Kevin Chiang: Thanks for taking my question.
Luke Pelosi: Thanks, Kevin.
Operator: Our next question comes from the line of Michael Hoffman with Stifel. Michael, your line is now open.
Michael Hoffman: Hey, Patrick, you don’t need me to make this comment, but run your business, you’ve proven that you’re a good steward of capital, run the business, and you’re not going to end up in some – in between ground on leverage. You either run it highly levered or you run at low leverage. You don’t run it in the – in between, so run your business. Now with that said, baseline repeatable capital spending for the whole company sort of think about it as 11% of revenues, cash flow from operations today is 18% of sales, but can it be sort of low 20s, that’s where the peers are. If that happens, then you walk your free cash, as a percentage of revenues from 8.5%, 9% up to sort of 10% to 12%. Is that the right model to build and then we can talk about what the ancillary spending is, and that’s what I’d like to get to is, how do I think about those incremental dollars above baseline capital spending on a multiyear basis, like 2024 – 2025, 2026, 2027, think about that compounding cash story.
Luke Pelosi: Yes. So Michael, its Luke. I’ll start on the sort of base framework, and I think you articulated it quite well. I mean, we’ll wait until – until Q4 to give the detailed 2024 free cash framework. But it’s exactly that. I mean, I think the pieces we’ve given on revenue and EBITDA, saying EBITDA at least $10 million, I can see that sort of $2.2 billion of EBITDA number. And if you do the walk down there, you have a baseline CapEx. I think your 11% number in the current rate environment is probably the right thing with the OEM cost increases. I think we’re all playing catch-up to get there. But in and around that for the ongoing maintenance CapEx, which would yield you a sort of mid to high 800s number for recurring CapEx. Our interest expense that was previously low 400s is now mid to high 400s in light of the incremental M&A spend.
And then, you have the other category of working cap, et cetera, I call that another sort of $50 million, $75 million in the year. You put that together, you have that baseline $800 million free cash number for next year that we’ve been talking about. And then that grows at the rates we’ve been seeing because as you start getting operating leverage, particularly at the free cash flow line. And we articulated that, that in 2025 goes to $1 billion number, and I don’t think you need to believe a lot to sort of see that. Now incremental growth or sustainability-related capital spend, as you’re alluding to, would obviously be something in addition to that. And I think as Patrick was articulating, and I’ll turn it to him, we’re still evaluating what those opportunities might look like.
But from our perspective, we hope there’s a large amount of those because of the return profile as attractive as this. Patrick, I’m not sure, if you had additional comment.
Patrick Dovigi: Yes. And I think from our perspective, we’re thinking about – we’re thinking about the capital allocation between M&A and those capital deployment, and that’s really largely around EPR, right? So we will toggle between the two to ensure that we’re delevering at the same time, making the investments in sort of in M&A and making the investments around these EPR projects that, again, there’s multiple contracts out for bid that we’re in negotiations for now. We’ll have very good clarity on these by the end of January. So we’ll be able to give you that. And then, we’ll be able to sort of break out the – what the M&A spend is going to be and what the spend will be around these EPR initiatives.
But I think you’re right down the middle of the fairway. And again, as Luke said, we have a commitment for 2024. We also have a commitment for 2025 was $1 billion of free cash flow, and that was done in light of significantly lower rates, but we feel very good about, where we are. Our free cash flow growth is sort of – is outgrowing what our expectations were a couple of years ago, and we’ll continue to do so. So we feel very good about where we are today.
Unidentified Analyst: And that EPR spend was identified as a couple of $100 million this year, assuming you can all get done. The upside is another $100 million if all these other ones are wins. So I got sort of $300 million over the next – this year, next year, maybe into 2025. Is that part of that? And then, you’ve got your RNG spend as well?
Patrick Dovigi: Yes. That’s right. Again, I don’t want to comment sort of on the EPR spend yet because I actually don’t know. There’s a lot of balls up in the air. We think we have pretty good visibility on what we’re going to get, and that’s why I said I’d prefer to wait till the end of sort of January to give you detailed guidance. But it will be – this next wave is for contracts that are starting in 2025 between January 1, 2025 and January 1, 2026. So most likely, those spends will be pushed out anyways because now they’re moving to the hauling portion of the EPR process. So the facilities and the processing was done and sort of awarded. And now we’re talking about the vertical integrated hauling contracts, transfer stations, et cetera.
So all of that is in process. And we expect that to wrap up by the end of January to have very good clarity and give you a very detailed bridge of capital that needs to be spent when the contract starts and when things going. The exact same way we will do RNG now, as we have very good visibility on facilities, construction, permits, et cetera, all that is sort of well in hand now, and we’ll be able to give you not just a generic, oh, it’s going to be all online by 2026. We will actually show you how that all phases in over 2024, 2025 and then full sort of run rate into 2026.
Luke Pelosi: But Michael, the summary is the capital being deployed is at the sort of great risk-adjusted sort of rates in that 3x to 4x EBITDA we’re saying. So whatever the ultimate dollar of capital is going to be, it’s going to have a return profile consistent with that.
Unidentified Analyst: Okay. Last one is you’re at 6.9% of revenues is your cash interest expense, peers are in the mid-3s with the elevated cost these days of capital. How far out am I looking before you’re back into that range of the peer group on a percent of the business model?
Luke Pelosi: Well, Michael, it’s Luke here. I mean, I think inherent in that question is the assumption of what I’m going to refinance my current debt stack at and the attempt of illustrating this – these pages was that there’s some uncertainty in the underlying treasury. If you tell me where treasuries are going to go over the next sort of three years to five years, could answer that sort of precisely. But I think the non-debatable amount is that our number is going to come down. The pace of which is somewhat tied to underlying treasury, but that percentage is going to migrate towards that of the peer group, and that’s going to afford us a free cash flow per share growth tailwind that – that my peers just aren’t going to have.
Unidentified Analyst: 4% tenure.
Patrick Dovigi: 4% tenure that’s your…
Luke Pelosi: That’s where it’s going. When is it going there? Anyway, that’s the direction. That’s the direction of travel, Michael. That we will continue to move and migrate towards them.
Patrick Dovigi: I prefer 2.5% by the way.
Unidentified Analyst: All right. Thanks for taking the questions.
Operator: Thank you for your question. Our next question comes from the line of Jerry Revich with Goldman Sachs. Jerry, your line is now open.
Jerry Revich: Yes, hi good morning everyone. And if we’re taking a vote, I’ll also vote for 2.5%. Can I ask around the – the preliminary outlook for 2024 EBITDA growth, is the landfill of gas upside relative to that? I think last quarter when we spoke, it was about a $65 million EBITDA tailwind at $2 D3 RIN prices, which would be a nice 3% tailwind. Obviously, D3 RIN prices are up, projects are a little to the right. And so, should we think about as landfill gas being upside to the 10% plus all-in EBITDA growth you spoke about? Would you mind expanding on that point, Patrick and Luke? Thanks.
