GFL Environmental Inc. Q3 FY2024 Earnings Call

Good morning, and thank you all for attending the GFL Third Quarter 2024 Earnings Call. My name is Breeca, and I will be your moderator for today. I would now like to pass the conference over to 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 third quarter and providing updates on other items. I'm joined this morning by Luke Pelosi, our CFO, who will take us through the forward-looking disclaimer before we get into details.

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

Thank you, Luke. The momentum from our exceptional first half of the year continued through the third quarter, resulting in nearly 20% adjusted EBITDA growth and another quarter of industry-leading margin expansion. The strength of our ongoing operational and financial performance this year once again demonstrates the dedication of our employees, the quality of our asset base, and the effectiveness of our overall value creation strategies. The impact of the commitment we see every day from our employees cannot be understated. Our employees' handling of the two hurricanes that hit within a two-week period is just one example. Given our extensive operations in the U.S. Southeast, the hurricanes had the potential to be severely disruptive to our operations. The extensive preparation and exceptional execution of our teams ensured that we were able to keep everyone safe while continuing to provide essential services to our customers. Once again, I am humbled by the more than 20,000 men and women on Team Green. Consistent with our guidance, the third quarter saw the highest adjusted EBITDA margin in GFL's history at 31.1%, a 300 basis point margin expansion over the prior year. This margin expansion is driven by all the levers we have talked about in the prior quarters. Our disciplined approach to pricing, generating a higher price/cost spread against moderating cost inflation, the accretive margin benefits of shedding low-quality revenue, and the exiting of non-core service offerings, improved productivity, onboarding efficiency, and low cost of risk associated with improving employee turnover, in an M&A strategy, synergy realization as the businesses we have acquired continue to mature within our existing footprint. Luke will walk through more of the specifics on the margin bridge, but we are extremely pleased with how things are working. This quarter's results once again demonstrate the highly predictable and recurring nature of our business model and further enforce our conviction in our near-term roadmap that we believe will continue to drive industry-leading financial performance. In the quarter, we continued to execute on our capital allocation strategy exactly in line with the framework we provided at the end of last year. We are on track to deploy approximately $900 million on both M&A and incremental growth investments this year, as previously announced. During the third quarter, we deployed $96 million into these incremental growth investments, primarily related to recycling and RNG infrastructure. We have commissioned two new MRFs so far this year and expect two more to come online in early 2025. Some of our EPR-related collection contracts started up in the third quarter, and we will see more start-ups between now and 2026. The contribution from EPR will be a good tailwind over the next 24 months, and we remain optimistic about incremental contract wins above and beyond the $130 million of EBITDA we have already talked about. As anticipated, two new RNG plants were commissioned in Q3, and we expect one to come online before year-end. All three of these projects will drive incremental contribution in 2025 and beyond. We also deployed $47 million into three tuck-in acquisitions and continue to have a robust pipeline of attractive M&A opportunities in our markets. We ended the quarter with net leverage of 4.05, the lowest in GFL's history, demonstrating our absolute commitment to the capital allocation and deleveraging targets that we previously shared. As we previewed in August, we officially launched a robust process to evaluate the sale of our Environmental Services segment in September. As anticipated, the best-in-class quality of this asset, coupled with its near-term growth opportunities, has attracted a significant number of highly credible potential buyers from diverse backgrounds. Based on the first round bids we received last week, we are highly confident that this action at a valuation equal to or greater than we have previously suggested can be signed and announced before we report our full year results in February. We have conviction that the transaction should meet a minimum of $6 billion in after-tax proceeds. We expect to repay at least $3.5 billion of debt with the remainder available to buy back stock and for general corporate purposes. Before I hand the call over to Luke, I want to take a minute to talk about the security incident that you may have read about in recent media reports in the context of where GFL is today. I started this business in 2007 with one solid waste transfer station and four old rollout trucks and $250,000 in start-up capital. This December will be GFL's 17th anniversary as a company. And today, we are the fourth largest diversified environmental services company in North America. We have operations across 10 Canadian provinces in 25 U.S. states. And this year, we are approaching $8 billion in annual revenue. We have millions of customers who trust us to provide them with their essential environmental services including the over five million households that we service across Canada and the United States weekly. We have achieved this level of success by providing high-quality service at a fair price and through the more than 250 acquisitions we have completed to date. With many of those owner-operators staying on with us post-acquisition to continue to contribute to the integration of their businesses into GFL. We have a reputation in the industry of doing what we say we're going to do, and we are very proud of that reputation. Investors in GFL now include the highest quality institutions from private equity funds to pension funds, sovereign wealth funds, and leading financial institutions around the world. Many of our investors have been with GFL since our early days and have done extensive due diligence on GFL, our leadership team, and the industry. All of our long-term investors have earned significant returns on their capital that they've invested with us. They have and continue to put their confidence in us to be the stewards of their capital and create long-term value for them. We do not take that trust lightly. Regarding the recent events, we are not going to comment on any specifics because the police are investigating these incidents and the investigations are ongoing. While the media likes to speculate, we would encourage everyone to allow the authorities to do their work. We are cooperating in the investigations and trust that the authorities will bring them to a successful resolution, hopefully in the near term. We are also working with third-party security consultants to review our security measures and any additional precautions we should be taking. While the authorities continue to do their work, we also remain focused on the safety and well-being of our employees who, as I said before, are core to everything we do. The results we've achieved this quarter and throughout our history are a reflection of all of the hard work and dedication of GFL's more than 20,000 employees. We have hundreds of facilities across our platform, and these incidents are not going to derail or distract us from continuing to drive the business forward. I will now turn the call over to Luke for additional color on the quarter, and I will then have some closing remarks before we open it up for Q&A.

Thanks, Patrick. Consolidated revenue for the quarter of $2.015 billion was right in line with our guidance after giving effect to FX and commodity prices. The third quarter saw 11.3% revenue growth in solid waste when excluding the impact of divestiture driven by stronger-than-expected solid waste pricing of 6% and volume of minus 0.8%, a 90 basis point sequential improvement over Q2 despite initial storm-related impacts at the end of the quarter. We expect volumes to turn positive in the fourth quarter and as we anniversary most of the impacts of our targeted volume shedding initiatives. Decreases in commodity and energy prices reduced third-quarter revenues derived from the sale of commodities as well as fuel surcharges compared to our guidance, a trend we expect to continue in the fourth quarter. Environmental services revenue was up 3% compared to the prior year, inclusive of the impact of lower UMO pricing and a tough comp arising from a large-scale event-driven revenue realized in the prior year period. Excluding the impact of these two items, segment revenue was up 9% versus the prior year, demonstrating the strength of our price-led growth strategy to offset this lower level of event-driven activity that we continue to see in certain markets. Adjusted EBITDA margins were 31.1% for the quarter, 300 basis points over the prior year and the first time in our history that we've reported adjusted EBITDA margins of over 30%. For context, adjusted EBITDA margins in Q3 2019, the first publicly reported third-quarter results we have, were 25.1%, this quarter representing 600 basis points of margin expansion over those past five years. Solid waste adjusted EBITDA margins were up 340 basis points, inclusive of tailwinds from commodity and fuel prices, the impact of recent divestitures and the impact of the results of our RNG joint ventures flowing through our P&L, which overcame headwinds from M&A that came in at decreative EBITDA margins, a dilutive margin impact of the increased cost of risk as well as the impact of reclassification of certain costs that had been recognized in the corporate segment in the prior period. Environmental Services adjusted EBITDA margins were 32.2%, 110 basis points ahead of the prior year despite headwinds from used motor oil pricing and increased cost of risk. Adjusted free cash flow and adjusted net income were $225 million and $126 million, respectively, both exactly in line with expectations and another data point illustrating the highly predictable nature of our financial results. Net leverage at the end of the quarter was 4.05, ahead of expectations, largely on account of translational FX, but when looking through the FX impact, this result is consistent with the quarterly cadence on which our year-end net leverage target is based. As you all know, it is difficult to predict where FX rates will be in the future, but on a constant currency basis, we continue to track towards the net leverage range outlined in our 2024 capital allocation framework. After the quarter end, we were successful in issuing our first industrial revenue bond, a tax-efficient financing instrument commonly used by all of our public company peers, the USD 210 million bond was issued with a 4.375% coupon rate, approximately 100 basis points lower than the current weighted average effective interest rate on our other long-term debt. Our initial foray into the tax-exempt bond market is another example of the incremental financing opportunities we expect to become available with our increasing credit quality profile. We have one additional secured bond in our current debt stack that becomes callable at par in the third quarter of next year. The debt markets remain highly constructive, and we expect to address these notes in advance of the maturity through cash on hand, proceeds from divestitures, or opportunistically accessing the debt markets when a window presents itself. During the quarter, we also converted approximately $14.5 million of our Series A perpetual convertible preferred shares into 16 million common shares. The conversion had no impact on our total diluted shares outstanding. Given our robust Q3 results and our expectations for the fourth quarter, we now expect revenue of approximately $7.82 billion to $7.5 billion for the year. All other aspects of our previously provided guidance remain unchanged. As a result, our expectation for fiscal 2024 adjusted EBITDA margin increases for the third time this year to approximately 28.6%, representing an industry-leading 200 basis point margin expansion over the prior year. Specifically, as it relates to the fourth quarter, we expect consolidated revenue of approximately $1.94 billion to $1.97 billion at just over 29% adjusted EBITDA margin representing another quarter of 300 basis points of year-over-year margin expansion. Q4 adjusted free cash flow and adjusted net income are expected to be approximately $350 million and $75 million to $80 million, respectively. Due to the significant impact, the potential sale of our Environmental Services segment would have on our financial outlook, we're going to wait until February to provide our fulsome 2025 framework and guidance. In addition, we plan to have an Investor Day in early 2024, details of which will be announced soon. However, where we sit today, we have a strong line of sight to a mid-single-digit top-line organic growth, double-digit adjusted EBITDA growth and another year of more than a 100 basis point margin expansion. Layering in the potential contribution from completing even a portion of our current M&A pipeline, we could see 2025 adjusted EBITDA growth in the low to mid-teens.

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

We have the first question on the line from Patrick Brown with Raymond James.

Patrick, I appreciate all the details on the ES sale, but I want to clarify something. Is the $6 billion amount net of any tax leakage? I don't want to get into a long discussion about the taxes paid or the structure of the deal. However, regardless of those taxes, the implied multiple on this deal seems very appealing. It aligns well with the multiples you discussed last quarter. Is that correct?

Yes, that's correct. What we meant to illustrate is that there has been a lot of media attention on the value of this business. We want to emphasize that we are very confident we will deliver at least $6 billion in cash proceeds. As enterprise values rise, so do the tax implications. From our perspective, we are seeking the most efficient tax structure since increased enterprise value leads to increased taxes. Nevertheless, you can be assured that there will be a minimum of $6 billion in cash proceeds. Out of that, at least $3.5 billion will be used to repay debt, while the remainder will go toward general corporate purposes and share buybacks. This clearly shows our strong confidence in these figures.

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

Yes. Tyler, I believe you're approaching the ramp correctly. If we consider EPR this year, as we mentioned, it will have a minimal impact, around $5 million to $10 million of EBITDA in your results. That figure is expected to increase to about $40 million to $50 million next year, giving us an additional $35 million to $45 million from EPR. For RNG this year, the Arbor Hills facility is projected to contribute approximately $25 million to $30 million of EBITDA, and that amount should roughly double next year. RIN pricing may influence the RNG side, and we are being quite conservative with our RIN expectations, keeping them significantly below current levels. We are effectively doubling the MMBtus with the new plants that have come online. The new plants expected to start later in '25 and into '26 will have a negligible impact here. Thus, I would estimate the EPR incrementally contributing around $35 million to $45 million and RNG in the range of $25 million to $30 million.

Yes, to be clear, based on the deals completed to date, there is currently no M&A impact expected in 2025.

No. What I can say about M&A for 2025 is that I am very confident we will achieve something in a relatively short timeframe. We have been developing our pipeline, and I believe next year will provide us with a strong foundation for M&A activities in both Canada and the U.S. Referring back to Luke's earlier remarks, we are setting up well for 2025 and considering the potential benefits from additional M&A. While we will continue to maintain our leverage targets and focus on an investment-grade credit rating, we are well-positioned with the proceeds from ES to invest more in our solid waste businesses, which should be highly beneficial from both a free cash flow and operational standpoint.

And Tyler, I mean, to Patrick's point, like M&A is really this kicker to what's an extremely attractive organic setup because as I said in the prepared remarks, like mid-single-digit top line, like think of it that, and we'll come out with the specifics. But I think there's a path where you have another 100 basis points of spread of price over year sort of cost inflation. So if you think at the margin level, you've got a mid-single-digit on the top line, 100 basis points of spread, that should give you 60, 70 basis points of margin coming out of the spread. You got R&G and EPR that we just talked to that's additive to that. The Michigan divestitures anniversary next year, you pick up another sort of 20 basis points there. So you don't need to believe a lot to see 100 basis points sort of margin expansion. And so this natural organically, EBITDA would be up 8%. The RNG and EPR contribution is another 2. That puts you at a 10% EBITDA increase before considering M&A. And we're feeling like really confident in those numbers. So we think it is a very attractive setup as we're getting into next year.

Great. Maybe just continuing on the margin discussion. And it sounds like you'll probably provide a bit of a medium-term outlook at our Investor Day. But if you put the ES business aside, can you maybe just give us maybe just rehash kind of the margin journey? Obviously, a peak margin this quarter, how we should think about the margins over the next 2, 3, 4 years and maybe the bigger bucket drivers over the medium term, specifically for the solid waste business.

Yes, it seems like you're trying to take some attention away from Investor Day, but at a high level, I believe you're looking at the basic algorithm of price and cost spread. This year, and broadly across the industry, there is a strong belief going into '25 and beyond that this trend is likely to continue. While we can discuss what the new normal might be, I expect to see ongoing base margin expansion resulting from this dynamic. We are still in the early stages of our price discovery, and I think there's additional potential for growth beyond what our industry peers are experiencing. Furthermore, there's the exploration of ancillary pricing charges, which is relatively new for us and less developed in our applications, but we anticipate that it will create an additional advantage as we align with industry standards. The price and cost spread will contribute positively to our annual margin growth. Regarding EPR and R&D, while Tyler inquired about the amounts for '25, if we consider them thoroughly, over the next few years, we expect to see at least $130 million from EPR at favorable margins. Additionally, our RNG is projected to grow from this year's $25 million to $30 million to over $175 million, which will also significantly enhance margins. The benefits of these developments should materialize over the next 2 to 3 years. Moreover, Patrick's comments highlighted advancements within our core business, especially in optimizing procurement and asset usage while realizing synergies from recent acquisitions. When we combine all these factors in our solid waste business, there's a clear trajectory toward industry-leading market growth, positioning us close to top-tier solid waste margins. Overall, we are optimistic about the outlook, and we will share more detailed insights at Investor Day.

Great. Appreciate that. And then I think the commentary around $3.5 billion at least of debt paydown. Just at high level numbers gets you to a very low 3x leverage. Is that sort of the leverage ratio, I guess, would that be a happy place to kind of continue to do M&A and maintain leverage? Is that how we should sort of read into that low 3x leverage pro forma the sale? Just any thoughts you could share there.

Yes. Obviously, the cash flow is going to continue to ramp. And obviously, with the organic growth, we're going to continue to organically grow the business, which is again to continue pushing leverage down. I think from a rating agency perspective, you want to maintain leverage between sort of 3% and 3.5% to get to that investment-grade rate credit rating. And again, we're moving all the way down there, so we're going to stay down there. So I think depending on sort of what M&A and timing of M&A could step up a little bit for a quarter 2, sure, but we're going to maintain leverage between the 3% and 3.5%.

Could I ask about EPR? It appears that as you've progressed on this journey, you've indicated that there's greater upside compared to the initial opportunities you identified. Patrick, in your prepared remarks, you mentioned potential upside to $130 million. Based on the investments you are making, is there a way to assess the earnings potential based on the capacity you will be introducing to the market? Also, if you expect to exceed $130 million, will that necessitate additional investment in more facilities to accommodate those new contracts?

Yes. As we mentioned, Ontario is nearly complete, and that's the figure Luke is referring to, along with an additional opportunity in Quebec. What remains on the horizon includes the Maritimes, Alberta, Saskatchewan, and to some extent, Manitoba. Those are the next significant opportunities. In an ideal scenario, you could approach $200 million in EBITDA. This is the optimistic outlook. Could we reach that optimistic scenario? Probably yes. Are we planning for it? No, but it will certainly exceed $130 million and may be just under $200 million. We are very confident about our asset positioning and our presence in those markets. From an asset positioning standpoint, we are in excellent shape across many of those markets. Our relationship with circular materials and the way we design this program puts us in a strong position to capture our fair share. As these bids progress, we are definitely leading the charge and continuing to move forward on all fronts.

And Kevin, as Patrick mentioned, regarding our asset positioning, in some markets we can utilize an existing facility to generate additional volume and profitability, so we can consider that for capital expenditures. In other markets, we might need to construct a new facility. However, the return profile of these investments aligns with the type of business we operate in. We prefer to allocate capital in areas where we have long-term visibility on consistent cash flows. The new contract supports that approach. Ultimately, it will involve a blend of utilizing existing facilities and constructing new ones. Both options fit within our overall framework for evaluating margin return on invested capital for all our capital decisions.

Nice margin expansion in the quarter. Just wondering, have you started to realize some benefit from the investment in camera technology for non-conforming pickup conditions or recycling contamination? And then could you just remind us how meaningful that opportunity could be for you over time?

Devin, it's Luke speaking. So the tablet initiative is still in flight, piloting getting the things in the trucks is one thing, but then changing the driver behavior and making sure we have the process in place to capture as another. So we're seeing, I'd say, the infant stages of this. And you can certainly see in the markets where it's being employed, the incremental dollars coming in. I want to be clear, right now, it's really focusing on blocked bins and overloading, recycled contamination fees, which I think our peers in the industry have brought into would be a sort of Phase 2 for us. I mean right now, we think the low-hanging fruit on the overflowing and blocked bins represent a sort of meaningful opportunity. Exactly what that is. We have $1.5 billion to $2 billion of commercial revenue. When you think about what the incremental sort of surcharge could be coming out of that, even a sort of small percentage is a very attractive number. What we're endeavoring to do, having is to use the pilot together with some Intel such as an Investor Day, we can provide an actual sort of quantification. But suffice it to say, we think there are real dollars there, all of which had dropped to the bottom line and just bring us to par with where our peers already are today.

Yes. And on the residential side, obviously, particularly on the back of EPR in Canada, we're developing also a camera system with AI technology to determine contamination rates, etc., that give us the ability to charge back based on those. And that's all in flight. I don't think that's a 2025 possibility, but I think as we move into 2026 and 2027 and beyond, the technology is getting very good, and we're piloting a bunch of different initiatives today that we think, again, will just be more value accretive as we move into '26 and '27.

That's helpful. I have a second question. In a world after the ES sale, and with cash available for your capital structure, does that affect your perspective on working capital seasonality? It appears that in 2024, it will be the third consecutive year with a significant working capital unwind in Q4, meaning a heavier burden in the first three quarters. Does this change in a post-ES scenario, and is it something you can manage as you consider the core solid waste business?

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

Yes, congratulations to Greg and Billy. I wanted to ask as a consequence of the divestiture, could you just talk about any benefits from a simplification standpoint to Luke, you just spoke about the working capital benefits. What about organizational structure, how much does simplify the process, create the ability to do more M&A without potentially ramping up overhead from here? Can you just address, is that an opportunity?

Well, Jerry, what I'd say is, I mean, we've contemplated divesting of ES sort of several times from a sort of disintegration perspective. I don't want to say it's stand-alone, but the thing is sort of autonomous isn't the right word, but not massively intertwined, and that's what gives us the conviction with the speed with which we could do something. And so why I highlight that is, look, obviously, not having that segment would simplify certain aspects, a couple less IT systems, a couple less particular administrative functions that serve to support ES. But I don't think you're going to have a step function change in our overarching overhead. Most of the ES specific overhead is actually already burdened in the ES segment. So if you think about my corporate cost bucket, we have like a $10 million to $15 million reduction that comes out of that when ES goes away as opposed to maybe a pro-rata number that you might be thinking of. And again, that's because a lot of the specific overhead is already in ES. But certainly, if you look today, we balance our sort of capital allocation amongst both of the segments. And with the capital allocation constraints, if you will, sometimes we're forward going. Opportunities in solid as we're sort of doing something in ES, and there's a sort of balancing coming through of that. But if you think about that corporate bucket, as we start doing the M&A, you get the sort of leverage that's going to sort of come out of that. And you're going to see we don't need incremental overhead investment and so with what we have, I think we have the base that's in place. And if you roll forward the model over the next 4 or 5 years, you can see what today is a sort of low 3% number gravitating towards that 1.5% to 2% number. And I think we expect to get meaningful leverage out of that as we grow the business from here. Yes, I think it encompasses all the factors that we and, to be honest, the industry have been discussing. When considering turnover rates, as Patrick mentioned in our prepared remarks, while there has been significant attention on unit cost inflation, the improvements in efficiency and productivity related to decreasing turnover is significant and is reflected in our cost inflation. Repair and maintenance costs are continuing to decrease as expected, and we are benefiting from that. So, Jerry, I would say it's not just one specific item, but rather a combination of various elements alongside the pricing levels that we have a strong degree of visibility on. It is this mix and its recurring nature that instills such confidence in our projections for 2025. Once again, there isn't a single factor, but rather the collective influence of all elements together. Brian, thanks for the question. When we provided the guidance for Q3 after Q2, we expected the commodity to be around CAD 225. In Q3, it dropped to approximately $210 or $215, which resulted in a revenue decrease of about $10 to $15. Following Q3, there has been ongoing downward pressure, particularly due to concerns about the oversupply in the northeastern region linked to the port strike, leading to current Canadian dollar prices below $200, around $180 to $190. Many believe this will recover. However, if we compare today’s pricing with the average realized in 2024, 2025 would face a slight headwind, causing some pressure on pricing and resulting in a modest margin impact. I estimate this could create a revenue headwind of around $5 million to $10 million, along with some margin effects. On the other hand, diesel prices remain low compared to the previous year and the average for 2024, providing a slight margin benefit moving into 2025. Considering commodities and various pricing factors, these two elements may balance each other out if prices remain stable at current levels, with any increase in commodity pricing potentially providing additional support to our guidance. The 100 basis point savings depends on our current debt situation and the state of the debt markets. We are now able to access financing instruments that are typically associated with higher credit quality than we have in the past. We will continue to explore these options because they represent a very cost-effective structure, which is why many of our peers utilize them. However, these instruments generally do not make up a large portion of our capital structure due to the specific regulations and requirements tied to particular capital expenditures in certain states. Landfill spending is often an ideal area for deploying this capital, and we invest hundreds of millions of dollars annually in landfill capital expenditures. We will actively pursue these opportunities, but when we compare ourselves to our peers, we believe that in the future, the typical contribution will be around 10% to 20% of our capital stack, rather than 50% or more.

We now have a question from Stephanie Moore with Jefferies.

Go start with maybe on the commodity prices, it was a little bit of a headwind. Can you talk about maybe where commodity prices have averaged year-to-date and where they are right now? And what kind of sensitivity that looks like maybe in the third quarter or going into 2025? Okay. That's helpful. And then I guess on the industrial revenue bonds that you guys did, how big or how large of a part can that become of the GFL's kind of debt stack? And how long does that take? And is that savings 100 basis points the right place to kind of model it? Or is there maybe some additional savings in that?

Yes. I think it's everything we've been discussing, and the industry has been focusing on as well. Regarding turnover rates, as Patrick mentioned in our prepared remarks, while there has been significant attention on unit cost inflation, the efficiency and productivity gains from reducing turnover are substantial and reflected in our cost inflation. Repair and maintenance costs continue to decrease as expected, and we are benefiting from that. So, Jerry, I would say it's not just one factor, but a combination of all these elements along with the pricing levels that we have good visibility on. This combination and its recurring nature give us strong confidence in our expectations for 2025. Again, it’s not a singular issue but all these factors working together.

Okay. Good color there. And then second question, just based on the EPR contract cutters that you've seen so far, the current RNG project development pipeline, what should we be expecting in terms of sustainability-related spending in '25? Then is there much carryover into 2026?

And then Patrick, I appreciate you addressing the recent incidents here. Just back to the ES sales process. I hear you guys several potential bids are coming in. So I just want to understand, like, what would narrow down to the final winner considering all the kind of different sets of bids you're receiving, you talked about tax implications, but are there any other considerations in selecting the final winner? And is there also a possibility of a call or put option there?

Yes. Currently, we've reached out to about 40 interested parties and sent NDAs to nearly 30 of them, which resulted in 10 to 11 proposals of varying types from both strategic and financial sponsors. We are in the process of narrowing this down and have selected 4 candidates, all of whom I have met personally and have confidence in their ability to follow through. We will focus on these 4 moving forward. It is crucial for us to consider price, structure, and the timing for closing. Given the increase in enterprise value, the structuring becomes vital, particularly since higher enterprise value leads to increased tax implications. We previously estimated an enterprise value of $6.5 billion to $7 billion, but we now anticipate it could be $500 million to $1 billion higher. The structure will be a key factor in our decision-making. If everything goes well, we aim to finalize the deal by our reporting date, ideally completing it in January and ensuring closure in the first quarter. While this would be an excellent scenario, we believe it's achievable and will strive to make it happen.

And then Patrick, I appreciate you addressing the recent incidents here. Just back to the ES sales process. I hear you guys several potential bids are coming in. So I just want to understand, like, what would narrow down to the final winner considering all the kind of different sets of bids you're receiving, you talked about tax implications, but are there any other considerations in selecting the final winner? And is there also a possibility of a call or put option there?

Yes. Currently, we reached out to about 40 interested parties and shared non-disclosure agreements with nearly 30 of them. This resulted in 10 to 11 proposals, which include a mix of strategic and financial sponsors. We are currently managing this process and have narrowed our focus to four contenders, whom I met with personally and trust to follow through on their commitments. We will proceed with these four to the end. For us, the price, the structure of the deal, and the timeline for closing are critical factors. As the enterprise value has increased, so have the tax implications, making the deal structure even more relevant today. Historically, it was believed that the enterprise value ranged from $6.5 billion to $7 billion, but it is now clear that it is significantly higher, potentially increasing by $500 million to $1 billion. The structure remains a key consideration, and we will make our decision as the process unfolds. Thank you, everyone, for attending the call, and we're looking forward to catching back up with you and we have some updates both on ES and certainly with our Q4 results as we move into next year. So thanks for attending and thank you for the support.

Thank you all for joining the GFL Third Quarter 2024 Earnings Conference Call. Today's call has now concluded. Please enjoy the rest of your day, and you may now disconnect from the call.