Earnings Call
GFL Environmental Inc. (GFL)
Earnings Call Transcript - GFL Q4 2024
Operator, Operator
Hello, everyone, and thank you for joining the GFL Fourth Quarter 2024 Earnings Call. My name is Marie, and I will be coordinating your call today. I will now hand over to your host, Patrick Dovigi, Founder and CEO, to begin. Please go ahead.
Patrick Dovigi, CEO
Thank you, and good morning. I would like to welcome everyone to today's call and thank you for joining us. This morning, we will be reviewing our results for the fourth quarter and providing our guidance for 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.
Luke Pelosi, CFO
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'll be making some forward-looking statements within the meaning of applicable Canadian and US 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 US 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 US securities regulators. I will now turn the call back over to Patrick.
Patrick Dovigi, CEO
Thank you, Luke. The quality of our asset base and the strong execution of our committed employees once again drove industry-leading organic growth for the year. In Q4, for the second quarter in a row, we saw 300 basis points of margin expansion. At the same time, we exceeded our internal expectations for growth across revenue, adjusted EBITDA, and adjusted free cash flow. The momentum of our financial performance gives us conviction in our key value creation strategies. One, generating durable price-cost spread; two, focusing on the quality volume; three, benefiting from improvement in employee turnover; four, optimizing our platform through improved asset utilization; five, realizing contributions from our sustainability-related investments; and six, capturing synergies from accretive M&A within our existing footprint. We believe our continued focus on these strategies will provide significant runway for further value creation over the coming years. The previously announced sale of our ES business is on track to close on March 1. As we said in January, this transaction facilitates the acceleration of several of our key financial objectives while preserving the opportunity to participate in expected material upside through our retained equity in the business. The sale leaves us with an enhanced balance sheet that will provide us with incremental capital deployment optionality creating capacity for additional M&A activity and also for the first time, allowing us to do share buybacks and increase dividends to become meaningful drivers of our shareholder value creation. Higher return on invested capital organic growth initiatives will continue to be prioritized. We deployed $300 million in incremental growth investments in 2024, consistent with our 2024 capital allocation framework. We intend to deploy $325 million of incremental growth capital in 2025, mainly comprised of final investments required for the EPR contracts we've been awarded. By the end of 2025, cumulative investments into EPR will total approximately $600 million, approximately $50 million remaining to be spent in 2026 and 2027. This material step-down will free up cash flows for other deployment opportunities such as share repurchases. M&A activity in 2024 was lower than what we would have done as we focused on balancing both accretive organic growth investments and deleveraging our balance sheet. We closed 11 transactions, all of which were small, except for the vertically integrated asset we acquired in Florida in the second quarter. This asset was highly complementary to our existing footprint in the fast-growing Florida market. In Q4, we also saw positive volume contribution from the broader network we have created in Florida that facilitated a higher level of participation in hurricane cleanup efforts. Our pipeline remains robust, and we see many similar opportunities to densify our existing networks and improve asset utilization through tuck-in M&A across our existing footprint. For 2025, we are once again guiding industry-leading organic growth across all of our financial metrics. Recall that in 2024, we laid out an extremely detailed plan, raised that guide multiple times throughout the year, and beat our expectations on all fronts. We see multiple avenues of upside to our current guide that gives us confidence in our ability to meet and potentially exceed the expectations for the year that Luke will walk through in detail. And we view 2025 as just the beginning. We believe we have an exceptional multi-year outlook, and we look forward to walking through the details at our Investor Day on February 27 at the New York Stock Exchange. I will now turn the call over to Luke for additional color on the quarter and the 2025 guide, and then I will have some closing remarks, before we open it up for Q&A.
Luke Pelosi, CFO
Thanks, Patrick. Consolidated revenue for the quarter of $1.98 billion was ahead of our guidance. Fourth quarter solid waste organic growth accelerated to 7%, excluding the impact of the divestitures, driven by solid waste pricing of 6% and positive volume of 2.3%, 75 basis points better than planned and a 310 basis point sequential improvement over Q3. The return to positive volumes was expected in the fourth quarter as we anniversaryed most of the impact of our targeted volume shedding initiatives. Hurricane cleanup activity and the accelerated commencement of EPR-related activity were the main drivers of the volume of performance versus plan. Decreases in energy prices reduced fourth quarter revenues from fuel surcharges as compared to the prior year and lower commodity prices in the quarter were a headwind to revenues as compared to our guidance, although to a lesser extent than what we historically would have experienced, as our transition to EPR continues to mitigate our exposure to commodity price fluctuations. Environmental Services revenue was down 2.2% compared to the prior year inclusive of the impact of lower used motor oil pricing, lower soil volumes and a tough comparison arising from large-scale event-driven revenue realized in the prior year period. Excluding the impact of these three items, segment revenue was up 2% versus the prior year. Adjusted EBITDA margins were 29.1% for the quarter, 300 basis points higher than the prior year, consistent with our guide. Solid waste adjusted EBITDA margins were 33.4%, a 270 basis point increase over the prior year, inclusive of the dilutive margin impact of the extra workday as compared to the prior year and increased cost of risk, as well as the impact of reclassification of certain costs that were recognized in the corporate segment in the prior year period. Commodity and fuel prices, FX, and M&A and the impact of recent divestitures were tailwinds to margins. Environmental Services adjusted EBITDA margins were 28.9%, 390 basis points ahead of the prior year, despite headwinds from used motor oil pricing. Recall, we had a fire at one of our facilities in December of last year, and that reduced Q4 2023 profitability. The lapping of this event was a tailwind to the margins, as was the timing of incident claim costs and performance compensation accruals. Adjusted free cash flow and adjusted net income were $360 million and $86 million, respectively, both ahead of expectations. Q4 cash collections were negatively impacted by a Canadian postal strike in December, creating a headwind to working capital in the quarter, an investment we expect to recover in 2025. We deployed $51 million of incremental growth CapEx during the quarter, bringing the total for the year for incremental growth CapEx of $298 million. Together with the approximate $590 million we deployed into M&A, total capital deployed into these growth initiatives was $890 million, in line with the $900 million cap we guided to in our initial capital allocation framework at the beginning of 2024. With the significant strengthening of the U.S. dollar versus the Canadian dollar in the fourth quarter, our net leverage at the end of the year increased to $4.06 due to the translational impact of revaluing our year-end debt stack at the year-end FX rate of 1.44. If you recap the year-end balance sheet and the full year's adjusted EBITDA at the FX rate of 1.35 on which our guidance was originally based, year-end net leverage would have been 3.85, exactly in line with the target we committed to at the beginning of last year. As Patrick said, we expect the ES transaction to close March 1. As previously indicated, we intend to repay approximately $3.75 billion of long-term debt shortly after the closing of the sale, giving rise to annual cash interest savings of just under $200 million. We also plan to use up to $2.25 billion of the proceeds to opportunistically pursue repurchases of GFL shares with a view to reducing the current overhang, as well as reducing our current diluted share count. Pro forma for the planned use of the ES proceeds, net leverage is expected to be approximately three times. Looking forward, the strength with which we are exiting 2024 and our outlook for 2025 sets up guidance better than the initial framework we provided in Q3. In the press release, we provided guidance both on a status quo basis, as well as pro forma for the divestiture of ES. As we have a high degree of conviction that the ES sale will close this coming weekend, the focus of our guidance will be ex-ES, and that is what I will walk through now. Top-line growth is expected to be 6% to 7%, yielding $6.5 billion to $6.55 billion of revenue. Underpinning this growth is 5.25% to 5.5% price, which we are implementing in response to our expected cost inflation of low to mid-4s. As we have said, we believe price-cost spreads over the next five years can be structurally higher than they were in the past due to the highly disciplined industry backdrop as well as incremental pricing opportunities unique to GFL given the relatively nascent stage of our price discovery compared to our peers that are more mature in this area. Partially offsetting the price growth is a 30 basis point headwind from commodity prices and fuel surcharges. Note that the continued deterioration in commodity prices since November has created a headwind versus when we provided our initial framework for 2025 and albeit to a lesser extent than typical, thanks to the reduced commodity price exposure resulting from our EPR transition. On volume, we are assuming roughly flat at the midpoint, plus or minus 25 basis points for the year. The volume assumption underlying the initial 2025 framework provided in November was slightly higher than this, but we're being conservative in light of the severe winter we've seen across many of our markets that we will expect will impact Q1 volumes. FX is assumed to be 1.41, which adds 200 basis points and net M&A contributes negative 80 basis points, which is largely the result of the Michigan divestitures that we completed in Q2, partially offset by the small rollover of the modest M&A we did in 2024. Excluding the impact of the 2024 Michigan divestitures, expected revenue growth is over 8%. For the third year in a row, we are guiding an industry-leading 100 basis points of adjusted EBITDA margin expansion. Consolidated adjusted EBITDA margin is expected to be 29.7%, solid waste margins are expected to be 33.8% to 33.9% and corporate costs of 4.1% to 4.2% of revenue. The step-up in corporate cost intensity is not due to an increase in costs, but rather reduced revenue as a result of the sale of the ES business. We expect meaningful leveraging of the corporate cost segment as we grow our top line, both organically and through M&A over the coming years. Commodity prices and the RNG ITCs previously recognized in the P&L 2024 are a 45 basis point headwind, whereas M&A rollover, the Michigan divestitures, and FX are a 45 basis point tailwind, meaning the effective 100 basis points of underlying organic margin expansion. Again, as we have transitioned to EPR, our recycling business is structurally less sensitive to commodity prices due to the higher proportion of overall recycling revenues derived from processing fees. Adjusted free cash flow is expected to be $750 million. For the walk from adjusted EBITDA, we expect normal course CapEx of $700 million to $725 million net of cash interest of approximately $350 million, approximately $200 million lower than what it would have otherwise been as a result of the use of the ES proceeds and $125 million of other cash flow items, mainly ARO and cash taxes. The $325 million of planned growth capital is excluded from the guide. Free cash flow conversion as a percentage of adjusted EBITDA increases 230 basis points to 38.7% as we push towards our near-term goal of free cash flow conversion that starts with a 4. We believe we have a clear line of sight to industry-leading rates of improvement to our free cash flow conversion, which will be a key focus of our discussion at this week's Investor Day. As Patrick mentioned, the post-ES deleveraged balance sheet allows for the reignition of our M&A strategies that have been tempered over the past 18 months. Our pipeline remains robust and the incremental M&A completed during the year will be upside to our guide. I want to highlight that our M&A program can be executed without having a significant impact on leverage, thanks to the power of our financial model, which provides dependable organic deleveraging each year through adjusted EBITDA growth and consistent strong free cash flow generation. Specifically, as it relates to the first quarter of 2025, we expect consolidated revenues of approximately $1.52 billion and approximately 27.1% adjusted EBITDA margin, which implies a 100 basis point expansion over the prior year pro forma for the ES sale. Q1 adjusted free cash flow pro forma that the ES sale occurred on January 1 is expected to be about nil, less than the prior year, largely on account of the timing of cash interest payments and anticipated investments in working capital and CapEx. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.
Patrick Dovigi, CEO
Thanks, Luke. As we said in January, I don't think our setup has ever been better. We have proven that we can execute on our strategic plan and we believe that we have laid out the foundation for long-term growth and value creation for all shareholders. Our go-forward strategy remains simple and clear. We're going to continue to generate industry-leading organic growth in part from the near-term ramp-up from EPR, RNG, and the other self-help strategies I described in my opening remarks. We're going to improve free cash flow conversion, execute on our robust M&A pipeline, while maintaining leverage in line with our targets and continuing to progress towards an investment-grade credit rating. We're going to broaden our capital allocation strategy to include share buybacks, as well as increased dividends. At our Investor Day, we will expand on each of these items and demonstrate why we believe that GFL is uniquely positioned for industry-leading financial performance over the near term. I always want to end with thanking our employees. Our continued success would not be possible without their tireless hard work and dedication, and I want to thank each and every one of them for their continued contributions. I will now turn the call over to the operator to open the line for Q&A.
Operator, Operator
Our first question comes from Sabahat Khan of RBC Capital Markets. Please proceed.
Sabahat Khan, Analyst
Okay, great. Thanks and good morning. Maybe before getting into the operation, just a broader question on capital allocation here. Your guidance at the time of the ES announcement was for pro forma leverage to be around three times. Maybe if you can just update us on the capital allocation priorities as we look ahead to the closing on March and kind of there forward? Thanks.
Patrick Dovigi, CEO
Thank you, Sabahat. As mentioned earlier, we anticipate closing on the first and receiving the capital on March 3rd. Initially, approximately $3.75 billion will be directed toward repaying debt, which includes a mix of revolving credit, term loans, and some existing payable bonds. The repayment of the term loan and revolver will happen quite quickly, whereas the bonds may take a couple of weeks. However, we expect all debt to be repaid by the end of the quarter. Following that, we will focus on share buybacks, as both our perspective and the Board's view is that the stock remains undervalued. Looking ahead to 2025 and 2026, considering our investments in EPR and RNG, we provide a conservative forecast regarding organic growth and potential M&A activity. The Board believes the stock is significantly undervalued at this point. Consequently, what you will likely see from us in the next 24 to 48 hours is a normal course issuer bid, for which we have sought exemptive relief to enable a buyback of up to 10% of the public float. Based on the rolling volume count on the US line, we plan to purchase approximately 350,000 to 500,000 shares daily, while on the Canadian line, we can buy around 65,000 to 70,000 shares each day. Additionally, now that we have clarity on the closing, we expect to finalize how we will repurchase shares pertained to the overhang from private equity shareholders, specifically Ontario Teachers, GIC, and BC Partners. We anticipate receiving more information from the OSC within the next week or two, which will also influence our plans. Together, we expect to successfully buy back the $2.25 billion worth of shares we mentioned when we announced the transaction.
Sabahat Khan, Analyst
Okay. Great. And then maybe just on some of the margin commentary that Luke shared for 2025. Maybe you can just dig a little bit deeper into the maybe the sell-up levels. I know you'll get a bit more detailed at the Investor Day. But maybe for 2025, what are some of the levers that are driving this margin improvement for this year? And maybe the stuff that we should wait for, I guess, over the next few years that you maybe take later this week. Thanks. That's it for me.
Luke Pelosi, CFO
Yeah, it's a great question, Sabahat. But obviously, we're really pleased with the setup and being able to come out with industry-leading margin expansion yet again. If you think about the drivers, as you know, I always like to talk about the exogenous factors, if you will, and if you think about the guide, you have 100 basis points of underlying solid waste margin. If I think about commodities and fuel with where we sit today, it's about a 20 basis point drag. And then last year, the sort of recognition of RNG ITC that ended up in EBITDA was another 25 basis point drag. So you got 45 basis points going against you. Now good guys, M&A, albeit a small amount is accretive, and that's 5 basis points. The FX today is 5 basis points, and you got sort of a 30, 35 basis point benefit from the Michigan divestitures. So the good guys and bad guys articulated there are a bit of a wash. So really leading this 100 basis points of underlying is really organic margin expansion. And now to your point, on the self-help levers, I mean, if you think about price/cost spread, we're thinking of cost inflation sort of low to mid-4s against the sort of price number of that kind of low to mid-5s. So you're banking on 100 basis points of spread there, which effectively means basis points of margin expansion coming out of that spread. So you really have another sort of 30 to 40 basis points coming from the self-help levers. And what it says, Bob, is what gets us excited, it's not any one thing, it's really all of the things contributing, right? And so you have the benefits of EPR and RNG rolling on, you're having the benefits of continued sort of fleet and asset utilization having the benefits of employee turnover, the quantification of which is multifold, but you see it from onboarding cost, but productivity, cost of risk, etc. So what gets us excited is the sort of incremental contributions from each of these levers working in concert to yield these sort of industry-leading results. So on Thursday, we'll talk about each of those levers in a little bit sort of more detail as to what we think the art of the possible can be. But safe to say, we have a high degree of conviction that the realization of those benefits ratably over the next couple of years is going to continue to deliver exceptional results at the margin and more importantly, free cash flow conversion mode.
Sabahat Khan, Analyst
Thanks very much.
Tyler Brown, Analyst
Hey, good morning. It's Tyler.
Patrick Dovigi, CEO
Good morning.
Tyler Brown, Analyst
Good morning, hey. Can we just start a little bit more on the EBITDA bridge? So if we started pro forma solid waste plus corporate, I think you're at, call it, $1.76 billion. But just how much is FX? And then how much is EPR and R&D laying in this year? And I think you've got maybe some corporate a little bit that goes with ES as well. But can you talk a little bit about the puts and takes?
Luke Pelosi, CFO
Certainly. If we look at the revenue, we started with approximately $61 million to $50 million last year when adjusting for ES. After accounting for about $100 million from the Michigan divestitures, the adjusted revenue stands at around $60 million to $50 million excluding ES. Our projected price increase is between 5.25% to 5.5%, with volume adjustments around plus or minus 25 basis points, effectively zero at the midpoint. Commodity prices are expected to decrease by about 25 basis points. Although the underlying index has shifted more significantly, our transition to a fixed fee processing model under EPR helps mitigate some of the volatility, yet we still face a 25 basis point decline from commodity prices. M&A contributions are positive, adding 80 basis points due to a small amount of M&A activity, but this is offset by a 160 basis point impact from Michigan. Depending on how you interpret the divestitures, starting figures could vary. Regarding foreign exchange, we're assuming it to be at $1.41 billion, which is lower than current levels. We usually base our guidance on prevailing interest rates, but given the recent fluctuations in FX, we opted for this more conservative approach. It's important to note that our revenue is sensitive to foreign exchange rates, with a change of $30 million per point of FX and about $10 million at the EBITDA level. If the current FX rate is closer to $1.44, a 3-point change could result in about $100 million additional revenue and over $30 million in EBITDA for context. On the EBITDA front, starting with approximately $1.76 billion in 2024 adjusted for the removal of ES, we can account for the natural contributions of various components. The contributions from RNG and EPR are increasing, with RNG expected to rise from about $25 million to $30 million in 2024 to around $50 million in 2025. EPR's contribution has improved from an initial estimate of $10 million in 2024 to closer to $20 million due to favorable conditions in Q4 and commodity price shifts. We anticipate an additional $35 million to $40 million lifting into 2025. Importantly, EPR helps shield us from the downward pressure on margins related to commodity price declines, preserving our EBITDA base as we transition to a fixed fee processing model. There are numerous factors at play, but these are the main elements informing our guidance.
Tyler Brown, Analyst
Excellent. Okay. Lots of good detail. Appreciate that very much. Patrick, can we talk real quickly about GIP? Can you just give us some updated financials there, maybe EBITDA, the leverage profile? And then now that you've got ES behind you, what's the plan to monetize that asset maybe over the next couple of years? Thanks guys.
Patrick Dovigi, CEO
Sure, yeah. So 2024 was a great year. Finished in low $200 million of EBITDA. We have a plan this year for approximately $225 million of EBITDA as a plan. We have three M&A transactions lined up for that business. So again, back on plan, which is great. Interestingly enough, we have had a significant amount of reverse inquiry into that about that business, particularly on the success that came from the ES transaction. So it is something we're going to look at and explore. Would it be a full outright sale? No, because I think there's a significant amount of value creation opportunities within that business, particularly coming out of this crazy inflationary environment. But it is something we're going to explore and maybe there's a partial liquidity event that comes with that business, but we're going to explore that post-closing the ES business. But it's on track, performing great. Valuations in the sector have never been better. So we're feeling very good about it and very confident about it.
Tyler Brown, Analyst
Okay. Perfect. Thank you.
Operator, Operator
We have a question from Kevin Chiang of CIBC World Markets. Please go ahead.
Kevin Chiang, Analyst
Good morning, everybody. Thanks for taking my question. Luke, maybe just on the margin guide for the year and maybe for the first quarter, I think you're calling on about 100 basis points for both. I guess, I think the margin cadence through the year, I would have imagined Q1 would have been tougher, just you called out winter, and I suspect commodity prices. I know EPR helps here, but commodity prices, the comps are probably tougher to start off 2025. Just I guess, how do I square a pretty good margin lift in Q1, which looks maybe is your most challenging seasonal quarter with the full year outlook also being 100 basis points?
Luke Pelosi, CFO
Yeah. It's a great question, Kevin. Thanks for it. I mean, if you think about H1 versus H2, I mean H1 has the benefit of this Michigan divestiture. And just those that show the power Patrick mentioned in the comment about focusing on quality of volume. And the benefit in Q1 of not having that sort of lower quality volume is roughly 65 basis points. So providing a lot of support to offset, I think, on the commodity and other exogenous-type factors, but also the seasonal component. Now if you think about the commodity ramp for last year, I think it's a point to understand the cadence there because recall, it was really a Q2 into Q3 ramp when the prices took off. So Q1 over Q1, we actually have a slight lift on commodities at the margin level, and that actually turns to the negative as you get into the order back end of the year. And it's also just the quality of the underlying margin expansion that's happened ratably. And so you're seeing that come through in each of the quarters, we anticipate being able to have the right firm of industry-leading, I keep saying, but the very impressive organic growth across each of the quarters. I think Q3 is going to be the toughest, just by virtue if you go back and look at what you're lapping, that was a record-breaking quarter for us. But the H1 is certainly benefiting from, again, with the outsized contribution from the sort of divestitures as well as just the cadence and timing of some of the exogenous factors on commodity.
Kevin Chiang, Analyst
That's very helpful information. I apologize if I missed this. I noticed an increase in your organic growth in the US, reaching 5.8% on a pro forma basis compared to what you're tracking in Q3 and into the first half of 2024. Is there anything to highlight regarding the increase in the fourth quarter?
Luke Pelosi, CFO
Yes, Kevin, I'd say if you look at the US, sort of specifically, I mean, both markets have been contributing sort of at the price line in a very, sort of satisfactory manner to us, a little bit of outsized price in Canada as you're getting new municipal contracts rolling on and you're getting the sort of price increase sort of benefit from that. I'd say the really strong story in the US in Q4 was the sort of volume piece, right? And again, as you lap the sort of intentional shedding and you think about how that's materializing in volume, I mean, the US volumes increased 360 basis points sequentially from Q3, right? Q3 was negative 1.9, and that increased to 1.7 in Q4. Now part of that was the anniversary. Part of it was strong success in the sort of hurricane cleanup efforts that we're able to participate in, thanks to our optimized platform in those regions. So that certainly sort of contributed to the step-up there where you were otherwise seeing negative volumes during the year.
Kevin Chiang, Analyst
That’s super helpful. Thank you for taking my questions.
Luke Pelosi, CFO
Thanks, Kevin.
Patrick Dovigi, CEO
Thanks, Kevin.
Operator, Operator
We have a question from Bryan Burgmeier of Citigroup. Please go ahead.
Bryan Burgmeier, Analyst
Hi. Good morning. Thank you for taking the questions. Maybe just digging into RNG a little bit. Do you expect to lock in any RIN pricing for this year? And are you able to maybe provide an earnings sensitivity to RIN prices just so we can monitor that throughout the year? And then after the $325 million in growth CapEx, is it possible to say how much you think could be left for 2026 and 2027?
Luke Pelosi, CFO
Yes. So this is Luke speaking. I'll speak on the first point or the second comment about sensitivity. If you look today, we're assuming RIN pricing in around the sort of 240 level roughly with what we have online, every $0.50 of RIN prices would drive roughly $15 million of EBITDA. Now at maturity, every $0.50 of RIN prices drives about $50 million of EBITDA. But obviously, with the sort of lower volume of MMBtus that we've yet to have in the system, today's sort of sensitivity is a little bit lower. I'll pass it to sort of Patrick as you think about sort of the locking in of pricing.
Patrick Dovigi, CEO
Yes. So long-term locking of pricing, obviously, we don't feel like today is the right time. But as the year progresses, similar to the last administration, we think that it will find a level set in place. And I think from an industry perspective, we think $2.75 to $3 is probably still the long-term number. That's what all the people are smarter than me think. That being said, we're going to forward sell all of our RINs for the year. So our expectation is that we don't see much volatility from that because everything will be pre-sold for the year in the near term.
Luke Pelosi, CFO
And Bryan, regarding the capital expenditures, each year, the sustainability spending has generally been about two-thirds for EPR and other initiatives, and about one-third for RNG. Looking beyond this year, we anticipate an additional net capital expenditure of around $100 million to $150 million related to RNG from 2026 to 2028. Overall, I expect that spending will decrease significantly compared to current levels, although there will still be some costs associated with completing the final RNG projects.
Bryan Burgmeier, Analyst
Okay. Understood. Thank you very much for the detail. And then last question for me, and then I can turn it over is I know guidance doesn't have any kind of incremental M&A in there. Just curious if you've either closed any deals this year? And then if you think maybe last year's $600 million in spending is like a decent proxy for 2025? Or maybe we should just hold tight until the Investor Day for more details. But thank you. I'll turn it over...
Patrick Dovigi, CEO
Yes, we've closed one small deal this year. We expect that after securing the funding, our M&A efforts will increase to previous levels. Typically, we budget for spending between $500 million and $700 million, with the potential upside likely closer to $1 billion. This is what we anticipate as we return to a more normal year compared to last year, which was unusual due to the capital allocation framework that involved balancing EPR, RNG spending, M&A, and deleveraging. With that behind us, we plan to return to our standard operations and continue executing our strategy that we have followed for the past 17 years. We'll provide a more comprehensive update at Investor Day on Thursday.
Operator, Operator
We have a question from Jerry Revich of Goldman Sachs. Please go ahead.
Unidentified Analyst, Analyst
Hi, good morning. This is Adam on for Jay today. Just one follow-up on M&A. It sounds like the pipeline remains robust. Can you just talk about the mix of opportunities in the M&A pipeline from a standpoint of solid waste business lines or geography?
Patrick Dovigi, CEO
Yes, we will focus on a combination of the US and Canada in existing markets where we are currently operating, which will enhance those markets since we already own significant post-collection assets. You can expect to see this activity spread across both Canada and the US. From a financial perspective, a larger portion of the investments will be channeled into the US due to the size of the opportunity and our plans to expand in areas where we operate landfills, recycling facilities, and transportation services. My expectation is that approximately 75% of the dollars will go to the US and 25% to Canada.
Unidentified Analyst, Analyst
Great. And then can you just talk about your assumptions for recycling prices in the guide and update us on how we should think about sensitivity to recycling prices based on risk-sharing mechanisms in place today?
Luke Pelosi, CFO
Yes, Adam, it's Luke speaking. I mean, we exited 2025 at roughly about CAD180, Canadian tonne when you look at where the sort of markets were, I think one thing to note when you look on a year-over-year comp is that during periods of price volatility. I mean, we ultimately sell at a spread above the market price, right? And when you have periods of rising prices, we're often able to sort of increase that spread that we're able to realize, and then the inverse as prices decline. And why I highlight that is when you look at the 2024 average rate, it's about CAD200, CAD205 per tonne – Canadian per Canadian tonne. It's about $25 delta when I think about the $180 exit rate, but our realized rate during 2024 was significantly higher than that because of that sort of price volatility. And you're looking at more like a sort of $40, $45 delta in terms of the sort of pricing year-over-year on which our guidance is based. Now at the roughly 1 million tons that we have, that would have implied like a $45 million headwind. The reality is today, we're seeing a significantly lower headwind than that because, again, as I mentioned, fixed away from volatile commodity-based contracts to fixed fee processing model. So today, where we said it's roughly every $10 change is going to be about a $5 change in EBITDA, the flow-through. And as we progress through 2025 and 2026, that exposure will reduce even further from there. But that's how I would think about the setup for 2025 as we sit today.
Unidentified Analyst, Analyst
Great. Thanks so much.
Operator, Operator
We have a question from Devin Dodge of BMO. Please go ahead.
Devin Dodge, Analyst
Thank you. Good morning. I wanted to ask about the directors appointed by OTPP stepping down. I believe the investor rights agreement allows teachers to appoint a Board member as long as they own more than 5%. Given the buyback and the proceeds from ES you've mentioned, I don't believe teachers would drop below that threshold. Could you provide some insight into the Board change and whether it impacts the planned buyback activity?
Patrick Dovigi, CEO
No. No change in the read-through. I think from our perspective, as we said, looking at Board composition, we've approached both of the sponsors and thinking about what the long-term view is on the Board, how that Board representation is going to play out, particularly given that the levels that they're going to be at post the buyback and then allowing the company to set itself up to go out and think about a long-term board and again, recruiting individuals that would go on the board in replacement of that's more of the sponsor type, right? And as I said previously, our expectation was that Ontario Teachers would come off in sort of early 2025, which is happening now. And obviously, with the sell-down, our expectation is that one of the BC members will come off as well. So I think the way the investor rights agreement reads is they have the right to appoint it. It's not a necessity. And then just given how close they'll be to the threshold, post the buyback, the expectation was we got one of them out of the way now, and we expect the other one we're in process now of working with our external advisors as well as the current board on what that board is going to look like and what new members will be appointed to the Board. So that's all in process as per plan.
Devin Dodge, Analyst
Okay. Thanks, guys. Good context. And then maybe just a modeling question, so it might be for Luke here. But the repayment of lease obligations on the cash flow statement. Look, there's been a fair bit of quarter-to-quarter volatility. I think it was almost zero in the quarter. Just wondering if you could provide some color on what's driving some of that noise in that line item? And what that should be on a go-forward basis and the mix between operating and finance leases.
Luke Pelosi, CFO
Yes, Devin, it's Luke speaking. On a go-forward basis, if you think about it, it's roughly like $100 million, $120 million per year amount. And I'd say that is the US dollar denominated to get some FX sort of volatility in that. The operating versus finance, as you know, like it doesn't really sort of exist under IFRS per se. So it's not a classification that we readily available. I think of it sort of roughly, call it, 75% when you think about operating which is buildings primarily, like offices and some of our key facilities that are leased and the other balance would be equipment type financing amounts.
Devin Dodge, Analyst
Okay. Can you help me understand what is causing some of the quarter-to-quarter volatility? Is it related to the timing of payments?
Luke Pelosi, CFO
This year, what you had is equipment specifically corporate aircraft lease that you had typically under a lease and you had had upfront payments for replacement aircraft being made, and then we received a reimbursement in Q4 as it pivoted into a regular loan for those payments. And so you just had some puts and takes within the quarters as a result of those amounts.
Devin Dodge, Analyst
Okay. Got it. Thanks for that. I'll turn it over.
Operator, Operator
We have a question from Konark Gupta of Scotiabank. Please go ahead.
Konark Gupta, Analyst
Thanks and good morning. Just wanted to understand, Luke, what's your expectation for the cadence for net leverage as the year progresses? And I'm asking this like from a perspective of you have obviously, the capital deployment for the sustainability, the ES sales will happen in the next month or so. And then you have some M&A as well happening. How do you see the ebbs and flows of the net leverage as the year progresses? Thanks.
Luke Pelosi, CFO
Yes, Konark, it's a great question, and obviously something we're going to pivot towards being very proud to report on as opposed to historically, maybe it wasn't always the case. But if you think pro forma for the transaction, you have roughly sort of three turns right out of the gate. And then as you go forward from here, I mean, ex M&A, I'll start, it's just the sort of natural sort of deleveraging that happens throughout the year between Q2, Q3, and then Q4, you bounce around in and around there, but you're going to end the year otherwise at 2.9 times on an organic basis. And that's inclusive of the sort of growth CapEx, etc. Now the actual sort of cadence from each of the periods, typically, H1 is a bit of a heavier investment on both working capital and CapEx. And then H1 will be roughly $100 million working capital investment, and you spend sort of 55% to 60% of your total CapEx spend. So from a free cash flow perspective, H1 is a little bit more of investments. You will see a slight uptick in Q2 on that sort of pro forma number. And then that rate of labor recovers through Q3 and Q4. Inclusive of potential M&A, which would be all additive to the guide at the EBITDA level, that could impact leverage depending on the timing of when those deals close. However, what I would say, and I highlighted in the prepared remarks, the relative impact of M&A, either the size and overall sort of EBITDA and free cash flow generation of the business is much more muted today at the leverage line. Specifically, if you look at it, you can spend about $500 million at 7.5 times, eight times on M&A, and that would impact leverage by roughly sort of 15 basis points. So that's part of our excitement of the story of this inflection point that's been reached, whereas you can execute on the M&A strategy and still maintain leverage at this desired level. So that's something that we've historically been able to do and gives us great sort of conviction in our ability to sort of balance the various sort of interest in driving equity value creation as we go forward from here.
Konark Gupta, Analyst
That's great color. Look if I can follow-up quickly. We have seen one of the companies in Canada was trying to redomicile in the US and then they pulled back. I'm just wondering, like with the ES sale transaction, is there any consideration to change anything on the headquarter side of things or from an accounting perspective, whether to go to US GAAP or not?
Patrick Dovigi, CEO
No decisions have been made yet. At the Investor Day, we will outline the two paths we are considering. From our perspective, inclusion in the index would be advantageous. Looking at our position in the TSX 60 rankings, we believe we are close to being one of the next industrial companies to be included. Larger companies like Fairfax and Celestica have been mentioned, and it appears we are next in line for TSX 60 inclusion based on the data available. Currently, industrials are underrepresented in the TSX 60, so it will depend on the committee's decision regarding future inclusions. With our market cap and trajectory, we expect that as one company exits, we might be among the next few to enter, possibly even the next one. Regarding our revenue, a significant portion comes from the US, which might open up additional opportunities for us. However, we would never consider reincorporating in the US for tax efficiency reasons. While it's theoretically possible, it wouldn't be efficient from a tax standpoint. There are examples of companies that have moved their headquarters for US index inclusion, and we are actively exploring that option. Ultimately, we want to attract the broadest base of investors. We are currently focusing on the Canadian TSX 60 path, but after the ES divestiture, we will evaluate both options to determine which offers the most value and attracts the most buyer interest. I will provide a more detailed update at the Investor Day on Thursday.
Konark Gupta, Analyst
That's great. Thanks, guys. Appreciate it and see you Thursday.
Patrick Dovigi, CEO
Thank you.
Operator, Operator
We have a question from Chris Murray of ATB Capital Markets. Please go ahead.
Chris Murray, Analyst
Hello. This is Harold on for Stephanie Moore. So I guess on the progress to investment-grade rating post the US transaction, you get down to three-time pro forma leverage. So I guess, what else needs to be done as you guys move to that aggressive grade rating up after you collect the capital from the divestiture?
Patrick Dovigi, CEO
Yes, we are not in control of the timing, but we expect to achieve significant upgrades when we reach an investment-grade credit rating, which ultimately depends on Moody's and S&P. They typically want to see the numbers over a 12-month period. In the meantime, we anticipate a material credit rating upgrade. It is a bit uncertain, but we are focused on it, especially with our debt repayment scheduled for next week.
Unidentified Analyst, Analyst
Got it. And I guess, just on the guide, what are you seeing on open book price and versus restricted book? And then volumes and other expected to be flattish. But if you could talk about intentional shedding versus expectations on specialty waste industrial? Are you expecting an improvement there? Are you expecting erasing the volumes to remain content at 2024 levels? Thank you.
Luke Pelosi, CFO
Yes, Harold, it's Luke. Regarding pricing, you are witnessing a decline in your open market commercial collection business compared to the levels seen in 2023 and 2024, which is anticipated due to the reduction in cost inflation. Your blended collection rate remains above 6%, with higher numbers in your commercial industrial sector and slightly lower in residential, which is tied to the Consumer Price Index and categorized as restricted. We are pleased to observe a new steady level of close to mid-single digits in post-collection, which historically has held back blended pricing. There is a prevailing sentiment in the industry that we can't offer post-collection services below our cost, so we continue to see strength in both collection and post-collection, even with the anticipated decline from 2024 and 2023, coinciding with reduced cost inflation. As for volume, we have mostly moved past our intentional shedding activities, with only minimal ongoing efforts. The projections for 2025 account for this. When we resume mergers and acquisitions, we might encounter additional volumes that do not meet our standards, which could contribute to some growth. The guidance focuses on Special Waste, including hurricane cleanup and general Special Waste, which introduces some uncertainty for 2025. Any additional volumes there would be regarded as a positive. In terms of margin, we are anticipating about a 50 basis point impact due to the assumptions related to Special Waste. Therefore, if the situation develops similarly to previous instances, there could be further upside beyond what we initially communicated.
Unidentified Analyst, Analyst
Thank you.
Operator, Operator
We currently have no further questions. So I will hand back to Patrick for closing remarks.
Patrick Dovigi, CEO
Thank you, everyone, and much appreciated for joining the call. I look forward to seeing everyone on Thursday, at our Investor Day. And as always, if any questions, please feel to reach out. And we're looking forward to speaking to everyone after Q1 and another successful quarter. Thank you so much.
Operator, Operator
This concludes today's call. Thank you for joining. You may now disconnect your lines.