GFL Environmental Inc. Q2 FY2024 earnings call

• The second quarter financial results show the predictable nature of the business model. Solid waste pricing and volume were better than expected. Operating cost inflation is moderating. They deployed $89 million into incremental growth investments related to recycling and RNG infrastructure. Accelerated exit from Michigan residential collection contracts. Success with EPR in Canadian markets with new contract awards adding to incremental adjusted EBITDA. Remain optimistic about RNG facilities coming online. First half M&A spend was $500 million with a robust pipeline of M&A opportunities. Increased guidance for adjusted EBITDA and margin due to strong first half results.

Revenue for the quarter was $2.06 billion, 11.1% higher than the prior year excluding solid waste divestitures. Solid waste pricing was 6.5% and volume was minus 1.7%, both ahead of plan. The Environmental Services segment advanced with price-led growth supported by increased oil volumes and used motor oil pricing. Adjusted EBITDA margins were 28.7% for the quarter, 90 basis points ahead of the prior year and 20 basis points ahead of guidance. Environmental Services adjusted EBITDA margins were 29.6%, in line with expectations.

• Adjusted EBITDA is increased to $2.24 billion to $2.25 billion and adjusted EBITDA margin to 28.4%. Revenue expected to be approximately $7.9 billion to $7.925 billion. Adjusted free cash flow increases to $810 million. Q3 expected consolidated revenue of approximately $2.055 billion to $2.06 billion, consolidated adjusted EBITDA margin of 30.25%, and adjusted EBITDA for Q3 around $625 million. Net leverage expected to reduce throughout the quarter and end the year within 3.65 to 3.85 range.

• Risks include market uncertainties affecting M&A execution, potential deviations from forward-looking statements, and valuation gaps that could impact asset sale strategies.

Q: Maybe if we could just start with those closing comments, I just want to maybe give you an opportunity maybe share a little bit more color on maybe the type of interest you've seen, the type of investor or the type of parties that are looking at it? Do you have like a lower bound on the multiple you're willing to sell, time lines? And just sort of your decision-making process?

A: Yes. I think, Saba, from my perspective, again, we've spent 17 years building this business...

Q: Maybe first on the 2024 guidance -- maybe just first starting on the 2024 guidance, your updated guidance has margins expanding 170 basis points year-over-year at this -- appears to me the highest margin expansion amongst your peers for the year. Can you comment on what's driving this? How much do you attribute to just the quality of your asset base versus self-help initiatives? And then can you update us just on what innings you are in on your self-help initiatives?

A: Yes. Stephanie, it's Luke. We're certainly impressed with the headline number of 170 as well. But I think the starting point is exactly what you said. It's the quality of the assets and the market selection in which we've gone on...

Q: Maybe just looking at your solid waste performance, I guess I've noticed a bit of a divergence -- almost a divergence, it's more the Canadian solid waste organic growth has been tracking at a decent positive spread versus U.S. organic growth. I'm just wondering if there's anything to call out there that you're seeing in Canada versus the U.S. So I'm not sure it's just the timing of how some of the M&A comes through and it rolls through after year 1? Or if there's something specifically happening in the Canadian landscape versus the U.S. landscape.

A: Yes. Kevin, it's a great question. If you think about solid waste organic growth being price and volume, recall, our Canadian business was sort of behind the 8 ball on pricing, if you will, when we really sort of embarked on price discovery, call it, sort of 5, 6 years ago. And so I think that upside that we've always articulated as to catching up with industry norms in terms of pricing, a lot of that existed in the Canadian book, and you're seeing that sort of come through...

Q: I just wanted to come back to the 2024 margin guidance. Look, the pace of increase really steps up in the second half compared to the first half. I know the sale of the operation in Michigan is part of it. But can you help us better understand that sequential improvement?

A: Yes. Devin, it's Luke speaking. And again, I think it sort of goes back to my sort of prior comments to Stephanie of the overarching margin and it's sort of all of these things coming together, right? So you continue to have price cost spread similar to what we've seen all throughout the year...

Q: I wanted to ask, your margins in the second quarter were up, call it, 1.5 points ahead of normal seasonality, really strong performance and the guidance for the third quarter is for another outsized margin move of 1 point versus normal seasonality. Can you just talk about what level of sequential price increase are you folks implementing to deliver that level of outperformance? And what are the sequential trends in unit costs that you're seeing that drove the beat in 2Q and again, outperformance in 3Q guide?

A: Yes, thanks for the question, Jeff. This is a year that's returning back to sort of normal cadence of pricing action. What I mean by that is the vast majority of pricing actually occurred already. And so as a result, we're seeing a normal course step down...

Q: I wanted to ask, your margins in the second quarter were up, call it, 1.5 points ahead of normal seasonality, really strong performance and the guidance for the third quarter is for another outsized margin move of 1 point versus normal seasonality. Can you just talk about what level of sequential price increase are you folks implementing to deliver that level of outperformance? And what are the sequential trends in unit costs that you're seeing that drove the beat in 2Q and again, outperformance in 3Q guide?

A: Yes, thanks for the question, Jeff. This is a year that's returning back to sort of normal cadence of pricing action. What I mean by that is the vast majority of pricing actually occurred already. And so as a result, we're seeing a normal course step down...

Q: I'd like to start by following up on that last question. If you're looking to deploy capital from the sale of the ES business, what's your view on the optimal level of debt for the remaining companies? Is it still the same? Is it mid-3s? Or if you have the option, could that go lower?

A: I think when we ran our models internally with the sale, I think you would basically -- I mean, I think comfortably, you'd move it to 3. And that's to get to IG -- to make sure you're definitively square in the view of getting that sort of investment grade rating...

Q: How has employee attrition training and safety expense trended year-to-date? Is there room for improvement from here? And is there a difference in trends if you look at the business geographically between Canada and the U.S.?

A: So I think there's a difference between secondary and urban markets. At secondary markets, again, employee turnover, obviously, significantly lower than the urban market, which has been good. I think if you look at trailing 12 months as a business as a whole. Like I said, last year, we were sort of -- we were trending sort of mid-20s. Today, we're just above 20. And we think that, again, goes back to sort of where we were pre-COVID sort of in the high teens. So mid- to high teens is what the goal is. And we are definitely on a trailing 12-month basis, trending down...

Q: Could you discuss any cross-selling or historical benefits that we should have in mind between solid waste and ES that you've generated with those businesses together that might not be a feature of the RemainCo?

A: Yes. So I think if you look at it, I mean, the model that had a solid waste need, right, not in the sort of reverse. So yes, there was cross-selling opportunities. But the way it's structured today is you basically have a solid waste salesmen and you have a liquid waste environmental services salesman, right? Or saleswomen. And I think when you look at that, we basically incorporate effectively a buddy-buddy system...

Q: Maybe turning around to, called it the more boring blocking and tackling stuff. We've talked in previous calls about some of the margin enhancements and improvements. And you touched a little bit on labor and turnover management. But just wondering how you're making progress on kind of core waste margins. And some of the initiatives, I think we talked a little bit about rolling out things like tablets and the trucks and some of the other pricing initiatives. Just wondering if there's any color on kind of the walk into higher margins as we go through the next few quarters?

A: Yes, it's a great question, something that as we look at the margin profile of what we're being able to deliver and the expansion year-over-year is very evident that the strategies we've been talking to are being sort of highly successful. And again, Chris, I think it's all of the above coming through in the beginning stages of what those ultimate run rates could be...

Q: Along those lines, though, the other question, just in terms of being able to receive things like new vehicles, technology, things like that, I know there's been some supply chain issues and -- but it seems like a lot of stuff is starting to feel better. How are you finding kind of things like truck supply, things like that in terms of your ability to get kind of newer trucks into the system, help you avoid some maintenance costs, things like that?

A: Yes. So we were sitting at around 70% of what we wanted. If you go back sort of 1.5 years, 2 years ago, I think that's trended sort of like 85% to 90%. And I think we could be 100% of where we want to be, absent, again, some of these big new EPR contracts that we've had to reallocate units coming off the floor to these because of the contract start date of those. But I think, yes, the log jam has definitely subsided, and we're moving to a point now where we can get exactly what we want.

Q: Just in terms of the ES business, is there any back office systems or anything? I know Patrick, you talked about sort of the sales front end, but is there any back office or common areas that you'd have to split up or anything that would make kind of a sale complicated from an operational perspective?

A: Not really. Obviously, there's a little bit in treasury and then definitely a little bit in HR are the 2 big sort of overlaps, but by and large, it's very -- it will be one of the simpler things we've done in our history. So again, nothing that would be an impediment to making it happen.