GFL Environmental - Q4 2022
February 22, 2023
Transcript
Operator (participant)
Good morning or good afternoon all, welcome to the GFL Environmental fourth quarter 2022 earnings call. My name is Adam, I'll be your operator for today. If you'd like to ask a question in the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor over to Founder and CEO, Patrick Dovigi, to begin. Patrick, please go ahead when you are ready.
Patrick Dovigi (Founder and CEO)
Thank you. 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 fourth quarter and providing our guidance for 2023. I'm 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. We have prepared a presentation to accompany this call that is also available on our website. During this call, we will be making some forward-looking statements within the meaning of applicable Canadian and US 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 US 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 (Founder and CEO)
Thank you, Luke. 2022 was yet another exceptional year for GFL. We once again achieved double-digit industry-leading growth, an accomplishment even more impressive considering the economic uncertainty and cost headwinds that we experienced for most of the year. We believe that with the resilience of our growth, despite the challenges of the last few years, demonstrates the effectiveness of our strategies, the quality of our asset base, and our team's exceptional focus on value creation. Organic revenue growth was nearly 14% in Q4, topping a year of double-digit revenue growth in the prior three quarters in both our solid waste and environmental services segment. Solid waste pricing was 11.5%, including fuel surcharges, with core price of 9.9%, the highest in GFL's history.
Core price accelerated 130 basis points over the record pricing we achieved in the third quarter and was 8.2% for the year as a whole, over 300 basis points better than our original guidance for the year. This outcome sets us up for an even more attractive launch-off point for 2023 than we previously anticipated. We also realized solid waste volume growth during the quarter and the year, which we believe is a testament to the quality of both our market selection and our customer service. Environmental services continued to materially outperform our internal expectations and substantially defied the seasonality we typically see in the fourth quarter for this segment. Our thesis underlying the Terrapure acquisition has clearly proven, and recent tuck-in M&A further bolsters our competitive asset positioning.
We believe our environmental services platform is already best-in-class, with margins in the mid-20 range, materially ahead of the industry peers. Longer term, we see potential for the environmental services segment to get to high 20% margin levels based on our significant scale in Canada and greater focus on pricing and quality of customers. As we continue to focus on quality of revenue and asset utilization, we remain extremely optimistic about this segment's growth prospects and operating leverage opportunities. We grew adjusted EBIT at 17% for the fourth quarter. Our relentless focus on optimizing our pricing strategies and cost efficiencies are yielding the expected outcome, and you can see this in the margin results. Luke will walk through the margin bridge in detail, but the improvement over Q3 is significant.
Our record-setting price growth drove 125 basis points of organic solid waste margin expansion in the quarter when excluding the impact of fuel and commodity prices. Our fuel cost recovery program, which is still ongoing in development, continues to mitigate the margin impact of higher energy costs and allows our price increases to drive operating leverage. We are highly encouraged by the improving trends that we are seeing in our labor costs going into 2023. Although cost inflation still remains exceedingly high, repair and maintenance cost headwinds continue to linger, we believe that the worst is now behind us. Going into 2023 and beyond, we have high visibility that the impact of our pricing and surcharge strategies, together with the expected moderation of cost inflation, will result in significant opportunities for outsized margin expansion. Luke will speak to this in more detail.
Because of our greater visibility into 2023, we are excited to be able to increase the preliminary outlook that we provided just a couple of months ago. We now expect to generate Adjusted EBITDA between $2 billion and $2.05 billion in 2023, an almost 20% increase over our 2022 results. Adjusted EBITDA margins are anticipated to expand over 100 basis points, a level we expect to be industry-leading, inclusive of headwinds from commodity pricing. Our guidance assumes approximately 8% solid waste price, flat solid waste volumes given some macroeconomic uncertainty going into 2023, and mid-single-digit top-line growth for our environmental services segment. Our guidance assumes commodity and RIN price is based at current levels, with any improvement over today's levels providing incremental upside to our guide.
The guide also does not factor in the impact of any additional M&A in 2023. We acquired approximately $480 million of revenue in 2022 and another $100 million in January, primarily consisting of a highly strategic asset for our environmental services segment in the U.S. Midwest. We've included the expected contribution from this asset in our guide since the acquisition occurred so early in the year. Our M&A pipeline remains robust, and we expect that we will continue to have opportunities to deploy capital into value-creating acquisitions, although we expect our total M&A spend in 2023 to be more tempered than in the last few years, which I'll discuss more in detail later in the call. Any contribution of M&A in 2023 will be upside to our base guidance. December 2022 marked the 15th anniversary of the founding of GFL.
I could not have imagined when I started this business that we would have achieved so much in the last 15 years. I believe that we have the best employees in the waste industry. It's their hard work and dedication that has allowed GFL to grow into the solid, sustainable platform that produced industry-leading results in 2022 and still has so much more room to grow in the coming years. I'll now pass the call to Luke, who will walk through the particulars of Q4 and the 2023 guide, and then I'll share some closing comments before we open it up for Q&A.
Luke Pelosi (CFO)
Thanks, Patrick. Consistent with prior quarters, our accompanying investor presentation provides supplemental analysis to summarize performance in the quarter and lays out the building blocks of our 2023 guidance. To provide more color on the fourth quarter, page five identifies the drivers of the $100 million of revenue outperformance versus our guidance, with the substantial majority derived from ongoing strength in our environmental services business, where we saw activity levels far in excess of seasonal norms. The quality of the environmental services platform we have built is clearly demonstrated by our customers' demand for our services, and we remain highly optimistic about our opportunities for high-quality organic growth in this segment. Rounding out the revenue bridge, continued outperformance of core price and recent M&A also contributed to the over $1.8 billion of revenue recognized in the quarter.
As Patrick said, core solid waste price accelerated 130 basis points from Q3 to 9.9% in the quarter, as a result, provides us significant confidence that 2023 pricing will be at least 8%. The bottom of page five shows the adjusted EBITDA walk for the quarter, which is inclusive of incremental IT costs to support our shift to the cloud and ongoing higher costs related to repair and maintenance expenses. Page six bridges solid waste adjusted EBITDA margins year-over-year. As anticipated, fuel and commodity prices remained a margin headwind as compared to the prior year. We were able to achieve a 45 basis point sequential reduction to the net impact from fuel prices as the effectiveness of our fuel cost recovery strategies continues to improve.
Excluding commodities and fuel, organic solid waste margins expanded 125 basis points on a same-store basis, an 85 basis point improvement over Q3, and an indication of the strong operating leverage occurring in the base business. Page seven summarizes the ongoing improvements we've made in our fuel surcharge initiatives during the year. We are tremendously proud of the pace with which we have been able to ramp up this program. With the success we've had to date, we are confident in our ability to conclude the first phase of this initiative in early 2023, 2 quarters earlier than initially planned. We see significant opportunity beyond the first phase, an opportunity we will continue to pursue throughout 2023 and beyond. As we've said on our previous calls, the industry has demonstrated the effectiveness of a mature fuel surcharge program.
Our initiatives in this area are not breaking new ground. We are simply catching up to the industry standard. In Q4, we estimate the net impact of fuel was a 70 basis point tailwind to some of our industry peers' margins, a result 200 basis points better than the 130 basis point headwind we had in the quarter. We expect that the stability and quality of our margins will continue to improve as we close this gap. Adjusted free cash flow for the year was $691 million, more than the high end of our updated guidance range and more than 8% above our original guidance, despite the significant headwind from fuel prices and interest rates that arose subsequent to the beginning of the year.
As anticipated, the $150 million invested in working capital during the first nine months of the year largely reversed during Q4. Partially offsetting this recovery was incremental working capital investment to support the revenue outperformance and recent M&A. On CapEx, recall our guide planned about $750 million-$800 million of net CapEx, excluding the $150 million normalization adjustment. At the low end, or at $750, that assumed about $880 million of gross spend across both our base business and RNG, offset by $130 million in asset sale proceeds. In the end, gross spend was $830 million, as $50 million of planned CapEx was unintentionally shifted into 2023. Reported net leverage was 5x at the end of the year.
The increase over where we ended the prior year was mostly the result of the translational impact of FX. On page eight, we have provided a simplified constant currency presentation of net leverage. That slide shows the year ending one point below the prior year. Again, an illustration of our growth-driven delevering capabilities despite significant unprecedented headwinds and continued execution of our M&A strategy in the year. As we've said before, we are committed to deleveraging. As part of our 2023 outlook, we will lay out a path to ending the year with leverage that starts with a three. The achievement of which would further improve our financial strength and provide a basis for accelerated free cash flow growth. On page nine, we have summarized our current debt profile to provide additional context when thinking about leverage.
Subsequent to year-end, we amended our $1.7 billion Term Loan B, extending the maturity of our nearest term debt by two years. As a result, we've materially reduced the amount of debt maturity occurring in the next four years. We remain highly confident in the likelihood of receiving material credit rating upgrades prior to the maturity of most of our existing debt, providing opportunity for lower borrowing costs and improved free cash flow conversion. Looking ahead to 2023, page 11 outlines the revenue bridge. Thanks to the strength of our finish to 2022, we're expecting at least 12% top line growth, inclusive of an expected 100 basis point headwind from commodity prices. Anchoring the double-digit increase is 8% solid waste price and surcharge growth, coupled with 3.5%-4% rollover of already completed M&A.
Given where we land at the end of 2022, we have great visibility in realizing double-digit price in the first quarter. Highly confident in the path to achieve 8% for price for the year as a whole at a minimum. The guide assumes relatively flat volumes across both segments, given the potential for some macroeconomic uncertainty and the tough comp for environmental services in 2022. It also assumes no recovery of commodity prices and no incremental M&A. With the quality of our anticipated top-line growth, we're expecting over 100 basis points of EBITDA margin expansion in 2023, or over 200 basis points of organic expansion when factoring in the headwind from commodity prices and the impact of acquisition rollover.
With our significantly improved ability to manage the margin impact of any changes in fuel prices through our fuel recovery program, we expect the substantial underlying operating leverage within our platform to shine through. Our guide does not assume that cost inflation reverses, but moderates on a year-over-year basis by virtue of lap-lapping the tough comps, particularly in the second half of 2023. The margin expansion is anticipated in both of our segments, partially offset by a 50 basis point increase in corporate cost margin, primarily related to incremental IT investments to support the migration of our systems to the cloud and provide added security and support the growth of the business. All of this translates to mid to high teens EBITDA growth or $2.025 billion at the midpoint of the guide.
The guidance assumes an FX rate of 1.34, 2 basis points lower than the 1.36 that was used for our initial 2023 thoughts provided last November. Recall that every penny of FX impacts revenue by $36 million. At the free cash flow line, the biggest piece of the story in 2023 is cash interest, which increases $100 million to just over $510 million for the year, representing a 15% headwind year-over-year at the free cash flow line. Patrick will speak in a moment about how we expect to materially reduce our annual cash interest, which we expect will support over 20% growth in free cash flow in 2024. 2023 is a recalibration year at this line item, as the full impact of the 2022 rate increases is realized.
We also have the $50 million of delayed CapEx shifting from 2022 to 2023. Excluding this CapEx amount, the net free cash flow growth would have been 17%, inclusive of the 15% interest headwind. Total net CapEx included in the guide is approximately $810 million-$815 million, inclusive of approximately $40 million in incremental equity investment into our RNG projects. Our current expectation is that the availability of project-level financing, combined with available investment tax credits under the Inflation Reduction Act, will significantly reduce the equity we need to contribute to these projects further improving the return profile. The net result of the planned growth in adjusted EBITDA and free cash flow is for net leverage to reduce to low 4s before considering the potential acceleration of deleveraging through asset sales that Patrick will speak to.
That's the math of the 2023 guide. When you think about the quarterly cadence, we typically realize 22%-23% of planned annual solid waste revenues in Q1 and 18%-20% of the plan for environmental services, which translates to just under $1.7 billion of total revenue in Q1. In terms of margin, we expect the first quarter will be the toughest comp. We're expecting a similar consolidated margin profile as Q4, around 24%, representing 130 basis point compression to Q1 2022. At the segment level, solid waste margins are expected to sequentially improve over 100 basis points versus Q4, environmental services margin is expected to be in the high teens, with corporate cost at sort of 3%-5% of revenue.
Subsequent to Q1, we expect margin expansion over the prior year, growing sequentially from Q2 to, through Q4. I will now pass the call back to Patrick, who will provide some additional perspective on our priorities for 2023 and beyond.
Patrick Dovigi (Founder and CEO)
Thanks, Luke. On page 13, it summarizes our priorities for 2023. Driving operating leverage through our continued focus on pricing, improved asset utilization, and cost optimization is first and foremost. Luke walked you through how we see a clear path to over 100 basis points of margin expansion as a result of our ongoing efforts in these areas. We think the longer-term opportunity is significantly greater than that. When you consider the amount of M&A we've successfully undertaken over the past two years. There's a built-in next leg up that can be realized as all these pieces gel together. All of the assets have been integrated into our systems and processes, but we know from experiences over the years that there's still another layer of opportunity as the platform continues to solidify.
We see 2023 as a year to allow all of the businesses we've absorbed into our platform to mature and to ensure that we are capturing all of the opportunities that present, including implementing our pricing strategies in addition to the other self-help levers available to us. We therefore anticipate a more tempered level of M&A compared to prior years, deploying somewhere between $300 million-$500 million into true tuck-in acquisitions that will continue to densify our platform and leverage our relatively fixed cost post-collection assets. We have a pipeline as robust as ever, would anticipate 2024 returning to more historical levels of M&A. In 2023, we expect a more moderate level of M&A activity while we focus on our other value creation initiatives.
It is important to remember that we, like the industry, are coming off a number of banner M&A years, with COVID also pulling the timing of some of those deals forward. Bringing our first large-scale RNG plant online is one of our main priorities and initiatives. Page 14 illustrates the expected cadence of the 20+ projects we are actively working on. While the in-year contribution to revenue and EBITDA for 2023 is relatively immaterial, you can see the significant ramp through 2024 and 2025. These projections have been updated to reflect today's pricing environment of approximately $2 RINs and $2.50 natural gas. Any improvements from these levels would be additive to the amount shown on the page. Even using these historic low levels, this opportunity would increase our consolidated margins by approximately 140 basis points.
In addition, the evolving financing structures and tax incentives that are available for these projects have made the economic returns even more compelling than originally estimated. Another key initiative is the potential for the further rationalization of our portfolio as we focus on maximizing our return on invested capital. Though some of the larger acquisitions completed in the past few years, we've acquired assets and operations in markets, given their specific market dynamics and geographic positioning, that were never going to represent key growth opportunities for us. We've identified three distinct markets, and since our Q3 call, we have ran a process and have now signed LOIs to divest of these businesses for at least $1.5 billion in gross proceeds. We expect to have definitive agreements for each of these three businesses signed by Q2, with the sales to be completed by the end of Q3.
We believe that selling these assets and using the proceeds to pay down our floating rate debt best positions us for sustainable industry-leading free cash flow growth over the midterm. Additionally, as shown on page 15, the proceeds of these asset sales would delever the balance sheet to below 4x, be immediately free cash flow accretive, and materially accelerate the improvement in our free cash flow conversion and overall credit quality. As Luke mentioned, we expect these improvements would be reflected in improved credit ratings and lower cost of borrowing. We will provide updates on these asset sales as we progress. On ESG, as most of you know, we issued our 2021 sustainability report in late November that includes our full set of sustainability goals and targets for the first time.
RNG is a big part of our achieving our near-term GHG reduction targets, and as I've already highlighted how we are well on our way to implementing that as part of our plan. We've been saying since we went public in 2020 that we were going to follow certain fundamental priorities to continue to successfully grow our business and that the impact following these priorities would be to get us to industry-leading metrics. That's where we are today on the back of our outperformance in 2022. The business is set up for what we think is a once in a generation opportunity for outsized organic operating leverage, supported by momentum in our pricing initiatives.
In the upside potential for additional contribution for our demonstrated ability to do highly accretive, densifying tuck-in M&A, bringing our RNG projects online in 2024 and 2025, and the impact of these assets divestitures I just described, we think there is a clear path to achieving our best-in-class EBITDA margins and driving materially higher free cash flow and generate free cash flow of over $1.1 billion by 2025. I want to again recognize and thank our close to 20,000 employees for their exceptional commitment to GFL. It is their focus on building a sustainable company, on providing these services for our customers with strong market pricing, and above all, value creation for all of our stakeholders that has gotten us to where we are today. I want to thank each and every one of them for their efforts.
I will now turn the call over to our operator to open the line for Q&A.
Operator (participant)
Thank you. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure your headset is fully plugged in and unmuted locally. Press star one to ask a question. Our first question today comes from Walter Spracklin from RBC Capital Markets. Walter, please go ahead. Your line is open.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Thanks very much, operator. Good morning, everyone. just on the pricing, you've got some good trends. Can you hear me okay?
Operator (participant)
Yeah, we can hear you.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Excellent. Okay, just on the pricing, just looking at your book, going into 2023, I know a lot of the contracts are
Are tied to rates that reset at certain times. Can you talk to us a little bit about how much of your current projected 8% pricing is locked in for 2023 to give an indication of the certainty around that?
Luke Pelosi (CFO)
Yeah. Hey, Walter. Good morning. It's Luke. I think, you know, we're really excited about our probability in achieving that when you think about 2022 and the abnormality of the pricing that happened throughout that year. What I mean by that is you think a normal annual pricing happens at the beginning of the year and ratably steps down. Well, 2022, in response to the headwinds that we're seeing, you saw continued pricing activities throughout the back half of the year. What that does is set us up for an unusual amount of pricing rollover that you have, you know, virtual certainty on. We're entering 2023 with about 55% of that price already baked purely from rollover. You have about another 30% of your planned pricing that happens in January.
You basically, where you sit today, have, you know, great line of sight to 85%-90% of what that total price number is gonna be in 2023. I think that further bolsters our confidence that we're setting that as a minimum level.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Yeah, no, that's fantastic. Okay, moving over to M&A, I know, you know, in past years you've kind of given a target. I think last year was around $500 million. You actually deployed $1.2 billion, so well above what you were targeting at the beginning of the year. Patrick, you sounded this time that, you know, yeah, you're looking for $300 million-$500 million, but you do indeed believe that this is going to be a more tempered year. Can you talk a bit about the rationale there? I mean, is this an intentional effort to delever, or is it just a function of the availability of acquisitions out there? Maybe it's a bit of both. Perhaps give us a little little color on the basis for why you think it'll be a much more tempered year on the M&A side.
Patrick Dovigi (Founder and CEO)
Sure. I think it's consistent with what we've done historically, Walter. I mean, if you look back, you know, with sort of the growth of GFL over 15 years, there'd be, you know, significant ramps over 2-2.5 years, and then we would spend a year digesting and then ramp it back sort of up. I think, you know, going public in sort of March of 2020, we went public because we knew there was a lot of M&A opportunity, particularly large scale, that we were well positioned for, and we needed to delever in order to achieve that goal. When you look at what we've done, you know, our plan back then was to double the size of the business over 5-6 years. The reality is we doubled the size of the business over 2.5 years.
Significant growth from $1 billion of EBITDA to over $2 billion of EBITDA in, you know, less than three years. All of that to be said, you know, we're reacting to sort of what's happened in the market, and you've had this, you know, crazy inflationary environment. You had a real ramp up in, you know, in sort of interest costs. I think from our perspective, driving the organic growth, layering in these, you know, pricing initiatives into the sort of base business, letting the businesses have time to sort of just season a little bit, get our procurement programs, making sure they're all rationalized, and spending the year to do that, is gonna lead to outsized organic growth.
You know, we can have a moderate spend of sort of $300 million-$500 million this year and then really ramp that back up in 2024. I think all of that put together will position this business to, like Luke said, to grow at more than, you know, 20%+ free cash flow growth over the next sort of 3-4 years on an annual basis by putting in place all those pieces of the puzzle. You know, we're very confident in that. Listen, if there's an exceptional opportunity that comes along, we're not gonna obviously miss it for no reason just to say for this. I think where we sit today, our focus is gonna be on keeping that spend in the $300 million-$500 million, barring something that comes up that we really wanna do.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Excellent. That makes a lot of sense. Just a last quick one. The divestitures, the three LOIs, does that cover the entire $1.5 you're projecting, or are you expecting more agreements to get up to the $1.5?
Patrick Dovigi (Founder and CEO)
No. As we've highlighted in the past, it's three market areas. I can even update a little bit. One of the transactions actually got signed last night. We're down to two LOIs. We have one definitive agreement. That one definitive agreement represents almost 50% of the proceeds. The other two agreements will represent the other 50%. I would say the 1.5 is, you know, a conservative number. I think, as you know, we've always been conservative. That number will probably be in excess of the 1.5. We've just taken a conservative view. I think from our perspective, one agreement is now signed. That represents over 50%. We expect the proceeds to be more than the 1.5.
Walter Spracklin (Managing Director and Senior Equity Research Analyst)
Awesome. That's great progress there. Appreciate the time.
Patrick Dovigi (Founder and CEO)
Thank you.
Operator (participant)
The next question comes from Michael Hoffman from Stifel. Michael, please go ahead. Your line is open.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Thank you very much. Luke, I was writing and didn't get the numbers, I'm sure. What is the CapEx number you said you were gonna guide to, and how does that compare to the $780? Just wanna make sure I understand this CapEx right. $780 is in your 2022 cash flow statement. What's gonna be in the cash flow statement in 2023?
Luke Pelosi (CFO)
780 in the 2022's CapEx is excluding RNG, Michael. We've been talking about, you know, the numbers together. We have 830 in the 2022 statement, including RNG, as sort of spend on that. What we're saying for this year is that number will be comparable in that 830 range. You're expecting about $20 million of proceeds from asset, small little asset sales. You would have a net CapEx number of 810. The comment about 830 in both years being comparable, recall that 2022 had outsized spend because of the $150 million we received in late 2021 that we employed in the beginning of 2022.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Cash flow from ops is forecast at what for 2022?
Luke Pelosi (CFO)
Well, with $810 million-$815 million of net CapEx, that would imply cash flow from ops about $1.5 billion before any adjustments.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Okay. There are no adjustments then in the 2023 free cash flow then?
Luke Pelosi (CFO)
Well, we don't forecast-
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Which is a huge positive.
Luke Pelosi (CFO)
any M&A or transaction costs. That's roughly what's been running $60 million-$70 million of transaction costs a year. We never include the forecast due to the uncertainty of the timing and quantum of those amounts. as Patrick said, with a $300 million-$500 million spend, there would be a certain degree of that, but none of that is included in our forecast. That would be a reduction to that financial statement presented cash flow from ops, the extent and magnitude of any transaction costs that we had back.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Okay. It's a powerful statement though that you've got a, you know, your simple free cash flow in 2022 is about $350 million. You're doubling the simple free cash, classic cash flow from ops, less all capital spending, no adjustments. That's a pretty powerful statement.
Luke Pelosi (CFO)
I would agree, and I think when you consider being achieved in the construct of the inflation, the interest rate environment, I mean, you have a $100 million interest rate headwind. Now, it's a very meaningful headwind at that cash flow number, and you're still achieving those results. Yes, we're very excited about watching the free cash flow sort of come through as we had, you know, articulated it would.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Okay. Just to be clear, I don't want to belabor this, if you had been able to spend everything you wanted to spend, you would have been done $640, but this year would have been $750. That's that. It's as simple as that. It's not any more complicated, right?
Luke Pelosi (CFO)
Yeah, correct. I think there may have been a different opportunity on working capital, if you were gonna come in that light, then maybe you would have been a little bit more aggressive and been able to make that six forty something a little bit better, in 2022. You're thinking about that exactly right, Michael.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Okay. bridging to the $700, is working capital a source or a use in 2023?
Luke Pelosi (CFO)
A simplifying assumption, working capital is a modest source that offsets the modest use for cash taxes and landfill closure, post-closure.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Okay. Interest we know. Recycling is a headwind.
Luke Pelosi (CFO)
Recycling is a material headwind in 2023. We have assumed that the prices-
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Right.
Luke Pelosi (CFO)
... might be 2022
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Sorry, I'm saying it again. I probably didn't mean to talk over you. Say, what were you saying?
Luke Pelosi (CFO)
No. Yes, recycling, we've assumed no improvement in the current levels, that represents a material headwind going into 2023.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
You've had a real fuel cost drag, not just a pass-through drag in 2022. That should be a tailwind in 2023 'cause you're making up for that.
Luke Pelosi (CFO)
Yeah. Fuel, if you're using the end of 2022 rates, I think the price was roughly 8% below what your average fuel cost was in 2022. That will be a modest tailwind at the cost line.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Price and organic growth makes up the difference to get flat. I mean, they got a couple hundred million dollars of the headwinds getting offset by a couple hundred million dollars of the positives, most of which is organic growth.
Luke Pelosi (CFO)
Correct.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Right. That's the other power. Okay. Then, on your cash interest, Patrick, you're at 6.7% of revenues today. Your peers are 2.5-3. You're gonna take $100 million of that out going into 2024 based on these asset sales. You know, basically, if I'm getting in line with the peers on a revenue percentage basis, I got $250 million I'm playing with. What's the thoughts about when the next $150 comes out?
Patrick Dovigi (Founder and CEO)
Yeah. I don't know if it's gonna come out. I think it's, you're gonna sort of grow into it as the EBITDA grows. You're gonna grow into the sort of de-levering process. I think, you know, what we said is we are committed to exiting 2023 with a three in front of our leverage number. I think when you look at what the opportunity is now and what we're positioning ourselves to do is take this beautiful platform and mature into what you would see sort of normal course other public companies. I think you sort of said it right in your note is, we are gonna move to investment grade, right? This squarely puts us on the path to do that on an expedited basis.
You know, it may take a couple of years post de-levering because the rating agencies, you know, like to look on a sort of trailing basis. We're gonna get there. We pushed out, as Luke said, our term loan refinancing into 2027, which people seemed concerned about earlier because of the maturity with the 2025 maturity. We renewed that at a lower rate than we currently had. As that all comes down, you know, we think. Listen, I mean, you can look at what Waste Connections refied their term loan at. You know, they're investment grade. They refied their term loan at, you know, SOFR plus 75, 85 basis points. Our term loan's at SOFR plus 300.
You know, there's material savings that are gonna come from the capital structure over the next 2-3 years as we get to refinance the capital structure and lower leverage closer to, you know, 3-3.5 turns from the, you know, high threes we're gonna end this year at. I think over the next couple of years, you're gonna see that just beautifully gravitate towards everywhere everyone else is at this point, and that you're gonna see a transfer of value from the debt holders to the equity holders, right? You know, that's gonna be very sort of powerful from an equity value creation standpoint.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Right. From a modeling standpoint, if you hit the investment grade, just to follow this point, as you do the refis in 27 beyond, the cash interest number theoretically is coming down on the same level of debt because you're gonna have a better borrowing cost. There's the leverage and the financial leverage into your free cash flow, let alone the operating leverage.
Patrick Dovigi (Founder and CEO)
Correct.
Luke Pelosi (CFO)
Correct.
Patrick Dovigi (Founder and CEO)
Yeah.
Michael Hoffman (Managing Director and Head of Diversified Industrials Research)
Okay. All right. That's all I needed. Thank you.
Patrick Dovigi (Founder and CEO)
Thanks, Michael.
Operator (participant)
The next question comes from Kevin Chiang from CIBC. Kevin, your line is open. Please go ahead.
Kevin Chiang (Managing Director and Senior Equity Analyst)
Good morning. Thanks for thanks for taking my question. Maybe just a clarification on Walter's earlier question. If I look at the $1.5 billion of gross proceeds, and the adjusted EBITDA but that that that will be removed from your consolidated results, it sounds like you're transacting these about 12.5-15x that that $1.5 includes the full I guess, divestiture amounts that you've laid out on slide 15 here.
Luke Pelosi (CFO)
Yeah, Kevin, it's Luke. I think on slide 15, we're saying $100 million-$110 million of EBITDA potentially. If you take the midpoint of that range-
Patrick Dovigi (Founder and CEO)
It's 110.
Luke Pelosi (CFO)
At $1.5 billion, that's a 14x forward number.
Kevin Chiang (Managing Director and Senior Equity Analyst)
Mm-hmm.
Luke Pelosi (CFO)
Right? Because that's our 2023-
Kevin Chiang (Managing Director and Senior Equity Analyst)
Yeah.
Luke Pelosi (CFO)
Guidance for those. It's probably a turn and a half.
Kevin Chiang (Managing Director and Senior Equity Analyst)
Right.
Luke Pelosi (CFO)
Higher on a trailing number. As Patrick says, there's probably an opportunity for proceeds slightly in excess of this, which would yield a multiple, you know, right in the middle of that mid-teen fairway that we had articulated the art of the possible as being.
Kevin Chiang (Managing Director and Senior Equity Analyst)
Okay. That's excellent. It seems like I mean, the gross proceeds are obviously a large amount. It feels as though the assets that are being sold, you know, maybe back in November, the quantum of EBITDA potential was a tad higher. Does that suggest there's more opportunities here to divest of non-core assets even after you kind of go through this more significant portfolio rationalization, or have you kind of touched on all the assets you think you need to divest of or, you know, shed the markets that you don't think you're gonna invest in to grow?
Patrick Dovigi (Founder and CEO)
I think the November comment came from the fact because we had a lot of inbounds over the last year about different parts of the business. I think when we sat down with all of our operators and we went through it, you know, this is what we said we're gonna do this once. There's gonna be one big sweep, and this is what we were gonna do, and this is what we sort of chuck out. Listen, these assets, they're great assets. I think they have a higher and better use to somebody else and in markets where, you know, either we're geographically sort of disadvantaged or in their markets where there's, you know, multiple sort of strategics.
I just think when I look at the opportunity set of where we can deploy incremental capital into M&A and incremental organic initiatives, we're gonna do it in all the markets where we have the ability that we can, you know, grow at a much higher clip and have a better return on our invested capital. I think when you look at that's what we're doing. These assets will be perfectly situated in others' hands who have a larger presence in those markets, and I think they will do very well with them. From our perspective, they weren't a priority for us in markets that we were actually gonna spend a lot of time in. Hence, you know, we kill two birds with one stone.
Get rid of those, have a significant amount of incremental capital to grow in the markets where we wanna grow. At the same time, set us up on the path to delevering, particularly in an interest rate environment that's uncertain. It's gonna set us up to expedite our ability to get to investment grade. All those coupled together, we think, you know, will yield great equity value creation for all the stakeholders involved here. That was the sort of rationale behind it. There's a significant amount of opportunity, so it's not as if... It's not like someone asked the question, "Well, did you do this because you wanted to just had to delever?" This had nothing to do with delevering.
Yes, it fulfilled that requirement as well, but at the same time, it was just the right thing to do about where we wanted to deploy capital, and that's what we did. Our expectation is that we should Like I said, we signed one definitive agreement last night after we actually reported, which is over 50% of the, you know, the dollars we're gonna be repatriating. The other two we expect, you know, over the next little while here, and we'll expect to close them between, you know, sometime in late Q2 and early Q3 as we go through the regulatory process. For your benefit, we selected partners, and we've done all of that DOJ analysis to make sure going in that, you know, we didn't think there were any issues with anyone.
That was a big part of the criteria in selecting who actually acquired the businesses. It's a wonderful thing, and I think, it's gonna yield a great result.
Kevin Chiang (Managing Director and Senior Equity Analyst)
I agree with you. Maybe just last question from me. You know, you know, your organic growth within the US solid waste business is tracking nicely ahead of what you're seeing in Canada. Is there anything to call out there? Is it primarily just, you know, you've owned Canada longer, so there's, you know, the there's just more low-hanging fruit, I guess, from an organic growth perspective in the US, or you're seeing something different in the volume or pricing environment between the two countries?
Luke Pelosi (CFO)
Kevin, it's Luke speaking. I think that has more to do with our mix. If you think about when we talk about our CPI-linked revenue, we have a greater proportion of that in our Canadian book of business in the U.S., that has obviously been the tranche of revenue that has been the anchor to your blended price. Actually, I think when you roll into 2023 and you finally get those CPI resets breaking that mid single-digit level, you're going to start to see more price acceleration in Canada as we finally get that sort of catch-up. The pricing environment in Canada, we think is equally attractive on a like for like basis from service levels. I think it is the revenue mix that is driving that delta more than anything.
Kevin Chiang (Managing Director and Senior Equity Analyst)
That makes sense. Thank you very much. Thank you for taking my questions. Best of luck in 2023.
Luke Pelosi (CFO)
Thanks, Kevin.
Patrick Dovigi (Founder and CEO)
Thank you.
Operator (participant)
The next question comes from Jerry Revich from Goldman Sachs. Jerry, your line is open. Please go ahead.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
Yes. Hi, good morning, everyone.
Luke Pelosi (CFO)
Morning, Jerry.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
Can we talk about price cost, just the cadence over the course of the year? You know, you are obviously offsetting all of inflation, so it looks like you're starting out with, you know, something like 10 points of pricing, 10 points of inflation. Based on the margin guidance, it looks like you're planning to exit with seven points of price, three points of inflation, just directionally. I'm wondering if we might be able to put a finer point on that and see how you folks are anticipating that spread as the year progresses.
Luke Pelosi (CFO)
Jerry, you did my work for me. You summarized it quite well. It is very much a tale of sort of two halves on the cost side, where you start the year, you know, I think Q1 is a double-digit number, and then it steps down sort of ratably throughout the year, and it'll really be an H1 versus H2. I think it's important to understand in addition to the pure unit cost inflation, we're also just looking at, you know, removal or absence of some of these one-time costs that we incurred this year, like truck rentals as being an example.
When you're getting to that lower single-digit number in the back end of the year cost, it's not just unit cost, but it's also just cost avoidance for some of these one-time costs we had, particularly in the back half of this year. At the pricing level, you know, I think we're anticipating in the guide a more normal course pricing cadence. What that is Q1 being the highest, and you're right, we're expecting double-digit number there. Then that ratably steps down, call it 100, 125 basis points a quarter as you move through the year, which is, you know, the more typical pricing cadence.
Obviously, if our assessment or expectations on cost inflation are different than what we just said, we are demonstrated an openness to go after more price in year, and we will continue to do so to the extent that's what's necessary to drive our appropriate return. The guide today is predicated on that cadence I just described.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
Super. Can we shift gears and talk about the divested asset where you have a definitive agreement? I'm wondering, Patrick, if you wouldn't mind sharing, you know, what the market position was of that asset, and what's the anticipated gain? Is it similar to the transactions that you folks did, was that a year or so ago?
Patrick Dovigi (Founder and CEO)
Sure. Was it a significant. Sorry. Just, yeah, we're not going to let the market. Once, I think we'll update everybody once all the definitive agreements are signed, and it just from. We have NDAs with everyone. I think from that perspective, you know, like I said, we had three markets which were, you know, the Colorado market, Pennsylvania, Maryland, Delaware, and you know, national market was the market we were interested in sort of looking to divest. As for your other comment on what we acquired in the last years, what was that?
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
No, that is, so you had a significant gain on your last set of divestitures, and you were something like number four, number five in the markets you divested. I'm wondering if you could give us-
Patrick Dovigi (Founder and CEO)
Oh. Oh, sorry. Market position.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
that similar framework on these assets.
Patrick Dovigi (Founder and CEO)
Yeah. In, in all the assets we are, we are three, you know, third or below. There's, you know, two others that are certain, you know, larger than us in the market. And they're markets with sort of multiple strategics, right? As you know, our experience has been we like to be in sort of duopoly type markets, secondary markets. You know, these were markets where we're divesting of where, you know, we were in third and fourth position. We just didn't see a path to deploying incremental dollars into those markets to be able to grow them significantly from the position we already had.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
You got it. Can we shift gears and talk about landfill gas? Thank you for the update on the earnings cadence. Can you just talk about the offtake agreements and how those are trending? We're hearing that for voluntary markets, the market has remained in the 20s, even though, you know, Henry Hub has gas has obviously come in. I'm wondering if you could just comment on if you're seeing that as well, and just give us an update on your contracted status relative to the pipeline.
Patrick Dovigi (Founder and CEO)
We haven't locked in anything sort of long-term yet. Obviously, we've been sort of watching the dust settle, particularly around the eRINs, et cetera, and then what was going to happen sort of the long-term pricing around RINs. We knew there was going to be some compression for sure this year. I don't think people expected $2 RINs, but I think $2.50-$2.70 RINs was where people were hoping. I think, again, as the voluntary market demand continues to come on, you know, we think, like you said, there's, there is a lot of demand for having a long-term supply agreement.
As we move into getting these projects online, in the near term, we will then look at sort of entering into, you know, somewhere between seven and 20-year agreements for a good portion of the fuel. As of this minute, we haven't locked into anything yet. You are correct, that pricing still exists and people are taking a longer term view versus Taking a view of the shorter term movements.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
Okay. Can I show you for your views on eRIN? It looks like, you know, the subsidy is going to add something like $0.30-$0.40 per kilowatt hour, the free subsidies. I'm wondering with your footprint, as it stands today, you know, how much electricity do you folks generate from gas to electric? You know, how are you thinking about that opportunity? I know it's early stages, but we'd love to get your thoughts.
Luke Pelosi (CFO)
Hey, Jerry, it's Luke. We're excited about eRIN because we view it as another incremental opportunity that's not sort of in our portfolio. I mean, today we have about five landfills that have existing landfill gas, electricity operating. Those are under royalty agreements with third parties, all those sort of roll off and at which time we can sort of, you know, revisit those under the sort of eRIN landscape. There's other landfills. I mean, as you know, electricity build out much less capital intensive than RNG. We have some other sites that we're evaluating that may also be good potential sort of host sites. We've yet to quantify the benefits.
You know, as you know, we need to understand a little bit more, you know, where it's all going to sort of shake out. You know, this would be additive to our current sort of RNG and landfill gas related economics. You know, we're excited to monitor the progress and, you know, we'll provide updates as we get more certainty there.
Jerry Revich (Managing Director and Equity Research Analyst of Industrials)
I appreciate the discussion. Thank you.
Luke Pelosi (CFO)
Thanks, Jerry.
Operator (participant)
The next question comes from Tyler Brown from Raymond James. Tyler, your line is open. Please go ahead.
Tyler Brown (VP and Equity Research Analyst)
Hey, good morning, guys.
Luke Pelosi (CFO)
Good morning, Tyler.
Patrick Dovigi (Founder and CEO)
Hey, Tyler.
Tyler Brown (VP and Equity Research Analyst)
Yes. Okay. Hey, thanks for all the detail. Hey, Luke, on the 100 basis points on EBITDA for new guide, can you just talk about some of those moving pieces, specifically how much is commodities, M&A? I mean, is fuel expected to be an actual tailwind as you're on this fuel surcharge journey?
Luke Pelosi (CFO)
Tyler, we're having real difficulty hearing your line. I think you asked about the 100 basis point margin expansion. I'm going to respond to that, and hopefully that was sort of the right question, the moving pieces. Look, if you think about the 100 basis points, I mean, if you break it down by segment, right? You know, talking about our solid waste segment first, you know, we're actually anticipating, you know, upwards of 200 basis points in solid waste when you think about the commodity headwind, right? Commodities, if you assume at the current basket price, is about a $50 million headwind just from our sales of commodity. You know, that alone is about a sort of 60 basis point headwind at the solid waste margin line.
Now we have incremental headwind in those locations where we use third-party disposal, right? Now that rebate, that part is often not talked about. We probably have another 20 basis point headwind coming out of that. Solid waste anticipating, you know, a 150 basis point margin as is. You know, you actually. That's closer to 200 when you think about the headwind coming from the commodities. Environmental services, you know, also anticipating a sort of 200 basis point plus margin expansion. I think it's actually mid-200s. That's really a function of, you know, as Patrick said, prioritizing quality of revenue over quantity and really starting to leverage the sort of fixed cost-based structure that we have there.
You know, if you think about those two margin expansion, the segment, you know, the third piece is the corporate cost bucket. As we said, we are anticipating incremental investment, primarily around IT-related costs in the corporate segment. That's going to see an incremental sort of $30 million-$45 million spend in the year as we sort of bolster our sort of transition to the cloud and all the sort of security associated with that. You're going to see expecting that corporate cost bucket in that sort of 325-330 basis points of revenue, which is, you know, somewhat offsetting that very strong organic EBITDA margin expansion in both solid and liquid. M&A, I mean, the rollover effect, 3.5%-4% of top line, that's a slight drag.
I'd call it a 25 basis point drag, I think is what we have in the plan today coming out of that M&A. Fuel, your last point. Look, fuel costing alone, direct fuel pass through, as I said, our surcharge is more mature and the fuel price actually slightly coming down. Not a significant impact there, a slight tailwind. What we do have is this indirect fuel pass through that was really prominent in the second half of 2022. What we mean by this is the third party transport providers and disposal providers that came with incremental price to recover their own energy costs. Those represent, you know, a pretty meaningful headwind as we go into next year by virtue of lapping those costs that, you know, arose really in the second half.
We'll see how that plays out if energy prices continue to moderate. Net-net aggregate fuel is a headwind as well. You take all those pieces together.
Tyler Brown (VP and Equity Research Analyst)
Okay.
Luke Pelosi (CFO)
You know, the organic margin expansion underlying as a result of this pricing and operating leverage, you know, is quite significant.
Tyler Brown (VP and Equity Research Analyst)
Yeah. Okay. Can you guys hear me better?
Luke Pelosi (CFO)
Yeah.
Tyler Brown (VP and Equity Research Analyst)
Much better. Okay, good. Sorry about that. I do want to switch gears just a little bit. Given that it's year-end, can you guys update us on where GIPI EBITDA came in for the year? If you have any expectations for 2023 and what that leverage profile looks on that entity, it's kind of hard to ascribe value for it without some of those financials. Could you just give us any help there?
Patrick Dovigi (Founder and CEO)
Sure. Yeah. The business that business this year will generate somewhere between $165 million and $170 million of EBITDA. Roughly five turns of leverage on that is where it shook out. I think when you look at that, and I'll just reiterate the plan for that business, you know, where we sit today, that'll grow. They, they obviously had cost inflationary pressures as well for contracts they bid in 2021 that they actually had to do in 2022. We expect for 2023, that business will do somewhere around $195 million-$200 million of EBITDA.
Tyler Brown (VP and Equity Research Analyst)
Okay.
Patrick Dovigi (Founder and CEO)
We expect that we will acquire $65 million-$70 million of EBITDA this year in that business. You know, largely last year, we just spent on integration. We didn't do any M&A. We have three targets under LOI at the moment. We expect that that business will exit 2023 with somewhere around $270 million-$275 million of EBITDA on a path to growing that to $300 million.
If you think about the original plan, you know, our plan was, "Hey, we're gonna grow that to 300+." We think that business, if you look at the comps like Road and others, and what it's worth to sort of private equity and the value creation opportunity from an M&A perspective, you know, we think those businesses conservatively trade for somewhere between 11x and 12x, which would roughly put that at around $3.5 billion of enterprise value. Net debt would roughly be $1.5 billion. So there'd be combined equity of about $2 billion, and GFL owns just under 50%. I think from our perspective, that gets us to the $1 billion of equity that we set out to create. Truthfully, that's nowhere to be seen today, but one day, GFL shareholders are gonna get a check.
Tyler Brown (VP and Equity Research Analyst)
Right.
Patrick Dovigi (Founder and CEO)
I'm very confident for closer to $1 billion. That's the math behind it.
Tyler Brown (VP and Equity Research Analyst)
Okay. Yeah, that is super helpful. Okay. My last one here. If I look at the pro forma schedule on the proposed divestitures, it looks like they run around 25% margins. The CapEx profile is 7%-8% of sales. If I just read those breadcrumbs, does that indicate that they're likely hauling operations, or are there some vertically integrated markets?
Patrick Dovigi (Founder and CEO)
It's a mixture of both. I mean, a couple of the markets are hauling and transfer, some are hauling only, and then other, you know, another market sort of vertically integrated as well, with a smaller landfill. You're right. It's mostly it's more sort of on the hauling and transfer side.
Tyler Brown (VP and Equity Research Analyst)
Okay, cool. Appreciate it. Thank you.
Patrick Dovigi (Founder and CEO)
Thanks, Tyler.
Luke Pelosi (CFO)
Thanks, Tyler.
Operator (participant)
The next question comes from Tim James at TD Securities. Tim, your line is open. Please go ahead.
Tim James (Managing Director and Equity Research Analyst)
Thanks very much. Good morning. I'm wondering if you could talk a little bit about the moving parts by market as you think about your volume expectations, your guidance for 23. Just thinking about different kind of expectations within commercial, industrial, residential, and maybe any differences you see in the U.S. market versus Canada.
Luke Pelosi (CFO)
Yeah. Hey, Tim. It's Luke. look, presented in the prepared remarks that we're taking a conservative view on volumes just in light of uncertainty. The reality is, as you can see throughout even the second half of 2022, I mean, our volume growth remained strong. I think that's a testament to our market selection as well as the sort of quality of service that we're seeing. I mean, in a typical, recessionary type environment, it's the C&D-related volume, right? That dries up first. You see that at the landfills in your sort of roll-off business. The guide does assume, you know, more tempered sort of landfill volumes and the collection. Although I would say that sort of together, you know, sort of a single-digit percentage of our total revenue base. It's not a material number.
I think really what we're anticipating is broad-based across both of the markets, a general slowdown in the sort of commercial industrial type volumes. Residential sort of remains strong, and a little bit more cycle agnostic. It's really in those areas, but I would highlight it is a conservative perspective based on uncertainty versus indication based on what we're seeing in the current data.
Tim James (Managing Director and Equity Research Analyst)
Okay. That's really helpful. The environmental services business that, you know, the growth that you've reported last year, I mean, just a great performance. Can you comment, and I don't know if it's possible to talk about how much of that performance was overall market strength versus GFL, you know, specific market share gains or opportunities that maybe you capitalized to outgrow the market?
Patrick Dovigi (Founder and CEO)
Yeah. I mean, from environmental services, I mean, I think, listen, we were very opportunistic when we stepped in and bought Terrapure, right? We bought that, I think, when others were scared of COVID and other things. You know, I think we bought that on an LTM number that was significantly affected by COVID at a very reasonable purchase price multiple of like, you know, just over 8x. You put that all together today, and you look at the market position, you look at the synergy opportunities, you look at the diversification of our service offerings and being able to offer our existing customers services that Terrapure was off, be able to offer their customers, and services that our existing GFL customers couldn't get because Terrapure did that work.
I think when you put that all together, that led to this outside sort of growth opportunity. In conjunction with, keep in mind, you know, we exited COVID for the most part in Canada in the spring of 2022, right? There was a lot of pent-up demand as well. When I think you look at that business and you look at the scale we now have in Canada, the facilities we now own in Canada, and what that's able to do in the service offerings we're able to offer our customers, and being able to sort of leverage that, to leverage that fixed cost base of facilities, push price, etc. That's what's sort of leading to that. You know, it's an already, it's an industry-leading margin business that's sort of mid-twenties.
You know, my goal over the next 2 to 3 years is to get that to closer to 30%. We think we can do that. We think we have the power to do it. I think when you look at the platform that we have, and if we're selective about the markets we go and the focus on the revenue from the existing customers, I think that is gonna yield an exceptional result.
Tim James (Managing Director and Equity Research Analyst)
Okay. That's really helpful, Patrick. Just a final question. I just wanna confirm my thinking just doing some simple math here. The asset sales plan for this year, they would be effectively slightly accretive once those sales are done to your solid waste margin percentage, but really have no material impact on the consolidated. Is that the right way to think about it?
Patrick Dovigi (Founder and CEO)
That's right, Tim.
Tim James (Managing Director and Equity Research Analyst)
Okay. Great. Thank you very much for the time.
Patrick Dovigi (Founder and CEO)
Thanks, Tim.
Operator (participant)
The next question is from Stephanie Moore from Jefferies. Stephanie, your line is open. Please go ahead.
Stephanie Moore (Senior Equity Research Analyst of Automotive Services and Trucking and Logistics industries)
Hi. Good morning. Thank you. I wanted to follow up.
Patrick Dovigi (Founder and CEO)
Morning.
Stephanie Moore (Senior Equity Research Analyst of Automotive Services and Trucking and Logistics industries)
Good morning. I wanted to follow up on Tyler's question real quick here. I think you called out obviously some nice progress made on the fuel surcharge program and some other initiatives, but maybe you could talk about some of the other self-help initiatives just embedded in your margin guidance as you think for this year? Thanks.
Luke Pelosi (CFO)
Yeah. I mean, Stephanie, it's Luke. When you're speaking about self-help, I assume you're talking about the three sort of levers that we identified in our investor day across sort of fleet conversion, RNG-
Stephanie Moore (Senior Equity Research Analyst of Automotive Services and Trucking and Logistics industries)
Exactly. Yep.
Luke Pelosi (CFO)
You know, pricing. I mean, we continue to make progress on those. I mean, if you think about CNG fleet conversion, like our peers have demonstrated the power of moving off of diesel onto these, those alternative fuels, and it's something that we're excited about and deploying capital into. However, in light of, you know, all of the uncertainty that we've sort of spoken about, I think deploying excess capital today with today's leverage levels, etc., is just not something we've had an appetite for. As we've articulated, we are currently just spending our replacement CapEx into those streams as opposed to outsized accelerated spend.
If as we move forward to the extent there's perhaps less a perception of leverage and therefore a tolerance of perhaps spending some outsized accelerated capital, you could look at, you know, accelerating the pace at which you would do that conversion and reaping the benefits accordingly. I highlight what we have included in the guide is our normal course replacement CapEx being favored towards CNG. While you're getting some benefit, it's by no means the lion's share of this EBITDA margin expansion that we're talking about. The complete conversion continues to remain an incremental leg up on margin expansion that we are slowly chipping away at today with potential design that sometime, you know, a few years out, we could then accelerate the realization of that opportunity.
Stephanie Moore (Senior Equity Research Analyst of Automotive Services and Trucking and Logistics industries)
Great. Thank you. Just on labor headwinds, as you kind of look into 2023, you know, I think, you know, what are you seeing in terms of maybe improvements in retention? I think wages, you know, remain high, but, you know, any kind of color on just labor expectations. Thanks.
Patrick Dovigi (Founder and CEO)
Yeah. I think, you know, one thing we tracked pretty closely is sort of voluntary resignations. I think where we were, if you look sort of pre-COVID, we were sort of sitting around 18%-20%. That went as high as sort of 30%-32% in 2022, and I think that's moderated significantly now down to the sort of mid-20s, and trending back sort of closer to sort of pre-COVID levels. You know, I think it's now not become necessarily sort of a wage game. I think obviously with a lot of the last mile guys starting to slow down where, you know, we saw a lot of pressure coming in some of the urban markets, that has largely subsided.
I think we're moving to a more normalized wage increase model. The retention has been very high through sort of, you know, later in Q2, Q3, into Q4, and now into Q1. You know, as Luke said earlier in the script, I think from our perspective, that is sort of moderating now. We think we're in a very good position to get back to sort of a more normalized state for the current environment. We're pretty optimistic about where we sort of sit. I think it's certainly getting significantly better than it was in late 2021 and through the early half of 2022.
Stephanie Moore (Senior Equity Research Analyst of Automotive Services and Trucking and Logistics industries)
Great. Thank you guys so much for the time.
Patrick Dovigi (Founder and CEO)
Thank you.
Operator (participant)
The next question comes from Michael Feniger from Bank of America. Michael, please go ahead. Your line is open.
Michael Feniger (Senior Equity Research Analyst)
Yeah, thanks for taking my question. I know we're going a little long. I guess I just wanted to ask for some of your comments, Luke, on first half for second half. you know, the cost you're absorbing in 2023, obviously low OCC rates, RINs ramping. You know, can 2024 look like an outsized year in terms of margin expansion and free cash flow conversion? If not, like, what would kind of hold back 2024 from being an outsized year?
Luke Pelosi (CFO)
Michael, I think you're thinking about it exactly right. We anticipate 2024 to be another year of outsized organic, even a margin expansion, right? If you think about the way the pricing cadence is now going to marry up against what should be a moderating cost inflation and entering into 2024 with still, you know, better than mid-single digit pricing, we think the organic algorithm there should yield another outsized year expansion. At the free cash flow conversion line, I think you said it exactly right. You know, this year I characterize it as a recalibrating year, right? Your free cash flow conversion by virtue of absorbing the extra interest expense is stepping down. You'll be in the sort of high 30s EBITDA conversion.
When you roll into 2023-2024 with the benefit of the divestitures, you're gonna be back into a low 40s% free cash flow conversion and then ramping up from there. I know there's always a lot of focus on the guide for what it means in the next 12 months. I think, you know, Patrick articulated in the prepared remarks, when we are going out to 2025, we don't see a path that is less than sort of $1.1 billion of free cash flow at, you know, approaching mid-40s free cash flow conversion and continuing to have opportunity to go up from there. I think you're thinking about it right. This is the year to absorb the interest costs, but thereafter we get meaningful leverage as we go forward.
Michael Feniger (Senior Equity Research Analyst)
Very helpful. Patrick, you know, when you IPO'd, in 2020, there was a knock on the fact that, you know, you had lower solid waste exposure and some other, yet we're seeing other large public players starting to get more into environmental services. I'm just curious, since we've seen some of these developments, are you observing in that market, where there's a connotation of volatility, not as much discipline? If you're seeing any shifts there, over the last year or so that's noteworthy.
Patrick Dovigi (Founder and CEO)
No, I think environmental services is just, you know, I think is where solid waste was 15 years ago, right? It's very fragmented across all the different geographies. You really only had one consolidator for a long period of time, which was Clean Harbors, but again, focused on different parts of the business. I think when you look at that business, it's the exact same as the solid waste business, and I've said this for like 15 years now. I mean, maybe not everyone sort of has believed me, but I think when you sort of leverage in this regulatory environment and having these sort of moats, which are, you know, wastewater treatment plants, all of our sort of TDF facilities, et cetera, all of these yield, you know, exceptional pricing power over time, right?
As the regulatory environment keeps getting tighter, as its markets continue to consolidate, it's gonna help with pricing power. As there's a higher focus for customers on the regulatory environment, it makes it more and more difficult for the smaller mom and pops to sort of compete. Just because of the amount of money you have to spend on infrastructure to be able to service the customer to meet today's regulatory requirements. With that, I think, you know, this is gonna be an exceptional business over sort of a long period of time. I think when you look at our business today, it's mid-20s margin running at sort of 8-ish% CapEx.
You know, my goal is to get that to sort of closer to 30% and maintain that sort of CapEx level of 8.5, it'll be, you know, the exact same free cash flow contributor as solid waste is to our existing business today. You know, I think that opportunity exists. You know, yeah, I think people always ask the question historically about why we're in that business. Obviously, as Republic identified a similar opportunity that we had over time, I think it's become more of a normalized view. But, you know, I think where we sort of sit today, it'll be a very similar margin business to our solid waste business, it's gonna be as good or better with a free cash flow contributor. Put all those together.
I think we've been cognizant, you know, I think under private equity ownership, you know, important thing to note. When we were under private equity ownership, we were running leverage levels of closer to 6.5-7. We really couldn't afford to be in cyclical type businesses, we really stayed out of the E&P space. None of our business is levered to the E&P space. With that, you know, this is just a sort of normal core steady Eddie type business. Yes, it was abnormally impacted because of COVID, but that was because of the dynamic that we were levered to Canada and Canada was closed for basically two years. Outside of that, I think you're gonna see our business continue to grow and be a great contributor to the GFL book of business for a long period of time.
Michael Feniger (Senior Equity Research Analyst)
Appreciate it. Thank you.
Patrick Dovigi (Founder and CEO)
Thanks, Michael.
Operator (participant)
Our final question today comes from Chris Murray from ATB Capital Markets. Chris, your line is open. Please go ahead.
Chris Murray (Managing Director of Institutional Research)
Yes. Yeah. Thanks, folks. Just a couple quick questions on margins. Just thinking back to the fuel surcharge, I think Luke, you mentioned that there's a delta of about 200 basis points between you and your peers. But in a flat to falling fuel price environment, you know, you probably get it on the cost side. Can you just talk a little bit about. Do you think you'll be able to recapture that whole $200 sometime in 2023? Or is it still gonna take a little bit longer than that as you need contracts to roll over?
Luke Pelosi (CFO)
No. To clarify, the 200 is the gap of the impact in Q4, right? What I'm suggesting is we had a 130 basis point headwind, where I calculate some of my peers probably had a tailwind of 50-75 basis points. 200 basis point gap in the impact. As we go into next year, what we have now established is a functional fuel cost recovery program. The initial recognition of that is almost like a permanent price layer in our book of business that we will now enjoy the benefit from. Yes, if fuel prices fall materially off, you will give some of that back, but doing so in conjunction with a much lower energy cost in the P&L. I think it was this year of initial recognition where we were sort of behind.
As we go forward, we think we are now, better positioned to respond to volatile energy prices, regardless of the dynamic going up or down.
Chris Murray (Managing Director of Institutional Research)
Okay. Just my last question, just on the environmental services business, you did talk about, you know, being able to grow margins up to the 30% by, you know, call it optimizing revenue. You're also talking kind of mid-single digit growth now. Are you intentionally starting to shed revenue? I mean, historically, we've seen a higher growth rate than that. Can you just talk about the kind of the price versus volume dynamic that you're willing to entertain to get those margins up?
Patrick Dovigi (Founder and CEO)
Yeah. I think, again, bigger focus on quality of revenue. You know, when this is a specialty type trade, right? Our guys, again, "Hey, we wanna get paid for the work we do and for the people we can do, and we can't do all the work. Let's focus on the work we're gonna get paid the most for, and for the customers that appreciate the work that we do for them in the timely basis that we do it on." Yes, we are gonna push that. We are gonna push the quality of the revenue, and we are gonna push price and surcharges in that space, too. Listen, we looked at our overall fuel surcharge in that business. It was sitting at around sort of 5%.
That should be at closer to 15% today. There's opportunity just on the surcharge line there as well, just to cover our existing costs. Again, pushing core price and surcharges in that space is gonna sort of push that up as well as the quality of revenue and the customer base in that business.
Chris Murray (Managing Director of Institutional Research)
Okay. Does that reduce volume as you think going forward or just flatten it out?
Patrick Dovigi (Founder and CEO)
It'll flatten it out a little bit, for sure. You know, I think 2022 was an abnormal year, just the ramp in terms of the amount of volume that came and how fast it came, just given the recovery from COVID. Yeah, it'll normalize and normalize just like the solid waste business would itself.
Chris Murray (Managing Director of Institutional Research)
Okay. Fair enough. Thanks, folks.
Patrick Dovigi (Founder and CEO)
Thank you so much.
Operator (participant)
We have no further questions at this time. I'll hand back to the management team for any concluding remarks.
Patrick Dovigi (Founder and CEO)
Thank you very much, everyone. Sorry the call dragged on a little longer, but we look forward to speaking to you after our Q1 results and appreciate all your support over the last number of years. Thank you.
Operator (participant)
This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.