence in the contribution from that aspect of our top line revenue growth.

In Environmental Services, I'm curious about the outlook for growth over the balance of the year. You talked about 10% on an adjusted basis. Is that a good trend line? And are there any other adjustments that you could remind us? Or if you need to call anything out?

No. So the adjustments really, if you recall in the Q1 presentation, I mean it was a perfect storm of opportunity in Q1 of last year and everything just came together and the business exceeded top line even our internal by about $40 million. So we normalize for that. If you think about the guide for this year, ES growth is supposed to be sort of mid-single digits organically. The Q1 and Q2 normalized growth is inclusive of M&A. But really, if you think about ex M&A for the year, we're anticipating this mid-single-digit top line growth. This is really a price-led growth strategy that's probably offsetting some shedding of lower quality volume. I think that will pick up in Q2 and Q3. And for the year as a whole, we're feeling good at that mid-single-digit number. But what's exciting us the most is the effectiveness of our top line growth strategy as measured by the sort of margin expansion. And if we look at the Q1 result despite some of the headwinds to see the margin coming in 70 basis points better than planned, that, I think, is a testament to the effectiveness of this chasing quality over quantity on the top line. And that's going to be something we sort of continue to do. I mean our business, unlike some of our peers, one of the benefits of our ES business, sort of 80% plus of it is recurring maintenance sort of type nature. And there is a small component that is more event-driven, but it's the quality of that sort of underlying recurring business that allows us to sort of drive that margin expansion. So I think for the year, that mid-single-digit holds, and we're encouraged by the margin expansion that we've seen in Q1.

Great. Last one for me. You mentioned negative weather impact beginning in the quarter; clearly, it was very cold in lots of places and then a little bit unseasonably warm. And if you net that out, what sort of impact did weather have on the quarter?

I mean it's hard to say to just measure that just the bad guys; I think on your sort of volume and solid waste, it's probably pretty close to offset by virtue of the pull-forward of the warmer weather, and you think about it in Ontario, Quebec and Michigan; solid waste benefited. I mean there is really the ES business that dealt it on both sides because the warm weather in a lot of our Michigan and other areas where they introduced half-load season earlier, the nature of that business is large full-size tankers just won't run in that sort of road conditions. So I think you probably saw 100 basis points plus of margin impact. I think I said that in the prepared remarks from the weather on sort of ES. Solid, I think it's probably a wash. We had anticipated with the January to be negative 4.5%, and we ended up at that negative 3% number, which I think you largely sort of offset by the benefit of the warmer weather in the end of the quarter.

Our next question comes from Chris Murray from ATB Capital Markets.

Yes, thanks. Luke, it's interesting to look at the chart. One thing you mentioned but didn't elaborate on was the surcharge pricing and how it's being integrated into the system. You also talked about some improvements, like possibly installing tablets in the trucks to help capture better pricing opportunities. Can you discuss what structural changes are still needed to align your pricing with what you believe your peers have been doing over the years?

Yes, it's Patrick here. Structurally, if we examine the margin independently of the two lines of business, the Environmental Services segment is performing approximately 300 to 400 basis points better than the rest of the sector after accounting for SG&A allocation. We still have significant work ahead, particularly with potential fuel surcharges and environmental charges that we believe can be implemented to enhance that business further into the high 20s on a like-for-like basis. Currently, our solid waste business is also operating in the high 20s after SG&A allocation. The margin expansion we’ve seen is a result of implementing repricing strategies and taking on municipal hauling contracts, along with the introduction of fuel and environmental surcharges, all contributing to our growth over the last couple of years. The integration of tablets in our trucks is also crucial, as it will help us capture additional charges that we might be missing. We expect that the rollout of 3,500 tablets will have a significant impact. When we combine all these factors, including EPR and RNG, which we have very little of currently, we believe we will move closer to industry-leading margins in solid waste. Overall, we anticipate that over the next two to three years, all these elements will come together, and by 2026, we expect a significant turning point regarding margins and the free cash flow dynamics of the business.

We have our last question for today from James Schumm from TD Cowen.

Nice quarter. Patrick, maybe just to follow up on that last point. So by '26, do you think that your margin free cash flow profile will sort of equal your larger peers? Do you think you can fully catch up?

I think the free cash flow conversion will still continue to lag, but that's just solely from the capital structure perspective. I think from a margin perspective, you're definitely going to be there. And I think you still have a little bit of a lag just in terms of the way our RNG portfolio is structured, right? Because you're going to get EBITDA contribution from the RNG portfolio, but the first dollars out of the RNG project actually go to repay a portion of the debt. That's the way they're structured today. So you're going to have 1 year, 1.5 years basically payback on those, and then you get the ramp of the free cash flow in that. But from a margin perspective, again, if you look at EPR, you look at RNG, you look at all the self-help opportunities internally. I think headline margin numbers certainly are going to be there; free cash flow conversion, and we'll get there just might be sort of 1 year to 1.5 years behind.

Right. Right. Great. And then just on the M&A front, as you noted, you're around $500 million of M&A. So tracking ahead there for the year. How do you think about that strategically going forward for the rest of the year? Do you continue to bid on tuck-in work? Do you put more low ball bids out there? And I'm just trying to think about how you strategically handle as you get closer to your target, $600 million to $650 million. Do you put in some low bids? And if you win them and exceed your guidance, so be it because it's a great opportunity or is that $600 million to $650 million a hard cap that you're definitely not going to surpass?

The $600 million to $650 million is a firm limit that we are committed to in our capital allocation framework, which influences our leverage levels. We have good visibility on our acquisition pipeline and what we expect to close in the next few quarters. It's important to note that acquisitions typically don't come together quickly; they usually take around 6 to 8 months of negotiations, and in some cases, even longer. However, we are comfortable with our target. While some rollover may occur, we are also nearing a point where we can plan for 2025. For 2024, we are committed to our framework and leverage levels. If we do extend into 2025, we will not increase leverage as a result of new deals. Given our free cash flow generation, organic margin expansion, and growth in our core business, we believe we can pursue M&A while still reducing leverage, aiming for levels below mid-3s for 2025. We are firm on the limit we've set and will adhere to it.

We have no further questions from the line. I will now hand back to the management team for closing remarks.

Thank you, everyone. Much appreciated. We look forward to speaking to everyone after our Q2 results in July. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.