GFL Environmental Inc. (NYSE:GFL) Q4 2023 Earnings Call Transcript

GFL Environmental Inc. (NYSE:GFL) Q4 2023 Earnings Call Transcript February 21, 2024

GFL Environmental Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Drew and I’ll be your conference operator today. At this time, I would like to welcome everyone to the GFL Environmental Fourth Quarter 2023 Earnings Call. [Operator Instructions] I will now hand over to Patrick Dovigi, Founder and CFO [ph] of GFL. Please go ahead when you’re ready.

Patrick Dovigi: Thank you and good morning. I’d like to welcome everyone to today’s call and thank you for joining us. This morning, we will be reviewing our results for the fourth quarter and providing our guidance for 2024. I’m joined this morning by Luke Pelosi, our CFO, who will take us through the forward-looking disclaimer before we get into detail.

Luke Pelosi: 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 U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators. Any forward-looking statement is not a guarantee of future performance and actual results may differ materially from those expressed or implied in the forward-looking statements.

These forward-looking statements speak only as of today’s date and we do not assume any obligation to update these statements, whether as a result of new information, future events and developments, or otherwise. This call will include a discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. securities regulators. I will now turn the call back over to Patrick.

Patrick Dovigi: Thank you, Luke. Throughout 2023, we continue to implement our strategy by building on the strength of our best-in-class platform. Some of the highlights of the year included executing on our pricing strategy across our Solid Waste platform, achieving industry-leading core price of 9.8%, the highest in company history and leading to outsized margin expansion. Growing environmental services revenue by over 17% and achieving best-in-class adjusted EBITDA margins of 26%. Deleveraging almost a full churn to over 50% was coming from organic growth of the business. Optimizing our footprint with the divestiture of 3 noncore U.S. solid waste markets for $1.6 billion at mid-teens multiples and advancing our initiatives related to the quality of earnings and asset utilization in both our Solid Waste and Environmental Services segments.

This includes the intentional shedding of low-margin business and noncore revenue that do not satisfy our return requirements. The impact of the steps we took are reflected in our exceptional performance for 2023, once again demonstrating the ability of our team to create long-term equity value for our shareholders. Fourth quarter adjusted EBITDA margin grew 200 basis points from the prior year with 245 basis points of underlying Solid Waste margin expansion and 180 basis points of margin expansion from our Environmental Services business. Adjusted EBITDA grew over 21% from the prior year, excluding the impact of the divestitures. The record high voluntary labor turnover rates that we saw in 2021 and 2022 as well as supply chain constraints continue to sequentially improve and we expect to continue to see the positive impact of these trends into 2024.

On acquisitions, in 2023, we deployed approximately $900 million into 39 acquisitions. We expect these acquisitions to generate revenue of approximately $355 million on an annualized basis. We also deployed approximately $275 million in incremental organic initiatives, primarily in RNG and EPR related opportunities. We continue to believe that these opportunities represent some of the best risk-adjusted returns that we have seen and we will provide significant upside to our long-term free cash flow trajectory in the coming years. Turning to our balance sheet. We ended the year with net leverage of about 4.1x, almost a full turn lower than where we ended 2022. On our calls over the last year, we have talked about the ability of the business to naturally delever over time.

We saw this play out in 2023, with the majority of the decrease in net leverage coming from organic growth in the base business. Our market selection, stronger balance sheet and continued execution on the self-help levers in the portfolio position us for a very attractive 2024 and beyond. Luke will walk us through in more detail but high level, we’re guiding to another year of strong revenue growth across the board with Solid Waste pricing of 6% to 6.5% and mid-single-digit organic top line revenue growth in Environmental Services. We expect that adjusted EBITDA margins will organically expand another 100 basis points in each of our segments which we expect to be industry-leading and support our adjusted EBITDA guide of $2.215 billion. In Solid Waste outsized price cost spread is expected to be the primary driver of this margin improvement.

We also expect that the cost impact of productivity, cost of risk in repairs and maintenance from labor and turnover trends and supply chain constraints will moderate and potentially provide upside to our guidance. Solid waste volumes are expected to be relatively flat when excluding the drag from intentional shedding of low-margin and noncore volume. Our guidance assumes commodity price consistent with Q4 prices which are lower than current levels. Any sustained price improvement will provide incremental upside to our guide. Included in the guidance is approximately $30 million of incremental adjusted EBITDA from RNG, all from our Arbor Hills facility that was commissioned in late 2023. Our guidance assumes a conservative volume ramp of this facility throughout 2024, meaning that there is potential upside as the operation of the facility matures.

In addition, we expect to commission another 2 to 3 facilities in 2024, none of which are factored into our current guidance. As we set out in our capital allocation framework provided at the end of November, we remain committed to making disciplined capital allocation decisions while continuing to delever the business with a focus on moving toward an investment-grade credit rating in the medium term. The incremental growth investments we plan to make in 2024 are estimated to be in the range of $250 million to $300 million and we’ll focus on high ROIC sustainability-related investments around EPR and RNG. We expect to realize adjusted EBITDA from our EPR related CapEx investment starting in Q4 of 2024, ramping to a full EBITDA run rate of $80 million to $100 million in 2026.

Given our first-mover advantage and strong asset position in Canada, including our state-of-the-art MRF network, we have already won a significant number of accretive EPR related contracts. We are optimistic that we’ll be able to capitalize on additional contracts that we have yet to be awarded. As a result, we believe that our EPR opportunity will be significantly larger than the $80 million to $100 million that we have already been awarded and we expect to provide updates on new contract awards in the coming months. On RNG, we now expect the first contributions from Arbor Hills in Q1 of 2024 and we remain confident in our ability to achieve our $175 million of EBITDA from RNG investments by 2026. We will provide an update on the EPR and RNG investments and potential EBITDA upside from these initiatives at our Investor Day later this year.

Consistent with our November capital allocation framework, we expect to deploy between $600 million and $650 million into densifying tuck-in M&A in our existing footprint in 2024. Over half of this amount will go towards the medium-sized acquisition that we have already signed. The asset represents a vertically integrated solid waste business within one of our fastest-growing existing markets in the Southeast that will be immediately margin accretive. We have completed the regulatory process and anticipate closing early in the second quarter. The in-year contribution from this acquisition and others we complete during the year will be additive to our 2024 guidance. Taking all of this into account, we expect to end 2024 with net leverage between 3.65x and 3.85x and to generate adjusted free cash flow of $800 million.

I’ll now pass the call to Luke to walk through particulars of Q4 and the 2024 guide and then I will share some closing comments before we open it up for Q&A.

Luke Pelosi: Thanks, Patrick. For the following discussion, I will refer to our accompanying investor presentation which provides supplemental analysis to summarize our performance for the year and our guidance for 2024. Fourth quarter revenue was $1.88 billion, representing year-over-year growth, 200 basis points better than we had guided. Solid waste price of 7.9% was realized through ongoing support from both our geographies with better than mid-single-digit pricing, continuing to be realized in the typically lower priced residential collection and post-collection lines of business. Solid waste volume of negative 3.6% represented a 100 basis point deceleration from the third quarter due to intentional shedding, a tougher comp in the prior year and softness in special waste.

Page 4 highlights the 245 basis point expansion of underlying solid waste adjusted EBITDA margins we realized during the fourth quarter, a 120 basis point acceleration over Q4 ’22. The impact from commodity prices flipped to a positive contribution, thanks to price appreciation during the last months of the year, an equal and offsetting impact arose tied to insurance proceeds that were received in the prior year period. While the net impact of fuel surcharges and fuel costs was a positive contributor to margin, the benefit of a fuel hedge we had entered into in Q4 ’22 did not repeat in ’23, resulting in a net 10 basis point drag. For the year as a whole, underlying solid waste margins expanded 290 basis points. We believe this is a strong demonstration of the effectiveness of our pricing and deliberate volume strategies and is consistent with the expected impact of the widening spread between price and cost inflation that we had forecast in the 2023 guide at the beginning of the year.

Our ES segment also had a very strong end to the year. The benefit of our strategic shift towards quality revenue growth initiatives is evident in the 180 basis points of margin expansion we realized in the fourth quarter. This result is even more impressive when considering the disruption from a small fire we had at our Columbus facility in November. The negative impact of which was approximately 165 basis points in the quarter. ES adjusted EBITDA margin was 26.2% for the year, inclusive of the impact of the fire. Consolidated adjusted EBITDA margin was 26.1% for the quarter, representing a 200 basis point increase over the prior year and in line with expectations when considering the 40 basis point consolidated margin impact of the facility fire.

Adjusted free cash flow for the quarter was $472 million which was in line with our guidance. Incremental growth capital in the quarter was $145 million, $25 million less than planned due to timing. $10 million of our planned landfill spend was reported to closure costs instead of CapEx and you can see that reclass between those 2 lines on the cash flow statement. Our underlying free cash flow generation was ahead of plan after factoring in approximately $20 million in RNG related ITCs that we expected to receive in 2023 but in the end, did not. On Page 6, we show the components of the material reduction to our leverage in 2023. The graph is a powerful illustration of the deleveraging capabilities of our business. Going forward, we expect organic growth and significant free cash flow generation to more than offset any leverage impacts from M&A, resulting in sequential annual delevering to which we are absolutely committed over the near term.

On Page 7, we have summarized our current debt structure. Post our highly successful refinancing in November 2023, over 85% of our debt obligations carry fixed rate of interest, providing significant certainty on our future interest costs. With the over 4 years of weighted average term remaining, we remain highly confident in the likelihood of receiving material credit rating upgrades prior to the maturity of most of our existing debt. The November refinancing also provides us with the opportunity in respect of near-term bond maturities. As we have previously communicated, while we do not know where underlying treasury rates will go, we expect the current spread of our borrowing rate over treasuries to materially decline as our credit quality improves.

Looking forward to 2024, we are providing guidance consistent with the preliminary framework we laid out last year. Page 8 outlines the revenue bridge and you can see we’ve provided a pro forma starting point for 2023 that takes into account solid waste divestitures completed in Q2. On the back of the strong end to 2023, we’re expecting over 9% top line growth in 2024 before the impact of any incremental M&A. Driving this robust growth is solid waste pricing of 6% to 6.5% and approximately 4% from acquisitions already completed. Given the strength of Q4 pricing, we have a high degree of visibility in realizing over 7% solid waste price in the first quarter and are confident in the path to achieve a minimum 6% price for the year as a whole. The guide assumes 100 to 125 basis points of negative solid waste volumes, all of which is attributable to our intentional shedding.

Otherwise, underlying volumes are expected to be flat to positive 25 basis points which we see is conservative but prudent given the potential for some macroeconomic uncertainty. Recycled commodity prices are assumed to be at Q4 levels which were 20% higher than the 2023 average but 10% lower than current pricing. If current pricing remains at Q4 levels, there would be upside to our 2024 guidance. Recall that post the divestitures, sensitivity to commodity prices is approximately $5 million of EBITDA for every $10 move in our commodity basket. Environmental Services is guided at mid-single-digit top line growth, underpinned by our continued focus on price-driven quality of revenue initiatives offset by shedding of low-margin work. For the second year in a row, the quality of our anticipated top line growth leads to the expectation of 100 basis points of EBITDA margin expansion in 2024, all of which is organic as rollover M&A is slightly margin decretive.

The guide assumes that cost inflation continues to moderate. A 100 basis points of margin expansion is expected in both segments, with corporate costs remaining flat year-over-year at 3.3% of revenue. The revenue growth, coupled with the margin expansion yields adjusted EBITDA of $2.215 billion, representing over 13% growth from the prior year on a pro forma basis. The guidance assumes an FX rate of 1.35 which is flat with the average rate in 2023 but 2 basis points lower than the 1.37 that was used for our initial 2024 thoughts provided last November. Recall that every penny of FX impacts adjusted EBITDA by approximately $11 million and our guide is therefore equivalent to a $2.24 billion of EBITDA assuming the November FX rate. At the free cash flow line, the walk from the $2.215 billion of adjusted EBITDA includes normal course net CapEx of $850 million to $900 million, cash interest of approximately $475 million and a net $50 million to $75 million outlay for other cash flow items.

The $250 million to $300 million of growth capital that Patrick spoke to is excluded from the guide. Additionally, any RNG tax credits are not included in the guide and would therefore be additive. Page 11 shows the expected 2024 deleveraging path in which organic growth drives net leverage down to mid-3s. As Patrick said, we expect to end the year with net leverage of 3.65x to 3.85x, inclusive of the deployment of incremental growth capital and M&A. In terms of the cadence of deleveraging, recall that based on the seasonality of our business and the timing of our cash flows, Q1 net leverage typically increases over Q4 levels. Q2 is relatively comparable to Q1 and then leverage steps down in Q3 and Q4. Sudden changes to FX rates and the timing of gross capital deployment may modestly impact the quarterly results but won’t impact the year-end landing point of 3.65x to 3.85x net leverage.

In terms of operational cadence, consistent with our historical seasonality, we expect to realize approximately 23% of planned annual Solid Waste revenue in Q1 and 20% of the plan for ES which equates to approximately $1.775 billion in revenue or 5% growth pro forma for the divestitures. In terms of margin, the first quarter is expected to be the toughest comp. Consolidated adjusted EBITDA is expected to be $440 million, just under 25% margin. Pro forma for the divestitures, that represents about 6.5% growth. At the segment level, after giving effects to the reclassifications of certain operations between segments as reconciled in the appendix to our investor presentation, solid waste margins expand 80 basis points versus first quarter of 2023 and ES margins contract approximately 70 basis points, largely as a result of the tough comp, the atypical January weather in many of our southern markets and disruption from the facility fire that spilled into the first quarter.

These impacts are not expected to persist into Q2. Corporate costs are expected at 3.7% of revenue in the first quarter as we anniversary the investments made in 2023, mainly around IT against the seasonally lower first quarter revenue. I will now pass the call back to Patrick for some closing comments before Q&A.

Patrick Dovigi: Thanks, Luke. We believe that the results in 2023 confirm that our strategy is working. Over the past 15-plus years, we’ve assembled a best-in-class asset base across North America and we are now optimizing what we have built. We are pulling the right self-help levers to grow revenue at industry-leading levels, helping drive outsized margin expansion. At the same time, we continue to strengthen our balance sheet and remain committed to further deleveraging. We expect 2024 to deliver another year of significant margin expansion with longer-term upside coming from our disciplined investments and highly accretive return opportunities in RNG, EPR and densifying tuck-in M&A. The contribution from all these initiatives will significantly improve our free cash flow profile over the time and continue the long-term shareholder value.

As always, I am very grateful for the efforts of our more than 20,000 employees who are truly the key to our success. 2023 was another year where Team Green demonstrated their exceptional ability to execute on our growth strategy and I want to thank each and every one of them for their contributions. I will now turn the call over to the operator to open up the line for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Walter Spracklin from RBC Capital Markets.

Walter Spracklin: Luke, I’d like to start with you. Now Patrick mentioned that investment-grade rating upgrade in the medium term expected and, Luke, you reiterated that it’s likely going to come before your current — the major maturities of your current debt arrangement. So just curious, what is the focus on the rating agencies? Is it just simply the leverage level, free cash flow? Or is there something else that they’re waiting for in terms of cadence, direction, momentum, anything like that, that we might be able to see a rating upgrade sooner rather than later?

Luke Pelosi: It’s a great question. Obviously, something that we focus a lot on. I mean the rating agencies are quite backward looking in that with the growth that we have enjoyed over the last few years, it does take them some time to sort of catch up. So I think it is very much a leverage focus and they do want to see you sort of below that 3.5x leverage level which you can see with the guide we have put out, we have a very clear path to achieving but they will be a couple of quarters behind us in terms of when we reach the level in their models. And then exactly as you said, they’ll want to see the sustained level and the commitment to that. I don’t think we could be any clearer in our commitment to deleveraging and achieving that.

And I think that aspect of it will be well in hand. So I think it’s really a matter of having their models which, again, backward-looking catch up with ours. So when you think about the 4 year weighted average maturities as well as our trajectory, I think those things do align and we will have the opportunity to get upgrades along the way because, recall, we have some upgrades that come before the IG rating but feel well in hand that by the time the majority of that debt stack comes in hand, will be a materially better credit rating than we are today.

Walter Spracklin: And then on the price cost spread, I know, not so focused on the nominal actual price but rather the spread between the 2. Can you speak — and you’ve given us guidance here on the price and just if you could give us a little bit more detail on how comfortable you are with the current cost inflation, where wages are right now, where rehiring — cost of rehiring comes in, on any attrition? How comfortable are you that you are maintaining a price cost spread? And how would the 2024 price/cost spread compared to perhaps ’23 and prior to 2023 on that spread basis?

Luke Pelosi: Yes, Walter, it’s Luke again. Another great question. I mean I think as we had articulated coming out of ’22, what we were expecting to see over that sort of 12 to 24 months was a widening of that spread. And although you had ’23 starting with double-digit price, you were based up against an equal amount of cost inflation and so we’re not really generating the spread that we had hoped for. Historically, I think the industry was looking for somewhere between 35 to 70 basis points of spread. And we articulated that we saw a path coming into 2024 of that spread almost doubling. And I think we’re exactly there. I mean our cost inflation based in the model; we’re anticipating a sort of mid to high 4s cost inflation number.

So if you put that against our expected solid waste price, you can see an opportunity for 150 basis points of spread between the 2 which we think is a fantastic outcome and it was one that we sort of had anticipated to come. Cost inflation is obviously still quite real but does seem to be tempering and the labor markets and the associated impacts to our cost structure with the softening of those is certainly something that we’ve been watching and enjoying as it seems to be moving in the right direction. So we’re feeling pretty good with the guide that we put forward. And I think it’s playing out exactly as we had sort of anticipated at the beginning of 2023.

Operator: Our next question comes from Kevin Chiang from CIBC Wood Gundy.

Kevin Chiang: Maybe just on the opportunities on EPR. You highlighted the $80 million to $100 million but there’s upside here just given, I guess, some of the changes in the regulatory environment that looks favorable to EPR. When you think of the upside there, is it upside on the existing investments you’ll be making over the next year or 2 and adding more earnings to that? Or do you foresee having to make more investments to kind of capture incremental earnings upside from what you’ve guided to or what you’re targeting today?

Patrick Dovigi: So it’s two-fold. One, Kevin it’s around volume through the existing contracts and to the existing facilities. There’s potentially a sort of regulatory change coming that could drive some incremental volume into our facilities; so that’s one. And two, it’s largely, again, around facilities where we already have a lot of the volume going through but it will be then switched to EPR. And then there’s the collection contracts which are moving from municipalities to the producers. So there’s a lion’s share of a multitude of contracts that are going to be let over the next, call it, 12 months and we think we’re positioned very favorably. Obviously, we’re not bidding on them all. We’re bidding on the ones where we’re being selective about where we already have infrastructure, where we already have people, where it’s an easy sort of turnover, not a lot of start-up risk.

So I think we’ll be able to update you with some very positive news over the course of the next quarter. But we’re feeling really good about where we’re sitting today and the position that we have in a bunch of those contracts.

Kevin Chiang: And maybe just as a follow-up, just for clarification, the 3.65x to 3.85x leverage ratio, you’ve burdened that with the incremental growth spend you’ve highlighted in your capital allocation plan. Are you including the earnings contribution from, for example, the $600 million to $650 million of M&A in there as well or is that excluded?

Patrick Dovigi: No, it’s not included in that. Yes.

Luke Pelosi: Kevin, it’s Luke speaking. For purposes of our guide, any incremental EBITDA from the M&A spend is not included. But for purposes of that illustrative pro forma net leverage at the end of the year, it’s assuming that in your run rate EBITDA, you have the benefit of the earnings of what you had bought, right? So if you spend $600 million on M&A and you paid it 8x, you’ve included that EBITDA for purposes of the net leverage cap but you have not included any earnings in our EBITDA guide of $2.215 billion.

Operator: Our next question today comes from Michael Hoffman from Stifel.

Michael Hoffman: I’d like to follow up on the leverage question because I think this is important. You have emphasized it but I want to draw it out. If I follow all the math, the table you gave in the press release shows the debt number, that debt number is unchanged without M&A but you spent all of the capital, growth and maintenance. Organic growth of EBITDA will drive you down to like 3.7. Have I done that math correctly? And it’s important that there’s a big operating leverage of this organic growth.

Patrick Dovigi: Yes, Michael, I think without seeing the exact math directionally, that’s exactly right. I mean if you look at the free cash flow generation, you can support the normal course CapEx plus a whole lot more, right? When you think about the classic free cash of what’s left over to do growth or dividends or buybacks, et cetera. That pool is growing and growing and that’s what’s allowing us to delever organically and even delever with the inclusion of all this incremental growth and M&A. You’re absolutely right.

Michael Hoffman: You’re going to have a pile of like $500 million in the middle of the table to do M&A, buybacks, dividends?

Patrick Dovigi: Correct.

Michael Hoffman: Spend everything. And then in the guide, how much, if any, because you mentioned in the beginning, all of the operating leverage of 100 basis points in solid waste is price cost. But you have a lot of self-help just given where you are in the life cycle of the company, whether it’s automation in residential or CNG, your own efforts around working capital which is more about free cash. Is anything in the guide related to the 100 basis points from self-help or is that also incremental upside?

Patrick Dovigi: Well, Michael, I mean, the price cost, as the math suggests 150 sort of basis points of spread would give you 100 basis points of margin just onto itself. But as we know, there’s other factors at play. I think about some of the exogenous factors. I mean, this year, commodities and RNG should be a slight tailwind, call it, sort of 35 basis points tailwind. But going against that, I mean, our cost of risk, when I look this year, is about 70, 75 basis point headwind that we’re facing this year. And I think that’s probably sort of industry-wide, something to that magnitude, right? So just if you think about those 3 exogenous factors, you’re starting at sort of minus 40 basis points. So yes, we have the price cost spread and I think that’s the largest sort of driver.

We also have the impact of our intentional shedding. As we’ve said, we’ve given up 200 basis points of volume at lower margin. There’s a sort of 30 to 40 basis point margin impact coming from that. And then as you said, yes, we have the self-help. We have the productivity improvement. We have all of the levers that we have been talking about as well as the anniversarying of some of the pain coming out of 2022 as it relates to people and productivity. And so it’s really the combination of all of those things. But to your point, if you sum those up, you get to something greater than 100 basis points. So we’re feeling really confident in our ability to execute on this plan. But as we attempted to articulate in the prepared remarks, we do see multiple points of upside above and beyond what we’ve currently guided.

Operator: Our next question comes from Jerry Revich from Goldman Sachs.

Jerry Revich: Patrick, can I ask the landfill gas transactions, so Enbridge $270 per MMBtus, what they paid to your footprint; you’re potentially looking at $2-plus billion versus fraction of that that you invested. How attractive is that opportunity to transact given where valuations are headed and then use that to reduce leverage or redeploy the M&A? Can you just talk about your views on that opportunity set?

Patrick Dovigi: Listen, I mean, again, if you actually had a leverage issue, you would potentially look at potentially pulling one of those levers. But the reality is, the business is naturally delevering to the place that it needs to be. And I think from our perspective, where we sort of sit today, obviously, if we got a massive, massive price that sort of overvalued it and then work from a tax perspective, you could definitely look at that. I think where we’re going today in the free cash flow generation, we’re going to get that from those RNG projects and what that does for the business over the long term, the right decision is to keep those — that gas for the long term, both from a margin perspective and a free cash flow conversion perspective.

And I think over the long term, the shareholders are going to win by keeping that asset versus doing something rash today just to delever the balance sheet, 9 to 12 months quicker than it normally would on an after-tax basis. So it’s good to know what it’s worth. And I think it’s just — it’s an asset that’s sitting nowhere within the organization today. But I think as those assets come online, I think you have an asset that’s worked in your math, somewhere between $3 billion and $3.5 billion. And so we feel good knowing it’s there but I think the free cash flow generation and what it does to the margin profile and the free cash flow conversion for our overall business is going to be better to keep that.

Jerry Revich: And can I ask Environmental Solutions, can you expand more on the outlook, Luke, you mentioned margin compression in the first quarter. When does that turn to margin expansion? What gives you that visibility? And just re-segmenting, does that drive synergy opportunities or is that just a pure reporting change?

Patrick Dovigi: Yes, I think, Jerry, I mean, before turning it over to Luke, I think when you look at — if we look at our business holistically, this was a [indiscernible] year in Canada and if you look at those, it brings a bunch of, I would say, strange weather patterns from sort of east to west. And I think that business is seasonally based. And I think the year before was really outside the year. So I think we’re being just conservative on the Q1 guide. Obviously, the full year number doesn’t change, we just want to be conservative of where we guided Q1 but the — which is more of a normal year, I would say. Last year was a bit of an outlier just given all the different pieces that came together, coupled together with, we really didn’t get any snow in Canada where sort of 80% of that revenue base is tied to. But overall, we feel really comfortable with where the year sort of stands and where we’re going.

Operator: Our next question comes from Stephanie Moore from Jefferies.

Stephanie Moore: I wanted to touch on the RNG opportunity for 2024, maybe even 2025. Maybe you could talk a little bit about just the ramp of the Arbor Hills facility coming online in 2023 and just that ability to see maybe some upside in 2024 as the facility matures, kind of likelihood of that potentially happening? And then you also called out maybe another 2 to 3 facilities in 2024. What would be the general ramp of those facilities coming online and contributing to EBITDA and then maybe free cash flow over time as well?

Luke Pelosi: I think when Arbor Hills commissioned in late 2023, initial expectation and our guide at that time was there was going to be some contribution as we’ve learned working with our partners, you need a sort of 3 to 6-month period post commissioning, it appears, in order for the actual gas to sort of be monetizable and flowing. And so we’re now taking that degree of sort of conservatism. So you think about what 2024 had baked in the guide, said roughly $30 million coming out of Arbor Hill’s RNG, that’s using a RIN price just under $3. It’s really assuming a more muted volume currently running about 70%, 75% of the total expected volume and that’s where the upside remains. We’ve assumed that that lower level remains throughout all of 2024, whereas the reality by the back half of 2024, you can see that ramping back up closer to that sort of 100% level.

So there’ll be sort of upside on that. In terms of the other 3 sites, 2 to 3 sites that will come online, probably 2 do get commissioned in the year. The third is scheduled for the very end of the year. So it’s possible that that slips into Q1 of next year. But those 2 to 3 sites in aggregate represent sort of equal size to slightly larger in terms of EBITDA contribution as Arbor Hills. Arbor Hills was our largest. Those 2 to 3 others in aggregate are about equal size. So you put that together, that brings you closer to sort of $75 million, $80 million of EBITDA number on a run rate basis with all of those. Now the 2 to 3 coming online, again, you need to bake in that sort of 3 to 6 month ramp period. So you may not realize all of that in year 2025 but certainly by exiting the year, you expect to be at that sort of run rate.

On the free cash flow component, as you know, some of these projects, we are sort of debt funding at the project level and as a result, roughly the first sort of 12 to 15 months of generation of cash at the site goes to debt repayment. So you are going to have a lag between the first year’s EBITDA generation and when the free cash actually starts being received. You do have an immediate free cash component tied to the royalty stream if you think about each of these projects around sort of 15% to 25% of the economics comes in a royalty. And so that actually is pre-cash but that other actual underlying equity pickup, you can have that 12 to 18 month lag, as I said.

Stephanie Moore: And then maybe just as a follow-up, Patrick, you noted some — you provided some color on a deal that you expected to close and I believe you said early 2Q of this year. So maybe if you could just talk a little bit about that transaction, expectations in terms of opportunity over time in that specific market?

Patrick Dovigi: Yes. So it’s a market where we’re currently operating in and around great family business, fully vertically integrated, wonderful hauling business, great landfill asset, again, in a market where we’ve done exceptionally well in. I think we like that market a lot. We like the markets around it a lot and we think over time, it’ll just fill in an area where we would like to be. And these opportunities don’t come along sort of every day and I think we were very well positioned, both from a relationship perspective with the seller as well as being able to get through the DOJ regulatory process in relatively short order. So you put those 2 things together, I think that’s what made it attractive to us. And I think when we’re picking our stock, particularly with M&A, we’re looking at places both we can add value and we have sort of a first mover or some sort of advantage with the asset around DOJ regulatory process with some of our competitors, et cetera.