GFL Environmental Inc. (GFL) Earnings

Management highlights

### Core Financial Performance - Q2 2026 results exceeded expectations, with the strong start to 2026 extending through the first half, demonstrating business model resilience and effective growth strategy in a uncertain macro environment. - Pricing outperformance continued: Q2 price growth hit 6.1% (20 basis points above plan), with full-year 2026 pricing now expected to be nearly 50 basis points above original guidance, driven by accelerated realization of previously identified pricing opportunities and incremental fuel surcharges. - Volume was 100 basis points better than plan: catch-up from Q1 2026 winter weather delays and EPR benefits more than offset declines in C&D and special waste volumes, which remain muted due to broader macroeconomic uncertainty. - Operating leverage improved for the sixth consecutive quarter: excluding elevated diesel price impacts, operational and SG&A cost intensity as a percentage of revenue declined year-over-year, driven by self-help initiatives outlined at 2025 Investor Day. ### M&A and Acquisition Updates - The Secure acquisition remains on track: competition bureau review is well advanced, integration planning is progressing, and management expects to close by the start of Q4 2026, aligned with the previously communicated pro forma financial framework. Management is increasingly optimistic about the combined entity's opportunities. - Seven acquisitions closed in Q2 2026, including Frontier and six tuck-in acquisitions, two of which are incremental to prior guidance. Frontier integration has proceeded exceptionally well, with a 5-year plan to double the business size in the fast-growing Texas market via a mix of organic growth and small tuck-ins. - The M&A pipeline remains robust, with management expecting to deploy an incremental $300 million to $500 million in additional capital before the end of 2026, focused primarily on tuck-in acquisitions that add incremental volume to existing facilities to leverage existing fixed costs. ### Capital Structure and Operations - In June 2026, GFL issued $750 million of new bonds in preparation for the Secure closing; the offering was significantly oversubscribed at the tightest spread in the company's history for this bond type, swapped to a 4.5% effective Canadian dollar rate, demonstrating strong debt market confidence. - Net leverage exited Q2 at 3.9x, 30 basis points higher than Q1 due to Q2 acquisitions, in line with prior guidance. Leverage is expected to stay stable in Q3 before natural deleveraging to the mid-3x range by year-end, with further improvement if the Canadian dollar rebounds against the U.S. dollar. - The Canadian segment achieved a record adjusted EBITDA margin, demonstrating successful execution of operational strategies despite fuel cost headwinds.

Guidance

- Management raised full-year 2026 guidance for the second time in 2026, driven by stronger than expected first half performance. The new guidance assumes current FX rates, commodity prices and sustained elevated diesel prices, and does not include any contribution from the Secure acquisition or other unclosed M&A. If Secure closes in Q4 2026, actual adjusted EBITDA growth could exceed 20%. - New 2026 full-year guidance: Revenue of $7.52 billion, adjusted EBITDA of $2.29 billion, adjusted free cash flow of $900 million (including $445 million in cash interest), net capex of $850 million. - Full-year 2026 pricing is now guided to just over 6% (up 50 basis points from original guidance), while full-year volume is guided to approximately -0.5% (down 75 basis points from original guidance) to reflect the expectation that soft C&D volume trends will persist for the remainder of the year, with any improvement in C&D activity representing upside. - Adjusted EBITDA margin is guided to 30.5% (up 10 basis points from prior guidance), despite a 60-70 basis point headwind from elevated diesel prices and 30-40 basis point headwind from M&A. Excluding diesel price impacts, full-year margin would exceed 31%, a more than 100 basis point year-over-year increase. Any diesel price reduction in H2 2026 will drive incremental margin expansion. - GFL expects 15%+ full-year 2026 adjusted EBITDA growth and nearly 20% adjusted free cash flow growth year-over-year. - Q3 2026 guidance: Consolidated revenue of approximately $1.99 billion, adjusted EBITDA margin of 31.2% (60 basis points above prior year, excluding a 100 basis point drag from fuel and M&A), adjusted free cash flow of approximately $235 million (including $165 million in cash interest and ~$200 million in net capex). - Standalone GFL growth capex for full-year 2026 remains ~$200 million (a small FX-driven increase from prior guidance), with any upside coming from potential spillover of Secure's planned capital spending if the acquisition closes in Q4 2026.

Segment performance

GFL operates across two core geographic segments: Canada and the U.S. For the second quarter of 2026: - **Canadian Segment**: Achieved an adjusted EBITDA margin of 34%, which is a 20 basis point year-over-year increase and the highest adjusted EBITDA margin in the segment's history. It contributed 34% of consolidated adjusted EBITDA margins, with 6.2% pricing growth for the quarter. The segment posted positive volume growth of 0.5% year-over-year, with part of this growth driven by EPR-related volumes. - **U.S. Segment**: Delivered 6.1% pricing growth for the quarter. Organic growth accelerated sequentially, with the strong performance driven by core underlying business strength rather than new surcharge implementation. Post-M&A intentional shedding of low-return business has concluded, and current volume metrics reflect stable underlying core business performance, with mixed performance across lines (slightly down IC&I collection offset by slightly up residential collection). - **Consolidated Performance**: Overall Q2 2026 revenue grew 16.3% year-over-year, including 6.4% organic growth (180 basis points faster than Q1 2026). Consolidated adjusted EBITDA margin was 30.4% in the quarter, with an organic 35 basis point year-over-year increase despite tougher year-ago comparables and 65 basis points of headwind from M&A activity. Excluding exogenous factors (fuel, M&A), underlying consolidated Q2 2026 margins increased 125 basis points year-over-year.

Risks & headwinds

- Elevated and volatile diesel prices create near-term margin pressure due to lags in the fuel surcharge mechanism, with both direct fuel costs and indirect cost increases from third-party transportation providers impacting results. While current surcharges now offset ongoing higher diesel costs, unrecovered costs from the early-2026 diesel price jump will continue to burden results until diesel prices decline. - Persistent macroeconomic uncertainty has led to softer than expected C&D and special waste volumes, which are expected to remain muted for the balance of 2026. Lower C&D volumes represent a disproportionate margin headwind because C&D landfill volume has higher margins than average. - Canadian dollar depreciation against the U.S. dollar creates temporary translational increases in reported net leverage, which constrains the amount of capital that can be deployed to M&A to some degree. - The go-private exploration process creates uncertainty around the company's long-term ownership structure, though management emphasizes business operations are continuing as normal with no changes to planned initiatives. - RNG project development may experience mild slippage, with full $125 million run-rate revenue now expected by the end of 2028 rather than early 2028.

Analyst Q&A

• Q: The company has received unsolicited take-private offers. How is management approaching this process, and what are the potential outcomes? /

  A: Management confirms multiple third parties have approached GFL about a take-private transaction at a price materially higher than the current share price, reflecting the gap between the current public valuation and the company's intrinsic value. A special committee of the board has been formed to explore the opportunity, and management is running the process in parallel with closing the Secure acquisition. CEO Patrick Dovigi will not sell any stake and will roll 100% of his equity into any proposed transaction. Two potential paths are under consideration: approve an offer for shareholders to vote on, or remain public, which management views as an equally good alternative. The process will move forward quickly to select a path, with no plan to walk away from the Secure acquisition (buyers view Secure as a valuable part of the transaction).

• Q: Underlying margins are running well ahead of original guidance, even as the headline margin guidance stays at 30.5%. What is driving this outperformance, and how much upside remains? /

  A: Headline margin guidance stays at 30.5% to account for much larger exogenous headwinds than originally expected, including a 100 basis point incremental drag from diesel and M&A alone. Underlying operational margin performance is actually ~2x stronger than original projections, driven by better than expected pricing, broader cost efficiency across major categories like labor and transportation, and faster than expected synergy capture from post-M&A integration. Management notes there is still significant additional upside from uncompleted self-help initiatives, as well as future AI and automation opportunities that have not yet contributed to margins. Post-Secure acquisition, additional procurement and cost synergy opportunities will further drive margin expansion.

• Q: What is driving the current valuation discount on GFL's public stock, and will changes be made to close the gap if the company remains public? /

  A: The discount stems from transitory factors, not core business fundamentals. After the 2022 market sell-off, leverage concerns faded, and the current discount reflects a broader industry sell-off driven by the AI trade that left waste out of favor, plus an extra discount specific to GFL around the Secure acquisition. Management notes that the remaining key point investors focus on is lower free cash flow conversion relative to peers, but GFL's free cash flow conversion will grow faster than peers moving forward, and the math of improving cash flow will eventually close the valuation gap over time. The company's strong core performance has already been validated by major debt and potential private equity investors, who recognize the company's intrinsic value.

• Q: What explains the strong sequential improvement in U.S. organic growth, and can SG&A cost intensity fall below 3% next year? /

  A: The strong U.S. organic growth performance reflects the end of post-M&A intentional shedding of low-return, non-hurdle meeting business that suppressed reported volume metrics from 2020-2024. As M&A activity slowed, the volume metric now reflects underlying core business performance, which is stable. For SG&A cost intensity, management notes that shared corporate overhead is a largely fixed cost base, and automation (including AI) will drive further productivity improvements. Management does not view 3% as a floor, and expects to push SG&A intensity below 3% pro forma next year, creating ongoing operating leverage as revenue grows faster than corporate costs.