GFL Environmental - Q2 2023
July 27, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to the GFL Environmental 2023 Q2 earnings call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. Also, note that the call is being recorded. I would like to turn the conference over to Patrick Dovigi. Please go ahead, sir.
Patrick Dovigi (President and CEO)
Thank you, good morning, everyone. Sorry for the slight delay, as our conference operator is experiencing technical difficulties at the current time. You may hear from others that they may have not been able to log in, but anyone that logged in prior to sort of 8:15 A.M. has the ability to log in. The conference call is available sort of on the webcast, and whoever was 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 (EVP and 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've 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. 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 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 (President and 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+ 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 divestitures 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 paydown, 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 de-lever into the mid-threes 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%. A combination of open market pricing activity, the roll forward of our surcharge initiatives from last year, and the continued elevating 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've 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 guide. 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. 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 to 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 R&M expense line, 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 30% 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 guide.
CapEx spend was slightly behind expectations, attributed to timing differences, but 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-$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 Arbor Hills 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 OPAL 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 later 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. Even without those larger, higher prices, we remain very excited about the contributions of EBITDA from our landfill gas-to-energy projects 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 identifying our existing footprints in North America. On the ESG front, we made progress in several areas. GFL was named Corporate Knights as one of the Canada's 50 Best Corporate Citizens and was awarded a 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 GHG 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 standalone report in line with the recommendation 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 (EVP and 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 three summarizes the bridge between realized revenue and our guidance, updated to reflect the impact of the divestitures consistent with our June 5th press release.
Excluding the impact of the steady appreciation in the Canadian dollar since the beginning of May, when we provided this Q2 guide, revenue was CAD 1.955 billion, as compared to our pro forma guide of CAD 1.95 billion. When unpacking the outperformance, it is really a function of incremental solid waste pricing, which was about 175 basis points ahead of plan, offset by just under 200 basis points of incremental negative solid waste volume.
Recycled commodity prices and higher revenue from our environmental services line contributed to the outperformance, they amount to relatively immaterial. Solid waste core pricing continues to be strong in both our geographies. Recall the normal and expected cadence of quarterly pricing is a peak in the first quarter, then a sequential step down thereafter. The 200 basis point deceleration in pricing from Q1 was less than expected, as open market pricing remained constructive and our CPI-linked revenue continued to reset at elevated levels, providing support to the relatively lower percentage price increases historically realized in the residential collection and post-collection lines of business.
Q2 solid waste volumes was -3.5%, which included a certain amount of volume pulled forward into Q1, as we had suggested on the first quarter call, as well as intentional shedding of low-margin work. Looking at the first half as a whole, which is more reflective of the underlying performance of the business, solid waste volume was -160 basis points. The components of this -160 breaks out as follows: approximately 60 basis points relates to the exiting of non-core other revenues in our Canadian business. 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.
Another 20 basis points relates to special waste volumes, which tend to vary in timing from one year to the next. The other 100 basis points relates to non-regrettable losses, substantially all of which is in the collection line of business. Our underlying volume growth for the first half was approximately 20 basis points. The vast majority of our customers are willing to pay for our high-quality services, and we continue to retain existing customers and win net new customers at appropriate prices every day. As Patrick mentioned, we're electing to not renew contracts that do not meet our return thresholds, given our increased focus on quality of revenue. In the current operating environment, we believe that it's better to use of our resources to focus on the many other accretive opportunities we see before us.
The positive impact of our pricing and deliberate volume strategies can be seen in the underlying adjusted EBITDA margin expansion. On page four, we show the bridge of the 220 basis points year-over-year solid waste adjusted EBITDA margin expansion. Commodities continue to be a year-over-year headwind and at a 110 basis points impact compared to the prior year.
Due to our scale and the quality of the commodities we sell, we typically realize a selling price at a spread above market indices. However, periods of significant price volatility can temporarily cause spread compression, such that the net price we realize can decrease, even when the headline market indices increase, and that's what we saw in Q2.
Although fiber prices have increased recently, the coincident rapid and significant decline in non-fiber prices yielded this type of spread compression during the end of Q2. As a result, the average net commodity price we realized for the quarter was only very modestly above our initial guidance. The divestiture of the Colorado MRF, which had a blended basket of goods price higher than our company average, also impacted our average commodity price.
The continued decline in non-fiber prices since quarter end results in a current basket price approximately equal to our original guide. The anticipated stabilization and subsequent recovery in commodity prices towards the end of the year should result in a reversal of this trend. The incremental effectiveness of our fuel cost recovery strategies is clearly evident on the bridge on page four of the presentation, with an 85-basis point sequential improvement to the net margin impact over Q1.
With the substantial completion of the first phase of our surcharge initiative, we do not anticipate material negative margin impacts from future rapid increases in diesel costs, and we see additional upside from continued enhancements that we are implementing, including on the indirect fuel side. Shown on the bridge is the impact of M&A and of receiving approximately $5 million of business interruption insurance for the MRF fires that we had in Canada last year.
After excluding those items, base business solid waste margins expanded 315 basis points, 125 basis point acceleration over Q1, and demonstrative of the widening spread between price and cost inflation that we forecast in the 2023 guide. The accretive margin impact of the non-regrettable revenue losses that Patrick and I just described also contributed to the margin expansion outperformance. Adjusted free cash flow for the quarter was $9 million. Better than our plan, despite incurring $10 million incremental cash interest expense as a result of repaying our floating rate debt earlier than originally anticipated.
Adjusted cash flows from operating activities increased 18%, despite a 32% increase in cash interest expense versus the prior year. On page five, we have summarized the impacts of the now completed divestitures. Due to timing differences between in-year impact of divested adjusted EBITDA and the associated savings and interest costs and CapEx, the divestitures are modestly dilutive to 2023 results but are still anticipated to be accretive within the first 12 months.
Cash taxes and transaction costs revolving from the asset sales will total just under $400 million, and the approximately $1.3 billion of proceeds were used to repay outstanding borrowings under our revolving credit facility and just under half of our term loan B. As Patrick mentioned, with the transactions yielding $150 million more than the original plan and closing a quarter early, we are reallocating a portion of the proceeds towards attractive capital opportunities that we have been evaluating, which I will flesh out in more detail when we walk through the guidance update.
As a result of the net debt repayment and the strong first half operating performance, we ended Q2 with net leverage of 4.18. On page six, we have summarized our new debt profile, where it shows that now almost 80% of our debt is fixed rate, and the overall complex blends to a borrowing rate of approximately 5.2%, nearly 50 basis points better than before the debt paydown. In terms of our updated guidance for the year, page eight provides the bridge from our original guidance.
Pro forma for the divestitures, we are increasing our revenue guidance by approximately $70 million on a like-for-like basis. The new guide assumes an ex- FX rate of 1.32 for the balance 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 goes to just under 9.5% from 8%. Surcharges go to -1% from flat, reflecting lower diesel prices. Solid waste volumes go to -2% from flat, with underlying volume growth of +20 basis points, offset by approximately 110 basis points of intentional shedding and approximately 90 basis points from exiting non-core ancillary services, mostly in our Canadian business.
Commodity prices are expected to impact consolidated revenue by negative 60 basis points, while FX is expected to contribute positive 160 basis points. The new guide also assumes that environmental services organic growth improves 200 basis points to around 7%, and the net impact of M&A decreases to 1.7%, reflecting the outperformance in the first quarter and new M&A during the year, offset by the impact of divestitures.
The new guide assumes today's commodity price environment, as previously discussed, the net impact of which is broadly in line with our original guidance. The expected recovery of commodity prices should provide upside to the guide throughout the back half of the year. Page nine completes the guidance update and shows the pieces to walk from revenue to free cash flow. Adjusted EBITDA increases $55 million using the same FX rate as our original guidance, or $50 million at the new FX rate, and adjusted EBITDA margin expands an incremental 50 basis points over the original pro forma guide.
As the widening spread of price over cost, improved asset utilization, and the accretive impact of shedding low-margin volume, all drive incremental margin. Cash interest expense reduces to $490 million, as the in-year savings from the debt repayment are partially offset by the increased interest costs from floating interest rates and borrowing levels higher than originally anticipated. In 2024, the full year impact of the debt repayment will be realized, and cash interest expense will be closer to $400 million.
On CapEx, as we said, we see highly compelling opportunities to redeploy a portion of the proceeds from the divestitures into incremental organic growth initiatives, which we anticipate will provide accretive returns on invested capital long into the future and further improve our ability to generate high-quality, sustainable, free cash flow growth.
Some of these projects were already in our queue, and the incremental expenditure reflects the acceleration of investment that would have otherwise been made beyond 2023. Others are net new opportunities that arose this year. As Patrick said, we expect that we'll able to deploy an incremental $200 million-$300 million of CapEx before the year is done and have updated our guidance for this gross CapEx accordingly.
The breakdown of the incremental investment is approximately $150 million-$200 million into five MRFs, four of which are in Canada and one in the U.S., $25 million-$50 million into RNG project development, and another $25 million-$50 million for land and building infrastructure to support these initiatives. The payback on the RNG investments are well known, and at today's RIN prices, the returns are even more attractive at sub-three-year paybacks.
We're obviously motivated to accelerate these projects as quickly as possible. In certain instances, the incremental RNG capital is a result of a changing partnership economics, which we expect to be positive. On the MRF spend, these projects are largely in response to existing EPR legislation and strategic positioning in markets where we expect EPR to arrive or where we have sufficient internal volumes.
These new EPR contracts can be 10-year fee-for-processing-based models with accretive margin profiles and sub-five-year paybacks. We view these investments as a reallocation of the proceeds received from the divestitures. We think that offsetting this excess investment by a corresponding and equal allocation of a divestiture proceeds yields an adjusted free cash flow metric that is more reflective of the current cash-generating capabilities of the business.
The impacts of working capital and other operating cash flow items are expected to be close to nil, excluding the impact of the cash taxes associated with the divestitures, which we intend to exclude in our adjusted free cash flow reconciliation. The resulting balance sheet from the revised operational guide is net leverage of less than 4x exiting 2023, a level that should organically reduce another 50 to 70 basis points by the end of 2024, as shown on page 11 of the presentation, putting us on a solid path toward an investment-grade rating in the medium term.
In relation to our specific expectations for the third quarter, we expect consolidated revenue of approximately $1.865 billion, just under 80% of which will be in solid waste. Keep in mind, the recent divestitures impact Q3 revenues by $115 million compared to the original guide, which is the driver of the atypical step down from the second quarter. The recast FX rate also impacts the sequential quarterly comparison by approximately $20 million.
Solid waste adjusted EBITDA margins are expected to be in line with the second quarter, reflecting underlying sequential expansion, offset by the 35-basis point benefit of insurance recoveries that we recognized in Q2. Environmental services margins are expected to be between 30% and 31% through operating leverage realized on the peak third quarter revenues. Corporate cost margins are expected to be 10 basis points higher than Q2 on continued investment in IT development and the impact of the divested revenue.
This results in adjusted EBITDA of approximately $525 million at consolidated margins of approximately 28%, representing over 200 basis points of expansion compared to the prior year. From that adjusted EBITDA, the components to get to adjusted free cash flow are cash interest costs of $115 million, a benefit from working capital net of other items of about $25 million, and gross CapEx of $275 million-$300 million, or approximately $160 million when incorporating the allocation of that divestiture proceeds previously discussed.
That results in adjusted free cash flow for the third quarter, approximately $275 million. That's the summary of the guidance update. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.
Patrick Dovigi (President and 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. The impact of that is demonstrated in the quarter-over-quarter underlying margins expansion.
We are taking action across our network of assets to maximize the return 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 (participant)
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If using a speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question. Your first question will be from Michael E. Hoffman at Stifel. Please go ahead.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Hey, everybody, thanks for taking the questions. Patrick, let me start with price. 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 add, look for more? I'd like to talk about cadence, because inflation is starting to ebb, so we do need to manage the thought about cadence.
Patrick Dovigi (President and CEO)
Yeah. I mean, 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 price, the initial recognition that comes into base price, so that it remains at elevated levels. You know, the mark, we still have a good opportunity with an 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, you know, the CPI lags in the residential books of business.
All those put together, you know, allowed us to sort of move up the guide, 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-rate. We're in a good position. Obviously, with CPI coming down as that moderates, we've built that into, you know, our forecast, but I think from where we sort of sit today, we feel very comfortable with the guidance that we put out.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
How should we think about cadence through the second half and then into 2024? Because CPI is coming down, and that doesn't mean you won't maintain this really strong spread, just the rate of change will narrow.
Luke Pelosi (EVP and CFO)
Yeah, Michael, it's Luke speaking. I think that's right. For the balance of 2023, we expect what we'll call the kind of normal cadence. That is 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 100 basis points step down then. Look, we're not at a position where we want to talk about 2024 in earnest, but as we've said historically, we think there's a constructive backdrop with the delays in CPI, as well as the constructiveness of the open market dynamic to continue at what would be 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. We think, as we've been saying for the last couple of quarters, that there's an opportunity to continue to maintain what is an outsized spread as compared to historical amounts.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Okay. You have socialized in the past the idea of by 2025, an adjusted cash number of $1 billion. It would appear now that without adjustments, that $1 billion is achievable by 2025. Are we looking at that correctly?
Patrick Dovigi (President and CEO)
I would be disappointed if it wasn't there, for sure. I mean, we've said, you know, we think when you sort of layer in RNG and you layer in all the other aspects, and now with the, the accelerated delevering. My expectation is we are definitely going to exceed the $1 billion in 2025.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Okay. Then the RNG projects that you're adding in the accelerated spend, do they qualify for investment tax credits? I'm going to get that capital, some of that back anyway.
Patrick Dovigi (President and CEO)
Yes.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Okay.
Patrick Dovigi (President and CEO)
Yes.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Can you max it out at 50%, or should we think about it as 30%?
Patrick Dovigi (President and CEO)
30%.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Okay.
Patrick Dovigi (President and CEO)
I mean, we'll push to maximize at 50%, but, you know, for conservatism perspective, we're using 30%.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
All right. Then what gives you confidence you can spend all this money in 2023, given the delays that happened in other stuff?
Patrick Dovigi (President and CEO)
You know, we're not certain. I think from our perspective, you know, it was prudent to sort of bring it up. I think when you think about these incremental capital spends, you know, as you know, we've been sort of a leader, particularly on the EPR front, and a lot of those contracts have come together over the last couple of months, and they are a combination of MRFs and hauling businesses to support those, not only in Ontario, but supporting them in other parts of the country.
You know, the way I would think about it, hey, if this was an acquisition, you're basically getting, you know, call it somewhere between $40 million and $50 million of EBITDA at very sort of high EBITDA margins for a spend of $200 million. You're paying sort of 4x-5x.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Yeah.
Patrick Dovigi (President and CEO)
I think from our perspective, we think we have the ability to deploy those dollars. you know, some of this has been in planning with the expectation that this would happen, you know, because these negotiations started last fall, but have really come together over the last couple of months.
Luke Pelosi (EVP and CFO)
Michael, the uncertainty about the ability is also the basis for the, you know, wider range. You know, put $200-$300 on that basis. You also have to remember, as Patrick said, a lot of this is in EPR and MRFs, and while Machinex and Van Dyk and the likes may not be able to deliver all the equipment, in certain instances, there's land building, retrofitting existing properties, construction. There's other costs that can be done in preparation for it, but you're absolutely right. It's a, a bit of uncertainty on the absolute quantum, and hence the wider range.
Michael Hoffman (Managing Director and Group Head of Diversified Industrial Research)
Okay. Thank you.
Luke Pelosi (EVP and CFO)
Thank you.
Patrick Dovigi (President and CEO)
Thanks, Michael.
Operator (participant)
Next question will be from Kevin Chiang at CIBC. Please go ahead.
Kevin Chiang (Managing Director and Senior Equity Analyst for Industrials)
Thanks, good morning, and thanks for taking my questions here. Maybe just on, on, on how to think about CapEx moving past 2023. You know, 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, in 2024 and onwards, should we be holding it at these levels, kind of 14%-15% of revenue, just given the pipeline of opportunities, or do you kind of step back down to, you know, let's say 10%-12%, like you were assuming in the original forecast earlier this year?
Luke Pelosi (EVP and CFO)
Yeah, 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. You know, the other component to this is RNG, and if you look at our total spend over all of the projects in totality might be, end up being at a sort of gross level in a sort of $500 million level.
When you think about 30% ITCs, and you think about, you know, 40%-50% project-level financing, your actual equity check at the end of the day is going to be materially less than that. Sometimes there's timing differences, and as part of this year's spend is the ITCs are going to come next year, but we want to invest the capital this year. You 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 a lower capital intensity than, you know, industry averages.
You know, 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 (Managing Director and Senior Equity Analyst for Industrials)
Excellent. That's great color. And then, you know, 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, you know, a number of acquisition scenarios. Just if you're able to share with us, you know, which of those three should we be thinking about to get to the mid-threes? Are you kind of back to an elevated M&A scenario in your mid-threes, or you're kind of in the middle of the pack? Does it seem no M&A? Any color there would be helpful.
Patrick Dovigi (President and CEO)
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. You know, we put out this guide. We've taken a conservative view on the guide. Obviously, every quarter since we've been public, you know, our philosophy has been sort of under promise and overdeliver. I think that theme will continue. The backdrop is, we've committed to, you know, this year, keeping leverage sort of around 4 turns, and we will do that with the model we have, as well as executing on the M&A.
You know, where we sort of sit from the company's first time in history, given the free cash flow profile of the business now and what that looks like free for next year, you know, we've thrown out a number next year for almost, you know, $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. You know, the business is going to grow organically. It's going to naturally de-lever, you know, M&A, taking a bunch of the free cash flow and reinvesting that into our M&A program. Again, we'll all be de-levering events, so we think we're going to get there, irregardless of our normal sort of M&A spend.
Luke Pelosi (EVP and CFO)
Kevin, the math today, I mean, it's pretty straightforward. If you think about organically, the business could de-lever to low threes. How much M&A will temper that otherwise de-levering? It's roughly four basis points of leverage for every $25 million of EBITDA you buy. If you put that together, if you, you know, buy $50 million-$100 million of EBITDA, that has an impact of somewhere to the tune of sort of 10-20 basis points of incremental leverage.
Kevin Chiang (Managing Director and Senior Equity Analyst for Industrials)
Okay. That's great color. Just last one for me, environmental services, long-term target of getting this 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 by a range 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 and that profitability.
Patrick Dovigi (President and CEO)
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. We are going to have that normal cadence each and every year. That being said, there's, like, 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, you know, I think there's the ability to just really take up margins.
You know, the Q1 margins will obviously always be the lowest, Q4 will be the next lowest, and Q2 and Q3 will be the highest. We have to push Q2 and Q3, you know, exceedingly above sort of where they are today, and we have to get those surcharges implemented to offset the sort of Q1 and Q4 dynamic. you know, it's going to be a bit of a mixed bag, but, you know, I think we have a clear path to sort of getting there, and I think you're seeing that come through, you know, quarter-over-quarter, year-over-year.
Luke Pelosi (EVP and CFO)
Kevin, you got to remember, the foundation of that business is largely credit-grade, 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 was 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.
Kevin Chiang (Managing Director and Senior Equity Analyst for Industrials)
That's great color. Thank you very much. That's it for me.
Patrick Dovigi (President and CEO)
Thanks, Kevin.
Operator (participant)
Next question will be from Jerry Revich at Goldman Sachs. Please go ahead.
Adam Bubes (VP of Equity Research)
Hi, this is Adam Bubes on for Jerry Revich today. Thanks for taking my question. Does the incremental, I think it was $25 million-$50 million RNG investments, does that include any new projects? Should that change how we're thinking about the cadence of projects beyond 2023?
Luke Pelosi (EVP and CFO)
Adam Bubes, 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, and we've now bought them out. We're going to go alone and accelerating some of the spend on that. 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'll be some lumpiness from quarter to quarter.
Adam Bubes (VP of Equity Research)
Understood. Then with D3 RIN 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 % that you intend to sell into transportation markets versus long-term arrangements?
Patrick Dovigi (President and CEO)
Again, currently in process, you know, I think our longer-term strategy may differ from the shorter-term strategy, but in the longer term, like we said, we want to get to a point where we basically have 60%-65% of our offtake parsed off in sort of long-term agreements. Obviously, we want the right price for that. Obviously, with a $3 RIN, that helps the longer-term strategy for those longer offtake agreements, but we want to get to a point where we're going to be at sort of a longer-term offtake agreement in the sort of 60%-65% range.
Adam Bubes (VP of Equity Research)
Got it. That's helpful. 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. Just any puts and takes around the sequential margin cadence from here, relative to normal seasonal trends?
Luke Pelosi (EVP and CFO)
Yeah. 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. As that's unwinding, it's causing some impact to the current year sort of seasonality cadence. 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. If you're stripping that out, continued sequential improvement in solid waste, and that's really a function of that continuing widening spread.
Cost inflation is anticipated to moderate even further in Q3, 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 about those two. Environmental services is similar to the comment we were saying before, really firing on all cylinders, but with the Q3 peak revenue, it's where you're going to get the sort of optimized operating leverage. That's why we see now a path that margins in that segment for Q3 could touch 31%. Q4, obviously, as the seasonal cadence, you have a bit of a step down from there as you move into the winter season.
Adam Bubes (VP of Equity Research)
Great. Thanks so much.
Luke Pelosi (EVP and CFO)
Thanks, Adam.
Operator (participant)
Next question will be from Tyler Brown at Raymond James. Please go ahead.
Tyler Brown (Managing Director for Construction Materials/Transportation Services/Waste and Industrial Services)
Hey, good morning, guys.
Luke Pelosi (EVP and CFO)
Good morning, Tyler.
Tyler Brown (Managing Director for Construction Materials/Transportation Services/Waste and Industrial Services)
Hey, 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? Will there be any difference between three and four?
Luke Pelosi (EVP and CFO)
Yeah. Tyler, I'd say your math is right, as that what the second half is looking at, and it's really just a continuation of what we articulated in the first. As I said, I think the pull forward from Q4- two into Q1. I think looking at first half in totality makes more sense. Negative 160 basis points of volume. If you break that down, you get about 60 basis points, which was $15 million of what I'm calling this non-core ancillary services.
This is work, stuff like wood chipping or gravel hauling, and other ancillary-type services, primarily in secondary markets, that we've been doing for a while, but we really don't make any money there, and we're exiting that. That's one component of it, and 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 event-driven special waste volumes.
You know, 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 certain degree of lumpiness. I don't think there's anything indicative of underlying trends that are concerning there, but rather just a normal sort of change. I'm anticipating by the end of the year, that's sort of neutralized more back to a sort of flat sort of level.
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, look, it's primarily in residential collection, although some is in IC&I. This is, you know, a function of our strategy of price over volume. I think by and large, it's working, and you can see it in the numbers and in the margin. 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, you know, 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 the exiting the non-core ancillary services. You know, another, so to call it $60 million from the non-regrettable losses or intentional shedding. You have an underlying $10 million-$20 million of positive growth from our normal course service level increases and new customers.
Tyler Brown (Managing Director for Construction Materials/Transportation Services/Waste and Industrial Services)
Okay. Yeah. Very detailed, very helpful. Appreciate that. Patrick, I want to talk about repairs and maintenance, because it sounds like the OEs are starting to deliver. It seems like part prices are disinflating, and I think rentals might be down next year. Does R&M feel like it could be a uniquely good story in 2024?
Patrick Dovigi (President and CEO)
I mean, we're still basically 100, almost 100 basis points more than where we've been historically. Yes, I think this year is going to be 50 basis points ahead of our, what our original plan was at the beginning of the year. Things are certainly coming down. We're certainly getting more truck deliveries, and the timeliness of those truck deliveries is coming on board. You know, from an OEM perspective, you know, it's obviously moderating prices on supply of parts as well. All of those coupled together are coming down. I mean, if you look at from us, from a rental truck perspective, you know, we are renting a quarter amount of the trucks that we were renting a year ago, right? That's all in the R&M line.
Yes, you're right, and I think as that moves into 2024 and 2025, that is certainly going to moderate and be a good news story as we move on for those next two years.
Tyler Brown (Managing Director for Construction Materials/Transportation Services/Waste and Industrial Services)
Okay, we'll keep an eye on that. Luke, on the $1.65 billion gross proceeds, I think you said $400 million maybe in taxes and transactions that's 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 (EVP and CFO)
Yes, maybe modest amount of transaction costs have been paid. Roughly, think of it, $360 of taxes, $40 of transaction costs, round numbers to get you to that $400. 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 that we have in the PNL. 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, sort of 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 of 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.
Tyler Brown (Managing Director for Construction Materials/Transportation Services/Waste and Industrial Services)
Okay. Okay, that's helpful. My last one, kind of another question along maybe a similar line, but a couple of your RNG plants are kind of in that initial startup phase, but how much EBITDA contribution are you baking in on those facilities, and how is the accounting going to work? I assume they're not 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 (EVP and CFO)
For 2023, the guide anticipated an inclusion of an immaterial number. I think it was about $10 million in total. With the delays, I mean, that might be a little light, but the RIN pricing probably offsets. The 2020 number is sort of as per the original guide.
Patrick Dovigi (President and CEO)
2023.
Luke Pelosi (EVP and CFO)
The 2023 number. As you get into 2024, that starts ramping up, yeah, Tyler, I think that's right. These are joint ventures that are unconsolidated, and our perspective is the GAAP-based accounting answer doesn't accurately reflect what our investors are looking for. You will have a adjustment to remove the GAAP-based net income that you're picking up and replace it with your proportionate share of the EBITDA. We'll preview that as part of our 2024 guide and make sure everyone understands very clearly what we're showing there, but we anticipate something to that effect.
Tyler Brown (Managing Director for Construction Materials/Transportation Services/Waste and Industrial Services)
Okay. All right. Good stuff. Thanks, guys.
Luke Pelosi (EVP and CFO)
Thank you, Tyler.
Patrick Dovigi (President and CEO)
Thanks, Tyler.
Operator (participant)
Next question will be from Walter Spracklin at RBC Capital Markets. Please go ahead.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
Yeah, thanks very much. Good morning, everyone.
Patrick Dovigi (President and CEO)
Hey, Walter.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
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 operate? Just curious as to what your experience is, where, you know, a couple of your, or at least one of your peers is talking about some pretty significant, also intentional shedding of business as to where it's ending up.
Patrick Dovigi (President and CEO)
Yeah, I mean, for the most part, I mean, it's in very selective markets. 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, et cetera. In a couple of the markets, it's been, you know, municipality taking a chance on a smaller type collector, in a market that's sort of a recent startup. You know, history tells us with those, we always generally end up with the work coming back to us over the course of the next sort of year to year and a half.
From our perspective, particularly in, you know, this OEM environment of getting new trucks and the cost of capital, we want to be rewarded appropriately for it. You know, and some of these residential contracts came with acquisitions, et cetera. You know, I tell everybody in the organization, "You know, we're a for-profit organization. We don't need to practice." 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, we're going to make money from. It's been a bit of a mixture of both.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
There's no worry here that this is representative of a lack of discipline among smaller players or anything-
Patrick Dovigi (President and CEO)
No.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
... to that effect?
Patrick Dovigi (President and CEO)
No.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
Okay. On the margin, Luke, you mentioned margin spread expansion in 2023, that comes after, you know, you saw some cost inflation really ramp in 2022, and your mechanism's kicking in nicely now in 2023 to be able to allow for an expanding spread, whereas perhaps it was contracting last year or was pressured 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 (EVP and CFO)
Yeah, Walter. I think as we've been saying consistently, we anticipate 2024 being another outsized year, and it's a combination of not just the natural spread expansion that you're going to have, but there's also, I mean, Patrick was just talking about R&M. That is not going to get fully, you know, sorted this year and will represent an incremental tailwind.
You can talk about commodities. I mean, we are very optimistic 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 you need to bank on commodities for the expansion, but just another example of what should be a tailwind. RNG, as that comes on for us, we have a relatively diminished, you know, 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. When you start layering those other pieces on top, you know, we see the setup for 2024 to be an exceptional year.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
Okay. That's fantastic. The CapEx Last question here is on the CapEx spend, and, you know, it seems like a, a larger number to happen all at once. Just curious, is this something you were always contemplating and just mindful of dollars spent and keeping everything in check? You know, with the proceeds now from the acquisition, you saw an opportunity to strike on this one, or did Is this just something that just popped up recently and kind of your, you had the opportunity and the capability, and you hit as a result of that? Just curious as to how that came up.
Patrick Dovigi (President and CEO)
I think as part of the divestiture program, we knew that there was going to be an opportunity, particularly with where we saw the EPR opportunity going at the last half of the year, meaning in 2022. A lot of that work was tendered and developed with us in the sort of first quarter of 2023, and really formalized in the 2nd quarter of 2023.
You know, I think from our perspective, our anticipation was, is that, you know, as we saw the divestiture sort of unfolding, you know, that we actually ran a little bit harder at the EPR opportunity than maybe we would've, in taking on the amount of work that was available under that program. Listen, from where I sit today, there is no better use of capital, you know, putting the RNG spend aside, than these partnerships that we've developed with, you know, the producers in Canada, particularly with some of these MRFs that, you know, contracts ranging from 10-20 years, annual PIs, ability to recover CapEx dollars to meet their sustainability goals. I mean, it's a wonderful partnership.
It's a win-win for both of us. The fact that we've moved these to fixed fee processing contracts, so we don't have any co-commodity volatility, I mean, it's just, it's a wonderful thing where you're basically going to be at, you know, around four-year paybacks on these with 10-20-year contracts, coupled together with the vertical integration of now putting the collection contracts together with them.
You know, we just didn't see a better opportunity to deploy those dollars. Given the fact that we even exceeded our own internal expectations, we of getting an extra $150 million of proceeds from what we anticipated when we started the process, this was just a logical place to put those dollars. Again, the setup that gives us for 2024 and 2025 is going to lead to a, you know, significantly above average growth CAGR as we move out into 2024 and 2025.
Walter Spracklin (Managing Director and Co-Head of Global Industrials Research)
Okay. I appreciate that color, Patrick. Thanks, guys.
Operator (participant)
Okay. Thank you. Next question will be from Stephanie Yee at JPMorgan. Please go ahead.
Stephanie Yee (VP and Equity Analyst for Industrials and Energy)
Hi, good morning. Can you talk about within environmental services, how much of the growth is price-driven and surcharge-driven versus the processing volume side?
Luke Pelosi (EVP and CFO)
Yeah, Stephanie Yee, it's Luke Pelosi speaking. I mean, if you look at the typical sort of growth algorithm in a solid waste business, we probably have 80% coming from price and 20% from volume. I think our environmental services business today is probably the inverse of that. It's not as homogeneous 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. Certainly, 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, you know, 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 (VP and Equity Analyst for Industrials and Energy)
Okay. Got it. That makes sense. Can you give us a sense of how the different business lines within Environmental Services is doing?
Luke Pelosi (EVP and CFO)
Just at a high-level bifurcation, people have historically asked about our sort of oil and oil-related exposure, and obviously, that business, with the decrease in energy costs, is realizing revenues at a sort of lower point than it had sort of historically. But more and more, with the diversification efforts that we've undertaken, that business is representing, you know, sub 10% of the overall as we go forward. Really, when you think about our broad-based sort of environmental services across sort of collection and processing, we continue to see strength. It'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. We continue to see, you know, phenomenal sort of growth as you've seen over the past sort of year or two.
Stephanie Yee (VP and Equity Analyst for Industrials and Energy)
Okay. would you consider expanding environmental services outside of Canada, more so into the U.S.?
Patrick Dovigi (President and CEO)
I mean, if the right opportunity and the right markets presented themselves, for sure. I mean, we have been slowly expanding into the U.S.. Obviously, the market selection and the right asset base is the most important part, yeah, I mean, we'll definitely look at opportunities. We're not shying away from different opportunities in the U.S., that's for sure.
Stephanie Yee (VP and Equity Analyst for Industrials and Energy)
Okay. Sounds good. Thank you.
Luke Pelosi (EVP and CFO)
Thanks, Stephanie.
Operator (participant)
Thank you. As a reminder, if you do have a question, please press star followed by 1 on your touchtone phone. Your next question will be from Michael Doumet at Scotiabank. Please go ahead.
Michael Doumet (Equity Research Analyst for Diversified Industrials)
Hey, good morning, guys. The expectation for price cost spread to expand in the coming quarters, you know, 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 2023. This obviously excludes, you know, commodity and RNG piece.
Luke Pelosi (EVP and CFO)
Yeah, Michael, it's Luke speaking. I think, you know, 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. I think if you think about the way the dynamics roll into 2024, there's clear math that supports continued wider spreads. You know, it's difficult to call the exact sort of when it's going to peak. We're just feeling very optimistic that 2024 will continue to be constructive.
Michael Doumet (Equity Research Analyst for Diversified Industrials)
That's helpful. Thanks, Luke. Then on 2024 EBITDA margins, maybe a little bit early to discuss, but if I were to exclude, you know, the full revenue and EBITDA contributions from the divestitures from the pro forma 2023 EBITDA guidance, I get to a full year EBITDA margin of 27.1. Just thinking if that's a fair starting point for 2024, obviously, I would add, you know, I don't know if it's 200 or 300 basis points of price cost spread, you know, RNG, et cetera. Just trying to get a sense from you on how to think about those numbers.
Luke Pelosi (EVP and CFO)
Michael, we're not going to talk about 2024 today. We gave you the 2023 guide ending at $2 billion, 27% margin. You know, I think normal course, historically, we've been saying 50-100 basis points of margin expansion. We think 2024 is an outsized year. You know, I, I think it's in that sort of directional zip code, but, you know, we're going to wait till we close out this year or at least another quarter before we start talking about 2024 guide in too much depth.
Michael Doumet (Equity Research Analyst for Diversified Industrials)
Fair enough. Yeah, those are my questions. Thanks very much.
Operator (participant)
Thank you.
Luke Pelosi (EVP and CFO)
Thank you.
Operator (participant)
At this time, Sir, we have no further questions registered. Please proceed with closing remarks.
Patrick Dovigi (President and CEO)
Thank you, everyone, for joining today. Sorry about the conference call. We started a little bit late given the issues with the operator. We look forward to speaking with you after our Q3 results. Thank you.
Operator (participant)
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 line. Have a good day.