GFL Environmental - Earnings Call - Q3 2025

Transcript

Operator (participant)

Hello everyone, thank you for attending today's GFL Third Quarter 2025 earnings call. My name is Ken, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. We will limit to one question and one follow-up. I would now like to pass the conference over to our host, Patrick Dovigi, the CEO and founder of GFL. Please go ahead.

Patrick Dovigi (CEO and Founder)

Thank you, and good morning. I would like to welcome everyone to today's call, and thank you for joining us. This morning, we will be reviewing our results for the third quarter and updating our guidance for the full year 2025. I am joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.

Luke Pelosi (CFO)

Thank you, Patrick. Good morning, everyone, and thank you for joining. We have filed our earnings press release, which includes important information. The press release is 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 and Founder)

Thank you, Luke. Once again, I want to start by thanking our incredible employees, whose commitment drove another quarter of exceptional performance. Our results exceeded expectations from top to bottom. For the quarter, we achieved the highest adjusted EBITDA margin in our company's history at 31.6%. All of this was accomplished despite a challenging macro backdrop and an incremental commodity-related headwind. As I said last quarter, we view the consistent delivery of record-setting results, even in the face of challenges, as a continued demonstration of the quality of our asset base, the effectiveness of our value creation strategies, and the resilience of our business model. Near double-digit top-line growth is driven by the continued success of our pricing strategies, the impact from our disciplined rigor on price-cost spread, harvesting pricing opportunities related to ancillary surcharges and incremental price discovery opportunities, as well as the EPR ramping and other contract renewals.

We're apparent in the quarter and position us now to expect pricing for the full year of 6%. Industry-leading volume performance also contributed to the top-line growth. MSW volumes and the ongoing tailwinds from our recent EPR investments more than offset the impact of softer construction-oriented activity, lower manufacturing and industrial collection, C&D landfill, and special waste volumes. We continue to see broader economic uncertainty impacting the level of activity in these areas of our market, but remain well-positioned to participate in upside when these volumes inevitably return. Operational cost as a percentage of revenue trended lower in the quarter in response to our continued improvements in labor turnover and our ongoing focus on cost discipline, process optimization, and the realization of self-help opportunities across our portfolio.

The effectiveness of these cost efficiencies is seen in the margin line, where we once again delivered an industry-leading 90 basis points of adjusted EBITDA margin expansion. Luke will take you through the detailed bridge, but when you factor in the impact of commodity prices and credits realized in the year, we realized over 250 basis points of underlying margin expansion. With each passing quarter, we are proving out the business's ability to meet and exceed the industry-leading margin expansion targets we laid out in our investor day presentation. We also remain highly confident in the targets we set out in our investor day for M&A. Year to date, we have deployed nearly $650 million into acquisitions, including approximately $50 million deployed subsequent to quarter end. We have several incremental deals in process and will deploy incremental capital into M&A before year-end.

Our M&A pipeline remains very active and anticipate transactions will close in the first half of next year as well. The rollover impact of these transactions provides us with significant growth tailwinds as we head into 2026. The strength of the base business performance and the anticipated contribution from recent M&A allow us to raise full-year guidance for the second time this year. Luke will provide you with those details. In the quarter, we also completed the previously discussed recapitalization of GIP by partnering with ECP, a leading investor in critical infrastructure. The transaction valued GIP at $4.25 billion. Returned approximately $585 million to GIP shareholders and added $175 million to the balance sheet to fund future growth. Since our original investment in GIP in 2022, I have consistently expressed my belief that GIP would be a vehicle for significant value creation for GFL shareholders.

The recapitalization back in 2022 valued our original investment at $250 million. At over $1.1 billion, returning nearly four and a half times just over three years. I believe this is yet another reflection of GFL's strength in the management team and the effectiveness of our strategies to create longer shareholder value. GFL received $200 million of the shareholder distribution and continues to own 30% of the equity of GIP. That will allow us to participate in what we expect to be continued value creation from the GIP business. We are pleased with the valuation we realized on GIP and environmental services transaction earlier this year, currently see a significant dislocation in the value of GFL's share price and therefore see share purchases as an attractive opportunity to deploy capital.

We repurchased $350 million of shares in the third quarter and nearly $2.8 billion of shares year to date. Going forward, we will continue to be opportunistic on executing share buybacks. I will now pass the call over to Luke, who will walk you through the quarter in more detail, and then I'll share some closing comments before we open it up for Q&A.

Luke Pelosi (CFO)

Thanks, Patrick. Consolidated revenue for the quarter grew 9% over the prior year, driven by a 50 basis point sequential acceleration in pricing to 6.3% and 100 basis points in positive volume, which more than overcame the headwinds from commodity prices and fuel surcharges that were even greater than anticipated. The accelerated realization of incremental price discovery opportunities that we outlined at investor day is increasing our full-year price growth expectations another 25 basis points to around 6%. Even when excluding the pricing impacts from large-scale contract renewals, both in collection and recycling processing, we continue to see pricing in excess of our internal cost of inflation, driving appropriate returns on our invested capital. Volumes grew 100 basis points as the benefits of recent growth investments and improved MSW volumes offset the ongoing softness seen in the broader macro environment.

Volumes were up 5% in Canada and 0.9% behind the prior year in the U.S., inclusive of 3% lower C&D and 9% lower special waste volumes. While Q4 is expected to see negative volumes on a tough hurricane cleanup comp, we remain well-positioned to benefit from a broader economic recovery. Adjusted EBITDA margin for the quarter was 31.6%, the highest in our company's history and ahead of our internal expectations. Commodity prices, which slid over 20% sequentially from Q2 and were down over 30% year over year, continue to be a drag on margins. M&A and the non-recurrence of ITCs recognized in the prior year comparative quarter were also headwinds, whereas R&G and fuel prices were tailwinds. Excluding these items, underlying solid waste margins expanded 250 basis points.

Adjusted free cash flow was $181 million, better than planned on account of the outperformance of adjusted EBITDA and the timing of CapEx, partially offset by changes in working capital items. With the continued strength of our operational performance, we are able to raise our guidance for the year yet again and now expect to be at or above the high end of the previously reported ranges. Specifically, we now expect full-year revenue to be between $6.575 billion and $6.6 billion and adjusted EBITDA to be about $1.975 billion, over $50 million more and nearly 3% higher than our original guidance for the year on a constant currency basis. Adjusted free cash flow remains at $750 million as the incremental adjusted EBITDA is offset by incremental working capital and cash interest.

While the incremental M&A expected to be completed before the end of the year will have minimal contribution to the 2025 results, it will add to the nearly 150 basis points of acquisition revenue rollover already in hand. Additionally, the continued ramp of EPR in 2026 should add another 75 basis points of incremental revenue growth in next year. While we will wait until February to provide our detailed guidance for 2026, we remain confident in our ability to deliver on GFL's multi-year growth trajectory that we laid out at our investor day. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.

Patrick Dovigi (CEO and Founder)

Today, we're keeping it short and sweet as we think the results speak for themselves. Our focus is singular, and our path forward is clear. Even in the face of an uncertain economic environment, the setup for 2026 is simple and clear. We are very confident in our operating plan, as you have witnessed quarter after quarter. Our M&A pipeline has never been stronger, and we now have the balance sheet that allows us to keep repurchasing our own shares at what we believe to be dislodged prices. I will now turn the call over to the operator to open the line for Q&A.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. To remove your question, please press star two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. There will be only one question and one follow-up. We'll pause here briefly as questions are registered. Thank you. We have our first question from Sabahat Khan from RBC Capital Markets. Please go ahead.

Sabahat Khan (Managing Director)

Great. Thanks, and good morning. Just on the guidance update, can you maybe just walk us through some of the puts and takes you reflected in the guidance uptake? I think there's some upside in the Q3 results, but just wondering how you took into account M&A effects and some of the moving pieces and sort of how comfortable you are with the guidance uptake. Thanks.

Luke Pelosi (CFO)

Yeah, hey, Sabahat. It's Luke. Good morning. Great question. Obviously, something that in this environment, we're very pleased to be able to come for the second time this year and push the numbers even further up. If you think about the year as a whole, initially, at the top line, we had guided at the midpoint about $6.525 billion of revenue. And if you'd used the constant currency effects, that would have equated to about $6.625 billion for the year as a whole where we're at today, but roughly $100 million incremental. I'll just take the translational impact of effects out of the equation for a second. If you think about that 100, really, what you have happening at the pricing line, we've now breaking pricing up to close to 6%, nearly 75 basis points higher than where we started.

You have $40-50 million of incremental pricing action as a good guy. That is largely offset by the fuel surcharge and commodity-related headwinds that you have seen through the industry for the year, pretty equally offset. You have about $40-50 million negative coming from that. You have the volume story. Now, volume for the year was going to be plus or minus 25 basis points. We are pleased to be able to report that we are going to be slightly positive on volume. Really, within that number, again, you have puts and takes. Our EPR ramping has outperformed, and we are enjoying excess benefit from some transitional contracts that have come on faster than anticipated. Obviously, offsetting that is some of the C&D and construction-oriented materials that Patrick alluded to in his opening remarks and consistent with the industry as a whole.

You have the M&A. Very pleased that we've been able to acquire about $200 million of annualized revenue for the year. Roughly, you're going to recognize half of that in year and half is going to rollover. That is really driving the majority of that raise. Very interesting and happy to see the benefits of our strategies being able to overcome the real industry-wide headwinds that have been present throughout 2025.

Sabahat Khan (Managing Director)

Okay. Great. For my follow-up, I guess we have maybe just recapped where we are on the EPR runway. It looks like it is starting to contribute. Maybe if you can just walk us through kind of the wins you have, how much of that is starting to roll in, and how much more is likely to come through 2026 and beyond. Thanks very much.

Luke Pelosi (CFO)

Yeah. Sabah, just continuing with what I just said, I mean, this year, we've had great outperformance coming from EPR. What we have spoken about for each quarter is how the Canadian, both price and volume, has been enjoying uplifts as all these EPR contracts are coming online. As I alluded to, we're seeing transitional arrangements whereby our customer base is asking us to do larger quantities of volume or start doing work earlier than initially anticipated. We're, therefore, enjoying an acceleration of the realization of those EPR benefits in 2025 on amounts that were otherwise going to be coming in 2026. Now, where we sit and what I said, it's looking like 2026, we're going to have an incremental, roughly 100 basis points of top-line rollover from incremental EPR revenues coming online, offset by the reduction of some of these transitional contracts that I spoke to.

You are going to get this net 75 basis point impact rolling into 2026. As we have kept alluding to, there are still smaller opportunities that we continue to pursue, which could be additive to those numbers. Feeling really good to be entering 2026, in addition to our normal course organic growth, normal course M&A, to have this incremental tailwind of roughly 75 basis points at the revenue line, which, as we said before, will be margin accretive to the business as a whole and certainly to our Canadian segment, which is very quickly closing the gap on that blended margin. You are seeing it consistently print at north of 30% margins.

Operator (participant)

Thank you very much. We have our next question from Kelvin Chan from CIBC. Please go ahead.

Kevin Chiang (Managing Director and Senior Equity Analyst)

Hey, thanks for taking my question. Congrats on a good Q3 there. I know we'll wait till, I guess, February when you provide 2026 guidance. Maybe if I just look at some of the moving parts, and I appreciate some of the top-line comments you provided, Luke, but if I look at your runway EBITDA at the end of Q3, and I know there's a bunch of moving parts in there, but I take that and I look back to your investor day in terms of the growth you expect organically and what you can get from an M&A perspective. It seems like a runway EBITDA of just over $2.1 billion could be close to $2.3 billion next year. Maybe some incremental M&A needs to be completed to get there.

Just, I guess, how do you think about that directionally, just given the strength you're exiting Q3 and 2025 at?

Luke Pelosi (CFO)

Yeah, great question, Kevin. Thank you for the comments on the quarter. Look, the run rate number being reported right now is a little bit skewed by virtue of the inclusion of some of these large EPR collection contracts. You're actually getting that number included in your run rate metric this year, even though the performance will come throughout 2026. I think to grow organically off that number, you're effectively double counting a little bit. The way I would think about next year, and without forcing us to give you our guidance, what we've said is we're going to enjoy periods of outsized margin expansion over the near term as we execute on our strategies and realize the benefits to self-help levers. The guidance we've just given for this year, you're ending at 30% margin.

I think the revenue building blocks we just gave, you get to a revenue number that's north of seven, starts with a seven. A margin expansion on that outsized, I think you should be banking on something north of 50 basis points. When you put that all together, I think on the $1,975 of EBITDA that we are guiding for the current year, there should be a double-digit growth number coming on that, consistent with what we said at investor day. As Patrick said, there's a very healthy pipeline and stuff that we're actively working on. Any incremental acquisition activity would be additive to that.

I think if you take the building blocks, where you sit today, see a 10% EBITDA growth before considering the impact of any incremental M&A or the recovery of some of the industry-wide headwinds, namely commodities and volumes, as all of that will be upside to where we sit today.

Kevin Chiang (Managing Director and Senior Equity Analyst)

That's extremely helpful. Maybe just a follow-up here. I noticed your SG&A intensity or the percentage of revenue, if my math is correct, down about 80 basis points quarter over quarter. I think that's the best we've seen since you've gone public. I know you've been shifting the portfolio a bit here, but just maybe thoughts on SG&A trends over the medium term here. It does feel like you're starting to get some of that cost absorption benefit we talked about at your investor day.

Luke Pelosi (CFO)

Yeah. Thanks for noticing, Kevin. I mean, what we're excited about, it's not just on the SG&A line. You're right. You had that 70-80 basis point improvement at SG&A. If you look at labor and benefits, our main cost category, you had 40 basis point improvement there. The R&M cost, you had about a 50 basis point improvement. It is really across all the cost categories. You're seeing that coming through. It is a function of, obviously, improving labor turnover, which is the narrative you've heard throughout the industry. We're certainly realizing that as well, which is certainly coming through in the cost. It is also just leveraging the infrastructure and cost base that we've put in place.

I mean, as we spoke about before, effectively, our corporate cost segment, which was trending down towards 3%, with the divestiture of ES, jumped back up north of 4%. Now you're getting the operating leverage, both organically, as you execute on our price-driven growth strategy, but also inorganically, because we do not really need to add to that supportive shared services and broader executive infrastructure to accommodate the incremental M&A contribution that is coming online. You are going to see the operating leverage. I think we are set up to print the corporate segment at 4% of total revenue this year. That is going to continue to trend down.

I think that's part of our excitement as we go forward over the near to medium term is that we have the cost in place and the scalability, and we can now execute on both organic and inorganic growth initiatives and be able to leverage these relatively fixed cost bases. Thanks for the question, Kevin.

Operator (participant)

Thank you. We have our next question from Stephanie Moore from Jefferies. Please go ahead.

Stephanie Moore (Senior VP of Equity Research)

Hi, good morning. Thank you. Now, Patrick, I think you've been pretty open about your view on just the underlying value of shares. I think you've taken pretty decisive actions to unlock value, whether it's selling ES or GIP and anything else here. As we think about where the business stands today, are there any other actions that you would consider that you believe would further unlock value for shareholders? Thanks.

Patrick Dovigi (CEO and Founder)

Yeah. I mean, I think when you sit and look at it, everyone says, "What's the relative value of the business?" I think we clearly demonstrated that the multiple that these businesses are trading at today, when you look at the crown jewels of all of our asset bases, I'm not just talking about GFL specifically, but just the industry in general, and where valuations have trended, I think. We've been handed, the industry has been handed a bit of a bad deck of cards today. I mean, if you look at the results of all the companies across the sector, even in the face of this economic environment, it's certainly overdone, in my view. If you look at the valuations in the private market and private capital.

The returns that can be generated in the private markets, I mean, that's what should drive what the multiples of these businesses trade for. I think today, it's clearly not. I think that's why. Even we executed on these transactions, exited those two businesses, and kept meaningful equity stakes, but 15-16 times for two businesses that I would say are slightly inferior to the solid waste business of Remain Co. That being said, it provides a great opportunity. As you've seen, we bought back. We anticipate that we'd buy back between $2 billion and $2.3 billion of stock at the beginning of the year. We bought back $2.8 billion-$2.9 billion. Me, as the largest individual shareholder, I think that's the best use of our capital today. That's why we did that. That being said.

We're obviously executing on continued M&A pipeline. I think in my closing remarks, I basically said what I said, which is a very straightforward plan moving forward. We're very confident in our operating plan. We have a balance sheet now that we can execute on share buybacks with what we believe to be dislocated share prices. Our M&A pipeline, since going public, has never been better. I think in the investor day presentation, we had a base number of spending $750 million-$1 billion. I think next year will be an outsized year again. I think well in excess of $1 billion. We have teed that up, coupled together with the rollover. I said, at the end of the day, the stock will move at the appropriate time. Obviously, we do not control the share price.

When we see opportunities like this, we are going to lean in pretty heavily to own more of the company. I want to own more of the company at these prices.

Stephanie Moore (Senior VP of Equity Research)

Great. I appreciate the time. I'll pass it on. Thank you, everybody.

Patrick Dovigi (CEO and Founder)

Thank you.

Operator (participant)

Thank you. We have our next question from Trevor Romeo from Bloomberg. Please go ahead.

Trevor Romeo (Equity Research Analyst)

Hi, good morning, guys. Thanks so much for taking the questions. I wanted to maybe dig in a little bit more on your price metric for this quarter because it did seem a little different than the typical seasonal cadence throughout the year, going up 50 basis points relative to last quarter. Maybe I missed it in the prepared remarks, but was there a specific portion of your book that had really good results this quarter or any mixed impacts? Or maybe you could just dive into the price a little bit more and what drove the improvement?

Luke Pelosi (CFO)

Yeah, great question, Trevor. You're absolutely right. It does sort of defy the typical seasonal cadence. That's really driven by sort of two pieces. One is EPR. As we're going through this transitional period, we are starting to have new contracts come on and recognizing price on that on a sort of off-typical calendar perspective. You're seeing the pricing of that come through. The Canadian pricing was a high sixes number for the period and really getting benefit from EPR coming through, defying the normal core seasonal cadence. The other piece is another part that we're really excited about, just the execution of the strategies that we spoke so much at our investor day. This is really realizing the latent benefit within our existing book, primarily related to ancillary surcharges.

We talked about that we are actively going to be ensuring that we're paid the appropriate rates on the services we provide, and we are out there executing on that strategy. You are seeing that start to ramp, which is providing incremental support to our blended pricing line and something that is setting us up with a high degree of conviction for visibility of pricing as we go into 2026. I would say it is both of those things together, Trevor. That underlying is normal course seasonality, and then you have these bolstering in the second half of the year.

Trevor Romeo (Equity Research Analyst)

Great. Thanks, Luke. That is helpful. For my follow-up, maybe just ask for an update on labor turnover. I think you touched on costs a little bit earlier, but maybe labor turnover specifically has been a good story across the industry. What kind of improvement have you seen so far this year? What do you think is possible next year? How does that translate into the kind of wage inflation that you're seeing now and maybe heading into next year?

Patrick Dovigi (CEO and Founder)

Yeah. I think. Patrick speaking, I think, obviously, it's trended in a direction that is very favorable. And it's the unquantifiable cost of the lower turnover numbers that are relevant to the overall P&L, i.e., productivity, overall performance, etc. But today, we're sitting at high teens today in the voluntary turnover line, which, again, as you know, in COVID, that ramped up to north of 30%. If you look at historical averages pre-COVID, we were always around 17-19%. And that's basically where we're sitting today. We think, obviously, in this macro environment, that probably adds the ability to continue to trend lower. I have labor pools broadened in a lot of the markets. Not everyone marketed the same. But we still have markets where our best drivers are expecting above-average increases. And the driver pools are shrinking for high-quality drivers.

That being said, we feel very comfortable in the voluntary turnover line of high teens is very comfortable. If we can trend towards mid-teens, obviously, just going to be further improvement on the margin line for us.

Operator (participant)

Thank you. We have our next question from H. Rosenbaum from Stifel. Please go ahead.

Shlomo Rosenbaum (Managing Director)

Hi. Thank you very much. Thank you for taking my questions. It's a really good quarter. I'm trying to just get underneath the numbers a little bit more just to understand the organic growth trends in Canada versus the U.S. I don't know if you could parse a little bit more about what's going on. You saw the organic growth in the U.S. trended down a little bit. I'm not sure how much of that was commodities prices coming down, but I was wondering if you could just unpack some of the trends there and how that translated to the organic growth rates of the two different regions.

Luke Pelosi (CFO)

Yeah. Thanks, Lowman. Luke speaking. Great question. As you see in the headline reported numbers across the segments, Canada did enjoy a higher overall organic growth number than the U.S. If you break the pieces apart, look at the pricing, both markets continue to price at the levels we need to be. I think both pricing in Canada and the U.S. was north of 6%. I think low sixes in the U.S. and high sixes in Canada. That was blended to the general 6.3%. I'd say the uplift in Canada was really driven by the EPR contribution. Ex that, Canada would have actually been slightly lower than the U.S., as some of the ancillary surcharge recognition we were saying is actually being realized in the U.S. at a faster rate than Canada. Volume is really the differentiator between the two.

Again, Canada positive volume once again, and it is really being supported by EPR. Not entirely, because even ex EPR, Canada still enjoyed positive volume. I think EPR contributed about an incremental $15 million in Canada for the quarter, which certainly was a great support to an otherwise sluggish macro. I'd say U.S. had negative volume for the quarter. It's really a function of the, I'd say, landfill, C&D, special waste volumes, and a little bit on the collection side. The special waste and C&D, while soft, I'd say, on a macro basis, you can still enjoy volumes geographically if you happen to be in an area where there is activity going on. There still is some activity, just muted.

I highlight that because, for instance, our Canadian business actually had positive special waste volumes in the quarter, whereas our U.S. business was negative, about negative 3% C&D and negative 8% special waste in the U.S. I'd say just sometimes luck of where your site is located. Take away those things around the edges. I think underlying, we continue to see similar organic trends in each of our markets. There is a softness in the broader manufacturing-related industrial expansionary CapEx spend. You're seeing that in your volumes. Underlying, our market selection continues to bolster our volumes by being in the demographic regions where people are moving to. Our strategic investments in items of EPR and other are providing volumetric tailwinds. Our pricing strategies continue to remain strong regardless of the broader macro environment.

Shlomo Rosenbaum (Managing Director)

Okay. Great. Then I am just trying to map the Q4 EBITDA guidance, the implied going to the top end of the range. I guess from the midpoint would be $12.5 million. You have already exceeded expectations in the third quarter by $10 million. The wage deal at kind of $2.5 million. You have done incremental $25 million in M&A. Looks like pricing is better. Incremental FX tailwinds. Can you just give me the puts and takes? It just seems to me that there is a certain conservatism that might be in there. Maybe that is it. Or maybe there are other headwinds on the commodities or things that I am not fully able to calculate.

Luke Pelosi (CFO)

Yeah. I think the issue is in these seasonal climates, like Canada and other, it's difficult to just say whatever your H2 guidance was, if you have outperformance in Q3, therefore all carries forward. Because going back to my comment I made on Canadian special waste volumes, we enjoyed a very strong quarter in Q3. That may now actually result in some sort of softness in Q4. I don't think it's appropriate to roll forward that 10. Obviously, we have some conservatism as we want to make sure that we can deliver. Commodities is an incremental headwind coming against you. The broader volumetric story doesn't seem to be improving anytime soon. You got a really tough comp that last Q4, you did enjoy a whole bunch of volume related to hurricane and other special waste cleanup that we're not seeing materialize.

I think it's an appropriate degree of guidance. Is there a little bit of conservatism in there? Sure. We hope to be able to do better versus doing worse. I would factor in the commodity and just that timing cadence before just extrapolating the Q3 results to an expected outcome for the year as a whole.

Operator (participant)

Thank you. We have our next question. Comes from Connor Gupta from Scotiabank. Please go ahead.

Konark Gupta (Equity Research Analyst)

Thanks, Trevor. Good morning, everyone. I wanted to touch on the sustainability targets you guys set out at the investor day. Specifically, as pertains to R&G, I guess. The commodity prices, they've been volatile this year so far. What do you expect for next year? It doesn't seem like the winners are trending at the range that you guys were assuming back then. Maybe they rebound next year. Do you need to reevaluate any of these R&G projects or investments as you consider the current commodity prices?

Patrick Dovigi (CEO and Founder)

Yeah. I think. Again. Everyone got a little bit and everyone seems to tend to forget where the RIN prices were when we actually embarked on these projects. We underwrote these projects at a $2.25 RIN. Yes, over the last couple of years, RINs under the last administration ran to $3-$3.25. That just made the profitability of those and paybacks of those R&G buildups look that much better. That being said, we always underwrote at $2.25. We still feel very confident about where we are in terms of returns on invested capital, coupled together with, obviously, bonus depreciation and other things that we were able to use on some of the buildups just make the returns look that much better. As we articulated last quarter, we did.

Slow things down a little bit, just ensuring that the administration wasn't going to make drastic changes to the program, which they didn't. Yes, we moved some of our R&G buildup six to twelve months to the right. From our perspective, we do have plans now to ramp that back up back half of this year as we started and now into next year. We will restart that program. From our perspective, at a $2.25 RIN, returns on invested capital are very good. Paybacks are still three to three and a half years versus the one and a half to two years we were getting when RINs ran to three to $3.25. If you look at the forecast of what a lot smarter people than me are forecasting in terms of the RIN program, people are forecasting back to high twos, low threes over the next couple of years.

That being said, our investment case is based on a $2.25 RIN. Even on a $2.25 RIN, we feel very comfortable about where the returns are at that.

Konark Gupta (Equity Research Analyst)

Okay. That's great, Keller. Thanks, Pat. And Luke, for you, I think on leverage side of things, pre-step, obviously, in Q3. I think you're expecting to now finish the year around those levels, roughly speaking. In terms of philosophy for leverage ratio, I think you guys have. The buyback opportunity has increased now, given the stock price. The M&A kind of remains pretty high. Would you be comfortable remaining in this range, low to mid-three or something for the foreseeable future, as long as you have these opportunities?

Patrick Dovigi (CEO and Founder)

Yeah. I think as we articulated at investor day, as we continue to articulate, we'll be opportunistic. Low to mid-threes is where we want to be. Given the free cash flow generation, the free cash flow ramp over the next couple of years, we feel very comfortable operating in that space. We have ultimate operating flexibility, as we said. One, to buy back shares, and number two, to execute on the M&A pipeline.

Operator (participant)

Thank you. We have our next question from Ryan Bogomir from Citi. Please go ahead.

Ryan Bonomi (Investment Banking Associate)

Hey, good morning. Thank you for taking the questions. Maybe just following up on R&G. Luke, I heard you call out the benefit for 2026 from the M&A rollover and the EPR. Are we still expecting another incremental step up from R&G next year? I think there's maybe a larger step up into 2027. Is that still accurate?

Luke Pelosi (CFO)

Yeah, Brian. Thanks for the question. Twenty-six is rather muted in terms of production volume. Now, the incremental production volume, really, as you had facilities come online in twenty-five that are now fully ramped, is probably offset by today's RIN pricing. So modest incremental amount in twenty-six, but it really is twenty-seven and into twenty-eight when you get the next leg up. We'll put a pin in our guide depending on where RIN prices are at at the beginning of the year when we speak in February. The expectation where I sit today is the modest incremental units of R&G will be offset by the year-over-year price declines. It is really twenty-seven and twenty-eight where we'll get that next leg up in tailwinds.

Ryan Bonomi (Investment Banking Associate)

Okay. Yeah. Makes sense. Thanks for that detail. And then just one more question for me. You've spoken a lot about price on the call, but maybe just any details on the restricted price versus the open market price and how that's trended in the back half of the year. And if you have any preliminary thoughts on 2026, that would be helpful as well. Thank you. I'll turn it over.

Luke Pelosi (CFO)

Look, I'd say blended pricing is typical cadence, what you're seeing: open market, commercial, industrials, high single-digit numbers. Your residential restricted is on the lower end of mid-single digits. As you're getting renewals and contracts being reset to appropriate pricing for today's cost environment, you're seeing the higher end of mid-single digit touching high single-digit price, blending to residential collection pricing in the higher end of mid-single digit. Post-collection, you're seeing that healthy mid-single digit level. We continue to, like the industry, be constructive of the narrative that we need to move our restricted pricing off of CPI-related indices as it doesn't necessarily accurately reflect our underlying cost structure. I'd say we're in the nascent stages of that migration vis-à-vis some of our competitors, but certainly something that we're supportive of and will continue to move forward. I'd say.

We view the pricing in our industry continue to remain rational, disciplined, and healthy. I think all of us are unwilling to give away our valuable services at rates that do not provide appropriate levels of return. We are going to continue to do that. As we round out the year here, we will form a view on 2026 expected internal cost inflation. You are going to see us pricing at a blended level in excess of that in order to generate the return that the shareholder group is looking for.

Operator (participant)

Thank you. We have our next question from James Shom from Citi Cowen. Please go ahead.

James Schumm (Senior Analyst of Environmental Services and Energy Transition)

Hey, good morning, guys. Yeah, I wanted to see if you could provide a little bit more color on those cost inflation expectations for next year. Should we be thinking about 4%, or could it be as low as 3.5%?

Luke Pelosi (CFO)

Hey, James, Luke speaking. We're going to wait till 2026 before we form a view. Where I sit today, I feel it's very squarely going to start with a 4. I know CPI may be doing what it's doing. But when you look at labor costs across the industry, notwithstanding the current labor market, those numbers are going to be north of 3 on a blended labor cost number. You start thinking about the potential delayed impact of some of these tariffs or other regulations starting to bleed through into spare parts and other items. I think there's a very viable path where your cost inflation on those amounts is something higher than a mid-single digit number. People focus on labor and labor standalone. When you think about.

Medical costs and other benefit costs in the U.S., those are accreting every year at something well north of 3%. When you put that all together, I'm expecting a number that starts with a 4. We are going to wait till 2026 to put a finer pin in that, James.

James Schumm (Senior Analyst of Environmental Services and Energy Transition)

Okay. Thanks, Luke. Then just on pricing. Are you trying to, based on your earlier answer there, you're in the early stages of trying to move off CPI. Are you trying to move to CPI, water, sewer, trash, or would you want just a 4% number? Where are you trying to go with that? As we think about pricing next year, you're at roughly 6% this year, and you noted some benefits from EPR this year. Is that, I think we're all expecting that number to be lower, but do those one-time benefits mean that we see a larger move lower because you won't have as much of those EPR benefits? If you could give any help there, it'd be appreciated.

Luke Pelosi (CFO)

Jim, I'll take the latter part, and I'll pass it to Patrick, how we think strategically and moving it.

Patrick Dovigi (CEO and Founder)

Yeah. Canada, breaking apart Canada and U.S., Canada obviously does not have sewer, water, trash index. That being said, the trend we are seeing in Canada, and what we are pushing for is, going to Luke's point, headline CPI is not reflective of the true cost of our business, to operate our business. What we are pushing for, a lot of the contracts are fixed price increases of high threes to 4%. If we do not see that, then we are pricing it in day one. I think we are articulating the story to our customers that, "Hey. We need this price in order to continue to be competitive and give you the best service that you have been experiencing to keep the best drivers." That has been received fairly well. This is more of a phenomenon on the municipal collection side as well as the landfill, transfer station, processing facilities.

Because obviously, on the commercial book, we can price where we need to be based on what we believe our CPI is internally at the time. Yeah, and obviously, in the U.S., wherever we can, we obviously want to move to a more favorable index than CPI, which is not reflective of our business costs. That trend is happening. It's been more of a West Coast phenomenon, truthfully, in the U.S. than it has been on the East Coast. We are looking for the same type of opportunities that exist on the West Coast to move to the East Coast. Whether that's fixed pricing, whether that's moving to another index, or whether it's pricing it in day one, we are finding that solution.

Luke Pelosi (CFO)

On your second part of your question, as you think about next year's pricing. High level, you have to say, right? This year, you're getting the benefit of this EPR ramp manifesting in the pricing line. The incremental ramp next year will be manifest more in the volume line. You can think between 75-100 basis points of this year's price is by virtue of incremental EPR ramp. If you were to back that out on the basis, you'd only be getting a portion of that next year. Yes, you would be looking at a pricing level something closer to 5% than the 6% that you're having today, just on that math alone. Again, we'll save our detailed pricing guidance until we speak to you again in February.

Operator (participant)

Thank you. We have our next question comes from Michael Dumont from National Bank of Canada. Please go ahead.

Michael Doumet (Equity Research Analyst)

Good morning. Just going back to pricing, the incremental price recognized in Q3 versus Q1, so that's 60 basis points. How much of that was recognized from surcharge implementations? Again, I'm just curious, how much more is there to go get? Would that flow through into 2026 incremental to whatever underlying price expectation?

Luke Pelosi (CFO)

Yeah. Hey, Michael. It's Luke. Thanks for the question. Look, the surcharge absolute quantity, it gets complicated as you think about volumes, puts or takes, and volumes attracting different degree of surcharge. Holistically, I think we said in the investor day there was a $50 million-$60 million prize. Forgive me, I might be a little off. I'm not trying to recast the guy. Whatever the number we had said in the investor day, I don't have it right in front of me. I think the idea was we're going to ratably recognize that over the next couple of years. I think we've had great success in 2025 in starting the recognition of that earlier than anticipated. You are seeing that come and support the overall pricing number this year. We remain.

On track to realize that overall prize as it relates to ancillary charges that we had articulated over that 2025 through 2028 period.

Michael Doumet (Equity Research Analyst)

Patrick, can you make some remarks on first half 2026 M&A? Given the second half 2025 looks to be pretty deal heavy, I would have thought that maybe you would be working down your M&A pipeline into the year end. From your comments, it sounds like you're actually going the other way and potentially entering 2026 with a healthy pipeline. Is there anything specific driving the larger pipeline or more of the activity that maybe larger deals? Anything you can comment on?

Patrick Dovigi (CEO and Founder)

Yeah. I think we spent the last half or sorry, the last quarter of 2024 really focused on repatriating capital and simplifying the business, which was really coming up with a plan for the ES business and completing that transaction, which was an $8 billion transaction. Around GIP, in which we always said, we spent the first half of 2025 focusing on those divestitures, which got executed. We said the M&A pipeline for GFL would be back half of 2025 weighted, which you're seeing. We had a high level of confidence given the pipeline that we had built for stuff that was going to close in H2 2025. When I look at H1 2026, again, these are all opportunities that we've been working on for a long period of time, relationships we've been fostering for a long period of time, sellers that.

Want to deal with us. These are not bank-run processes. These are opportunities that are sourced by ourselves with relationships from either myself or the team in the field. Where I sit today, I think, as we said in our investor day, $750 billion would be the average spend. There would be years where there would be a higher level of M&A. I think when I look at what we have teed up for H1 of next year, and then opportunities that are in the hopper, I think we are going to have a bigger year on M&A next year than we have had this year. I think that could be 50% plus higher than what we did this year. We feel very comfortable with that. Again, back half of 2025, as you are seeing and what we have articulated, has been strong.

First half of next year looks to be very strong as well. A lot of opportunities will backfill into the second half. We are feeling very good about the M&A pipeline for next year. As I said, for us in the markets where we want to be, again, focused on opportunities that are in existing regions where we can leverage existing infrastructure, we believe those are going to get the highest returns on invested capital for us. That is where we are focused. That is where we are focused on executing. We are not looking to buy a business in a new geography at the moment. These are all things within the existing footprint that work with our existing footprint that we can leverage, those post-collection assets. That is what we are focused on.

Operator (participant)

Thank you very much. We have our next question comes from Toby Somo from TD Securities. Please go ahead.

Tobey Sommer (Managing Director)

Thanks. I want to follow up on that M&A comment for next year. I'll steer clear of pricing for now. Given the more permissive U.S. antitrust posture, is that a factor that could lead to larger deals for GFL or maybe within the industry over the next three years?

Patrick Dovigi (CEO and Founder)

If you were thinking about a mega merger, now is probably the time. I do not think, from my perspective, much has changed in terms of the HSR and the regulatory environment. Under the old administration and the new administration, that being said, 95%-99% of the deals that we do do not even require HSR approval because they are under the threshold. So the line of chair, what we do is follow the vendor HSR. Yeah, we might have one or two that exceed, but from where we sit today, we have not seen much of a change. I think if someone was wanting to do something much larger, this would probably be the administration to do it under.

Tobey Sommer (Managing Director)

Appreciate that. I am curious what you think the upper bound as a percent of sales you think the business can have associated with commodity-related areas within the portfolio and still warrant that higher multiple versus the current dislocated price?

Patrick Dovigi (CEO and Founder)

Yeah. I mean, commodities today are a relatively de minimis number. I mean, not only for us, but for the rest of the industry. I mean, what do you have going in that bucket? You have R&G today that would have a little bit of volatility. And then you have all the recycling volumes. I think today, where we all sit today, I think the entire industry, that's sub 10%. These are very good margin-accretive assets that we want to own regardless. I think, most importantly, meet the returns on invested capital threshold that we all basically run our businesses on. From my perspective, again, do you want to have that number 20%? Absolutely not. But anywhere in the 10-15% range, I think, is more than comfortable, particularly with the structures that we all have today.

Operator (participant)

Thank you very much. We have our next question from Chris Mowry from ATB Capital Markets. Please go ahead.

Chris Murray (Managing Director of Institutional Research Diversified Industries)

Yeah. Thanks, folks. Good morning. Turning back to some of the self-help initiatives and thinking about this, going back to the investor day, at the time you're here, you've been in the chair for about a month. Maybe had a little more time to think about the operation. Look, there were all kinds of levers. There was technology. There was turnover, pricing strategies, things like that. Just thinking about ideas as we go into 2026, where do you feel you are on these self-help levers at this particular point? Are there any new opportunities you're starting to uncover or think about doing? I guess what I'm trying to figure out is where we are in the margin catch-up or progression against the rest of the industry and anything you think you can do on the MSW business to drive margins over the next couple of years?

Luke Pelosi (CFO)

Yeah. Hey, Chris. It's Luke. Great question. And something that hopefully we're demonstrating where we're delivering on quarter after quarter, continuing to lead the industry with the margin expansion and being able to beat the guide that we lay out that's already inclusive of industry-leading expansion. Look, you said Billy was in the seat for just a month. I mean, Billy's been here with us for years and has been an active member of the operational and senior executive leadership team all that time. It's not as if we put together that plan with imperfect information per se. That has been well-crafted. And Billy was an author of that over the years leading up to that investor day presentation. I'd say our strategies and/or focuses have not changed. In Patrick's remarks, you heard him say that we are clear and our focus is singular.

I would echo that. Those are what we believe to be the highest and best use of our time and efforts in terms of reward that is going to come out. It is the area of focus. In terms of the cadence by which we are realizing that, look, every quarter with which we exceed our otherwise provided EBITDA guidance, we are doing better than a pro rata ramp. If you say in that presentation, we said we are going to go from X to Y, from 25 to 28, this year, we have now just added 20 basis points to our margin expansion that we set at the beginning of the year. That puts us that much further ahead of the curve. We are feeling really good. I do not think the levers are going to materially change over this window of the medium term.

Those are going to be the things you're going to hear us talking about. It will get boring. Hopefully, the results are anything but that. I'd say we're feeling very good about our progress towards those goals. As Patrick alluded to, the setup we have in going into 2026 makes us feel that we'll get even further ahead of that otherwise pro rata cadence.

Operator (participant)

Thank you. We have our next question from Will Gripper from Barclays. Please go ahead.

Will Grippin (Director and Senior Analyst)

Good morning. Thanks for the time. Just one question for me here. Wanted to come back to leverage. Obviously, ticked up a little bit quarter on quarter on a trailing 12-month EBITDA basis. Just given your comments around possibly ramping share buybacks here and a very strong M&A pipeline and outlook into 2026, how should we think about maybe the trajectory of that leverage ratio over the next several quarters? I know you kind of reiterated the low to mid three times target. Should we think about this not being a straight line down and maybe there's more variability quarter to quarter just around actual capital deployment?

Patrick Dovigi (CEO and Founder)

Yeah. I mean, leverage, again. We spend time moving leverage from low fours to low to mid threes. I think we've made a commitment that we will keep leverage, that it'll toggle between low threes and mid threes. You'll see us reinvesting the free cash flow of the business based on those leverage targets. That's what we're focused on.

Luke Pelosi (CFO)

Yeah. I mean, there is a seasonal cadence. Obviously, naturally, with the free cash flow, Q4 is a higher free cash quarter. You will see the generation and the reduction in debt coming out of that. Buybacks and M&A can augment that otherwise organic cadence. In a given year, it is not going to be a perfectly straight line because the pace of M&A and/or buybacks and/or just general underlying free cash flow will not be a perfect straight line. I think what you hear is this absolute commitment to live in and around these ranges. Obviously, if there is a higher level of M&A at one point, then you are afforded the opportunity to temporarily pause as you then bring leverage back in and so on and so forth. It is not going to be perfectly straight.

We will be absolutely committed over four quarter periods to live within these ranges that we're talking about.

Will Grippin (Director and Senior Analyst)

I appreciate it. Thank you very much.

Patrick Dovigi (CEO and Founder)

Thank you.

Thank you, everyone, for participating today. Sorry, operator, is that the end of the last question?

Operator (participant)

Yes. Thank you.

Patrick Dovigi (CEO and Founder)

Okay. Thank you, everyone. We look forward to speaking with you in February when we report our full year results and giving our full outlook for 2026.

Operator (participant)

Thank you very much. This concludes today's call. Thank you for your participation. You may now disconnect your line.