Q2 2024 Earnings Summary
- GFL expects continued significant EBITDA margin expansion, with over 100 basis points improvement anticipated in 2025, driven by price-cost spread and contributions from high-margin initiatives such as Renewable Natural Gas (RNG) and Extended Producer Responsibility (EPR) programs. The company believes the negative volume impact from shedding low-margin contracts is largely behind them, paving the way for flat to positive volume growth next year.
- GFL is considering the sale of its Environmental Services segment at a mid-teens EBITDA multiple, which could unlock significant shareholder value. Proceeds from the sale could be used to reduce leverage and repurchase a substantial amount of shares at attractive valuations, increasing the ownership stake of existing shareholders and eliminating overhang from private equity partners. Management believes this strategy would maximize long-term value creation for shareholders.
- GFL is achieving substantial margin expansion through operational efficiencies and strategic initiatives rather than relying solely on price increases. Factors contributing to this include moderating cost inflation, improved asset utilization, the rollout of technology such as tablets in trucks, conversion to CNG vehicles, and the expected ramp-up of high-margin RNG and EPR projects. Management anticipates these initiatives will drive margins higher into 2025 and 2026, with the company achieving a consolidated adjusted EBITDA margin of over 30% in Q3 2024 for the first time in its history.
- The potential sale of the Environmental Services segment could negatively impact future earnings, and the uncertainty around this sale might distract management attention. Patrick Dovigi stated that they are exploring options to sell a portion of their business at valuations more in line with fair value, and have begun to implement steps necessary to prepare for a potential transaction.
- High employee turnover remains higher than desired levels, currently just above 20%, with the goal being mid- to high teens. This high turnover could impact operational efficiency and increase costs.
- Special waste volumes are flat, continuing to "chunk sideways" due to current interest rates. This indicates possible weakness in certain segments and macroeconomic pressures affecting volume growth.
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Potential ES Business Sale
Q: Can you provide details on the potential sale of Environmental Services?
A: We plan to sell our Environmental Services (ES) business due to a significant valuation gap and strong inbound interest from investors and strategics. The auction process will start after Labor Day in September, and we believe the ES business is worth significantly more than GFL's current trading value. This sale will maximize shareholder value. -
Use of Sale Proceeds
Q: How will you use the proceeds from the ES sale?
A: Proceeds from the ES sale will be used to buy back a significant amount of our stock, reduce leverage to around 3x—aiming for an investment-grade rating—and fund future growth initiatives. This strategy benefits shareholders by increasing our ownership stake and removing overhang from private equity partners selling shares. -
Margin Expansion Drivers
Q: What's driving the 170 basis points margin expansion guidance?
A: The expansion is driven by our high-quality assets, effective execution of strategies, and synergy realization. We expect margins to improve due to price-cost spread, moderating cost inflation, benefits from intentional volume shedding, M&A contributions, and ongoing self-help initiatives. -
2025 Margin and Volume Outlook
Q: Can margins expand another 100 basis points in 2025?
A: Yes, we expect margins to expand by at least another 100 basis points next year, driven by price-cost spread opportunities and contributions from RNG and EPR initiatives. We anticipate volumes to be closer to flat or up, as most of our intentional volume shedding is behind us. -
M&A Strategy and Pipeline
Q: What's your M&A outlook for 2025?
A: We plan to spend between $850 million and $1 billion on M&A next year, even without the ES sale. If the sale occurs, we'll have greater flexibility to increase M&A spending or accelerate share buybacks, while keeping leverage comfortably in our targeted mid-3x range. -
Leverage Targets Post-ES Sale
Q: What is your optimal leverage target after the ES sale?
A: We aim to reduce leverage to around 3x post-sale to secure an investment-grade rating, moving between 2.75x and 3.25x for a period. This positions us favorably for future growth and capital allocation. -
Employee Turnover Trends
Q: How is employee turnover trending?
A: Employee turnover has improved, decreasing over 4% in the last 12 months, now just above 20%. We're targeting mid- to high teens, with trends moving positively, especially in secondary markets where turnover is lower than in urban areas. -
RNG and EPR Contributions
Q: How will RNG and EPR impact future earnings?
A: Our RNG and EPR initiatives will be significant margin accretive contributors. We have $130 million of EPR contracts in hand, expecting $5 million to $10 million contribution this year, ramping up in 2025 and 2026. These will enhance margins, particularly in Canadian solid waste, pushing them to the low 30s. -
Operational Improvements
Q: How are operational initiatives affecting margins?
A: We are seeing benefits from new initiatives like tablets in trucks, improved asset utilization, and supply chain improvements. Truck availability is improving, moving from 70% to 85–90% of desired levels, decreasing maintenance costs and enhancing efficiency. -
Cross-Selling Post-ES Sale
Q: Will cross-selling between Solid Waste and ES continue after the sale?
A: Yes, we expect cross-selling to continue through our "buddy-buddy" system between sales teams, benefiting both companies. There's no need to decouple these arrangements, and it's advantageous for all parties involved.