Earnings Call Transcript - GFL Q1 2023

Operator, Operator

Hello, and welcome to the GFL Environmental 2023 Q1 Earnings Call. My name is Elliot, and I'll be coordinating your call today. I will now hand over to Patrick Dovigi, Founder and CEO. The floor is yours. Please go ahead.

Patrick Dovigi, Founder and 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 first quarter. 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 filed our earnings press release, which includes important information. The press release is available on our website. We have prepared a presentation to accompany this call that is also 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.

Patrick Dovigi, Founder and CEO

Thank you, Luke. Our exceptionally strong first quarter performance once again showcases the quality of our assets and the capabilities of our team, and sets us up for another year of industry-leading organic growth. Exceeding our own expectations for revenue, adjusted EBITDA, margin, and free cash flows, our results clearly demonstrate the highly successful execution of the value creation strategies we've been communicating to you since we went public. For the fifth quarter in a row, we realized double-digit organic revenue growth across both our segments, contributing to nearly 30% top-line growth in the first quarter. Solid Waste core pricing was 12.6%, the highest in our history and an acceleration of 270 basis points over the record pricing we realized in the fourth quarter. The impact of our open market pricing strategies, fuel surcharge initiatives, and the acceleration of price increases on CPI linked revenue, all combined to yield a core price level higher than we anticipated, setting us up to exceed the 8% minimum price level on which our 2023 guidance was based. The positive Solid Waste volumes we realized in both of our geographies were also ahead of our expectations and speak to the quality of our market selection and the resiliency of our business. Additionally, the rollover of 2022 Solid Waste M&A also exceeded our plan. Our Environmental Services segment once again delivered results significantly ahead of our internal expectations, realizing over 25% organic growth in the quarter, and continuing to demonstrate the merits of our strategy in this segment. Our previously discussed focus on pricing quality added to the substantial double-digit volume growth that has been ongoing since the second half of 2021. As I said last quarter, we remain extremely optimistic about this segment's growth prospects and operating leverage opportunities given our focus on quality of revenue and asset utilization. Adjusted EBITDA grew 24% in the first quarter, and margins were nearly 50 basis points better than planned as our diligent focus on optimizing pricing and on our cost base continues to drive our higher underlying profitability. The $441 million of adjusted EBITDA was ahead of our expectations and attributable to the broad-based revenue outperformance and operating leverage across both segments. The margin impact of higher fuel costs that were a focus for most of 2022 continued to be mitigated by the ongoing implementation of our fuel cost recovery program, which allows price increases to drive operating leverage. The quarter saw almost double-digit unit cost inflation, which was in line with expectations and is expected to ratably step down as the year progresses. With that said, repair and maintenance cost headwinds continue to linger. Our record price increases overcame these cost pressures and drove nearly 200 basis points of organic Solid Waste margin expansion when excluding the impact of fuel and commodity prices. As we look forward to the balance of the year, we're seeing positive signs in labor and commodity prices, which would shape us up to have a tailwind to the guide. The strength in the first quarter further solidifies our high degree of visibility on the widening spread between price and cost inflation, and makes us optimistic that we should be able to meet or exceed the high end of the already industry-leading margin expansion we included in our full-year guidance. For adjusted free cash flow, Luke, will talk through the moving pieces, but at a high level, the front-end loading of working capital investment and capital expenditures result in a plan that was negative in the first half and positive in the second half. The first quarter results were better than our plan. We are actively trying to pull forward the receipt of every truck and piece of equipment we can in response to the repair and maintenance cost pressures, a strategy that we anticipate will drive incremental profitability as we move forward. In addition to outstanding financial performance, the first quarter also saw material progress on our portfolio rationalization initiative. On our last call, we told you that we would identify three distinct non-core markets for divestiture. As of this week, we have signed definitive agreements for all three and we now anticipate total gross proceeds of CAD 1.6 billion, over CAD 100 million more than we had said on our February call. We expect one of the transactions will close as early as next month and the other two to be closed by the end of Q2 or the end of the third quarter. The net proceeds from the transactions will be used to pay down our floating rate debt. The divested assets represent approximately $110 million of adjusted EBITDA at a mid-20s margin, and the transactions are expected to be immediately free cash flow accretive as the interest in CapEx savings more than offset the divested adjusted EBITDA. Because of the mid-teens multiple we were realizing on these sales, the transactions are de-levering by nearly half a turn. The high degree of visibility that we now have on the transaction timing, combined with our exceptional first quarter operating performance, solidifies our conviction that we will end the year with net leverage that is less than 4x. We are committed to achieving this leverage target by year-end and expect further deleveraging in 2024 and beyond. We think that this will position us to secure an investment-grade rating over the medium-term. On the ESG front, in Q1, we continue to make progress on our RNG project pipeline. The largest of these projects is at our Arbor Hills facility in Michigan and is expected to start production in Q2 of this year. We hired our first director of diversity, equity, inclusion and belonging. This month we expect to begin to see positive impacts on employee retention and engagement as we continue to roll out our DEI&B roadmap and the other employee-focused programs that we talked about in our last Sustainability Report. Also, this month we announced the appointment of Sandra Levy to our Board of Directors. Sandra is a great addition to the Board with her HR and legal background combined with her experience as an Olympian. We expect she'll be able to provide some good insights to management as we continue to foster our already strong culture at GFL. Lastly, Joy Grahek, our EVP of Strategic Initiatives, who has been with GFL since the early years will be recognized as one of the five inaugural women who inspire at Waste Expo next month. To sum it all up, the quarter delivered industry-leading financial performance that exceeded our plan and at the same time saw material advancement of our ESG-related initiatives. Once again, I want to thank each and every one of our 20,000 employees for all that they do to allow GFL to continue to achieve these exceptional results. I'll now pass the call over to Luke, who will walk through the quarter in more detail and then I'll share some closing comments before we open it up for Q&A.

Luke Pelosi, CFO

Thanks, Patrick. Our company Investor Presentation provides supplemental analysis to summarize our performance in the quarter in a consistent format to what we previously provided. Page 3 summarizes the bridge between our guidance and actual revenue, with outsized underlying price volume fundamentals combining with M&A outperformance to drive a result more than $100 million above the original guide. Note that the M&A outperformance is primarily related to the rollover of 2022 M&A as the contribution from new 2023 M&A excluding the Heartland deal, which was included in the base guide, was approximately only $5 million. While Environmental Services continues to materially outperform and consistently surprise to the upside, the quarter's overall outperformance was almost equally driven by Solid Waste where pricing, volume, and M&A rollover were all ahead of our expectations. Core Solid Waste pricing accelerated 270 basis points from Q4 with double-digit pricing in both our geographies and high-single-digit price in the typically lower-priced residential collection and post-collection service lines. This result is largely attributable to CPI-linked revenue finally starting to reset at prices commensurate with the cost inflation environment, a dynamic that is expected to provide pricing support for quarters to come due to the inherent lag in the mechanics of the underlying contracts. As Patrick said, the strength of the first-quarter pricing provides conviction that we will do better than the 8% pricing that was included in the guide for the year as a whole. Page 4 shows the bridge for Solid Waste adjusted EBITDA margins compared to the first quarter of 2022. As anticipated, the decline in commodity prices in our MRF business was a 125 basis point headwind to margins year-over-year. Recall our guide assumed commodity prices remained at January 2023 levels. While this pricing was broadly in line with first quarter actuals, any improvement from here will be upside. Although, fuel costs decreased sequentially from Q4, the increased diesel costs over the prior year continue to be a margin headwind. However, the ongoing improvement of our fuel costs recovery strategies yielded a 35 basis point improvement in the net margin impact from higher diesel prices as compared to the fourth quarter. Excluding the impact of commodity and fuel prices, Solid Waste margins expanded 190 basis points on a same-stores basis, a 65 basis point acceleration over the spread in Q4, and as Patrick said, a result that reinforces our optimism in being able to meet and exceed the already industry-leading margin expansion we included in our base guide. And while the positive benefits of using fuel surcharges to mitigate the margin impact of fuel price volatility are clearly evident in our results, Page 5 highlights that we still see a substantial opportunity for further improvement in this area. We remain highly confident in our ability to conclude the first phase of this initiative by June of this year, two quarters ahead of the original plan, and we remain committed to pursuing the additional upside of Phase 2 throughout the second half of 2023 and beyond. We continue to lag the industry in this area due to the rapid growth of our platform in recent years that anticipate meaningful improvements to margin stability and quality as we close the gap to industry peers. Adjusted free cash flow for the quarter was negative $55 million, approximately $35 million better than planned, despite $25 million of unanticipated cash interest payments solely due to timing. On this point, interest rate volatility during the quarter led to the decision to accelerate the timing of our variable-rate interest payments, which resulted in effectively four months of cash interest payments in the first quarter. This is purely just a timing difference, and Q2 will see cash interest $25 million less than planned, and the first half as a whole will be in line with the guide. When thinking about the cadence of free cash flow, in addition to the seasonality and adjusted EBITDA, the quarterly variances in free cash flow are primarily attributable to working capital and capital expenditures timing. On working capital, we typically see an investment in the first quarter, a larger investment in the second quarter, and then a substantially equal and offsetting recovery in the second half, predominantly in the fourth quarter. The current year first quarter investment was anticipated to be greater than the prior year in light of the material revenue growth, particularly Environmental Services, which has a higher DSO profile. For capital expenditures, we typically see a front-end loading in the first half and then a ratable step down in the second half. For the current year, the front-end loading was expected to be even more pronounced by virtue of the $50 million rollover from 2022, and the active strategy to take delivery of new trucks and equipment early as mitigation to lingering repair and maintenance pressures. Incremental CapEx tied to recent M&A that is effectively purchased price, but as it was incurred post-closing also presents itself as CapEx in our reporting. As a result of these dynamics, the adjusted free cash flow was expected to be negative $90 million in the first quarter, and the actual results are significantly better than our plan. Reported net leverage was 4.97 at the end of the quarter. Looking forward, achieving adjusted EBITDA and adjusted free cash flow at plan would organically reduce year-end leverage to low-4s, and then the divestiture transactions will reduce leverage an additional 40 basis points resulting in year-end net leverage that starts with a three. This is the starting point to achieving an investment-grade rating in the medium-term. In the meantime, once our leverage is reduced and maintained at these lower levels, we anticipate material credit rating upgrades prior to the maturity of most of our existing debt, providing opportunity for near-term borrowing costs and improved free cash flow conversion. We will wait until the second quarter to update our guidance, but based on the strength of Q1, we certainly see a path to be at or above the high end of our ranges. In relation to our expectations for the second quarter, we typically realize just over 25% of annual Solid Waste revenues in the second quarter and 26% to 27% of the revenue plan for Environmental Services, which translates to approximately $1.975 billion of consolidated revenue expected for the second quarter. In terms of margins, with the toughest margin comp behind us, we remain optimistic that margins can accelerate to the low to mid-27s or approximately 70 to 90 basis points expansion over the second quarter of 2022. At the segment level, this assumes Solid Waste margins of between 30.5% and 31% and Environmental Services margins of almost 30%, with corporate margins comparable to Q1. The guide then contemplates further margin expansion in the third quarter before stepping down in the fourth quarter as per the typical cadence of the business. That yields the Q2 adjusted EBITDA expectation of $535 million to $545 million. To continue the walk to Q2 adjusted free cash flow, in Q2, we are expecting CapEx of approximately $300 million, cash interest of $110 million, and an investment in working capital and other operating cash flow items comparable to Q2 of the prior year of about $130 million combined, for an adjusted free cash flow of about nil. It's worth noting that this backend-loaded free cash flow cadence, primarily driven by working capital seasonality and CapEx timing, is in line with the expectations and assumptions underlying our original guidance to which we remain committed. I will now pass the call back to Patrick who'll provide some closing comments before Q&A.

Patrick Dovigi, Founder and CEO

Thanks, Luke. I wanted to conclude with a few thoughts on where we are today and where we are headed. We've now reported as a public company for 13 quarters. With each quarter, the impact of the strategies that we have been talking to you about since our IPO in March of 2020 have been clearly demonstrated. We have always been confident in our strategy and in our ability to execute. I've said this many times before, and I'll say it again. We have built the best team in this industry. We are all driven to make the business better every day, and we deliver on what we say we are going to do. That's our culture, and it can be felt across GFL. All of these pieces, including the effective strategies we use to lever the cumulative impact of both organic growth and M&A programs, these have been in place for a long time. We didn't adopt a new strategy when we went public. We are consistently applying the same strategies that we have used to create billions of dollars of value for shareholders over the past 15 years. When you look at what's in front of us, here's what I see: the optimization of pricing to provide sustainable durable price-cost spread, the rationalization of the portfolio to focus on the most attractive markets, the de-leveraging and associated financial leverage, the ramp-up of RNG, all the self-help levers we can pull to improve asset utilization and cost efficiency, and the runway for further M&A and the opportunity for industry-leading growth along with material improvements to our margins and free cash flow conversion is undeniable. So from where I sit, I would say we're just getting started. I will now turn the call over to the operator to open the line for Q&A.

Operator, Operator

Thank you. Our first question today comes from Kevin Chiang from CIBC Wood Gundy. Your line is open.

Kevin Chiang, Analyst

Hey Patrick and Luke, thanks for taking my question here. Congrats on a Q1. I know you're going to update the outlook when you report Q2 and thanks for the details on what Q2 looks like. But if I just look at what you did in Q1, and if I take the implied seasonality you inferred on the Q4 call in terms of what first quarter could look like, it does suggest an EBITDA on a full-year basis maybe closer to $2.1 billion to $2.2 billion obviously excluding any of these asset divestitures. Just wondering if there's anything wrong with that simplistic math, I guess just based on how much you all performed in the first quarter here.

Luke Pelosi, CFO

Yes. Kevin, it's Luke speaking. I'd say yes, we're thinking there's an opportunity to exceed the high end of the guidance we put on based on the strength of Q1, but I think it is premature to just simply roll forward a 100% of the outperformance of Q1 and add that on. And that's why we want to hold off until Q2 before we formally update the guidance. I mean, in Toronto, you were there this season; it was very mild, and no doubt you had some pull-forward that benefited. But obviously, with the strength of the pricing and the quality of the cost optimization that we're seeing in the results, we're feeling very bullish, and there's going to be an opportunity to revisit. So we do want to get Q2 under the belt, but I would say you're probably not thinking about it wrong.

Kevin Chiang, Analyst

Okay. That's helpful. Just my second question, just looking at I guess it'll be Slide 4, your kind of waterfall graph on the Solid Waste margins. 29.5%, as I think through some of the headwinds that dissipate as we get through this year and into next year and beyond. You're obviously clearly through 30%, and then you have the RNG projects, which I believe you've called up in another couple of hundred basis points of EBITDA margin. Is this approaching a mid-30% EBITDA margin when I look at some of the puts and takes and you kind of lap some of the headwinds you've experienced year or so within your Solid Waste business?

Patrick Dovigi, Founder and CEO

I mean, we've been consistent in saying that we think over time there's still another 250 to 300 basis points of opportunity within the Solid Waste business. Could that be revisited with the moving up of sort of RNG and others? For sure. The continued pricing initiatives, for sure, the continued cost rationalizations, for sure. The focus on sort of higher-margin, more accretive markets, for sure. So I mean, we're not going to stop at that incremental sort of 250 to 300 basis points, but over time, like we've said, there's no reason that this business couldn't push closer to the mid-30s over time.

Luke Pelosi, CFO

Yes. Kevin, if you think about the guide, the original guide, we were saying Solid Waste was going to be like 30.5% margin in and around that area, and that was inclusive of the material headwind to margin from commodity prices. Commodity prices alone normalizing something brings that number closer to 31%. Obviously, the strength of the Q1 and the continued durable spread of pricing costs could provide upside on top of that number as well. So never mind going forward to RNG and the other market densification optimization that Patrick spoke to, I think just within this year alone, there's an opportunity to meaningfully sort of close that gap. So yes, we're very excited about the Solid Waste, and obviously, Environmental Services is the other segment in which we believe there's a lot of runway at the margin level as well.

Operator, Operator

Our next question comes from Tyler Brown from Raymond James. Your line is open.

Tyler Brown, Analyst

Can you hear me? Hey, sorry. Sorry about that.

Patrick Dovigi, Founder and CEO

Yes.

Tyler Brown, Analyst

Hey, I just want to come back to price. Yes, so obviously pricing was very solid, but can you just remind us what percent of the book is restricted versus open? I think you've got maybe a little bit more tilt towards the open market. And then Luke, I think you mentioned what the trends were. Could you refresh that what open market and restricted pricing was?

Luke Pelosi, CFO

Yes. So on an annual basis, as you said in the Solid Waste book, we have about $1 billion, $1.1 billion that's tied to more of that CPI-linked type revenues. Mostly in the residential collection, we also see it in post-collection and some of our MRF processing type contracts. We're now seeing, and we saw in the first quarter that restricted book resetting at 7% and 8% price increases, which is obviously a much healthier number than what we've seen historically. Now you're just catching up for the cost pressures that you were effectively eating, but it's certainly nice to sort of feel that relief. And then on the open market piece, we're seeing pricing in the sort of mid-teens. Now, again, this is the catch-up in response to the cost environment. We do expect that that will moderate as the year progresses. But you should continue to have broad-based support on the CPI-linked revenue as those resets continue to occur throughout the balance of 2023 and honestly even into 2024.

Tyler Brown, Analyst

Right. Okay. That's helpful. And then I've been kind of asking all the companies this just to level set it, but what are you expecting or what is embedded in the guidance today from a unit cost inflation perspective?

Luke Pelosi, CFO

Yes. So our guide started for the year, we said it was around a 6% number and it was really a tale of two halves, right? As Q1 was going to be a high-single-digit and then moderating to a lower single-digit by the time you got to Q4 by virtue of the lapping. Now if you look at labor, labor cost is a 5.5% to low 6% number today. That is right in line with the expectation of the guide and seems to be moderating and/or easing in line with expectations. We don't think there's any material deviations there. R&M continues to linger the cost pressures associated with that. Now its ability to move the blended number is more limited, but that is the one area that we're watching. But otherwise, we think this year is going to be that sort of just above mid-single-digit and really entering into Q4 and therefore into 2024 at now a sub mid-single-digit level.

Tyler Brown, Analyst

Okay. All right. Good. So this kind of brings me to my last question. So there's a lot of talk about pricing, a lot of talk about unit cost inflation and this idea of spread. So if you look back over the past, what do you think that that spread to unit cost inflation has been? Where do you think it is today? And do you think that we could see a structurally wider spread as we think about it often to the future? I don't know if that's a forever thing, but maybe over the next couple of years. Just any thoughts on that. Appreciate it.

Luke Pelosi, CFO

Yes. I mean, I think historically to either the industry was trying to get somewhere between 100 and 175 basis points of spread and then the sort of 30% margin business that would drive your sort of 30 to 50 basis points of annual organic margin expansion. I think what happened in 2022 is everyone was trying to catch up with the cost inflation and that spread compressed, and now we're coming out the other side of that, you're seeing that spread widening. I think 2023 is going to be characterized by an exceptionally widespread, particularly as you're getting the second half of the year. And I think that carries into 2024, at which point you'll have some sort of moderating. I think the question you're asking is the right one in that, where does that spread now settle out as we go forward over the medium and longer-term? Our perspective is that it's a better spread than it was before. And I think when you look at the continued discipline on pricing in the industry, the need to earn appropriate returns on the invested capital in this highly regulated business coupled with a continued consolidation, I think those are all supports to retain what is going to be a structurally higher spread. I think it's difficult to say what exactly it will be, but I think it is clear the industry has demonstrated we will price at the required level in response to the cost environment we see. And in doing so, we're going to ensure that that spread is there to earn the appropriate return.

Operator, Operator

Our next question comes from Michael Hoffman from Stifel. Your line is open.

Michael Hoffman, Analyst

Good morning, Luke. I hope that's spring allergies and not a cold.

Patrick Dovigi, Founder and CEO

That's me actually.

Luke Pelosi, CFO

That's actually Mr. Dovigi. I'm healthy today, Michael.

Michael Hoffman, Analyst

Okay. Very good. So 12.6 less 1.90 is 10.7. So that's the first quarter inflation heads to four, five in the fourth quarter you add that up on an average basis and there's your mid-point. That's what you're testifying?

Luke Pelosi, CFO

Yes. I would just say the 10.9, Michael, that doesn't take into account the incremental cost investment. When you consider the IT spending we've discussed, you technically need to subtract that to determine your actual unit cost inflation. Doing so with the various factors involved, you arrive at a number closer to the low to mid-9 range.

Michael Hoffman, Analyst

Okay. All right. And are you starting to see it ease or is it still persistently high in April? Is the evidence of an ease happening?

Luke Pelosi, CFO

The evidence of the ease of the cost inflation is certainly happening. You're seeing it in reality and you're seeing it in the math of just the comparison. If I look month-by-month round numbers, the January margin was backwards like 200 basis points plus. By February, that was about 50 basis points. By April, you were actually ahead, I'm saying on a year-over-year basis. I'm sorry, by March, you were ahead. In April, you're expected to spread even wider. So we're certainly seeing it, and I think it's a combination of both the actual unit cost inflation moderating as well as just the year-over-year comping fact.

Michael Hoffman, Analyst

The point I want to make is that you implemented significant wage increases throughout the spring, and now we are comparing against that as these effects start to decrease.

Luke Pelosi, CFO

Correct. And then you think about for us, we had the second half of the year, we had significant incremental cost inflation from some of our third-party suppliers that were then finally just catching up on their own wage and fuel-related headwinds, but then got passed on, right? And so the Q1 and the first half is a materially more difficult comp than the second. And we're seeing that play out as anticipated, which further gives the optimism we have in the guide that we put out.

Michael Hoffman, Analyst

Okay. What do we pay down with some of the 1.2, 1.3, what instruments are we paying down?

Luke Pelosi, CFO

You'll pay your variable rate debt, right? So you have your Term Loan B, and you have your revolver balance. They have a comparable coupon. You'll, depending on the timing of receipt, you'll look at your revolver and you'll evaluate how much pay down should happen there in conjunction with the free cash flow generation of the business to preserve an appropriate level of liquidity. But the majority of those dollars will go against the Term Loan B, which is the highest coupon component of our capital structure.

Michael Hoffman, Analyst

And what are the rating agencies telling you today about what they need to see for a period of time in order to get that investment-grade? It's not just the leverage. What else do they need to see?

Luke Pelosi, CFO

Well, the leverage will be the primary gating item. They'll want to see sustained leverage at the lower level. And then in addition, over time, they'll want to see sell down from the sponsorship growth to a level slightly below where they are today. And that's just because as long as the sponsor continues to own in the size that they do, there's an incremental perspective on the sort of financial policies of the business. So those two things have to happen, but the major gating item is simply getting the leverage to that below 3.5 level for more than just a moment in time.

Michael Hoffman, Analyst

Okay. That's somewhat uncertain in terms of timing and the extent of their plans. It's a reminder that the sponsors will be looking to monetize, which they haven't done since November 2021. So this will start to occur again.

Patrick Dovigi, Founder and CEO

Yes. It'll happen, Michael, just the question of when. I mean, I think the shareholder's perspective, at least on our side, I mean, they just see a material disconnect in sort of the valuation today. So I don't think anyone's rushing to do anything sort of anytime soon, particularly given the value disconnect that the shareholder group continues to seek. So I don't think it's anything happening anytime soon, but as we continue to deliver, as we continue to perform and the thesis continues to play out, in theory, the stock should move up and the valuations should trend closer to where the industry comps are; then I think you might see some of that, but until then, it's going to be pretty quiet.

Michael Hoffman, Analyst

Okay. And given that really healthy start to ES, is there a corollary to what's happening at Green Infrastructure Partners, and does that speed up the timing on when you might be able to monetize that?

Patrick Dovigi, Founder and CEO

No, I mean, as you know, on Green Infrastructure Partners sort of slow and steady there obviously last year with the big ramp up and cost inflationary, we were cautious about what M&A we did, just getting our hands around the business to make sure that we didn't have any headwinds that were material. We got through that and obviously, as you know, we wrapped up the M&A program this year in that business actually closing sort of our largest acquisition on May 1, which is the Aecon Road Building Business. But we'll spend time getting that integrated and we have a couple of other things under NOI, still on track to meet the targets. My goal is sort of in the course of the next year-and-a-half to get that to $300-plus million of EBITDA. We'll get that to $300-plus million of EBITDA and then we'll look at sort of some strategic alternatives for that business. But I don't foresee anything happening with that business in 2023.

Michael Hoffman, Analyst

Okay. My final question is about why commodities weren't included in the guidance, which I believe was the right approach. What insights do Steve Miranda and Stephanie's recycling teams have regarding trends that might reinforce our confidence in the high-end aspects beyond just pricing?

Patrick Dovigi, Founder and CEO

And in their perspective, how it's always been from the beginning of the year, Q1 and most of Q2 was going to be pretty soft. But we are seeing increased demand for the recycled products. And I think their perspective is that late Q2 and into Q3 and particularly into the latter half of Q3, we'll start seeing some movements up in the right direction and that's been their assessment from the beginning of the year. I mean, obviously, things are subject to change, but there's certainly demand. It's now just moving price to the right spot.

Jerry Revich, Analyst

Yes, Patrick, I'm glad you mentioned that. Could you elaborate on the value capture for the industry compared to the auto OEMs? How are those discussions progressing? Also, can you remind us of your current power generation levels? This will help us understand the potential impact of e-RINs at your existing facilities.

Patrick Dovigi, Founder and CEO

Yes. It's unclear for us exactly because we have to make an assessment of our existing sort of fit contracts. So we're literally deep in the throes of it now, but I have pretty good conviction that we'll be able to come back to you with a pretty concrete perspective after Q2.

Walter Spracklin, Analyst

Thanks very much. Good morning, everyone. I just wanted to focus in on that M&A strategy post your three handle leverage. As you get into 2024, you'll have a credit upgrade, it'll further lower your borrowing costs, you'll be of size then I think Patrick, you mentioned $875 million and $900 million, and then on route to $1 billion of free cash flow generated organically without recourse to debt. I think all this has been a great strategy in terms of how you're proceeding here. Just curious once we get to 2024, how do you look at your total addressable market for M&A like when you look at the total market that's in private hands, how much of that is in your wheelhouse so that we can frame kind of the cadence of what you would ramp up to and for how long could you run at that rate given your organic free cash flow that's fueling that strategy? How long can you go at that run rate?

Patrick Dovigi, Founder and CEO

Yes, we have been quite clear about our position. Currently, analyst consensus forecasts for free cash flow in 2024 estimate it to be between $800 million and $825 million. However, following the recent divestitures, I believe that figure will likely increase to between $875 million and $900 million. This estimation is quite conservative and assumes that we will reinvest this amount in 2024 without any additional mergers or acquisitions beyond our current base. Historically, we have managed capital deployment in mergers and acquisitions effectively, and we plan to continue this approach, focusing on reducing leverage towards the mid-3 range. If we examine the performance of the base business, it is expected to reduce leverage by approximately 70 basis points organically in 2024. Starting from the high-3 range at the end of 2023 and moving into the low-3s throughout 2024, our initial spending of $900 million next year will primarily serve to reduce leverage. Even with expenditures potentially reaching between $1 billion and $1.2 billion in 2024, we anticipate maintaining a leverage level below 3.5 times. Looking ahead to 2025, we project free cash flow to exceed $1.1 billion, possibly approaching $1.2 billion, driven by organic growth, with ongoing increases thereafter, especially as free cash flow from RNG begins to materialize in 2025 and 2026. Our strategy will persist as it has in the past, targeting a leverage level below 3.5 to facilitate an investment-grade rating in the coming years. Additionally, with respect to our pipeline...

Walter Spracklin, Analyst

That's fantastic.

Patrick Dovigi, Founder and CEO

I've mentioned this several times. In Canada, there's currently a market of $11 billion to $12 billion, but the big three companies only account for $3.5 billion to $4 billion of that, and this is just in Solid Waste. There remains an unconsolidated market of $6.5 billion to $7 billion, spanning about 2,000 to 2,500 companies across 10 provinces. This represents a significant opportunity for us. In the U.S., we see our target markets presenting $5 billion to $7 billion in revenue, where we plan to expand significantly. Therefore, over the next 10 to 12 years, we anticipate maintaining this growth pace. While the profile of our business will change notably due to increased free cash flow, we will continue our mergers and acquisitions strategy as we progress.

Walter Spracklin, Analyst

Well, that's fantastic color, Patrick. On maybe one for Luke here, CapEx guide for the full-year, I think is at $300 million to $500 million. I think Luke you said that would be $300 million in the second quarter, so does that mean we're going to be closer to the $500 million for the full-year? And does that at all impact your guidance for the free cash flow of $700 million for the full-year? Just curious on that.

Luke Pelosi, CFO

Yes. Hi Walter, I think a little confusion there, $300 million to $500 million was the articulated number in M&A deployment. So dollars spent to M&A. The CapEx guide for the year was I think about $830 million gross with the recent M&A, as I said, probably another $20 million, $30 million of land purchases that are coming on some deals we just did. So that number's probably $850-ish million. And so what I was just trying to articulate with the approximately $250 million, $260 million spent in Q1 and then $300 million in Q2, you do have sort of 60% to 65% of your CapEx plan happening in H1. That was the front-end loading I was trying to speak to. The $300 million to $500 million was articulated as the art of the possible in proceeds deployed into M&A by virtue of as Patrick characterized a bit of a lighter year.

Walter Spracklin, Analyst

Yes, I was looking at the wrong note. You answered my question regarding the cadence. The cadence of the front-end CapEx guidance is not affecting your full-year free cash flow target at all.

Luke Pelosi, CFO

Correct.

Operator, Operator

Our next question comes from Rupert Merer from National Bank. Your line is open.

Rupert Merer, Analyst

Hi, good morning. Thanks for taking the question. Just to follow-up on that last question. So I think you're showing acquisitions of $217 million in Q1. Can you talk about how the M&A market is shaping up and you still comfortable, you'll fall in that $300 million to $500 million range for this year?

Luke Pelosi, CFO

So Rupert, this is Luke. Just one clarification you'll recall, we purchased the Heartland facility from Vertex in the first week of January, or the very beginning of January, and that was about $130 million of M&A spend that we actually included in our base guide by virtue of the earliness in the year in which it had to occur. So when we're talking about spending $300 million to $500 million, that was going to be incremental to the Vertex spend. So in reality, excluding Vertex, we spent about $100 million this year. At Patrick's point on the quality and opportunities and the pipeline, yes, we anticipate we will be in that range of that incremental call it $500 million to deploy into M&A. And so that'll be on top of the Heartland. So on the financial statements, it will present as a $600 million spend because we're always talking about incremental to Heartland and we're able to do that without any implications to our stated goals and commitments around leverage.

Rupert Merer, Analyst

Thank you for the opportunity to discuss volume trends in Solid Waste for both the near and long term. In the short term, you've mentioned the possibility of pulling some volumes into the first quarter, and that comparatives may be getting more challenging in certain markets. What is your outlook for volumes for the rest of the year? Looking at the long-term perspective, we've touched on what the business model may resemble after 2024. What do you consider to be a healthy run rate for volume growth, and how do you feel your positioning is in key target markets? For example, in Canada, the population growth suggests a favorable position. How do you see this influencing your strategy?

Patrick Dovigi, Founder and CEO

Yes. We have indicated that we expect volume to be flat to up by 1%. There are various factors at play across different regions in Canada and the U.S. However, it's important to note that slight changes in volumes don't significantly impact our overall business. In Canada specifically, we anticipate remaining flat for a while due to a small amount of construction and demolition (C&D) volumes entering landfills. We expect some lagging effects in late 2023 and into the first half of 2024 on those C&D volumes, which may slow down a bit. Nonetheless, this wouldn’t greatly alter our numbers. In certain markets, a slight decrease in volume could actually be beneficial, allowing us to reduce the number of our less efficient trucks and drivers. This would lead to a more efficient operation similar to what we experienced during parts of COVID. Overall, a range of down half to up one seems appropriate for long-term expectations.

Luke Pelosi, CFO

And Rupert, just to clarify on your comment about pull-forward of volume from Q2 into Q1. We're not necessarily saying there was a pull-forward, but as you know, with our exposure to the sort of winter belt, if you will, across Canada but also in Wisconsin, Michigan, et cetera, you just never know exactly how the spring is going to play out. And that's just why we always want to reserve until Q2 to actually see if there was pull-forward or not. So not necessarily saying that's the case, but just would appreciate the incremental time to fully formalize our view on that. Just wanted to clarify that point.

Rupert Merer, Analyst

Yes. And I appreciate that the numbers are pretty small compared to what we're seeing on pricing. Great. I'll leave it there. Thank you.

Patrick Dovigi, Founder and CEO

Thanks, Rupert.

Luke Pelosi, CFO

Thanks, Rupert.

Stephanie Moore, Analyst

Good morning. I was wondering if you observed any potential volume weakness in the U.S. or Canada regarding Solid Waste during the first quarter. Some of your competitors have mentioned experiencing slower activity, so I would appreciate any insights you could share on this matter. Thank you.

Patrick Dovigi, Founder and CEO

Yes, I think the performance has clearly moderated and isn't exceptional anywhere in particular. There are some lower roll-off revenues in specific markets, especially related to construction and demolition, which accounts for under 5% of our revenue. We are observing a slowdown in some of the larger primary markets, particularly in Canada. In the U.S., the impact has also moderated. We don't have significant exposure to the West Coast, which has experienced weather-related issues, but others may have been affected. We were somewhat fortunate this year not to be operating in those areas. However, this will eventually affect everyone in the industry. Overall, we haven't noticed any significant slowdown outside of some of the construction and demolition areas in the larger primary markets in Canada.

Stephanie Moore, Analyst

Great. Thank you. And then Luke, you mentioned this I think earlier in your remarks about the margin opportunity and maybe some of your investments in new technology or automation. Could you maybe just give us an update on some of those investments expected for 2023?

Luke Pelosi, CFO

Yes. So Stephanie, what I would say is what we're seeing and realizing thus far is without any substantial incremental dollars in there. We've spoken about both of the truck to CNG conversion, automation and some of these capital spends that have attractive return profiles and how we've been more limited in deploying capital into them as there's been this perception around leverage constraints, if you will. So our current guide, as we previously said, just in assumes normal course replacement schedules, yes, favoring CNG where we can, but nothing out of the ordinary in terms of incremental spend that would help accelerate the realization of some of those opportunities. So they're real, they're there, and once we perhaps get leveraged to a level that is more consistent with what the expectation set looks like, you'll see an opportunity to revisit profitable high return investments like that and others. But as of now, there's been just the normal course and mostly what you're seeing on the margin is before including what we expect to be the significant benefit once we start implementing more initiatives around those areas.

Stephanie Yee, Analyst

Hi, good morning.

Patrick Dovigi, Founder and CEO

Hi, Stephanie.

Stephanie Yee, Analyst

Want to ask about the first quarter price. Good morning. I want to ask about the first quarter pricing outperformance. Did you get less customer pushback from the pricing that you rolled out and that's what drove the outperformance or can you just kind of comment on how the conversations with customers went in implementing those pricings?

Patrick Dovigi, Founder and CEO

Yes, I believe the outperformance wasn't about whether we could charge more; it was primarily due to the initial implementation of the fuel and surcharge program that customers were contractually required to pay. It was more about applying those charges rather than negotiating with them, making sure they were aware of their contractual obligations. We communicated this throughout the third and fourth quarters of last year, indicating that the initial recognition of some of those surcharge elements would be reflected in the base price, which explains the observed outperformance in base price. Regarding customer churn, it has reached an all-time low. While catching up has increased, the overall customer churn remains at an all-time low.

Stephanie Yee, Analyst

That's great to hear. Regarding M&A, do you feel that you need to assess M&A opportunities differently because you might have to be cautious about some due to your leverage commitment?

Patrick Dovigi, Founder and CEO

Yes. What we have communicated historically and today is that we will allocate funds appropriately, focusing on markets where we have substantial fixed-based cost facilities that can be utilized more effectively with increased volumes. This involves targeting markets with numerous post-collection operations, which we may have acquired through previous acquisitions or divestitures, currently operating at about 60% to 70% capacity. Our goal is to maximize those to 100% utilization, and this is where the majority of our investment will be directed this year. As we progress through the year, we will consider expanding into tertiary markets adjacent to our existing platforms within the same geographical area. Therefore, our main focus this year is on small acquisitions that we can purchase at significantly lower costs, leveraging the fixed cost base of our current post-collection operations that are not yet operating at full capacity.

Operator, Operator

Our next question comes from Chris Murray from ATB Capital Markets. Your line is open.

Chris Murray, Analyst

Thanks, everyone. Returning to the pricing discussion for Q1, how much of the pricing for the remainder of the year do you believe is already established, and how much do you think is still outstanding for the rest of the year?

Luke Pelosi, CFO

Yes. Good morning, Chris. I'd say you probably have 85% to 90% of the price just in the typical seasonal cadence. And that's being most of our price occurs in Q1 within another pricing event that happens in Q3. So where we would sit, that would normally be the level of comfort when you think about our guide of at least 8%. And when you think about the strength of Q1, I would say you have probably a 100% visibility that you're going to achieve your guide. The question now will become the extent to which there's upside above that.

Chris Murray, Analyst

Okay. Fair enough. And then I'm not sure who wants to take this one, but you were talking about the fuel surcharge program, and you were talking about getting to the first phase of the plan and then a second phase into 2024. Can you just maybe elaborate on what you're talking about in terms of different phases for the fuel surcharge? And any thoughts around this actually being accretive as perhaps you get the surcharges into pricing in the next few quarters?

Luke Pelosi, CFO

Yes. So Chris, all we were simply saying is what we're looking today is to cover our direct fuel costs with a surcharge mechanism such that for every dollar change in diesel price I can recover my dollar plus my margin. That's what we really perceived as Phase 1 get to that point where we've effectively neutralized the margin impact from fuel cost changes in our P&L. The reality is, we are subject to fuel costs in indirect manners through a whole host of lines on the P&L. It could be third-party trucking support; it can be plastic containers and other items that are impacted by petroleum costs. So I think we will continue to pursue the overarching industry approach whereby there's a path to recover all of those types of costs beyond just our direct energy. And that's what we mean really by sort of Phase 2 and beyond. Yes, I think this is all margin accretive in that the initial recognition of these surcharges is effectively, there's a certain tranche of it that's just like incremental permanent base price and that's what you're seeing sort of come through in the results. So we're happy to now substantially be at the place where we've achieved Phase 1 and we will continue through our pricing discovery to optimize the surcharge program in conjunction with our normal course pricing practices as we go forward from year and beyond.

Devin Dodge, Analyst

Thanks. Good morning. I wanted to start with more of a modeling question, and apologies if I missed it earlier, but once the divestitures are completed, how does that impact the timing when GFL is expected to be a full cash tax?

Luke Pelosi, CFO

Sorry, Devin, we're having a really difficult time hearing you. I think you said a mention about cash taxes associated with the divestitures. So yes, as you know, we currently have significant net operating losses that have provided us tax shields on a regular basis. The divestitures will consume a significant component of those operating losses and accelerate the pace at which you become a sort of cash taxpayer. Now, obviously, with our capital deployment and M&A deployment there are opportunities to continue to minimize what is due at the cash taxes level. But starting in late 2024 and now into 2025, which is probably about half a year earlier than previously anticipated, you'll start having a ramp-up in cash taxes to the extent there are not mitigating factors such as M&A, et cetera.

Michael Feniger, Analyst

Hey guys, thanks for just squeezing me in. You guys are showing areas of addressing the low-hanging fruit as you build this company; a fuel surcharge program is a great example. Just curious, over time, do you think you'd create less seasonality with that, that free cash flow? Could it smooth out over the next few years?

Luke Pelosi, CFO

Yes. Good morning, Mike. It's Luke. I think the answer is yes. The CapEx that we're always going to respond with capital expenditures to what we see out there and this year pulling forward I think was just prudent in light of what you're seeing on the R&M side. The working capital swings that we have will always have a certain degree of it coupled with by virtue of the Canadian or winter climate and Environmental Services. But then there's a meaningful opportunity to standardize and harmonize our processes and programs there. And you think about all of the sort of payables associated with businesses that come on, that's sort of the generator of it and get to a point where you have more muted amounts from quarter-to-quarter. So I think it's a great question. I think it's something that will represent an opportunity for us as we go forward with what is now a more sort of stable size core that will allow for that sort of harmonization of those practices.

Michael Feniger, Analyst

Great. And just to sneak one last in the Environmental Services side, another big player reported a great quarter there with volume and price. Do you sense that this side of the waste industry is becoming more rational and discipline if project activity and volumes there start to soften? Do you think pricing will stay disciplined on this area of the waste industry? Thanks everyone.

Patrick Dovigi, Founder and CEO

I do. I mean, it's been my thesis for almost 16 years now, so I think it's probably 15 years behind where the Solid Waste business is. But I think over time, and the most of those businesses are particularly our facilities that are very difficult to replicate today. Again, think about it as a landfill fixed cost base, materials come in on a route-based collection network come in, process those, discharge those wastewaters or solidify them, put them into a sludge and send it to one of our sort of landfills. I think where we're sitting is that the market and the competitors are realizing what the actual cost is to do that work and it's becoming significantly more rational. And as we've said, our business, we anticipate it'll be a mid-20s margin business this year, and we think we can push that closer to 30% over the coming years. So yes, we are of the same thesis. I believe that to be true, and I think you're seeing that sort of come through in some of the competitor's numbers as well.

Operator, Operator

Our final question comes from Michael Hoffman from Stifel. Your line is open.

Michael Hoffman, Analyst

Hey, thanks for the follow-up. I meant to ask this before and I forgot. So the U.S. House has passed a debt ceiling bill and they have pulled the RNG investment tax credit that was in the IRA out of it and it's got to get through the Senate. But assuming that goes away, you'd still do all of this RNG investing, but how does it impact the cash numbers you've been sharing?

Luke Pelosi, CFO

Yes. So Michael, if you recall our previous conversation around this was we were going to use the ITC of the initial jobs to serve as the equity investment in the subsequent ones. We're going to have this opportunity to recycle that nicely. To the extent that goes away. What it will require will be a little bit more equity than we were previously anticipating. But again, as you well know, the returns on that equity and the overall profile of these are still probably one of the most compelling opportunities that we've seen in this industry or in this business. So nothing changes. It potentially changes the timing of our sort of CapEx into those. We don't anticipate there being a material shift for this year's guide, but we'll obviously sort of stay close to it as we go forward and think about 2024.

Michael Hoffman, Analyst

Yes. And just to remind everyone, they were developing these before the IRA was even in Congress's line of sight, so.

Patrick Dovigi, Founder and CEO

Of course, all those self-help opportunities will continue to generate more cash. The transfer of wealth from the debt side of the balance sheet to the equity holders is happening. As that occurs, all that value will shift from the debt side to the equity side. Combining those two factors will drive significant free cash flow.

Operator, Operator

This concludes our Q&A. I'm going to hand back to Patrick Dovigi, Founder and CEO, for any final remarks.

Patrick Dovigi, Founder and CEO

Thank you very much everyone for joining the call this morning and we look forward to speaking to you after Q2. And again, thank you to everyone for their continued support and always available to take calls, et cetera, for the balance of the day. But thank you very much.

Operator, Operator

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.