GFL Environmental Inc. Q2 FY2024 Earnings Call

Good morning everyone, and thank you for joining the GFL Second Quarter 2024 Earnings Call. My name is Breeca, and I will be your moderator today. I would now like to introduce your host, Patrick Dovigi, Founder and CEO at GFL Environmental. Thank you. You may proceed, Patrick.

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

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

Thank you, Luke. Our second quarter financial results continue to prove the highly predictable and recurring nature of our business model. These results are better than we expected and reflect the underlying quality of our asset base and the effectiveness of the value creation strategies that we have put in place over the last few years. Most importantly, these results demonstrate the drive of our employees to deliver consistent high-quality results quarter-over-quarter and to make our business better every day. I want to thank each and every one of them for their dedication to Team Green. Both solid waste pricing and volume came in better than expected for the quarter and continued to trend above our initial plan. Operating cost inflation is sequentially moderating mainly around labor rates and repair and maintenance expenses. The accretive benefit of shedding low-quality revenue and exiting noncore service offerings are also evident in our margins. Luke will walk through more of the details for the quarter that confirm the ongoing operational excellence of the business that we have built. Consistent with our previous guidance, we deployed $89 million into incremental growth investments primarily related to recycling and RNG infrastructure that we expect will generate significant ROIC for years to come. We remain on track to deploy a total of $250 million to $300 million into those investments during 2024 as previously guided. In the quarter, we also accelerated our exit from a portfolio of residential collection contracts in Michigan that no longer met our return thresholds. The sale of this book of business occurred at the end of the second quarter and will be accretive to our margins in the second half. We've seen continued success with the development of our book of business related to EPR in the Canadian markets. New contract awards in Ontario and Quebec have added to the $80 million to $100 million of incremental adjusted EBITDA we previously identified related to EPR; we now expect to generate approximately $130 million of incremental adjusted EBITDA from the contracts awarded to us to date. To reiterate what I said last quarter, the contribution from these contracts is expected to start late in 2024, slowly ramping through 2025 and achieve our expected full contribution in fiscal 2026. The contribution of this work is expected to be highly accretive to the margin profile of our Canadian solid waste segment and to our consolidated margins. We also remain optimistic about opportunities for further upside as EPR programs are rolled out in Quebec, Western Canada, and the Maritimes. On RNG, we continue to expect that two or three more facilities will come online by the end of the year, and we remain confident that we will realize the $175 million of adjusted EBITDA previously disclosed once our portfolio of landfill gas energy facilities is fully operational in the coming years. In the first half of the year, we deployed approximately $500 million into M&A, all of which was completed when we provided our first-quarter results in May. We remain absolutely committed to our cap for the 2024 growth investment of $900 million and the net leverage target that we set out late last year. While we continue to have a robust pipeline of attractive M&A opportunities in our markets, at this stage, there will likely only be small transactions in the second half, with the majority of the current pipeline to be executed in 2025 and beyond. The quality of our first-half results with the continued strength of our business model supports an increase in our guidance for the second time this year. We are increasing adjusted EBITDA to $2.24 billion to $2.25 billion and adjusted EBITDA margin to 28.4%, a 70 basis point increase over our original guidance and a 170 basis point increase over the prior year. Luke will walk through the guidance in more detail, but to be able to raise the guide two consecutive quarters and to have line of sight to 170 basis points of annual margin expansion certainly has us feeling very optimistic about the effectiveness of our value creation strategies. I will now turn it over to Luke.

Thanks, Patrick. Revenue for the quarter of $2.06 billion was 11.1% higher than the prior year, excluding the impact of the solid waste divestitures. Solid waste pricing of 6.5% and negative 1.7% volume were both ahead of plan, and the continued strength in recycled commodity prices also contributed to the year-over-year increase. Our Environmental Services segment's price-led growth strategy advanced and was further supported by increased oil volumes and used motor oil pricing. Large-scale event-driven response work around major spills and fires, the timing of which can be more variable, was lower compared to the prior year. Adjusted EBITDA margins were 28.7% for the quarter, 90 basis points ahead of the prior year and 20 basis points ahead of our guidance. Underlying solid waste margin expansion of 100 basis points reflected the positive impact of price-cost spread, higher commodity prices plus M&A that came in with accretive EBITDA margins, offset by the dilutive margin impact of the increased cost of risk as well as the absence of one-time benefits related to the prior year divestitures and insurance proceeds received in Q2 2023. Consistent with the first quarter, elevated price-cost spread, the positive margin impact of our deliberate volume strategies, RNG, and favorable commodity price contributions, as well as incremental operating leverage, are all contributing to margin expansion ahead of expectations. Environmental Services adjusted EBITDA margins were 29.6%, in line with expectations and inclusive of nearly 100 basis points of cost of risk headwind, indicative of the success of our price-led growth strategy. Adjusted free cash flow was $185 million in the quarter, $177 million greater than the prior year period and approximately $20 million better than guidance. The contributions to the outperformance came from CapEx, working capital, and other operating items, which are all expected to be timing differences that will normalize by the end of the year. Net leverage at the end of the quarter was 4.29%, ahead of expectations and consistent with the quarterly cadence on which our year-end net leverage target was based. During the quarter, we were successful in refinancing one of our 2025 bonds with a new bond maturing in 2032. After the end of the quarter, we also successfully refinanced our Term Loan B in a transaction that both reduced the borrowing spread by 50 basis points and extended its maturity to 2031. We have one additional bond that becomes callable at par in the third quarter of this year. The debt markets remain highly constructive, and we expect to opportunistically refinance this bond when a market window presents itself. After we complete that expected refinancing, over 90% of our non-revolving long-term debt will have a maturity date of 2028 and beyond. As Patrick said, the success of our first-half results sets us up to increase guidance for the second time this year. Revenue is now expected to be approximately $7.9 billion to $7.925 billion driven by solid waste pricing of 6.25% to 6.5% and solid waste volumes of negative 1.25%. Incremental revenue from in-year M&A is more than offset by the Q2 asset sale, which is now expected to reduce our original expectations for second-half revenue by just over $110 million again, seasonality. Additionally, in light of the lower volume of large event-driven work in our Environmental Services segment in the first half of the year, we have taken a more conservative view for the back half of the year, and the new guidance assumes this trend continues. If large-scale event-driven work picks up in the back half, there should be upside to the guide. The contribution from any additional M&A completed in the back half of the year will also provide upside to the guide. Adjusted EBITDA guidance increases to $2.24 billion to $2.25 billion, a $30 million increase over our original guide, a result of the described changes in revenue together with ongoing expansion of adjusted EBITDA margin, which as Patrick said, increases to 28.4%. Adjusted free cash flow increases to $810 million, a $10 million increase driven by the incremental adjusted EBITDA and partially offset by $25 million of incremental interest costs, which are now expected to be $500 million for the year. So in summary, revenue increases pro forma for the divestitures, adjusted EBITDA increases again, adjusted EBITDA margin expands an additional 70 basis points on top of the original 100 basis points guide, and adjusted free cash flow increases as well. As it relates to the third quarter, we expect consolidated revenue of approximately $2.055 billion to $2.06 billion, with a similar split between solid and Environmental Services revenues as what we saw in the second quarter. Keep in mind that the Michigan residential contract sale results in a sequential revenue step down from the second quarter. In terms of margin, we expect consolidated adjusted EBITDA margin of 30.25%, over 200 basis points higher than the prior year and the first time in our history achieving a consolidated margin of over 30%. The guide then contemplates margin stepping down in the fourth quarter as per the typical seasonal cadence of the business. Those revenue and margin expectations equate to approximately $625 million of adjusted EBITDA for the third quarter. Additionally, we expect $230 million of net capital expenditures, $165 million of cash interest, and close to a nil impact from the recovery of working capital offsetting other operating items. For our Q3 adjusted free cash flow of approximately $225 million. In terms of net leverage, we expect a reduction of approximately 15 basis points throughout the quarter to end the quarter at just above 4.1x and then a larger reduction in the fourth quarter to end the year within the previously stated range of 3.65 to 3.85. Adjusted net income is expected to be $125 million for the third quarter.

I will now pass the call back over to Patrick, who will provide some closing comments before Q&A. Before we open it up for Q&A, although we don't generally comment on market speculation, I want to address some of the headlines that you have all seen lately. We believe that the business today is significantly undervalued when you consider the quality of our assets, the capabilities and track record of our team, the near-term growth prospects, especially around EPR and RNG, and the deleveraging trajectory we're currently on. In my view, the current valuation does not make sense. With the current disconnect in valuation, we are buyers of GFL, not sellers. Based on the noncore asset sales we completed last year at mid-teens multiples and the recapitalization we completed in 2014 and 2018 as a private company at 13 to 14x EBITDA, we have demonstrated that GFL's assets are worth more than what is reflected in our current stock price. And since then, publicly traded waste multiples have continued to expand. So while selling the entire business is not on the table today, there could be merit in selling a portion of our business at valuations that are more in line with what we believe is the fair value of the business. A sale of high-quality assets, such as our Environmental Services segment, could easily attract mid-teens multiples. We have had significant inbound interest from both strategic and financial sponsors that support this valuation perspective; such a sale could serve the dual purpose of accelerating our deleveraging and, most importantly, allowing us the opportunity to buy back a significant amount of stock at an attractive valuation. To make a decision around such a significant sale would require a full auction process to ensure we are maximizing shareholder value and achieving the best use of proceeds. We are absolutely exploring all of our options and have begun to implement the steps necessary to prepare for a potential transaction. Since we went public, I believe that we have clearly demonstrated that we are a dynamic, roll-up-our-sleeves management team that can and will implement the appropriate strategies to ensure that we are maximizing long-term value creation for all of our shareholders. We have no intention of deviating from that strategy with the opportunities we now have in front of us. I will now turn the call over to your operator to open up the line for Q&A.

We have the first question from Saba Khan with RBC.

Maybe if we could just start with those closing comments, I just want to maybe give you an opportunity to share a little bit more color on maybe the type of interest you've seen, the type of investor or the type of parties that are looking at it? Do you have a lower bound on the multiple you're willing to sell, timelines? And just sort of your decision-making process? Any additional color you can share on what the market should expect over the next little while and how you're maybe arriving at that decision.

Yes, I believe we've put a lot of time and effort into building this business over the past 17 years, and it’s very important to us. It's been central to our strategy for a long time. Recently, we've noticed a substantial valuation gap, not just relatively to peers, but also regarding what private investors are willing to pay for similar assets and the returns they can generate from them. As we've embarked on this process, we began with several options, which we then refined. To achieve alignment with the Board and major shareholders, we had to go through a structured process. Due to the strong interest from both investors and strategics, we concluded that an auction is the best way to sell the business, and we have been preparing for that over the past few months. We plan to launch this process after Labor Day in September to ascertain the true value of the business. I genuinely believe that the business is worth considerably more than GFL’s current trading value. If we examine the market and recent transactions, such as Covanta, Circon, and Heritage Environmental, we can see that these companies traded at similar valuations. Running a private equity model on our business indicates a solid growth trajectory, with top-line growth in the high single digits, translating to low double-digit EBITDA growth, alongside leveraging, resulting in an expected IRR of around 15% in a base case, and potentially reaching 23% to 25% in an upside scenario. Historically, GFL has demonstrated robust returns, as evidenced by past recaps. Private equity investors would likely share this optimistic view. The level of interest we've received has exceeded my expectations, and I believe pursuing an auction is the best path to maximize value. Looking at our existing company, while GFL is trading at around 12 to 12.5 times in 2024, it’s crucial to focus on 2025 and 2026. We’ve provided guidance on RNG and EPR for those years. As the largest shareholder, I see an opportunity to sell at mid-teens valuations and buy back a significant portion of our stock, which would increase my ownership stake in the company and alleviate the pressure from some of our private equity partners. This approach would mitigate the need for continual market offerings, thus creating a favorable environment. It has taken time to engage shareholders, but the Board is in agreement with this decision, and they support the process. I believe this will minimize overhang in the market. If investors want GFL stock, they shouldn’t anticipate secondary offerings, as we plan to increase our ownership significantly. Additionally, we will reduce leverage, which will provide us with capital to invest in our core services without any restrictions, facilitating the growth of our solid waste business. Overall, I see this as a mutually beneficial strategy.

Yes. Great question. It was the one thing that may be contemplated; we should provide a deck, but we think once you hear the details, it will be straightforward enough. But at a high level, the EBITDA line starting with the previous guidance number. If I think about that, I think about exogenous factors of FX and commodities, that's giving me a little bit greater than plus 30, to the good. And then you have this Environmental Services volume, right? The large-scale event-driven stuff, the new guide assumes about $100 million less of that. So the margin on that effectively offsets the benefit you're getting from FX and commodity, right? So then we think about M&A, and right we did early in the year, we did those couple of deals. And we have the positive contribution from that offset by the Michigan portfolio sale, and the net of those two is roughly about $15 million to the good, right? So if you think about those as the broad-based external factors, it leaves you with about sort of $15 million to $20 million of just pure underlying guidance raise. And it's really coming out of, as you said, solid waste and solid waste margin as we're seeing the effectiveness of our strategies just come through even greater than anticipated.

Regarding the 2024 guidance, your updated forecast indicates a margin expansion of 170 basis points year-over-year, which seems to be the highest among your peers this year. Can you elaborate on what is driving this improvement? To what extent do you credit this to the quality of your asset base versus self-improvement initiatives? Additionally, could you provide an update on the progress of your self-help initiatives?

Yes, Stephanie, it's Luke. We're certainly impressed with the headline number of 170 as well. But I think the starting point is exactly what you said. It's the quality of the assets and the market selection in which we've gone on. We've always said that we have, I think, a best-in-class asset portfolio in the right markets, and that's what's allowing us to now sort of execute on our strategies. And so you think about the price cost spread that we talked about at the beginning of the year and the ability of that to sort of come in better than anticipated. If you think about the synergy realization of all the pieces that we've put together historically and starting to get the benefit of that, you think about the self-help levers that we're sort of pulling on. And all of these are sort of coming to fruition, and you're seeing the benefit come through in the margins. And so it's not any specific one thing. Yes, commodities give a little bit of an incremental impact and certainly our intentional shedding in those deliberate volume strategies are helping and the Michigan sale sort of accelerates that even more. But for actual quantification, you think the base guide of 100 basis points. If you recall, that was effectively all organic because the M&A was actually a net drag going into the year. So now with that, we have new M&A this year and improved commodity pricing, that's adding roughly 35 basis points of incremental. So the 70 basis point raise, half is coming from those two pieces. And then the other half is just the ongoing success of our strategies, both on the volume and just the underlying margin. And so I think it's a great testament to all of the things we've been saying for the past couple of years, as we bring these pieces together and what the opportunity is in front of us, and the most exciting part is we really think this is just getting started.

No. It will be limited.

I've observed some differences in the solid waste performance, particularly with Canadian organic growth showing a positive trend compared to U.S. growth. I'm curious if there are any factors influencing this divergence in Canada compared to the U.S. Is it related to the timing of M&A activities or are there specific developments in the Canadian market that differ from the U.S.?

Yes, Kevin, it's a great question. If you think about solid waste organic growth being price and volume, recall, our Canadian business was sort of behind the eight ball on pricing, if you will, when we really sort of embarked on price discovery, call it, sort of five, six years ago. And so I think that upside that we've always articulated as to catching up with industry norms in terms of pricing, a lot of that existed in the Canadian book, and you're seeing that sort of come through. I think additionally, we're starting to see some of the benefits of these investments we've made in the recycling EPR and other initiatives in the Canadian landscape, which are helping to support sort of overall volumes there. And then the offset is while the U.S. pricing discipline has been sort of more mature, certainly have more runway there, but it wasn't as much steep of a ramp as we saw in Canada. Some of our intentional shedding has been more focused in the U.S. market where we've done a larger quantity of M&A and therefore inherited larger volumes of books of business that no longer meet our return threshold. So I think it's a combination of those two things. Certainly, we're seeing very robust organic growth across both segments. But you're absolutely right. When you sort of pick it apart, you do see a bit of that sort of divergence. But as we go forward, we're feeling highly confident in the organic growth prospects on both price and volume in both of those segments.

No, that makes a lot of sense, and I appreciate the clarification. I'm sure there will be many questions during this call about possibly divesting ES. Maybe I will just ask one regarding the portfolio of assets within ES. When considering the potential divestment, do you envision selling all of it, none of it, or are you also considering divesting parts of it as part of your current review?

No, you would be selling the entire portfolio. The only part that might not go with it is the soil remediation piece, which we might want to keep due to its exposure to the GTA and GIP. Overall, it's a small part of environmental services, but primarily it would be sold as a whole, both in Canada and the U.S. As you know, nearly 80% of the revenue from Environmental Services is generated in Canada, while 20% comes from the U.S. So yes.

I just wanted to come back to the 2024 margin guidance. Look, the pace of increase really steps up in the second half compared to the first half. I know the sale of the operation in Michigan is part of it. But can you help us better understand that sequential improvement?

Yes, Devin, it's Luke speaking. And again, I think it sort of goes back to my prior comments to Stephanie of the overarching margin, and it's sort of all of these things coming together, right? So you continue to have price-cost spread similar to what we've seen all throughout the year. The cost of risk headwind, that's been a big drag all year. It's moderating as you get into the second half, and the benefits of intentional shedding and other deliberate volume strategies are improving as we sort of go forward. And you're going to have the M&A contribution as well. So it's not any sort of one thing. I mean, the guide does contemplate solid waste margins expanding. I think it's roughly 200 basis points over the prior year in terms of Q3. And if you break that apart, the Michigan sale would give you sort of 80 to 90 basis points of that, and commodities give you sort of 70 basis points of that. Cost of risk is going to be, again, not as impactful as the first half, but call that another 30 to 40 basis point headwind against you. So it's still sort of when you take the puts and takes speaking to this underlying 100 basis points of solid waste margin expansion, which we've been consistently seeing. And again, I think, is a function of all of those pieces we've said starting with the market selection in the assets, getting the synergy realization as these businesses are really sort of starting to gel, improved asset utilization, and all of the like. And so I think it's all of those pieces. And obviously, culminating in a 30% consolidated margin for Q3 through the first time in our history of printing that is something that we're pretty excited about.

I wanted to ask; your margins in the second quarter were up, call it, 1.5 points ahead of normal seasonality. Really strong performance, and the guidance for the third quarter is for another outsized margin move of 1 point versus normal seasonality. Can you just talk about what level of sequential price increase are you folks implementing to deliver that level of outperformance? And what are the sequential trends in unit costs that you're seeing that drove the beat in 2Q and again, outperformance in Q3 guide?

Yes, thanks for the question, Jerry. This is a year that's returning back to a sort of normal cadence of pricing action. What I mean by that is the vast majority of pricing actually occurred already. And so as a result, we're seeing a normal course step down. We started the year sort of high at 6.5%, and you're going to be at a high 5s number in Q3 and then stepping down a little bit further in sort of Q4. So why I give that color and cadence is because that margin is not being achieved by us going out and implementing a whole host of incremental price increases. It's simply all of the things that we have said coming together. So yes, you're getting price-cost spread because although Q3 will be high 5s, you're going to be against moderating cost inflation, still probably getting somewhere of 100 to 150 basis points of spread on top of that. But that moderating cost inflation is also accelerating. I mean if you look at labor rates last Q2, labor rates year-over-year would have been up sort of a mid- to high single-digit number versus now, it's sort of sub-5%. And that's sort of continuing to trend in the right direction. I mean R&M is obviously another sort of key cost that's been dry. I mean if you look at R&M as a percentage of revenue, I think we were sort of at 10% plus in Q1, albeit in the lower seasonally revenue, but then that stepped down to a high 9s number in Q2. It's going to step down to sort of a low to mid-9s as a percentage of revenue in Q3. And so you're going to be getting the sort of torque coming out of that as well. I mean the commodity prices and the ramp in the first half of the year is certainly helping the Q3 margins as is the incremental impact from the exiting the Michigan portfolio, which, as I said, about sort of 80, 90 basis points going to help you in the quarter. But it's not any of these one things, Jerry. It's all of the things coming together. And as I said, kind of yield the 30% margin for the first time in our history. And we think there's a lot more room to run as we go forward to 2025 and 2026 and beyond as you really start gaining the benefit of EPR, RNG, and all those margin-accretive pieces that we've been talking about for the last couple of years.

Super appreciate the color. And on the RNG point, Luke, can you folks just weigh in on your updated views on the attractiveness of voluntary markets versus D3 RIN markets? Do you view the Chevron ruling as any uncertainty for the D3 RIN market? Can you just weigh in with your updated thoughts on spot versus potentially locking in those volumes long-term?

Yes, nothing has changed, and the knowledgeable individuals are focused on the RINs. They don't believe the Chevron decision will have any impact. From our viewpoint, the market remains very stable, allowing us to advance in the transportation sector given the RIN pricing. The voluntary market is gradually increasing. As more volume becomes available, there will be opportunities to channel some of that into the voluntary market. Our long-term strategy hasn’t altered; we are focused on maintaining balance. We still aim to allocate 60% to the voluntary market and 40% to the spot market. Yes. When considering the business, we've made several important moves. Earlier this year, the Canadian government modified the capital gains rate, allowing us to reorganize our existing operations to maintain the previous rate in that sector. We've established the Environmental Services business as a separate entity. Interestingly, back in 2010, we received a $100 million offer for this segment, which grew to an $800 million offer in 2018. The current valuations indicate substantial potential. The management team has excelled, achieving margins over 29% in Q2, showcasing the strength and growth potential of this business. However, it will incur significant taxation in the U.S., specifically on the 20% portion. Thankfully, we have considerable losses we can apply in Canada. While the exact tax impact would depend on the purchase price, you can estimate it to be in the range of $500 million to $600 million.

Nice quarter. Most of my questions have been answered. Maybe just one for me. I know it's way too early for 2025 guidance, but just at a high level with price cost spread opportunity plus some RNG and EPR contributions. Can we see another 100 basis points plus improvement to EBITDA margins next year? And then just thinking longer term about the volumes, what they could do next year, could those be flat to marginally up next year? Or do you still have a lot of shedding ahead of you?

James, it's Luke speaking. I mean, I think where we sit today, I'd say it's a definitive yes that we're expecting next year to be another 100-plus. We'll obviously unveil the full guidance as we go forward. But I think you're absolutely thinking about that correct. And if you do the math, you actually don't need to believe a lot to get to a number like that. In terms of the delivery volume strategy, look, as we said previously, early this year, the portfolio of residential contracts in Michigan was like the last big chunk. I mean there's always going to be pieces. And as you do M&A, there's stuff around the edges. But I think the lion's share of the strategy that was actually moving volume and overshadowing actually underlying positive volume is largely sort of behind us. So I think we’ll hold until the end of the year or early next year before we give a final view on volumes for 2025, but certainly think we're not going to be printing in the minus 3% that we did in the first half of this year, and it's certainly something sort of closer to flat with the path to being up.

First one on just on the Environmental Services timeline, I guess, you talked about after Labor Day kind of starting the auction process. I guess what's your thoughts on and maybe appetite on how long that process runs? I mean, does that go through the end of 2024, maybe into '25? Or is there an expectation to try to do that sooner rather than later?

From our perspective, we want to complete this as quickly as possible. It will depend on how swiftly we can move. For those familiar with us, it's generally understood that we don’t waste time. The advantage here is that this isn’t a large auction; instead, we have about eight to ten experienced buyers who are familiar with this market. This means there isn't a significant learning curve involved regarding assets and markets. I believe the process will progress rapidly, though uncertainties remain. The crucial aspect for us now is finalizing the cargo financials, especially for potential financial sponsor buyers. As a public company, we have reported our segment independently, but securing financing requires us to finalize cargo financials, which is currently underway. Other than that, my objective is to complete this by the time we report Q4 at the latest, but ideally, we hope to establish a clear path by the end of 2024.

Okay. And then maybe on the M&A spend for the back half and then maybe thinking about the pipeline going into 2025. Obviously, it's moderating in the back half of '24 to be at the leverage target. But when you think about the opportunities still in front of you in your pipeline, how should we think about 2025 M&A? And then maybe if the sale of Environmental Services happens, should that be much larger? Just trying to think about where that could go.

We are focused on maintaining our leverage in the mid-3s, aiming for that target by 2025. This will influence our M&A spending. For this year, I anticipate we could spend between $600 million and $650 million on M&A, considering our recent EPR successes and the need to balance this with our organic growth capital expenditures. Looking ahead to next year, I believe we can increase our spending to somewhere between $850 million and $1 billion. If we proceed with the sale of the Environmental Services business, it would provide us with significant flexibility in our financial decisions, including potentially increasing our M&A spending even further alongside our share buyback strategy.

And Brian, it's Luke speaking. And referenced the $850 million to $1 billion that you could potentially be looking at in a non-Environmental Services divestiture sort of scenario. I just want everyone to recall, with this size, roughly every $500 million you deploy in M&A has an impact of leverage of about 10 basis points around numbers. So if you think about the organic deleveraging model, if you're ending this year in that sort of 3.65 to 3.85 range, organically, you would delever to something well below 3.5. And even at spending that $1 billion of a level of M&A still very sort of comfortably arriving at the end of 2025 in that sort of mid-3s range.

Okay, that's helpful. If I could ask one final question, regarding the shedding of volumes, are you still seeing upgrades outpacing downgrades in the service intervals of the commercial business?

Yes, it's clearly specific to the market. However, we generally continue to observe growth outpacing declines, indicating that markets are performing well. We haven't encountered anything particularly significant. Special waste volumes are affected by the current interest rates, but aside from that, things have been quite positive.

I'd like to start by following up on that last question. If you're looking to deploy capital from the sale of the Environmental Services business, what's your view on the optimal level of debt for the remaining companies? Is it still the same? Is it mid-3s? Or if you have the option, could that go lower?

When we analyzed our models regarding the sale, I would say that we should move the target leverage to 3. This adjustment would help ensure we secure an investment grade rating. If we are that close, it makes sense to aim for 3 to guarantee that rating. There’s no point in being uncertain about that number. I believe the target leverage will fluctuate between 2.75 and 3.25 for a while, but ultimately, it will settle around 3 after the transaction.

Okay. Great. And then looking at M&A potential with any remaining proceeds, how do you see the relative price of assets in your pipeline today versus the price of your stock if you're looking at buybacks? And would the pipeline have any platform acquisition opportunities? Or do you think there's still plenty to do in tuck-ins?

There are a couple of points to consider. From my perspective, acquiring an asset of this quality at this level is significant. Again, referring back to Luke's earlier comments about '25 and '26, the business is currently trading at around 12 to 12.5 times earnings, and in 12 to 14 months, it will be based on the 2026 projections. With EPR and RNG, this business may trade around 10 times the 2026 forecast, depending on the specific model used. I believe the best way to utilize capital at this level is to buy back our stock. That said, this is just one option for using capital. There are considerable M&A opportunities in our existing markets. We have a substantial presence with 10 provinces in Canada and 24 to 25 states in the U.S., including high-growth markets with plenty of potential. Therefore, we feel confident in our ability to deploy that capital effectively. From a valuation standpoint, it’s somewhat variable; some assets are priced higher than others. Overall, valuations may have decreased slightly due to rising interest rates. Nevertheless, competition exists for medium-sized assets, particularly from private equity, and with leveraged finance markets recovering—despite higher rates—it's still possible to achieve attractive returns if you believe in the growth potential and stability of the business. So, I think our strategy regarding tuck-in acquisitions remains solid, and there are still many opportunities for M&A within our current footprint.

How has employee attrition training and safety expense trended year-to-date? Is there room for improvement from here? And is there a difference in trends if you look at the business geographically between Canada and the U.S.?

So I think there's a difference between secondary and urban markets. At secondary markets, again, employee turnover, obviously, significantly lower than the urban market, which has been good. I think if you look at trailing 12 months as a business as a whole. Like I said, last year, we were sort of trending sort of mid-20s. Today, we're just above 20. And we think that, again, goes back to sort of where we were pre-COVID sort of in the high teens. So mid- to high teens is what the goal is. And we are definitely on a trailing 12-month basis, trending down. I mean turnover is down over sort of 4%, 4.5% over the last 12 months. So we are definitely heading in the right direction. And the opportunity is still great to continue moving again down sort of mid- to high teens. Yes. If you examine the situation, the model addresses a solid waste need rather than the opposite. There were opportunities for cross-selling. Currently, the structure includes a solid waste salesperson and a liquid waste environmental services salesperson. We effectively employ a buddy system in each region, where salespeople from both sides collaborate to cross-sell between the two services. This arrangement is beneficial for both companies. In discussions with potential buyers, it seems likely that this structure will remain unchanged, as it serves both parties well. Customers currently receive separate invoices for each service, so there’s no need to separate them. From our standpoint, this approach will continue to be advantageous for both sides.

Yes. Maybe turning around to call it the more boring blocking and tackling stuff. We've talked in previous calls about some of the margin enhancements and improvements. And you touched a little bit on labor and turnover management. But just wondering how you're making progress on core waste margins. And some of the initiatives, I think we talked a little bit about rolling out things like tablets and the trucks and some of the other pricing initiatives. Just wondering if there's any color on kind of the walk into higher margins as we go through the next few quarters?

Yes, it's a great question, something that as we look at the margin profile of what we're being able to deliver and the expansion year-over-year is very evident that the strategies we've been talking to are being highly successful. And again, Chris, I think it's all of the above coming through in the beginning stages of what those ultimate run rates could be. I mean, you mentioned the tablets and the trucks. I mean, that is a new initiative for this year that's in the nascent stages. And yes, there's a little bit of modest contribution, but nothing compared to one that's fully ramped with the implementation completed towards end of Q4 into Q1 of next year. And so that's going to be another lever that's going to be sort of additive. We talk about the RNG. And this year, we have a very modest amount of it. But as the full portfolio comes online, you think about the margin-accretive nature of that is EPR. You heard Patrick talking about, we now have roughly $130 million of EPR contracts in hand. You're going to have, I think we said about $5 million to $10 million of contribution in this year. But then that ramps up to '25 and '26 and call, that's all accretive margins, which unto itself is going to take our Canadian solid waste margin up to low 30s and be accretive to both the consolidated solid margins and the consolidated business as a whole, continuing with the benefits and the rollover now that's exiting in the Michigan portfolio contracts. There'll be a rollover effect into next year. And you have really all of these pieces coming together. I mean, as we start talking about the next layer down of CNG conversion, improved asset utilization from routing technologies. This is the sort of next leg up that we anticipate being able to see. And Chris, what I would say is we're actively engaged over on this side, looking and figuring out how to prioritize all of these value-added levers in front of us. And we hope to do as an Investor Day later this year, teeing this all up and articulating what the next couple of years could look like. But as you heard it from Patrick, I mean there's a lot of focus on 2024, but from our perspective, I think we're sort of missing the forest for the trees when you think about what this looks like in sort of 2025 and beyond. And so we do look forward to our Investor Day at the end of the year sort of to piece out and quantify what all those buckets could be.

Yes. So we were sitting at around 70% of what we wanted. If you go back sort of one and a half years, two years ago, I think that's trended sort of like 85% to 90%. And I think we could be 100% of where we want to be, absent, again, some of these big new EPR contracts that we've had to reallocate units coming off the floor to these because of the contract start date of those. But I think, yes, the log jam has definitely subsided, and we're moving to a point now where we can get exactly what we want. Yes, it's not really structured in a siloed way, which has kept things quite clean, and that helps. If you want to discuss opportunities, it would be beneficial to get a clear picture of what you're observing today. I want to emphasize that we don't necessarily need to allocate capital, but you're correct that it could lead to some efficiencies over time. However, the extent of capital allocation could significantly drive value in the coming years, depending on how we integrate things as we move forward. Thank you, everyone, for joining us this morning, and we look forward to speaking to you after Q3. Thank you very much.

Thank you all for joining the GFL Second Quarter 2024 Earnings Call. Please enjoy the rest of your day, and you may now disconnect from the call.