So I think that’s where we’re spending the bulk of our time today on assets as we believe we can get higher return assets with sort of the capital that we have to deploy when we focus on those type of situations. So I think it will be great and we’ll be able to update — our expectation is we’ll close early Q2, potentially as early as April 1 and then we’ll update everybody clearly with that in mind.
Operator: Our next question comes from Michael Doumet from Scotiabank.
Michael Doumet: I obviously understand the reason behind the capital allocation strategy you laid out in November and reiterated today. But I wonder, based on kind of everything, if that means you may forgo M&A opportunities that you would otherwise pursue and close, I mean, especially given you’ve allocated about half of the spend and if that’s the case, is there anything that you can do to minimize that?
Patrick Dovigi: Yes. I think this was a year — again, this is — as we said, we put in our capital allocation plan. This was a year to sort of squarely put leverage into the 3s. Yes, there’s multiple levers we can pull in order to do that. Are we going to do that? No. I think the plan is stick to the sort of capital allocation plan we laid out which really is for the next sort of 6 months because if you think about what the growth plan would be as you roll into 2025, you’re going to start putting the wheels in motion in sort of Q4 of 2024. But we have a lot on our plate, again, with the rollout of EPR, again, this M&A transaction that we’ve been working on for sort of closer to almost 6 months now plus together with the ones we’ve doing and small tuck-in, highly accretive acquisitions that are going to the existing footprint around sort of underutilized post-collection assets.
And again, focus on just continuing to delever the balance sheet squarely get that the 3s. Once we get the balance sheet clearly into the 3s, then it will be sort of a natural gravitation down to work closer to 3. We will then not have to have this conversation again and we can just deploy incremental free cash flow. And given the size and scale of the business, M&A is not really going to move the needle in any major way in terms of actually toggling between low 3s and sort of mid 3s. So I think we’re going to just stick to this — we’re going to stick to the course now. And I think there’s lots of opportunities and there will be continue to be lots of opportunities. But for 2024, we want to stick with this plan.
Michael Doumet: I appreciate the comments. Maybe turning to volumes. Again, for Solid Waste, the expectation for the outsized headwind in terms of volumes in Q1 given the comp and then you get a moderation for the balance of the year and then just turning to ES, I’m assuming organic growth there is going to be price led but just curious what your thoughts are on volume assumptions.
Luke Pelosi: Yes, Michael, it’s Luke speaking. For Q1, solid waste, you’re absolutely right. The volume is sort of, I think, in the guide, we alluded to negative 4.5% which is really negative 3.5% from the intentional shedding. When you think about last year’s cadence, Q1 was positive volume than Q2 through Q4 of a negative 2% to 3%. So you’re anniversarying that in Q1 and that yields about negative 3.5%. And then all the weather impacts that Patrick has alluded to, we think about roughly another 100 bps. So starting with that negative 4.5% and then that ratably improves as you go through the year, getting to a positive volume number by Q4. That’s roughly the expected cadence. And all of the comments in the prepared remarks, we think there could be some conservatism in there.
But given the uncertainty, we’re feeling confident that’s the right sort of place to be guiding to. ES is really if you have to go back to Q1 ’23 and recall the significant outperformance that ES had in that quarter and so you’re really comping off a very tough quarter. So that is certainly driving part of the Q1 dynamic in the Environmental Services segment. I think more overarchingly in Environmental Services, though, is something that we’ve consistently been saying is that business historically was a volumetric growth story and is now pivoting to a price-led growth story, so quality of revenue over quantity. And so if you think about the mid-single-digit overall top line growth that really is sort of higher single-digit top line growth coming out of price-driven initiatives, offset by some negative volume.
What I would say with ES, unlike solid waste is there is some more event-driven components to it and so you could have an event or an emergency response type action that does give rise to sort of more difficult to forecast volumes over the year. We’ve been quite conservative on that and that can arise. Again, a lot of winter weather in Canada gives rise to those with the milder winter, you didn’t see as much of that but it could come at any time. So there is upside from that to the guide but that’s how we’re thinking about it overall.
Operator: Our next question today comes from Stephanie Yee from JPMorgan.
Stephanie Yee: I know you’ve been talking about the RNG and EPR spend together. But could you maybe break out either for 2024, how much is dedicated to RNG or maybe just even for the 2026 EBITDA, $175 million to RNG, what is the total RNG CapEx associated to get to that EBITDA?
Luke Pelosi: Well, so Stephanie, it’s Luke speaking. So there are 2 different questions in there. On the latter, $175 million of RNG in 2026, what we had previously said, it was just under sort of a 2x capital spend in order to do so. And I think to date, through our equity contributions into JVs, we’ve put about $80 million or $90 million. We’ll have the benefit of sort of debt from being a significant component of the remainder of those that won’t require an equity check. And then on the ones that we are building ourselves, we’ll continue to have the sort of capital spend. When all said and done, we think it’s in that sort of just under 2x what the EBITDA was is what we had said. Now ITCs have not certainly been sort of factored in and then others pending and [indiscernible] at the various legislative levels as to what’s going to be the final outcome there but it does seem, if you’re reading the TVs that some amount of ITCs will be made available and that will obviously serve to offset what that sort of capital cost is.
In the 2024 spend, your first question, roughly sort of 2/3 of that amount is going into EPR type initiatives with the other sort of third into RNG. Our capital commitments and the JV contributions this year will be significantly lower than the prior year as those projects are now sort of standing on their own. But that’s how we’re thinking about each of those buckets.
Stephanie Yee: And just going back to Environmental Services. I guess this year, you mentioned in the kind of mid-single-digit organic revenue growth is embedded high single-digit pricing, that’s getting you to 100 basis points of margin expansion in 2024. I guess can you just kind of walk through how you expect to get to that 30% plus EBITDA margin target over the medium term? Is it going to be primarily price-driven to get there? Or any other color you can provide?
Luke Pelosi: Yes. So Stephanie, I think it is a combination of price-driven asset utilization as well as the self-help levers that we’ve been talking, although we typically talk with the solid waste plant, equally applicable to environmental services. So price, as a starting point, focusing on quality of revenue or net new revenue but also and perhaps almost equally important, shedding lower quality revenue doesn’t — that does not mean our return thresholds, right? I mean, if you just look at the math, the power of shedding, call it low single or mid-teens margin work is very accretive to the sort of blended margin. And so you’ve seen that at play in solid waste and we expect to see and realize similar benefits in environmental services as we undertake this sort of quality of revenue focus.
Asset utilization is one that we’ve spoken about and continues to be a key focus. I mean the number of SKUs and product offerings in environmental services is far greater than what you have in solid waste. And with the way the businesses have come together, really with the Terrapure integration from a few years ago, we have a diverse service offering that is not yet fully offered in all of our markets and therefore, it’s opportunity for improved asset utilization by ensuring that each of our locations is doing all that it can be to driving incremental sort of contribution. And so that focus on asset utilization is another sort of lever of the approach. And then the overarching sort of self-help that talks about really just benefiting from a lot of the operational best-in-class practices from efficiency, costing, et cetera, that the solid waste industry has sort of perfected and benefited from over the past decade, just deploying that into our environmental services business as well.
So when you think about the margin expansion that we’ve achieved over the last few years and now with the pivot towards this quality of revenue, we’re feeling really comfortable about that upward march to that sort of high 20s and eventually 30% EBITDA margin in ES.
Operator: Our next question comes from Tobey Sommer from Truist.
Tobey Sommer: I was hoping you could speak to labor market trends and the inputs and costs for turnover, resulting onboarding, training, safety expenses, et cetera. Is that static at current rates, those trends in your guidance or do you embed the incremental improvements throughout the year as that trend kind of reverses from great resignation a couple of years ago?
Patrick Dovigi: Yes. We have not embedded any upside, so we exited where we exited Q4. We do believe there is some upside. I mean in voluntary turnover still sitting in the low 20s range today. We’d like to see that in the high teens across our book of business. So we do think there’s some upside coming from that. We haven’t embedded any of that into our numbers for 2024. So anything that happens would be upside to the guide.
Tobey Sommer: Could you talk about the anticipated pipeline of acquisitions as you look out this year, both from a geographic mix, how you think the split may fall? And is anything in the complexion of that pipeline indicate that there would be or could be a change in the rate of intentional shedding going forward?
Patrick Dovigi: No. I think if you look at the sort of — I mean, on the intentional shedding piece, if you look at the intentional shedding piece, there’s a bit of sort of low-margin commercial work that you’ve inherited with some acquisitions. But the lion’s share of that is going to become in residential contracts where a service provider generally only without any material vertical integration. We’re not going to deploy incremental capital into those types of opportunities. So Southeast Michigan is an example of markets where we’re potentially shedding some work because it’s just, again, the cost in what we’re actually getting the revenue we’re getting for those contracts just doesn’t make a ton of sense. There are some municipalities communities that are prepared to pay the rate we need because they appreciate the service offerings that we’re able to give them.
But I think that’s where the lion’s share of that comes. That being said, if you look at where we’re going to deploy capital, the pipeline, I would say these acquisitions don’t always just happen in a month. I mean, these relationships have cultivated over a long period of time. In terms of what we’re focused on, really, the focus is once getting the sort of medium-sized acquisition out of the way, the lion’s share of what we’re going to do is just small tuck-in M&A sort of largely sort of collection only in markets where we have, I would say, underutilized post-collection assets and transfer stations, recycling facilities and landfills where we can just drive incremental volumes for those facilities, we’ll have facility consolidation, eliminated the SG&A cost, the consolidation of routes, et cetera which will then provide the most torque for all of us as shareholders over the course of next year.
