GFL Environmental Inc. Q3 FY2025 Earnings Call

Hello, everyone. Thank you for joining today's GFL Third Quarter 2025 Earnings Call. My name is Ken, and I will be your moderator. I would now like to turn the conference over to our host, Patrick Dovigi, the CEO and Founder of GFL. Please go ahead.

Thank you, and good morning. I would like to welcome everyone to today's call, and thank you for joining us. This morning, we will be reviewing our results for the third quarter and updating our guidance for the full year 2025. 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 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, I want to start by thanking our incredible employees whose commitment drove another quarter of exceptional performance. Our results exceeded expectations from top to bottom. For the quarter, we achieved the highest adjusted EBITDA margin in our company's history at 31.6%. All of this was accomplished despite the challenging macro backdrop and an incremental commodity-related headwind. As I said last quarter, we view the consistent delivery of record-setting results even in the face of challenges as a continued demonstration of the quality of our asset base, the effectiveness of our value creation strategies and the resilience of our business model. Near double-digit top-line growth is driven by the continued success of our pricing strategies, the impact from our disciplined rigor on price/cost spread, harvesting pricing opportunities related to ancillary surcharges and incremental price discovery opportunities as well as the EPR ramping and other contract renewals were apparent in the quarter and position us now to expect pricing for the full year of 6%. Industry-leading volume performance also contributed to the top-line growth. MSW volumes and the ongoing tailwinds from our recent EPR investments more than offset the impact of softer construction-oriented activity, lower manufacturing and industrial collection, C&D landfill and special waste volumes. We continue to see broader economic uncertainty impacting the level of activity in these areas of our market, but remain well positioned to participate in upside when these volumes inevitably return. Operational costs as a percentage of revenue trended lower in the quarter in response to our continued improvements in labor turnover and our ongoing focus on cost discipline, process optimization and the realization of self-help opportunities across our portfolio. The effectiveness of these cost efficiencies is seen in the margin line, where we once again delivered an industry-leading 90 basis points of adjusted EBITDA margin expansion. Luke will take you through the detailed bridge, but when you factor in the impact of commodity prices and credits realized in the year, we realized over 250 basis points of underlying margin expansion. With each passing quarter, we are proving out the business's ability to meet and exceed the industry-leading margin expansion targets we laid out in our Investor Day presentation. We also remain highly confident in the targets we set out at Investor Day for M&A. Year-to-date, we have deployed nearly $650 million into acquisitions, including approximately $50 million deployed subsequent to quarter end. We have several incremental deals in process and we will deploy incremental capital into M&A before year-end. Our M&A pipeline remains very active and anticipate transactions will close in the first half of next year as well. The rollover impact of these transactions provides us with significant growth tailwinds as we head into 2026. The strength of the base business performance and the anticipated contribution from recent M&A allow us to raise full-year guidance for the second time this year. Luke will provide you with those details. In the quarter, we also completed the previously discussed recapitalization of GIP by partnering with ECP, a leading investor in critical infrastructure. The transaction valued GIP at $4.25 billion, returned approximately $585 million to GIP shareholders and added $175 million to the balance sheet to fund future growth. Since our original investment in GIP in 2022, I have consistently expressed my belief that GIP would be a vehicle for significant value creation for GFL shareholders. The recapitalization back in 2022 valued our original investment at $250 million and at over $1.1 billion, returning nearly 4.5x just over in 3 years. I believe this is yet another reflection of GFL's strength of the management team and the effectiveness of our strategy to create longer shareholder value. GFL received $200 million of the shareholder distribution and continues to own 30% of the equity of GIP that will allow us to participate in what we expect to be continued value creation from the GIP business. We are pleased with the valuation we realized on GIP and Environmental Services transaction earlier this year, but currently see a significant dislocation in the value of GFL share price and therefore, see share repurchases as an attractive opportunity to deploy capital. We repurchased $350 million of shares in the third quarter and nearly $2.8 billion of shares year-to-date. Going forward, we will continue to be opportunistic on executing share buybacks. I will now pass the call over to Luke, who will walk you through the quarter in more detail, and then I'll share some closing comments before we open it up for Q&A.

Thanks, Patrick. Consolidated revenue for the quarter grew 9% over the prior year, driven by a 50 basis point sequential acceleration in pricing to 6.3% and 100 basis points in positive volume, which more than overcame the headwinds from commodity prices and fuel surcharges that were even greater than anticipated. The accelerated realization of incremental price discovery opportunities that we outlined at Investor Day is increasing our full year price growth expectations another 25 basis points to around 6%. Even when excluding the pricing impacts from large-scale contract renewals, both in collection and recycling processing, we continue to see pricing in excess of our internal cost of inflation, driving appropriate returns on our invested capital. Volumes grew 100 basis points as the benefits of recent growth investments and improved MSW volumes offset the ongoing softness seen in the broader macro environment. Volumes were up 5% in Canada and 0.9% behind the prior year in the U.S., inclusive of 3% lower C&D and 9% lower special waste volumes. While Q4 is expected to see negative volumes on a tough hurricane cleanup comp, we remain well positioned to benefit from a broader economic recovery. Adjusted EBITDA margin for the quarter was 31.6%, the highest in our company's history and ahead of our internal expectations. Commodity prices, which slid over 20% sequentially from Q2 and were down over 30% year-over-year, continue to be a drag on margins. M&A and the nonrecurrence of ITCs recognized in the prior year comparative quarter were also headwinds, whereas RNG and fuel prices were tailwinds. Excluding these items, underlying solid waste margins expanded 250 basis points. Adjusted free cash flow was $181 million, better than planned on account of the outperformance of adjusted EBITDA and the timing of CapEx, partially offset by changes in working capital items. With the continued strength of our operational performance, we are able to raise our guidance for the year yet again and now expect to be at or above the high end of the previously reported ranges. Specifically, we now expect full year revenue to be between $6.575 billion and $6.6 billion and adjusted EBITDA to be about $1.975 billion, over $50 million more and nearly 3% higher than our original guidance for the year on a constant currency basis. Adjusted free cash flow remains at $750 million as the incremental adjusted EBITDA is offset by incremental working capital and cash interest. While the incremental M&A expected to be completed before the end of the year will have minimal contribution to the 2025 results, it will add to the nearly 150 basis points of acquisition revenue rollover already in hand. Additionally, the continued ramp of EPR in '26 should add another 75 basis points of incremental revenue growth in next year. And while we will wait until February to provide our detailed guidance for '26, we remain confident in our ability to deliver on GFL's multiyear growth trajectory that we laid out at our Investor Day. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.

Today, we're keeping it short and sweet as we think the results speak for themselves. Our focus is singular and our path forward is clear. Even in the face of uncertain economic environment, the setup for 2026 is simple and clear. We are very confident in our operating plan as you have witnessed quarter after quarter. Our M&A pipeline has never been stronger, and we now have the balance sheet that allows us to keep repurchasing our own shares at what we believe to be dislocated prices. I will now turn the call over to the operator to open the line for Q&A.

We have our first question from Sabahat Khan from RBC.

So just on the guidance update, can you maybe just walk us through some of the puts and takes reflected in the guidance uptake? I think there's some upside in the Q3 results, but just wondering how you took into account M&A, FX and some of the moving pieces and sort of how comfortable you are with the guidance uptick.

Sabahat, it's Luke. Great question. Obviously, something that in this environment, we're very pleased to be able to come for the second time this year and push the numbers even further up. Now if you think about the year as a whole, right, initially at the top line, we had guided at the midpoint about $6.525 billion of revenue, and if you use the constant currency FX, that would have equated to about $6.625 billion for the year as a whole where we're at today, but roughly $100 million incremental. So I'll just take the translational impact of FX out of the equation for a second. And if you think about that $100 million, really, what we have happening at the pricing line, we've now taken pricing up to close to 6%, nearly 75 bps higher than where we started. So you have sort of $40 million to $50 million of incremental pricing action is a good guide. That's largely offset by the fuel surcharge and commodity-related headwinds that you've seen through the industry for the year, pretty equally offset. So you have about $40 million to $50 million negative coming from that. Then you have the volume story. Now volume for the year is going to be plus or minus 25 bps. We're pleased to be able to report that we're going to be slightly positive on volume. But really within that number, again, you have puts and takes. Our EPR ramping has outperformed, and we're enjoying excess benefit from some transitional contracts that have come on faster than anticipated. And obviously, offsetting that is some of the C&D and construction-oriented materials that Patrick alluded to in his opening remarks and consistent with the industry as a whole. And then you have the M&A, right? So very pleased that we've been able to acquire about $200 million of annualized revenue for the year. And roughly, you're going to recognize half of that in year and half is going to sort of roll over. So that's really driving the majority of that raise, but very interesting and happy to see the benefits of our strategies being able to overcome the real industry-wide headwinds that have been present throughout 2025.

Great. And then just for my follow-up, I guess, maybe just recap where we are on the EPR runway and it looks like it's starting to contribute. But maybe if you can just walk us through kind of the wins you have, how much of that is starting to roll in and how much more is likely to come through 2026 and beyond?

Yes. So Saba, just continuing with what I just said, I mean, this year, we've had sort of great outperformance coming from EPR. And what we have spoken about for each quarter is how the Canadian, both price and volume has been enjoying uplifts as all these EPR contracts are coming online. And as I alluded to, we're seeing transitional arrangements whereby our customer base is asking us to do larger quantities of volume or start doing work earlier than initially anticipated. And we're, therefore, enjoying an acceleration of the realization of those EPR benefits in '25 on amounts that were otherwise going to be coming in '26. Now where we sit and what I said, it's looking like '26, we're going to have an incremental roughly 100 basis points of top line rollover from incremental EPR revenues coming online, offset by the reduction of some of these transitional contracts that I spoke to. And so you're going to get this net 75 basis point impact rolling into '26. As we've kept alluding to, there's still smaller opportunities that we continue to pursue, which could be additive to those numbers. But feeling really good to be entering '26 in addition to our normal course organic growth, normal course M&A to have this incremental tailwind of roughly 75 bps at the revenue line, which, as we said before, will be margin accretive to the business as a whole and certainly to our Canadian segment, which is very quickly closing the gap on that blended margin, and you're seeing it consistently trend at north of 30% margins.

We have our next question from Kevin Chiang from CIBC.

Congrats on a good Q3 there. I know we'll wait until, I guess, February when you provide 2026 guidance. But maybe if I just look at some of the moving parts, and I appreciate some of the top-line comments you provided, Luke. But if I look at your run rate EBITDA at the end of Q3, and I know there's a bunch of moving parts in there. But I take that and look back to your Investor Day in terms of the growth you expect organically and what you can get from an M&A perspective. It seems like a run rate EBITDA of just over $2.1 billion could be close to $2.3 billion next year. Maybe some incremental M&A needs to be completed to get there. But just, I guess, how do you think about that directionally, just given the strength you're exiting Q3 and 2025.

Yes, great question, Kevin. Thank you for your comments on the quarter. The current run rate number is somewhat misleading due to the inclusion of some large EPR collection contracts in this year's run rate metric, while the actual performance will materialize throughout 2026. This means we might be overestimating organic growth from that figure. Looking ahead to next year, and without giving specific guidance, we anticipate periods of significant margin expansion as we execute our strategies and leverage our self-help initiatives. Our guidance indicates that we expect to finish this year with a 30% margin. Based on the revenue projections we've provided, we expect revenue to surpass 7%, along with increased margin expansion that should exceed 50 basis points. So, when you combine that with the $1.975 billion EBITDA we are targeting for this year, we expect to see a double-digit growth rate, consistent with what we communicated during Investor Day. Additionally, as Patrick mentioned, there’s a robust pipeline we are actively managing, and any further acquisition activity could contribute positively. Therefore, based on our building blocks, you can expect around 10% EBITDA growth before factoring in potential acquisitions or the recovery from industry-wide challenges such as commodity prices and volume, which would all add upside to our current position.

That's extremely helpful. And maybe just a follow-up here. I noticed your SG&A intensity as a percentage of revenue, it was if my math is correct, down about 80 basis points quarter-over-quarter. And I think that's the best we've seen since you've gone public. I know you've been shifting the portfolio a bit here. But just maybe thoughts on SG&A trends over the medium term here. It does feel like you're starting to get some of that cost absorption benefit you talked about at your Investor Day.

Yes. Thanks for noticing, Kevin. But I mean what we're excited about is not just on the SG&A line. You're right, you have that 70, 80 basis point improvement in SG&A. But if you look at labor and benefits, our main cost category, you had 40 basis point improvement there. The R&M cost, you had about a 50 basis point improvement. So it's really across all the cost categories. And you're seeing that coming through, and it's a function of obviously improving labor turnover, which is the narrative you heard throughout the industry, and we're certainly realizing that as well, which is certainly coming through in the cost. But it's also just leveraging the infrastructure and cost base that we put in place. I mean, as we spoke about before, effectively, our corporate cost segment, which was trending down towards 3% with the divestiture of ES jumped back up north of 4%. And now you're getting the operating leverage, both organically as you execute on our price-driven growth strategy, but also inorganically, right, because we don't really need to add to that supportive shared services and broader executive infrastructure to accommodate the incremental M&A contribution that's coming online. And so you're going to see the operating leverage. I think we're set up to print the corporate segment at a sort of 4% of total revenue this year, and that's going to continue to trend down. And I think that's part of our excitement as we go forward over the near to medium term is that we have the cost in place and the scalability, and we can now execute on both our organic and inorganic growth initiatives and be able to leverage these relatively fixed cost bases. So thanks for the question, Kevin.

We have our next question from Stephanie Moore from Jefferies.

Now Patrick, I think you've been pretty open about your view on just the underlying value of shares. And I think you've taken pretty decisive actions to unlock value, whether it's selling ES or GIP and anything else here. So as we think about where the business stands today, are there any other actions that you would consider that you believe would further unlock value for shareholders?

Yes. When you consider the relative value of the business, it's clear that the multiples these companies are trading at today do not reflect the true worth of our best assets. This isn't just about GFL, but the industry as a whole has been dealt a tough hand. The results across the sector show that even with the current economic challenges, the valuations seem exaggerated. If we compare this to private market valuations and the returns available, it’s evident that the current multiples are not justified. We've made strategic moves by exiting two businesses while maintaining significant equity stakes, but it’s concerning that companies like ours are valued at only 15x to 16x, which is slightly below the optimal level. Despite this, it presents an excellent opportunity for us. As you might have noticed, we've planned to buy back between $2 billion and $2.3 billion of stock at the start of the year, and we have actually repurchased around $2.8 billion to $2.9 billion. As the largest individual shareholder, I believe this is the most effective use of our capital. We're also progressing with our M&A strategy, and I mentioned earlier that we have a clear plan for moving forward. We have a strong balance sheet that allows us to buy back shares at what we see as undervalued prices. Our M&A pipeline has never been stronger since going public. We initially estimated a spending range of $750 million to $1 billion, but next year could surpass that by a significant margin, likely exceeding $1 billion. We are prepared for that along with ongoing strategic actions. Ultimately, the stock will respond in due time. We don’t dictate the share price, but we will actively seek to increase our ownership at these valuations.

We have our next question from Trevor Romeo from William Blair.

I wanted to maybe dig in a little bit more on your price metric for this quarter because it did seem a little different than the typical seasonal cadence throughout the year going up 50 basis points relative to last quarter. So maybe I missed it in the prepared remarks, but was there like a specific portion of your book that had really good results this quarter or any mix impacts? Or maybe you could just dive into the price a little bit more and what drove the improvement?

Yes, that's a great question, Trevor. You're correct that it deviates from the usual seasonal pattern, mainly due to two factors. First, EPR has started to bring in new contracts and recognize pricing in a way that doesn't follow the typical calendar. Canadian pricing was in the high 6s for the period, benefiting from EPR and breaking from normal seasonal trends. The second point, which we're very enthusiastic about, is the successful implementation of strategies we discussed during our Investor Day. This involves tapping into the potential benefits within our existing operations, particularly related to ancillary surcharges. We're actively ensuring we are compensated at the right rates for the services we provide, and this strategy is beginning to take effect, adding support to our blended pricing. This positions us with strong confidence in pricing visibility heading into '26. So, it's these two elements combined: deviations from typical seasonality and enhancements in the latter half of the year.

Okay. That is helpful. And then for my follow-up, maybe just ask for an update on labor turnover. I think you touched on costs a little bit earlier, but maybe labor turnover specifically has been a good story across the industry. What kind of improvement have you seen so far this year? What do you think is possible next year? And how does that translate into the kind of wage inflation that you're seeing now and maybe heading into next year?

Yes, it's Patrick speaking. Clearly, the trend is very favorable. We have unquantifiable costs associated with lower turnover numbers that affect our overall P&L, such as productivity and performance. Currently, we are experiencing high teens in voluntary turnover, which, as you know, rose above 30% during COVID. Historically, pre-COVID, our turnover was around 17% to 19%, and that's essentially where we are today. We believe that in the current macro environment, there is potential for this to trend lower as labor pools expand in many markets. While not all markets are the same, we have observed that in some areas, our best drivers expect above-average increases, yet the pool for high-quality drivers is shrinking. Nevertheless, we are comfortable with the current voluntary turnover rate in the high teens. If we manage to reduce it to the mid-teens, it would lead to further improvements in our margins.

We have our next question from Shlomo Rosenbaum from Stifel.

It's a really good quarter. And I'm trying to just get underneath the numbers a little bit more just to understand kind of the organic growth trends in Canada versus the U.S. I don't know if you could parse a little bit more about what's going on. You saw the organic growth in the U.S. trended down a little bit. I'm not sure how much of that was commodities prices coming down. But I was wondering if you can just kind of unpack some of the trends there and how that translated to the organic growth rates of the two different regions.

Yes. Thanks, Shlomo. It's Luke speaking. Great question. As you see in the headline reported numbers across the segments, Canada did enjoy a higher overall organic growth number than the U.S. If you break the pieces apart, look at the pricing, both markets continue to sort of price at the levels we need to be. And I think both pricing in Canada and the U.S. was sort of north of 6%. I think low 6s in the U.S. and high 6s in Canada. And that's always blending to the general 6.3%. I'd say the uplift in Canada was really driven by the EPR contribution. And ex that, Canada would have actually been slightly lower than the U.S. as some of the sort of ancillary surcharge recognition we were saying is actually being realized in the U.S. at a faster rate than sort of Canada. Volume is really the differentiator between the two. Again, Canada, positive volume once again and is really being supported by EPR, not entirely because even I think ex EPR, Canada still enjoyed positive volume, but I think EPR contributed about an incremental $15 million in Canada for the quarter, which certainly was a great support to an otherwise sort of sluggish macro. I'd say U.S., U.S. had negative volume for the quarter. It's really a function of the, I'd say, landfill C&D and special waste volumes and a little bit on the collection side. The special waste and C&D, while soft, I'd say, on a macro basis, you can still enjoy volumes geographically if you happen to be in an area where there is activity going on. There still is some activity, just muted. And I highlight that because, for instance, our Canadian business actually had positive special waste volumes in the quarter, whereas our U.S. business was negative, by negative 3% C&D and negative 8% special waste in the U.S. I'd say just sometimes luck of where your site is sort of located. But take away those things around the edges. I think underlying, we continue to see similar sort of organic trends in each of our markets, and it is that there is a softness in the broader sort of manufacturing-related industrial expansionary sort of CapEx spend and you're seeing that in your volumes. But underlying, our market selection continues to sort of bolster our volumes by being in the demographic regions where people are moving to. Our strategic investments in items of EPR and other are providing volumetric tailwinds and our pricing strategies continue to remain strong regardless of the broader macro environment.

Okay. Great. I’m trying to understand the 4Q EBITDA guidance and the potential for reaching the upper end of the range. From the midpoint, that would be $12.5 million. You already surpassed expectations in the third quarter by $10 million, leaving a gap of about $2.5 million. You've also achieved an additional $25 million in M&A. It appears that pricing is improving and there are favorable FX influences. Can you explain the factors at play? It seems like there might be some conservatism in the estimates, or perhaps there are other challenges related to commodities or other aspects that I might not be fully aware of.

Yes. So Shlomo, I think the issue is in the seasonal climates like Canada and other, it's difficult to just say whatever your H2 guidance was if you have outperformance in Q3, it therefore, all carries forward. Just going back to my comment I made on Canadian special waste volumes, we enjoyed a very strong quarter in Q3, and that may now actually result in some sort of softness in Q4. So I don't think it's appropriate to roll forward that 10%. Obviously, we have some sort of conservatism as we want to make sure that we can sort of deliver. But commodities is an incremental headwind coming against you. The broader sort of volumetric story doesn't seem to be improving anytime soon. And you got a really sort of tough comp that last Q4, you did enjoy a whole bunch of volume related to hurricane and other sort of special waste cleanup that we're not seeing sort of materialize. So I think it's an appropriate degree of guidance. Is there a little bit of conservatism in there? Sure. We hope to be able to do better versus doing worse. But I would factor in the commodity and just that timing cadence before just extrapolating the Q3 results to an expected outcome for the year as a whole.

We have our next question comes from Konark Gupta from Scotiabank.

I wanted to touch on the sustainability targets you guys set out at the Investor Day, specifically as it pertains to RNG, I guess. I mean, the commodity prices, right, like they have been volatile this year so far and what you expect for next year. But I mean, it doesn't seem like the RINs are trending at the range that you guys were assuming back then, maybe they rebound next year. But do you need to reevaluate any of these RNG projects or investments as you consider the current commodity prices?

Yes. I think everyone tends to forget the RIN prices when we started these projects. We based our projections on a $2.25 RIN. In recent years, RIN prices reached $3 to $3.25, which improved the profitability and payback periods of our RNG build-outs. However, we have consistently underwritten at $2.25, so we are confident in our returns on invested capital. Additionally, factors like bonus depreciation have enhanced these returns. As we mentioned last quarter, we decided to slow down our projects to ensure there wouldn't be significant changes to the program, which hasn't occurred. We've postponed some RNG project developments by 6 to 12 months, but we plan to ramp up our efforts in the latter half of this year and into next year. At a $2.25 RIN, our returns on invested capital remain solid, with paybacks around 3 to 3.5 years, compared to the 1.5 to 2 years we experienced with higher RIN prices. Forecasts from analysts suggest RIN prices could return to the high $2s or low $3s in the coming years, but our investment strategy remains anchored on a $2.25 RIN, and we feel confident about the returns at that level.

Okay. That's great color. And Luke for you, I think on the leverage side of things, I mean, it creeped up, obviously, in Q3. And I think you're expecting to now finish the year around those levels, roughly speaking. But in terms of philosophy for leverage ratio, I mean, I think you guys have like the buyback opportunity has increased now given the stock price and the M&A kind of remains pretty high. I mean, would you be comfortable kind of like remaining in this range, like low to mid-3 or something for the foreseeable future, like as long as you have these opportunities?

Yes. I think as we articulated at Investor Day, as we continue to articulate, we'll be opportunistic, low to mid-3s is where we want to be, given the free cash flow generation, the free cash flow ramp over the next couple of years, we feel very comfortable operating in that space. And we have ultimate operating flexibility, as we said, one, to buy back shares; and number two, to execute on the M&A pipeline.

We have our next question from Bryan Burgmeier from Citi.

Maybe just following up on RNG. Luke, I heard you call out the benefit for 2026 from the M&A rollover and the EPR. Are we still expecting another kind of incremental step-up from RNG next year? And then I think there's maybe a larger step-up into 2027. Is that still accurate?

Yes, Bryan, thanks for the question. '26 is rather muted in terms of production volume. Now the incremental production volume really as you had facilities come online in '25 and are now fully ramped is probably offset by today's RIN pricing. So modest incremental amount in '26, but it really is '27 and into '28 when you get the sort of next leg up. So we'll put a pin in our guide depending on where RIN prices are at the beginning of the year when we speak in sort of February. But the expectation where I sit today is the modest incremental units of RNG will be offset by the year-over-year price declines. And it's really '27 and '28 where we'll get that next leg up in tailwinds.

Okay. Yes, makes sense. And then just one more question for me. You've spoken a lot about price on the call, but maybe just any details on sort of the restricted price versus the open market price and how that sort of trended in the back half of the year? And if you have any preliminary thoughts on '26, that would be helpful as well.

So look, I'd say our blended kind of pricing is typical cadence, what you're seeing open market commercial industrial is high single-digit numbers. Your residential sort of restricted is on the lower end of mid-single digits. And then as you're getting renewals and contracts being reset to appropriate pricing for today's cost environment, you're seeing the higher end of mid-single digit, touching high single-digit price blending to sort of residential collection pricing in the higher end of sort of mid-single digit. Post collection, you're seeing that sort of healthy mid-single-digit sort of level. So we continue to like the industry, be constructive of the narrative that we need to move our restricted pricing off of CPI-related indices as it doesn't necessarily accurately reflect our underlying cost structure. I'd say we're in the nascent stages of that migration vis-a-vis some of our competitors, but certainly something that we're sort of supportive of, and we'll continue to sort of move forward. But I'd say we view the pricing in our industry continue to remain rational, disciplined and sort of healthy. And I think all of us are unwilling to give away our valuable services at rates that don't provide appropriate sort of levels of return. So we're going to continue to do that. As we round out the year here, we'll form a view on 2026 expected internal cost inflation, and you're going to see us pricing at a blended level in excess of that in order to generate the return that the shareholder group is looking for.

We have our next question from James Schumm TD Cowen.

Yes, I wanted to see if you could provide a little bit more color on those cost inflation expectations for next year. Should we be thinking about 4%? Or could it be as low as 3.5%?

James, it's Luke speaking. I mean, we're going to wait until '26 before we form a view. I mean, where I sit today, I feel it's very squarely going to start with a 4%. I know sort of CPI may be doing what it's doing. But when you look at labor costs across the industry, notwithstanding the current labor market, those numbers are going to be north of 3% on a blended labor cost number. You start thinking about the potential delayed impact of some of these tariffs or other sort of regulations starting to bleed through into spare parts and other items. I think there's a very viable path where your cost inflation on those amounts is something higher than a mid-single-digit number. And then again, people focus on sort of labor and labor stand-alone. But when you think about medical costs and other benefit costs in the U.S., those are accreting every year at something well north of sort of 3%. So when you put that all together, I'm expecting a number that starts with a 4%, but we are going to wait until 2026 to put a finer pin in that, James.

Okay. Regarding pricing, are you trying to move away from CPI? Are you considering CPI for water, sewer, and trash, or are you aiming for just a 4% increase? What are your goals with that? Looking ahead to next year, you're at about 6% this year, and you've mentioned some benefits from EPR this year. Are we expecting that number to decrease? Do the one-time benefits from EPR indicate a larger decrease since you won't have that support next time? Any clarification on this would be appreciated.

So Jim, I'll take the latter part, and I'll pass it to Patrick how we think strategically and moving...

Canada is different from the U.S. in terms of certain indices, particularly regarding sewer and water metrics. However, the trend we observe in Canada indicates that the headline Consumer Price Index does not accurately reflect the actual costs associated with operating our business. We are actively advocating for many of our contracts to include fixed price increases in the high 3% to 4% range. If we are unable to secure that, we will implement immediate pricing adjustments. We are effectively communicating to our customers that we require these price increases to remain competitive and continue providing the high level of service they expect, ensuring we retain the best drivers. This issue is more pronounced in municipal collection and landfill transportation processing, whereas, in the commercial sector, we can adjust pricing based on our own assessment of CPI at any given time. Additionally, in the U.S., we aim to shift towards more favorable indices than CPI, which does not accurately capture our business costs. This trend has been more noticeable on the West Coast than the East Coast, but we are seeking similar opportunities to expand those practices from the West to the East, whether through fixed pricing, the adoption of different indices, or immediate pricing adjustments.

And then, Jim, on your second part of your question, as you think about next year's pricing, high level, you're absolutely right. This year, you're getting the benefit of the sort of EPR ramp manifesting in the pricing line. The incremental ramp next year will be manifest more in the volume line. So you can think between 75 to 100 basis points of this year's price is by virtue of incremental EPR ramp. So if you were to sort of back that out on the basis, you'd only be getting a portion of that next year. Yes, you would be looking at a pricing level something closer to 5% than the 6% that you're having today just on that math alone. But again, we'll save our detailed pricing guidance until we speak to you again in February.

We have our next question from Michael Doumet from National Bank of Canada.

Just going back to pricing, the incremental price recognized in Q3 versus Q1 60 basis points. How much of that was recognized from surcharge implementation? And again, I'm just curious how much more is there to go get? And would that flow through into 2026 incremental to whatever underlying price expectation?

Yes. Michael, it's Luke. Thanks for the question. Look, the surcharge absolute quantity it gets complicated as you think about sort of volumes puts or takes and volumes attracting a different degree of surcharge. But holistically, I think we said in the Investor Day, there was a $50 million to $60 million price. Forgive me, I might be a little off, I'm not trying to recast the guide. whatever the number we had said in the Investor Day, I don't have it right in front of me. I think the idea was we're going to ratably recognize that over the next sort of couple of years. I think we've had great success in 2025 and starting the recognition of that earlier than anticipated. And so you're seeing that come and sort of support the overall pricing number this year. But we remain well on track to realize that overall price as it relates to ancillary charges that we had articulated over that sort of '25 through '28 period.

And Patrick, you made some remarks on the first half '26 M&A. And given the second half '25 looks to be pretty deal heavy, I would have thought maybe that you would be working down your M&A pipeline into the year-end. But from your comments, it sounds like you're actually going the other way and potentially entering '26 with a healthy pipeline. Is there anything specific driving the larger pipeline or more of the activity that maybe larger deals that you can comment on?

Yes, we spent the last quarter of 2024 focused on repatriating capital and simplifying the business, specifically developing a plan for the EES business and completing an $8 billion transaction. In the first half of 2025, we concentrated on executing those divestitures. We anticipated that the M&A activity for GFL would be weighted towards the second half of 2025, and we’re seeing that now. We have a high level of confidence in the deals scheduled to close in 2025, particularly in the second half. For the first half of 2026, we have been working on several opportunities and nurturing relationships that align with our goals. These are not processes driven by banks but instead opportunities sourced through our established connections. At our Investor Day, we mentioned that our average M&A spend would be between $750 million to $1 billion, with some years seeing a higher level of activity. Based on the current prospects for the first half of next year and other opportunities in development, we expect M&A activity next year to exceed this year’s figures, potentially by over 50%. We are confident in the M&A pipeline for next year, particularly in the second half of 2025 and the first half of next year, with many prospects reinforcing our strategy. We are focusing on markets where we can leverage existing infrastructure to improve returns on invested capital, concentrating on opportunities within our current operational regions. Our strategy does not involve acquiring businesses in new geographies at the moment; we are focused on deals that complement and enhance our existing capabilities.

We have our next question from Tobey Sommer from Truist.

I want to follow up on that M&A comment for next year. I'll just clear pricing for now. Given the more permissive U.S. antitrust posture, is that a factor that could lead to larger deals for GFL or maybe within the industry over the next 3 years?

If you're considering a major merger, now is likely a good time. From my perspective, not much has changed regarding the HSR and the regulatory landscape between the previous and current administrations. However, 95% to 99% of the deals we engage in do not require HSR approval because they fall below the threshold. Therefore, the majority of our activities are within HSR limits. We may have one or two that exceed those limits, but at this point, we haven't observed significant changes. That said, if anyone plans to pursue a much larger deal, this current administration may be the most favorable time to proceed.

Appreciate that. And then curious what you think the upper bound as a percent of sales you think the business can have associated with commodity-related areas within the portfolio and still warrant that higher multiple versus the current dislocated price.

Yes. I mean commodities today are sort of a relatively de minimis number. I mean, not only for us, but sort of for the rest of the industry. I mean what do you have going in that bucket? You have RNG today that would have a little bit of volatility and then you have sort of all the recycling volumes. I think today, where we all sit today, I think the entire industry is that sort of sub-10%. These are very good margin accretive assets that we want to own regardless. And I think most importantly, meets the returns on invested capital thresholds that we all basically run our businesses on. So from my perspective, again, do you want to have that number 20%? Absolutely not, but anywhere sort of in the 10% to 15% range, I think is more than comfortable, particularly with the structures that we all have today.

We have our next question from Chris Murray from ATB Capital Markets.

Turning back to some of the self-help initiatives and thinking about this, you go back to the Investor Day. And at the time, your CEO had been in the chair for about a month. Maybe had a little more time to think about the operation, and look, there was all kinds of levers. There was technology, there was turnover, pricing strategies, things like that. But just thinking about ideas as we go into 2026, where do you feel you are on the self-help levers at this particular point? And are there any new opportunities you're starting to uncover or think about doing? I guess what I'm trying to figure out is where we are in the margin kind of catch-up or progression against the rest of the industry and anything you think you can do on the MSW business to drive margins over the next couple of years?

Chris, it's Luke. That's a great question, and we're working to meet our commitments each quarter, consistently leading the industry in margin expansion and exceeding our guidance, which reflects our strong position. You mentioned that Billy has only been here for a month, but he has been with us for years and played an active role as part of our operational and senior executive leadership team during that time. The plans we developed were well thought out, and Billy contributed to that leading up to the Investor Day presentation. Our strategies and focuses remain unchanged. As Patrick mentioned, our goal is clear and singular, and I agree with that. These are what we see as the most effective use of our time and efforts. Each quarter when we exceed our EBITDA guidance, we're outpacing the expected ramp-up. For instance, in our presentation, we projected moving from X to Y from '25 to '28, and we've already increased our margin expansion by 20 basis points this year, putting us ahead of schedule. We're optimistic and don't anticipate significant changes to our strategies in the medium term. These will continue to be our main points of discussion, which may become routine, but hopefully the results will be anything but dull. We're very pleased with our progress toward our goals, and as Patrick pointed out, our position going into '26 gives us confidence that we'll advance even further ahead of our projected timeline.

We have our next question from Will Grippin from Barclays.

Just one question for me here. I wanted to come back to leverage. Obviously ticked up a little bit quarter-on-quarter on a trailing 12-month EBITDA basis. Just given your comments around possibly ramping share buybacks here and a very strong M&A pipeline and outlook into 2026, how should we think about maybe the trajectory of that leverage ratio over the next several quarters? And I know you kind of reiterated the low to mid-3x target, but should we think about this not being sort of a straight line down? Maybe there's more variability quarter-to-quarter just around actual capital deployment?

Yes. I mean leverage, again, we spent time moving leverage from low 4s to low to mid-3s. And I think we've made a commitment that we will keep leverage that will toggle between low 3s and mid-3s. So you'll see us reinvesting the free cash flow of the business based on those sort of leverage targets. So that's what we're focused on.

Yes. Well, I mean, there is a seasonal cadence, obviously, naturally with the free cash flow. Q4 is a higher free cash quarter. And so you'll see the generation and the reduction in debt coming out of that. But then buybacks and M&A can sort of augment that otherwise organic cadence. But in a given year, it's not going to be perfectly straight line because the pace of M&A and/or buybacks and/or just general underlying free cash flow won't be a perfect straight line. But I think what you hear is the sort of absolute commitment to live in and around these ranges. And obviously, if there's a higher level of sort of M&A at one point, then you afforded the opportunity to sort of temporarily pause as you then bring leverage back in and so on and so forth. So it's not going to be perfectly straight, but it will be absolutely committed over sort of 4 quarter period to live within the sort of ranges that we're talking about.

Thank you all for joining us today. And excuse me, operator, was that the final question?

Yes. Thank you.

Okay. Thank you, everyone, and we look forward to speaking with you in February when we report our full year results and giving our full outlook for 2026.

Thank you very much. This concludes today's call, and thank you for your participation. You may now disconnect your lines.