Earnings Call Transcript
GFL Environmental Inc. (GFL)
Earnings Call Transcript - GFL Q2 2023
Operator, Operator
Good morning, everyone, and welcome to the GFL Environmental 2023 Q2 Earnings Call. The call is being recorded. I will now hand it over to Patrick Dovigi. Please proceed.
Patrick Dovigi, CEO
Thank you, and good morning, everyone. I apologize for the slight delay as our conference operator is experiencing technical difficulties at the current time. So you may hear from others that they may not have been able to log in, but anyone that logged in prior to around 8:15 a.m has the ability to log in. The conference call is available on the webcast, and those who logged in before 8:15 can certainly ask questions. I'd like to welcome everyone to today's call and thank you for joining us. This morning, we will be reviewing our results for the second quarter and updating our guidance for this year. I'm joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into 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. We have prepared a presentation to accompany this call that is also available on our website. During this call, we'll 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, CEO
Thank you, Luke. In the second quarter, we continued to build on our strong start to the year with another quarter of double-digit core pricing and over 300 basis point expansion of underlying solid waste margins. Based on our strong performance in the first half, together with our optimistic outlook for the remainder of the year, we are increasing our already industry-leading guidance for 2023. Both Q2 top line growth and margin expansion were beyond our internal expectations and continue to demonstrate the strength of our best-in-class asset base and the ability of GFL's exceptional team to execute on our proven value creation strategies. With each passing quarter, I continue to be more humbled by the capacity of our 20,000-plus employees to drive our results, and I'm grateful to each and every one of them for their contribution to our success. The second quarter also saw the successful completion of our portfolio rationalization initiative that we committed to earlier in the year. From these non-core divestitures, we realized gross proceeds of approximately $1.65 billion, which is $150 million more than our original guidance. We also completed all three divestitures one quarter earlier than we had originally anticipated. Our ability to complete an initiative of this size and complexity over a short six-month period is another testament to the capabilities of our team to successfully execute on our strategies. The rationalization initiative was part of a broader, more comprehensive portfolio review that we undertook in 2022. As a result of that review, we recognized that while all the divested assets were of high quality, their forecasted return profiles were far less attractive relative to other outside accretive growth opportunities that we had identified in other areas of our business. We expect that the resulting geographic concentration of our portfolio after these divestitures will further support our ability to compound earnings and free cash flow at industry-leading growth rates. The divestiture had the added benefit of accelerating our balance sheet deleveraging with the net proceeds from the sales applied to paying down our highest coupon floating rate debt. As a result of the pay down, we ended Q2 with our lowest net leverage in company history. The resulting enhanced strength of our balance sheet alongside our margin expansion and accelerated free cash flow generation sets us on a clear path to ending the year with net leverage at less than 4x and the opportunity to delever into the mid-3s by the end of 2024. As we have demonstrated, we remain committed to our stated deleveraging goals and are optimistic about the positive impact of the credit rating upgrades that we expect will occur along the way as our net leverage decreases with an eventual path to investment-grade ratings. On our Q2 operating performance, we achieved revenue growth of nearly 14%, including the impact of asset divestitures, driven by solid waste core pricing of 10.4%. The combination of open market pricing activity, the roll forward of our surcharge initiatives from last year, and the continued elevated price increases on our CPI-linked revenue drove our core prices to close to 200 basis points higher than expectations. We expect that the strength of the pricing that we have experienced in the first half will position us to achieve a full-year core price of over 9% compared to 8% that was the basis for our initial 2023 guidance. Lower solid waste volumes in the quarter were in part driven by the pull forward of volumes in the first quarter, but also our exit from non-core service offerings, mostly in our Canadian business. As part of our strategic portfolio review that I described earlier, we also decided to intentionally shed high-volume, low-quality revenue, primarily in our U.S. residential service line and to deploy our resources into other attractive opportunities. We believe that this quality of revenue focus is yet another example of our discipline around capital allocation and our returns on invested capital. The margin expansion that we are seeing in the first half of 2023 continues to demonstrate the impact of our diligent focus on optimizing price and our cost base to drive higher underlying profitability. Consolidated margins in the quarter expanded 130 basis points over the prior year. As the spread between price and cost inflation continues to widen, adjusted EBITDA margin expansion in our underlying solid waste business accelerated to 315 basis points in the quarter. In addition, our solid waste adjusted EBITDA margins were 60 basis points ahead of 2021, meaning we now have more than recovered our pre-cost inflation margin profile. The effectiveness of our fuel cost strategy initiatives can be seen in the quarter-over-quarter decrease in the margin impact of diesel prices. We are pleased with the progress we have made on the respect of fuel surcharges and see incremental opportunity as we continue to optimize the program across our platform. While commodity prices continue to be a margin headwind compared to the prior year, we believe an eventual price recovery will occur and the future benefit of margins as we go forward. As we anticipated, cost inflation, excluding fuel prices, continues to moderate, although we continue to see repair and maintenance cost pressures persist. We now expect to end the year 50 basis points above the original plan on the repairs and maintenance expense line, but with the overall cost trending in the right direction. Labor costs continue to sequentially improve, and we are optimistic about further moderation in the back half of the year. Performance in our environmental services segment was equally impressive with a revenue growth of nearly 20% and adjusted EBITDA margin expansion of 100 basis points. We continue to believe our strategic focus on our revenue quality and asset utilization will yield meaningful incremental operating leverage in this segment over the coming years, with a line of sight to segment EBITDA margins. Adjusted free cash flow was ahead of plan, inclusive of incremental interest expense as a result of the earlier debt payment, which was not previously factored into our guidance. CapEx spend was slightly behind expectations, attributed to timing differences. The CapEx for the quarter included spend on new projects incremental to the original plan. With the success of the divestiture transactions, we intend to allocate $200 million to $300 million of the proceeds to a number of incremental sustainability-related capital projects, primarily related to opportunities arising from extended producer responsibility legislation and renewable natural gas. In keeping with our strategy to maximize our returns on invested capital, we believe that these projects represent some of the highest quality near-term investment opportunities and are excited about the positive contribution that these investments will have across many facets of our strategy going forward. On RNG, we had the ribbon cutting at our RNG facility in June, marking the completion of its construction. The Arbor Hills RNG plant is the first and largest GFL renewables project that we have with Opel fuels and is expected to produce more than 2.5 million MMBtus of RNG when it comes online later this quarter. We had said earlier in the year that we expected to have two projects in addition to the Arbor Hills online as part of this review. We now expect that we only have one of the additional projects to meet that timeline, with the third project now expected to follow by the second half of 2024. The recent run-up that we have seen in the RIN prices is very positive for our investments in these projects. But even without those larger, higher prices, we remain very excited about the contributions of EBITDA from our landfill gas energy project that we will begin to see this year and ramp into 2024 and 2025. We believe that our existing network of best-in-class assets and market selections positions us for high-quality organic profitable growth. In the first half of this year, we have been very focused on completing the three non-core divestitures and harvesting the self-help opportunities in our existing platform. Our results demonstrate our success in implementing these initiatives. We continue to have a robust M&A pipeline. And given the enhanced strength of our balance sheet and free cash flow profile, we will again focus on our M&A strategy of densifying our existing footprint in North America. On the ESG front, we made progress in several areas. GFL was named Corporate Knights as one of Canada's 50 Best Corporate Citizens and was awarded the SEAL Business Sustainability Award for the second time in three years. For the RNG initiatives that we are implementing in our landfills, these RNG projects are key pillars of our sustainability action plan and support our goals of reducing our own emissions by increasing capture of landfill gas and displacing the use of virgin fuels in our fleet. We are also continuing to increase our ESG disclosure with the filing of our first CDP report this month, and we are on the path to completing our first comprehensive stand-alone report in line with the recommendations of the task force on climate-related financial disclosures by the end of the year. I'll now pass the call over to Luke, who will walk through the quarter in more detail, then I'll share some closing comments before we open it up for Q&A.
Luke Pelosi, CFO
Thanks, Patrick. For the following discussion, I will refer to our accompanying investor presentation, which provides supplemental analysis to summarize our performance in the quarter. Page 3 summarizes the relationship between realized revenue and our guidance, updated to reflect the impact of the divestitures consistent with our June press release. Excluding the steady appreciation of the Canadian dollar since the beginning of May when we provided this Q2 guidance, revenue was $1.955 billion compared to our pro forma guidance of $1.95 billion. The outperformance is primarily due to incremental solid waste pricing, which was about 175 basis points ahead of plan, offset by just under 200 basis points of negative Solid Waste volume. Higher recycled commodity prices and increased revenue from our environmental services line contributed to the outperformance, but these amounts were relatively minor. Solid Waste core pricing remains strong across our regions. Typically, quarterly pricing peaks in the first quarter and then steps down sequentially thereafter. The 200 basis point slowdown in pricing from Q1 was less than anticipated as open market pricing stayed favorable and our CPI-linked revenue continued to reset at elevated levels, supporting the relatively lower percentage price increases historically seen in the residential collection and post-collection lines of business. Q2 Solid Waste volumes decreased by 3.5%, which included some volume brought forward into Q1, as we mentioned in the first quarter call, as well as intentional reduction of low-margin work. Looking at the first half as a whole, which better reflects the underlying performance of the business, Solid Waste volume decreased by 160 basis points. This negative impact breaks down as follows: approximately 60 basis points from exiting non-core revenues in our Canadian business, which are lower-margin ancillary services we decided to stop providing. Another 20 basis points stemmed from variability in special waste volumes, while the remaining 100 basis points relate to non-regrettable losses, mainly in the collection line of business. Our underlying volume growth for the first half was about 20 basis points. Most of our customers are willing to pay for our high-quality services, and we continue to retain existing customers and gain new ones at suitable prices. However, as Patrick noted, we are choosing not to renew contracts that do not meet our return standards, given our increased focus on quality of revenue. In the current market environment, we believe it is a better use of our resources to concentrate on the numerous other profitable opportunities we see. The positive effects of our pricing and deliberate volume strategies are evident in the expanded adjusted EBITDA margin. On Page 4, we display the bridge of the 220 basis point year-over-year Solid Waste adjusted EBITDA margin expansion. Commodities remain a year-over-year challenge, impacting us by 110 basis points compared to the prior year. Due to our scale and the quality of the commodities we sell, we typically achieve a selling price above market indices. However, periods of significant price volatility can temporarily compress this spread, causing the net price we realize to decline even when headline market indices rise, which is what occurred in Q2. While fiber prices have recently increased, the simultaneous sharp and substantial decline in non-fiber prices resulted in spread compression at the end of Q2. Consequently, the average net commodity price we realized for the quarter was only slightly above our initial guidance. The divestiture of assets, which had a basket of goods priced higher than our company average, also influenced our average commodity price. The ongoing decrease in non-fiber prices since the end of the quarter results in a current basket price roughly equal to our original guidance. The expected stabilization and subsequent recovery in commodity prices towards the end of the year should reverse this trend. The effectiveness of our fuel cost recovery strategies is clearly shown on the bridge on Page 4 of the presentation with an 85 basis point sequential improvement to net margin impact compared to Q1. As we have substantially completed the first phase of our surcharge initiative, we do not foresee significant negative margin impacts from future rapid increases in diesel costs, and we see further upside from enhancements that we are implementing, including on the indirect fuel side. Also highlighted on the bridge is the impact of mergers and acquisitions, along with receiving approximately $5 million in business interruption insurance from the fires in Canada last year. After excluding these items, base business solid waste margins expanded by 315 basis points, a 125 basis point acceleration over Q1, reflecting the widening spread between price and cost inflation that we predicted in the 2022 guidance. Adjusted free cash flow for the quarter was $9 million, exceeding our plan despite incurring $10 million in additional cash interest expense due to repaying our floating rate debt sooner than originally anticipated. Adjusted cash flows from operating activities rose by 18% even with a 32% increase in cash interest expense compared to the prior year. On Page 5, we summarize the impact of the now completed divestitures. Due to timing differences between the in-year impact of divested adjusted EBITDA and the associated savings in interest costs and CapEx, the divestitures modestly dilute 2023 results, but are still expected to be accretive within the first 12 months. Cash taxes and transaction costs tied to the asset sales will total just under $400 million, and the approximately $1.3 billion in proceeds were used to repay outstanding borrowings under our revolving credit facility and nearly half of our term loan B. As Patrick mentioned, with the transactions yielding $150 million more than the initial plan and closing the quarter earlier, we are reallocating a portion of the proceeds towards attractive capital opportunities we have been evaluating. I will provide more details when we go through the guidance update. As a result of net debt repayment and strong first-half operating performance, we ended Q2 with net leverage of less than 4x. On Page 6, we summarize our new debt profile, indicating that nearly 80% of our debt is fixed rate, with an overall blended borrowing rate around 5.2%, nearly 50 basis points better than before the debt repayment. For our updated guidance for the year, Page 8 illustrates the shift from our original guidance by about $70 million on a like-for-like basis. The new guidance assumes a specific FX rate for the rest of the year. The last step on the bridge shows the impact of that change in FX rates. Underlying this new guide are the following assumptions: Solid Waste pricing increases to just under 9.5% from 8%. Surcharges shift to negative 1% from flat, reflecting lower diesel prices; Solid Waste volumes adjust to negative 2% from flat, with underlying volume growth of positive 20 basis points, countered by around 110 basis points of intentional shedding and approximately 90 basis points from exiting non-core ancillary services mostly in Canada. Commodity prices are anticipated to negatively impact consolidated revenue by 60 basis points, while FX is expected to contribute positively by 160 basis points. The new guidance also predicts that Environmental Services organic growth improves by 200 basis points to around 7%, and the net impact of mergers and acquisitions decreases to 1.7%, reflecting the outperformance in the first quarter and new M&A during the year, adjusted for the impact of divestitures. The new guidance reflects the current commodity price environment, as discussed, with a net impact that aligns broadly with our original guidance. The expected recovery in commodity prices should provide additional upside to the guide for the second half of the year. Page 9 completes the guidance update, showing the components from revenue to free cash flow. Adjusted EBITDA is expected to increase by $55 million using the same FX rate as in our original guidance or by $50 million at the new FX rate. The adjusted EBITDA margin is anticipated to expand by an additional 50 basis points over the original pro forma guidance, driven by the widening spread of price over cost, improved asset utilization, and the positive impact of shedding low-margin volume. Cash interest expense is projected to decrease to $490 million as the savings from debt repayment are partially offset by increased interest costs from floating interest rates and borrowing levels higher than initially expected. In 2024, the full-year effect of the debt repayment will be realized, bringing cash interest expense closer to $400 million. Regarding CapEx, we see compelling opportunities to reinvest a portion of the divestiture proceeds into organic growth initiatives that should provide attractive returns on invested capital and enhance our ability to generate high-quality, sustainable free cash flow growth. Some of these projects were already on our agenda, and the additional expenditure reflects an acceleration of investments that would have otherwise occurred beyond 2023. Others are new opportunities that emerged this year. As Patrick noted, we expect to deploy an incremental $200 million to $300 million of CapEx before year-end and have updated our guidance for this gross CapEx accordingly. The breakdown of this additional investment includes approximately $150 million to $200 million into five projects, four of which are located in Canada and one in the U.S., $25 million to $50 million for RNG project development, and another $25 million to $50 million for land and building infrastructure to support these initiatives. The payback on the RNG investments is well-established; with today's VIN prices, the returns are even more appealing at sub-three-year paybacks. We are motivated to expedite these projects as quickly as possible. In certain cases, the increased R&D capital results from changing partnership terms, which we expect to be beneficial. Regarding spending, these projects largely respond to existing EPR legislation and strategic positioning in markets anticipating EPR arrival or where we have sufficient internal volumes. The new EPR contracts can be ten-year fee-for-processing-based models with promising margin profiles and sub-five-year paybacks. We see these investments as a reallocation of proceeds from the divestitures. By offsetting this excess investment with a corresponding allocation of divestiture proceeds, we believe the adjusted free cash flow metric will better reflect the current cash-generating capabilities of the business. The effects of working capital and other operating cash flow items are expected to be near zero, excluding cash taxes associated with the divestitures, which we plan to omit from our adjusted free cash flow reconciliation. The resulting balance sheet from the revised operational outlook indicates net leverage of less than 4x at the end of 2023, which should organically decrease by another 50 to 70 basis points by the end of 2024, as shown on Page 11 of the presentation, positioning us solidly for an investment-grade rating in the medium term. As for our specific expectations for the third quarter, we anticipate consolidated revenue of about $1.865 billion, with just under 80% of that from solid waste. Keep in mind, the recent divestitures will impact Q3 revenues by $115 million compared to the original guidance, which is the primary reason for the atypical decline in the quarter. The adjusted FX rate also affected the sequential quarterly comparison by about $20 million. Solid Waste adjusted EBITDA margins are expected to align with those of the second quarter, reflecting underlying sequential growth, tempered by the 35 basis point benefit of insurance recoveries recognized in Q2. Environmental Services margins are projected to fall between 30% and 31% due to operating leverage realized on peak third-quarter revenues. Corporate cost margins are expected to increase by 10 basis points relative to Q2 due to continued investments in IT development and the effects of the divested revenue. This leads to adjusted EBITDA of about $525 million at consolidated margins of approximately 28%, representing over 200 basis points of expansion compared to the previous year. From that adjusted EBITDA, the components needed to arrive at adjusted free cash flow include cash interest costs of $115 million, a working capital benefit of around $25 million, and gross CapEx ranging from $275 million to $300 million or roughly $160 million after factoring in the allocation of divestiture proceeds previously discussed. This results in adjusted free cash flow for the third quarter of about $275 million. That summarizes the guidance update. I will now hand the call back to Patrick, who will provide some closing remarks before we open it up for questions and answers.
Patrick Dovigi, CEO
Thanks, Luke. This quarter shows the results of our focus on taking the exceptional platform we have built and continuing to enhance it to produce industry-leading results. We continue to use all of the self-help levers that we have at our disposal to improve asset utilization and cost efficiency and the impact of that is demonstrated in the quarter-over-quarter underlying margin expansion. We are taking action across our network of assets to maximize the returns from our customer base, from each market area and from strategic capital investments, all confirming the relentless commitment of GFL's employees to long-term value creation for our shareholders. As I said earlier, I'm extremely grateful to all of GFL's employees for their commitment to the success of Team Green. I will now turn the call over to the operator to open the line for Q&A.
Operator, Operator
And your first question will be from Michael E. Hoffman at Stifel.
Michael Hoffman, Analyst
Patrick, let me start with price. So the whole industry has been enjoying this benefit. From your perspective, is it better retention of what you've been doing? Or did you come back through and look for more? And then I'd like to talk about cadence because inflation is starting to moderate. So we do need to manage the thought about cadence?
Patrick Dovigi, CEO
Yes. So I think we had the benefit of, again, some of the surcharge programs and rationalizing the existing book that we had. A lot of that will be recognized in base — the initial recognition that comes into base price. So that remains at elevated levels. But we still have a good opportunity with the existing book of business with some underpriced customer bases, particularly on the commercial side and on the residential side, to continue moving those up coupled together with the CPI lags in the residential books of business. So all those put together allowed us to sort of move up the guidance, particularly on price, particularly with seeing where some of those CPI adjustments have been coming earlier in the year and where we think the balance of those re-rates. So we're in a good position. Obviously, with CPI coming down as that moderates, we've built that into our forecast. But I think from where we sit today, we feel very comfortable with the guidance that we put out.
Michael Hoffman, Analyst
And how should we think about cadence through the second half and then into '24? Because CPI is coming down. And that doesn't mean you won't maintain this really strong spread, just that the rate of change will narrow?
Luke Pelosi, CFO
Yes, Michael, it's Luke speaking. I think that's right. For the balance of '23, we expect that we'll call it kind of the normal cadence that sees Q3 stepping down, like another 200 basis points similar to Q1, and then the step down sort of moderates in Q4, and you're looking at sort of more like a 100 basis point step down then. We're not in a position where we want to talk about 2024 in earnest. But as we've said historically, we think there is a constructive backdrop with the delays in CPI as well as the constructiveness of the open market dynamic to continue it, but the elevated levels of pricing. I don't think you're going to see it at 2023 levels. But to your point, we're going to be facing a cost inflation number that is well inside of what 2023 saw. So we think, as we've been saying for the last couple of quarters that there's an opportunity to continue to maintain an outsized spread as compared to historical amounts.
Michael Hoffman, Analyst
Okay. And you have socialized in the past the idea that by 2025 an adjusted cash number of $1 billion would be achievable, but it would appear now that without adjustments that $1 billion is achievable by 2025. Are we looking at that correctly?
Patrick Dovigi, CEO
I would be disappointed if it wasn't there, for sure. I mean, if you sort of look at what the math, I mean, we said we think when you sort of layer in RNG and you layer in all the other aspects and now with the accelerated de-levering, I think we're certainly going to — my expectation is we are definitely going to exceed the $1 billion in 2025.
Michael Hoffman, Analyst
Okay. And then the RNG projects that you're adding in the accelerated spend, do they qualify for investment tax credits? So I'm going to get some of that capital back?
Patrick Dovigi, CEO
Yes.
Michael Hoffman, Analyst
And can you max it out at 50%? Or should we think about it as 30%?
Patrick Dovigi, CEO
I mean we'll push to maximize that 50%, but for conservatism perspective, we're using 30%.
Michael Hoffman, Analyst
All right. And then what gives you confidence you can spend all this money in '23, given the delays that happen in other stuff?
Patrick Dovigi, CEO
We're not certain. I think from our perspective, it was prudent to sort of bring it up. I think when you think about these incremental capital spend, as you know, we've been sort of a leader, particularly on the PR front. And a lot of those contracts have come together over the last couple of months, and they are a combination of collection and hauling businesses to support those, not only in Ontario but supporting them in other parts of the country. And the way I would think about it, hey, if this was an acquisition, you're basically getting call it, somewhere between $40 million and $50 million of EBITDA at very high EBITDA margins for a spend of a couple hundred million, so you're paying sort of 4 to 5x. So I think from our perspective, we think we have the ability to deploy those dollars. Some of this has been in planning with the expectation that this would happen. Because these negotiations started last fall, but have really come together over the last couple of months.
Luke Pelosi, CFO
And Michael, the uncertainty about the ability is also the basis for the wider range but on that basis. You also have to remember, as Patrick said, a lot of this is an EPR and supporting infrastructure development. While machinery and the likes may not be able to deliver all the equipment in certain instances, there's land building retrofitting existing properties, construction. So there's other costs that can be done in preparation for it. But you're absolutely right. It's a bit of uncertainty on that and hence, the wider range.
Kevin Chiang, Analyst
Maybe just on how to think about CapEx moving past 2023 gross CapEx, and I appreciate you have offsets here given the successful asset divestitures. But if I think of what the gross CapEx intensive the business is in '24 and onwards? Should we be holding at these levels kind of 14%, 15% of revenue, just given the pipeline of opportunities? Or you kind of step back down to let's say, 10%, 11%, 12%, like you were assuming in the original forecast earlier this year?
Luke Pelosi, CFO
Yes, Kevin, it's Luke speaking. I think characterizing this year as an outlier is the appropriate approach, and it's really by function of these divestitures, proceeds being reallocated. The other component to this is R&D. And if you look at our total spend over all of the projects in totality, it might end up being at a sort of gross level in a sort of $500 million level. But when you think about 30% ITCs, you think about 40% to 50% project level financing, your actual equity check at the end of the day is going to be materially less than that. But sometimes, there's timing differences as part of this year's spend where the ITCs are going to come next year, but we want to invest the capital this year. And so we are going to have a bit of this gross versus netting as we deploy into RNG. I think when you look at our underlying business, you think about the relatively lower landfill concentration that we have because of the Canadian dynamic and the Environmental Services business that both run at lower capital intensity than industry averages. We see a clear path to live at that sort of 11% level, which is inclusive of the normal course growth. To the extent attractive, compelling opportunities to deploy capital arise, we'll talk about it, like times like this. But I think the relative dollars at play as we go forward will become less impactful to the overall, and that in and around 11% is the right intensity to think about.
Kevin Chiang, Analyst
Excellent. That's great color. And then you laid out a, I'll say, a target to mid-3x leverage exiting 2024. I guess when I think back to your Investor Day, you kind of laid out a number of acquisition scenarios. Just if you're able to share with us, which of those three should we be thinking about to the mid-3s? Are you kind of back to an elevated M&A scenario in your mid-3s? Or are you kind of in the middle of the pack? Does it assume no M&A? Any color there would be helpful.
Patrick Dovigi, CEO
Yes. Listen, I think from where we sit today, we have some wonderful acquisition opportunities that will be very compelling for us to execute on in the back half of this year. So we put out this guide. We've taken a conservative view on the guide. Obviously, every quarter since we've been public, our philosophy has been sort of underpromise and overdeliver. So I think that theme will continue. The backdrop is we've committed to this year, keeping leverage sort of around 4 times. And we will do that with the model we have as well as executing on the M&A. So where we sit from the company's first time in history, given the free cash flow profile of the business now and what that looks like for next year, we've thrown out a number next year for almost $875 million of free cash flow. When you look at that, coupled together with the free cash flow in the back half of the year, we're going to be able to do both. The business is going to grow organically, it’s going to naturally delever. M&A will take a bunch of the free cash flow and reinvest that into our M&A program. Again, we'll all be de-levering events. So we think we're going to get there regardless of our normal sort of M&A spend.
Luke Pelosi, CFO
And Kevin, the math today, I mean, it's pretty straightforward. If you think about organically, the business could delever into low 3s; how much M&A will temper that otherwise delevering. It's roughly 4 basis points of leverage for every $25 million of EBITDA you buy. So if you put that together, if you were to buy $100 million of EBITDA, that has an impact of somewhere to the sort of 10 to 20 basis points of incremental leverage.
Kevin Chiang, Analyst
Okay. That's great color. I guess last one for me. Environmental services, long-term target of getting to 30% EBITDA margin. You kind of hit that in certain quarters, at least very high-20s. Just when you think of getting there, I guess on an annualized basis, is it trying to reduce the seasonality of the margins, which are a little bit lower in the shoulder quarters? Does everything have to come up by basis points? Or do you just have to kind of hit it out of the park, even more so in the Q2 to Q3 quarter? Just wondering how you think about getting to that 30% overall, just given the seasonality in that profitability.
Patrick Dovigi, CEO
Yes, there's always going to be a large element of seasonality in that business just because for the simple fact that it's levered to Canada. So we are going to have that normal cadence each and every year. That being said, there's going to be a high focus on quality of revenue and surcharges that we believe we should be getting in that line of business. I think when you look at it, there is the ability to just really take up margins. The Q1 margins will obviously always be the lowest. Q4 will be the next roll up in Q2 and Q3 will be the highest. We have to push Q2 and Q3 exceedingly above where they are today, and we have to get those surcharges implemented to offset the Q1 and Q4 dynamics. So it's going to be a bit of a mixed bag, but I think we have a clear path to sort of getting there. And I think you're seeing that come through quarter-over-quarter, year-over-year.
Luke Pelosi, CFO
And Kevin, you got to remember the foundation of that business is largely built around these post-collection facilities we have across Canada that are very high-fixed cost base in nature. As you think about the revenue growth, we're now putting in the utilization improvement of those assets; you get a lot of operating leverage coming in that. You're seeing that this year. And as we roll that forward, what used to be $500 million, $600 million of revenue in that segment, we're now going to be approaching $1.5 billion, and you're going to get meaningful operating leverage at a much more fixed cost base.
Operator, Operator
Next question will be from Jerry Revich at Goldman Sachs.
Adam Bubes, Analyst
This is Adam Bubes on for Jerry Revich. Can you talk to the incremental, I think it was $25 million to $50 million RNG&D investments? Does that include any new projects? And should that change how we're thinking about the cadence of projects beyond 2023?
Luke Pelosi, CFO
So Adam, it's Luke speaking. Nothing is new in that number. There is one project that was previously going to be a partnership that we're now going to go alone in that it was a partnership with not one of our core partners, but a tertiary partner. We've now bought them out and are going to go alone and accelerating some of the spend on that. So we're still looking at the same number of projects in totality. The reality is, as I was speaking before, with a combination of timing of receipt of ITCs as well as project-level financing, there's just a bit of a change in the cadence of our equity checks. I think when you get to the end of the next couple of years, the actual net investment will remain the same, but just there will be some lumpiness from quarter to quarter.
Adam Bubes, Analyst
Understood. And then with RIN fee prices now in the $3 range, can you just update us on how you're thinking about your offtake strategy in RNG? Do you have a targeted percent that you intend to sell into transportation markets versus long-term arrangements?
Patrick Dovigi, CEO
Yes. Currently, we are in the process of developing our strategy, which may differ between short-term and long-term approaches. In the long-term, we aim to secure 60% to 65% of our take through long-term agreements. We want to ensure we receive the right price for that. With RIN prices around $3, this supports our long-term strategy for these agreements, and our goal is to reach that 60% to 65% range in long-term offtake agreements.
Adam Bubes, Analyst
Got it. That's helpful. And then lastly, really strong margin performance in the quarter with margins well ahead of normal seasonality. Just looking at the back half guidance, it looks to be implying sequential margins basically in line with normal seasonality. And it also looks like your underlying inflation is decelerating much faster than price. So just any puts and takes around the sequential margin cadence from here relative to normal seasonal trends?
Luke Pelosi, CFO
Yes. So I think last year sort of defied the normal seasonality by virtue of the inflationary ramp that was really more focused in the second half of this year. And so as that's unwinding, it's causing some impact on the current year sort of seasonality cadence. But look, for the Q3 guide that we've put out, effectively saying Solid Waste continues to expand from where it is today, just normalized for the insurance recoveries that we received in Q2, which created about a 30, 40 basis point benefit to Q2. So if you're stripping that out, continued sequential improvement in solid waste and that's really a function of that continuing widening spread. Yes, cost inflation is anticipated to moderate even further in Q3, and you're going to be in a mid-single-digit number. And as pricing sort of comes down accordingly, I think you'll get a little bit more spread above those too. Environmental Services is similar to the comment we were saying before, really firing on all cylinders, but with the Q3 peak revenue, so you're going to get the sort of optimized operating leverage. And that's why we see now a path that margins in that segment for Q3 could touch 31%. And then Q4, obviously, as the seasonal cadence, you have a bit of a step down from there as you move into the winter season.
Operator, Operator
Next question will be from Tyler Brown at Raymond James.
Unidentified Analyst, Analyst
Luke, I think you touched on it, but volumes were a bit weak in the quarter, it sounded a bit by design. You gave some color, but second-half volumes are maybe down 2% on my math. Is that about right? And will there be any difference between Q3 and Q4?
Luke Pelosi, CFO
Yes. So I'd say your math is right about what the second half is looking at. It's really just a continuation of what we are articulating in the first half. As I said, I think the pull forward from Q2 into Q1. So I think looking at first half in totality makes more sense, negative 160 basis points of volume. If you break that down, you had about 60 basis points, which was $15 million of what I'm calling this non-core ancillary services. These are lower-margin ancillary services inherited through acquisitions that we have decided to no longer provide as a result of our ongoing strategic portfolio reviews that Patrick spoke to. That will sort of basically maintain each quarter throughout the year until that work is gone. For the first half, we have about 20 basis points of the event-driven special waste volumes. If you look last Q2, special waste volumes or landfill volume in the U.S. was plus 12%. I think we benefited from cleanup from some tornadoes and other events. That's always going to have a trend that are concerning there, but rather just the normal sort of change. So I'm anticipating that by the end of the year, that sort of neutralizes more back to sort of flat sort of level. And then what you're left with for the first half is this sort of 80 basis points or call it $20 million of the net of this intentional shedding offset by real underlying volume growth. The intentional shedding is primarily in residential collection, although some is in IC&I and this is a function of our strategy of price over volume. By and large, it's working, and you can see it in the numbers and in the margin. But certain select handful of residential large accounts that are unwilling to pay for our service. We're going to walk away from and we're happy to do so in this environment. For the back half of the year, where you end up with the roughly 200 basis points or $100 million of negative volume for the year as a whole, you roughly have half of that as a result of exiting the non-core ancillary services. Another $60 million from the non-regrettable losses or intentional shedding. And then you have an underlying $10 million, $20 million of positive growth from our normal course service level and increases in new customers.
Unidentified Analyst, Analyst
Okay. Very detailed; very helpful. I appreciate that. Patrick, I want to talk about repairs and maintenance because it sounds like the OEMs are starting to deliver. It seems like pulp prices are dis-inflating, and I think rentals might be down next year. But it does feel like it could be a uniquely good story in '24?
Patrick Dovigi, CEO
Yes. I mean we're still basically 100, almost 100 basis points more than where we've been historically. So yes, I think this year is going to be 50 basis points ahead of our original plan, but things are certainly coming down. We're certainly getting more truck deliveries and the timeliness of those truck deliveries is coming on board. Now from an OEM perspective, it's obviously moderating prices on supply of parts as well. So all of those coupled together are coming down. If you look at us from a rental truck perspective, we are renting a quarter amount of the truck that we were renting a year ago, right? So that's all in the repairs and maintenance line. So yes, you're right. I think as that moves into '24 and '25, that’s certainly going to moderate and be a good news story as we move over those next two years.
Unidentified Analyst, Analyst
Okay. We'll keep an eye on that. And then, Luke, on the $1.65 billion gross proceeds, I think you said $400 million maybe in taxes and transactions going to be out the door. Has any of that been paid? If not, when will that be paid? And where will that show up on the cash flow statement?
Luke Pelosi, CFO
Yes. So maybe a modest amount of transaction costs have been paid; roughly, I think of it, $360 million of taxes, $40 million of transaction costs, round numbers to get you to that $400 million. A modest amount of transaction costs would have been paid in Q2. The rest was accrued, and you can see that in the large transaction cost adjustment we have in the P&L. The balance of those transaction costs will be paid in Q3 and will show up in our normal transaction cost bucket. The cash taxes will be paid roughly, call it, half in Q3 and half in Q4, maybe actually more like 60-40 towards Q3. It will show up in our cash tax section and the cash flow. We may have some incremental disclosure to break it out so you can see the impact of what we're calling the sort of one-time versus ongoing.
Unidentified Analyst, Analyst
Okay. That's helpful. And then my last one, kind of another question along maybe a similar line. A couple of your RNG plants are kind of in that initial start-up phase. But how much EBITDA contribution are you baking in on those facilities? And how is the accounting going to work? Are you guys seen at consolidated? So will you just have some sort of an add-back in the EBITDA reconciliation? Or how is that going to work just practically?
Luke Pelosi, CFO
So for 2023, the guidance anticipated an inclusion of an immaterial number, I think it was about $10 million in total. With the delays, that number might be a little light, but the RIN pricing probably offsets that. So the 2023 number is sort of as per the original guidance.
Patrick Dovigi, CEO
The 2023 number.
Luke Pelosi, CFO
As you get into 2024 and that starts ramping up, yes, Tyler, I think that's right. These are joint ventures that are unconsolidated. Our perspective is the GAAP-based accounting doesn't accurately reflect what our investors are looking for. So you will have an adjustment to remove the GAAP-based net income that you’re picking up and replace it with your proportionate share of the EBITDA. So we'll preview that as part of our 2024 guidance to make sure everyone understands very clearly what we're showing there. But we anticipate something to that effect.
Operator, Operator
Next question will be from Walter Spracklin at RBC Capital Markets.
Walter Spracklin, Analyst
Good morning, everyone. So on the intentional shedding of business, we're hearing that from your peers as well. Just a basic question. Where is that being shed to? Are you seeing smaller players now picking up some of this? Is it going to some of the majors that are seeing a better opportunity through combining with their own operator? Just curious as to what your experience is where a couple of your peers are talking about some pretty significant intentional shedding of business as to where it's ending up?
Patrick Dovigi, CEO
Yes. I mean, for the most part, it's been a mixture of both. It's been some strategics that have some strategic opportunities there, whether that's internalization of streams into their landfills, etc. In a couple of the markets, it's been municipalities taking a chance on a smaller type collector in a market that's sort of a recent start-up. History tells us with those, we generally end up with the work coming back to us over the course of the next sort of year to 1.5 years. From our perspective, particularly in this OEM environment of getting new trucks, and the cost of capital, we want to be rewarded appropriately for it. So in some of these residential contracts came with acquisitions, etc., I tell everybody in the organization, we're a for-profit organization. We don't need to practice. So there's no sense in practicing on some of these residential contracts, particularly in this environment. If we can take those good dollars and deploy them into things that are actually going to make money, we're happy to do that. So a bit of mixture of both.
Walter Spracklin, Analyst
And there's no worry here that this is representative of a lack of discipline among smaller players or anything to that?
Patrick Dovigi, CEO
No.
Walter Spracklin, Analyst
Okay. On the margin, Luke, you mentioned margin spread expansion in 2023, and that comes after you saw some cost inflation really ramp in 2022. And your mechanisms are kicking in nicely now in '23 to be able to allow for an expanding spread, whereas perhaps it was contracting last year. How do you look at it for next year? Are you expecting more of a normalized? In other words, is there less benefit from an expanding spread? Or could we see that spread last longer into 2024 based on how your mechanisms work?
Luke Pelosi, CFO
Yes, Walter. So I think as we've been saying consistently, we anticipate '24 being another outsized year. It’s a combination of not just the natural spread expansion that you're going to have, but there's also — I mean, Patrick just signed R&M. That is not going to get fully sorted this year and will represent an incremental tailwind. You can talk about commodities. I mean we are very optimistic that commodities will start rebounding this year, but I think that's going to be a real tailwind going into next year. I'm not saying ample of what should be a tailwind. RNG, as that comes on for us, we have a relatively immaterial amount in the current consolidated results, and it's very high margin. I think the natural price versus cost inflation spread dynamic unto itself should provide an opportunity for outsized expansion. But when you start layering those other pieces on top, we see the setup for 2024 to be an exceptional year.
Walter Spracklin, Analyst
Okay. That's fantastic. And the last question here is on the CapEx spend, and it seems like a larger number to have all at once. Just curious, is this something you were always contemplating and just mindful of dollars spent and keeping everything in check? With the proceeds now from the acquisition, you saw an opportunity to strike on this one? Or is it the opportunity and the capability and you hit as a result of that? Just curious as to how they came up?
Patrick Dovigi, CEO
Yes. As part of our divestiture program, we recognized an opportunity, especially regarding the EPR prospects for the latter half of 2022. Much of that work was initiated and developed during the first quarter of 2023 and became more formal in the second quarter. From our viewpoint, we expected that as the divestiture progressed, we would actively pursue the EPR opportunity more than initially planned, given the available workload under that program. However, from my perspective today, there is no better allocation of capital, aside from the RNG spending, than the partnerships we've forged with producers in Canada, particularly with contracts lasting 10 to 20 years to support their sustainability objectives. These are excellent partnerships that benefit both parties. Transitioning to fixed-fee processing contracts eliminates commodity price volatility. We're looking at around four-year paybacks on these contracts, paired with the vertical integration of combining collection contracts. We didn't find a better opportunity to invest those funds. Moreover, the groundwork laid for 2024 and 2025 will result in a significantly higher growth rate as we advance into those years.
Operator, Operator
Next question will be from Stephanie at JPMorgan.
Stephanie Yee, Analyst
Growth is price-driven and surcharge-driven versus the processing volume side?
Luke Pelosi, CFO
Yes, Stephanie, it's Luke speaking. I mean if you look at the typical sort of growth algorithm in this business, you probably have 80% coming from price and 20% from volume. I think our Environmental Services business today is probably the inverse of that. Now it's not homogenous of a mix, so it's harder to do exact, but it has certainly been a volumetric growth story and is only recently pivoting to price. A larger portion in this quarter versus the prior was price, and you're going to continue to see that migration towards a price-centric growth story. That's what gets us excited about the opportunity because as we start being more thoughtful about the quality of revenue and ensuring we're getting priced appropriately, we see the opportunity for meaningful incremental operating leverage over where we are today.
Stephanie Yee, Analyst
Okay. Got it. That makes sense. And can you give us a sense of how the different business lines, particularly environmental services, are doing?
Luke Pelosi, CFO
I mean just at a high-level bifurcation, people have historically asked about our oil and oil-related exposure and obviously, that business with a decrease in energy costs is realizing revenues at a lower point than it had historically. But more and more the diversification efforts that we've undertaken mean that business is representing sub-10% of the overall as we go forward. So really, when you think about our broad-based sort of environmental services across collection and processing, we continue to see strength that's particularly levered in Canada. I think the brand we have created and the quality of the service that we're offering is very valued by our customers, and we continue to see phenomenal growth as you've seen over the past sort of year or two.
Stephanie Yee, Analyst
Okay. And would you consider expanding environmental services outside of Canada, more so into the U.S?
Patrick Dovigi, CEO
If the right opportunity in the right markets present themselves, for sure. I mean we have been fully expanding into the U.S. Obviously, the market selection and the right asset base is the most important part. But yes, I mean, we'll definitely look at opportunities. We're not shying away from different opportunities in the U.S. That's for sure.
Operator, Operator
Your next question is from Michael Doumet at Scotiabank.
Michael Doumet, Analyst
The expectation for price cost spread to expand in the coming quarters, that's been well explained. I wonder despite inflation slowing, whether you think peak price cost spread will occur in 2024 rather than in the second half of 2022. This obviously includes commodity and RNG piece?
Luke Pelosi, CFO
Yes, Michael, it's Luke speaking. I think we could debate whether we'll be sort of Q4 of this year or Q2 that it's actually peaked. I think our perspective is the trend line is supportive of establishing a new wider spread than what we had before, and I think you're seeing that happening. If you consider the dynamics that roll into this, there's clear math that supports continued wider spreads. But it's difficult to call the exact sort of when it's going to peak. We're just feeling very optimistic that 2024 will seem to be constructive.
Michael Doumet, Analyst
That's helpful. And then on 2024 EBITDA margins, maybe a little bit early to discuss, but if I were to exclude the full revenue and EBITDA contributions from the divestitures from the pro forma '23 EBITDA guidance, I get to a full-year EBITDA margin of 27.1%. So just thinking if that's a fair starting point for 2024? Obviously, I would add, I don't know if it's 200 or 300 basis points of price/cost spread, RNG, etc. Just trying to get a sense from you on how to think about those numbers.
Luke Pelosi, CFO
Yes, Michael. So we're not going to talk about 2024 today. We gave the 2023 guide, ending at $2 billion, 27% margin. I think normal course, historically, we've been saying 50 to 100 basis points of margin expansion. We think 2024 is an outsized year. I think it's in that sort of directional zip code, but we're going to wait until we close out this year or at least another quarter before we start talking about 2024 guidance in too much depth.
Michael Doumet, Analyst
Okay. Fair enough. Yes, those are my questions. Thanks very much.
Operator, Operator
Thank you. And at this time, sir, we have no further questions registered. Please proceed with closing remarks.
Patrick Dovigi, CEO
Thank you, everyone, for joining today. And sorry about the conference call. We started a little bit late given the issues with the operator, but we look forward to speaking with you after our Q3 results. Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good day.