Welcome to the GFL Environmental Q1 Earnings Call. My name is Ruby and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press star followed by one on your telephone keypad. I'll now hand over to our host, Patrick Dovigi, Founder and CEO, to begin.
Thank you and 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 first quarter. 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.
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. During this call, we'll 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.
Thank you, Luke. Once again, we started this year with an impressive first quarter results that set us up for another exceptional year. The positive impacts of price, volume, acquisitions, and portfolio rationalization are all surpassing our expectation and positioning us to continue to exceed our industry-leading growth objectives. Organic revenue growth for the quarter was over 11%, with double-digit growth in both our solid waste and environmental services segments. Solid waste pricing accelerated to the mid-sixes, the highest in our history and ahead of our own expectations. Our ability to adjust our pricing strategy to reflect the changing operational landscape in real time is a testament to both the quality of our business model and the capabilities of our team.
We continue to see our opportunity for price and surcharges as we optimize our book of business, and we'll be focused on that for the rest of the year. With the strength of the first quarter and our expectations for the balance of the year, we feel confident in our ability to exceed the high end of the guidance for our base business that we previously provided. Volume trends were also up across all of our geographies and business lines in the first quarter, excluding one-time MRF volumes from the prior year that we knew were not going to recur. This increase in volume is impressive because we achieved it even with the acute impacts from Omicron at the start of the year and the severe winter weather conditions that we experienced in many of our Canadian and northern U.S. markets.
Given that backdrop, we think that there is a positive read-through of this trend for the rest of the year. We've been anticipating the full recovery of our environmental services sector that we saw this quarter. We saw our customers reengage services that had been deferred or reduced during the pandemic, with the result that revenues in this segment were ahead of our own expectations by over 15%. As a result, we think we're going to be able to prove out the thesis in this segment faster than previously expected. Adjusted EBITDA margin was 25.3% for the quarter, a result we're really proud of considering the inflationary factors at play. You'll recall our previous comments that a year-over-year margin comparison would be less relevant this quarter because of the uniqueness of the prior period.
Luke will unpack the puts and takes, but when you peel it all back, the results demonstrate the exceptional foundation of our business model that allowed us to leverage price to more than cover the cost of inflation while driving operating leverage through our improved asset utilization. The significant and sudden spike in fuel costs was a headwind for the quarter, but we think we should be able to recover most of that lost margin by the end of the year. With Canada finally moving on from its COVID-related restrictions by the end of Q1, we're also very optimistic about the positive impact that this lifting of restrictions will have on our Canadian business for the balance of the year. Complementing our strong base business performance was the continued implementation of our portfolio rationalization. In April, we finalized the spin-off of GFL Infrastructure into Green Infrastructure Partners.
GIP acquired the Coco Paving business to create a leading Canadian provider of vertically integrated infrastructure services. As we said last quarter, this transaction demonstrates GFL's commitment to rationalizing our balance sheet to maximize the value of our asset base. We think that the brand recognition of GIP, together with a highly supportive macro backdrop of infrastructure projects over the near, mid, and longer terms will create a compelling organic growth opportunity. We also see consolidation opportunities in the fragmented Canadian infrastructure services market, and we believe that our investment in GIP will result in meaningful value creations for our shareholders. We also continued to execute on our M&A strategy, completing 21 acquisitions year to date, representing approximately CAD 300 million of incremental annualized revenue. As we announced earlier this week, one of our acquisitions we completed was Sprint Waste Services.
Sprint, a vertically integrated regional solid waste business based in Texas, with a footprint that strongly complements GFL's existing footprint. Sprint has achieved industry-leading margins for over 15 years under the ownership of Joseph Swinbank and his family. We're excited that Joseph and his sons, Will and Regan, are showing their support for the combined GFL opportunity through their continuing investment as a shareholder of GFL and as consultants to the business. In addition to Sprint, we closed 20 smaller tuck-in acquisitions, 9 in the quarter and 11 subsequent to the quarter. Thirteen of those acquisitions were less than $5 million in enterprise value, and all contribute to further densifying our footprint. Our pipeline remains robust, and with the strength of our start to the year, we see another year of continued outsized M&A opportunities.
On RNG, we continue to progress on the development opportunities that we highlighted to you earlier in the year. The projects expected to start to come online mid- to late next year in Q1. We deployed around $12 million of capital into these projects and are encouraged by the pace of development. We continue to expect that our share of incremental free cash flow from these sites to be in the range of $115-$125 million per year. On the ESG front, we continue to focus on biodiversity with a new pollinator project at one of our landfills in Canada. On Earth Day, our employee engagement activities across GFL centered around increased awareness of local at-risk species.
On the governance front, we appointed Jessica McDonald to our board in the quarter and have committed to increase female representation on our board to 30% by the time of our 2023 AGM. I will now pass the call back over to Luke, who will walk us through the details of the financial results, and I will share some closing perspectives before we wrap up.
Thanks, Patrick. Before I start, to frame the discussion, we have excluded the contribution of the now-divested GFL Infrastructure division from the discussion analysis of our results. All period-over-period comparisons that I reference are on a like-for-like basis. As Patrick said, we started the year exceptionally strong, with solid waste organic revenue growth of 10.3%, driven by 6.6% price and surcharges, 1.1% from commodity prices, and 2.6% from volume. Volumes were 3.1% when excluding the non-recurring Merck volumes that we anticipated in our original guidance. The broad-based outperformance came from both price and volume, with organic growth exceeding expectations in both of our geographies. Our outperformance on price was a function of higher price increases, better retention, and a pull forward of price increases in certain markets.
Compared to our guidance, incremental fuel surcharges recovered approximately 20% of the increase we saw in fuel costs during the quarter. Part of this is a timing lag that will be recovered, but on balance, this is an area where we see significant opportunity within our existing customer book. Many of our industry peers have done a great job at mitigating rising fuel costs, and we see meaningful upside as we migrate our practices in this area closer to the industry norm. On volumes, as I said, we were pleased to see growth in both geographies.
Solid waste collection volumes were positive across all service lines, with the strength of commercial being impacted by headwinds on roll-off pulls in certain of our northern markets that were contending with the acute wave of Omicron at the beginning of the year and significantly more severe winter weather conditions compared to the first quarter of the prior year. Post-collection volumes were strong across most geographies, particularly in some of our newer market areas. While volumes may have started a little slower in the quarter, momentum started accelerating as we exited March. This was particularly true in the Canadian markets, where, as Patrick mentioned, we've just recently emerged from COVID restrictions. Nowhere was this more apparent than the phenomenal results in our environmental services segment, where we realized nearly 20% organic revenue growth as our customer base began to restart or increase service level intervals.
Again, we think the impact of all these government-mandated market openings and closings has been to rewrite the normal seasonality cadence for our Canadian business. With that, we definitely think we had some pull forward of work into the first quarter, but nonetheless, the read-through of these results forms a highly favorable outlook for the balance of the year. Contribution from M&A was 16.2%, a result was ahead of plan and largely attributable to the ongoing strength in the performances of businesses acquired in the second half of 2021. In terms of profitability, adjusted EBITDA margins were 29.9% for solid waste, 20% for environmental services, and 25.3% for the company as a whole.
Although this is a decrease from the prior year, as communicated when we provided our guidance for 2022, the quarter-over-quarter margin comparison was going to be less relevant this quarter based on the somewhat anomalous strength of the first quarter of 2021. To recall, Q1 2021 saw solid waste margins in Canada increase sequentially over Q4 2020, and the highest solid waste margins of the year in our US business, both of which were atypical outcomes and attributable to various impacts of organic and inorganic factors. Looking at our guidance at the beginning of the year, we expect the solid waste margins to decrease, environmental service margins to increase, and the company as a whole to end the quarter in the high 25%.
Considering the impact of diesel costs and the change in segment mix alone, combined to a 70 basis point headwind versus our guide, we view the performance of Q1 ahead of our expectations, excluding the impact of these two items. Although cost inflation was higher than anticipated, we respond with incremental price and see a path to continue to do so for the balance of the year. The quarter-over-quarter margin comparisons are expected to moderate as we go through the year, and we remain confident in our ability to drive margin expansion across both segments and for the company as a whole by the end of the year. Adjusted free cash flow was CAD 119 million, compared to CAD 117 million in the prior year period.
Note that the comparable period was only burdened by $42 million of cash interest, an outcome tied to refinancing activities around that time that skewed the cadence of cash interest payments during the individual quarters of 2021. Included in adjusted free cash flow reconciliation is approximately $90 million in proceeds received from additional asset disposals completed during the quarter. As you'll recall, our strategy with these disposals is to redeploy these proceeds into attractive organic investment opportunities within our core markets, effectively aiming towards a net CapEx number. The inflows and outflows don't happen in the same period, and therefore, timing differences and the net number may be elevated or lower in any given period.
We started this process last year and expect to be complete by the end of this year or early 2023, and we remain confident that we'll be in balance of a net CapEx number by the end of the program. We've also included our investments in joint ventures, which, at this point, effectively represent our capital contributions to RNG projects as a CapEx-like item in our free cash flow reconciliation. It appears our partners on the development of these projects may be able to deploy capital faster than originally anticipated, and as such, we may have a pull forward of 2023 dollars into 2022. This is an outcome we're thrilled with, and we'll be able to cover any incremental investment with disposal proceeds we received during the first quarter. As Patrick said, we deployed $67 million into 9 tuck-in acquisitions in the quarter.
After quarter end, we deployed incremental dollars into the 11 additional acquisitions, including the acquisition of Sprint Waste Services. A portion of Sprint's consideration was equity that served the dual purpose of including the Swinbanks in our shareholder base while continuing to demonstrate our commitment to leverage levels. The in-year revenue contribution for 2022 is expected to be approximately $200 million of the total anticipated contribution of $300 million acquired on an annualized basis. These amounts are before the impact of any divestitures during the year. As we guided, GFL Infrastructure was classified as held for sale at quarter end and was divested at the end of April. Consideration received was comprised of $224 million in cash and approximately 45% equity interest in GIP.
As a result of the transaction structure and GFL's historical approach to financing the acquisitions that constitute GFL Infrastructure, a charge was taken to reduce the carrying amount of the net assets divested from GFL's balance sheet to equal the proceeds received from the spin-off. Going forward, GFL's interest in GIP will be accounted for under the equity method of accounting. Regarding the $224 million cash proceeds received from the spin-off, these proceeds have been reinvested into M&A, and therefore will not be included within our adjusted free cash flow reconciliation as we go forward. Net leverage at quarter end improved slightly over Q4 2021. Pro forma for the post-quarter end M&A leverage slightly increases. We still expect the business to deliver by the end of the year, albeit at a tempered pace on account of M&A.
Finally, before turning the call back to Patrick for closing remarks, you'll see in our press release that we're raising our guidance for fiscal 2022. On this point, I want to clarify that we're not providing any updates with respect to our base business, the business for which we provided guidance at the beginning of the year. We're not seeing an increase on the base business as warranted because we expect that there'll be one, but we want the benefit of another quarter before we update our views there. The strength of the M&A in the beginning of the year solidifies that we should do better than the guidance by at least the incremental M&A contribution. We've updated revenue, adjusted EBITDA, and free cash flow for only that impact.
The updated amount is net impact of new M&A less the contribution or the lost contribution from the CAD 90 million of divested assets. With that, I will now turn the call back over to Patrick.
Again, this quarter, our more than 18,000 employees deserve all the credit for our exceptionally strong start to this year. The dedication and capabilities of this team couldn't make me prouder, and a big catalyst for our upcoming Investor Day is to showcase to you the exceptional talent that drives GFL. You've all heard me say it before, Luke and I may be the face of GFL for most of you, but we're fronting a best-in-class management team that continue to deliver our industry-leading results. We're excited for you to see firsthand the quality of Team Green and hope to see you all in New York later this month. I will now turn the call over to the operator to open the line for Q&A.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure you are unmuted locally. If you change your mind, please press star followed by two. Our first question is from Michael Hoffman of Stifel. Your line is now open. Please go ahead.
Thank you very much. Good morning, Patrick, Luke.
Morning, Michael.
If I could dig into growth and kind of walk through the pieces just to feel like I understand where we are cadence. Really good price. I get it. You made a comment in your script. What's the exit momentum? If you did 6.3 as an average, what did you exit the quarter? How do I think about what I'm entering 2Q with?
Yeah, Michael, a lot of our base Q1 surcharges and pricing happens on January 1, right? You really have a big January number that's starting that. If you looked at the guide on the normal cadence of what we were anticipating, you would have been ratably stepping down through the year just by virtue of the math. Now, as we commented and intend to do, you know, we think there's incremental pricing and surcharges that we need to go out and get after. If the normal cadence would have been a step down from the Q1 level to Q2 of sort of 50-70 basis points, I think the incremental price and surcharge that we're now going after is gonna temper that stepping down.
Still, the expectation today, absent, you know, material net new pricing, is going to be a step down, but at a lower cadence than we would have previously anticipated.
It's got a 6 handle on it or a very high 5, low 6?
I think that's exactly right with where we sit today, Michael.
Okay. Yeah. You know why we're both laughing. Volume 3.1 ex the MRF, I get that. You alluded a little bit to regional. Is there a little bit of a lag to the pace at which Solid Waste Canada is recovering? Not to be dismissive, but, you know, to perhaps look at the, hey, harsh winter, it's almost summer. I'll come back to the office in the fall. Instead, given that summers are so short up there, and therefore some of that leverage is still in front of us, so the 3.1 is even more powerful.
Yeah. I think in itself. I mean, you're bifurcating between the urban markets and the secondary markets. I think secondary markets are, you know, getting back to sort of family or, you know, normalized levels. I would say certainly in the, you know, large urban markets when you sort of look across Canada, I mean, the big eight primary markets when you're thinking about Vancouver, Edmonton, Calgary, Winnipeg, you know, Toronto, Ottawa, Montreal, Halifax. Those markets, you know, are still, I would say for the most part, you know, still way off pre-pandemic levels, and a lot of that's driven by exactly what you said, people getting back to offices and getting back to a normal work schedule. So listen, yeah. I mean, these results that we presented here are in the face of a full January shutdown in Canada again, right, with Omicron.
I think, you know, that took some time from February to start to come back online. Most restrictions came off at the end of March. Now you actually are back to fairly normal living for the most part in Canada. Restaurants, sporting events, et cetera, all happening. I think you're 100% right. As we fully get back over the summer into the fall, assuming no other waves and assuming the Canadian government moves off of their COVID zero strategy, which I think they've done, you know, we're gonna have some upside here on the volume side for sure. You're seeing that a lot on the environmental services side, obviously. We knew it was gonna come.
It was just a question of when, and, you know, it came with a vengeance in sort of late February, March, post the Omicron shutdown in January. I think we're positioned really well here, and we're pretty bullish about what that looks like. Obviously, we like to temper that expectation because we never know. I think we've said this five or six times now, but I think now we're on the other side of it and, you know, we've finally moved on.
Michael, the other point on that that I'd highlight is if you think about Q1 over Q1 2021 was negative 3.2% volume. Here we are printing the 3.1% positive ex MRF. If you think about Q2 of 2021, I think it was +5 or +5 and change. Arguably a much tougher comp there. Our original guide contemplated being close to flat by virtue of, you know, that tougher comp. I think for all the reasons Patrick just said, we see upside to that number. You know, because of the math on the comp, you know, I think it's going to be something less than what the print was in Q1.
Right. Fair enough, and that's very helpful. If I could touch on the M&A, 21 deals, you thought you'd do 25-30. I'm assuming of the 21, Sprint's big. Of the CAD 300 million of revenue is sort of CAD 200 million of it is Sprint, CAD 100 million of it is the other 20, and you even frame 13 of them are really little. Can you talk a little bit sort of about the sizes inside that portfolio that you've acquired? And then where are we. I'm imagining all the little ones. Are you fully integrated already and Sprint maybe takes 90 days? Can you talk about the integration?
Yeah. I think that's a good question because it's certainly important to unpack the M&A. I mean, if you look at the 21 deals, like you said, Sprint, large, will be fully integrated between now and sort of August first-ish. You know, that's the timeline we had laid out. I mean, obviously certain parts of it, accounting, HR, that stuff's moving a little quicker, but fully integrated sort of by August 1. Then you have 15 deals that were smaller than $10 million of enterprise value, right? Very small, just little regional tuck-ins, generally hauling only that tuck into our existing facilities, leverage our fixed cost base of, you know, transportation, recycling facilities, landfills. Then you had five between $10 million and $30 million.
That group of 20 acquisitions will be fully integrated over the next 30-60 days. They'll be fully on our platform, and, you know, it'll just run in the normal course. Nothing out of the norm, ordinary, very simple, you know, spread through, you know, 9 provinces in Canada, 26 states in the US. Not a lot for the team to take on.
Of the CAD 300 million, how much of it's U.S. versus Canada?
Well, I mean, of the total 300, you're
Yeah, yeah.
About 240 of it is in the U.S.
Okay. It's not shifting the mix at all as well.
No.
Lastly, on the RNG, there are so many developers now playing in this game. What are the chances since you've, I think wisely are partnering, what are the chances you can negotiate where you put less capital up but get equal or better economics?
That is certainly something that's available to us. I mean, you know, as the developers are sitting with a lot of capital on their balance sheets, they're looking at finding ways to differentiate themselves, and one way to differentiate themselves is by putting up capital. Obviously we have the asset, which is the gas, you know, they have to find a way other than just saying, "Hey, we know how to develop a site," to be able to move forward with that. I think you'll see some of that, as we share more details over the next couple of quarters. You know, reaffirming that, you know, $115 million-$125 million of gas in the base case.
Obviously, as the incremental sites come on, that number's gonna go up. You know, we think internally the opportunity there to probably grow that to somewhere between CAD 150 million and CAD 200 million. But you know, what we're communicating today is sort of CAD 115 million-CAD 125 million, which we feel we have in hand. That's using, you know, fairly conservative numbers on the actual sale of the gas. All of that is, you know, well on track. It's coming online. Listen, it's coming online 2023 and 2024. You know, we feel very comfortable in you know, what we previously communicated. There's been no changes, so all that will progress nicely over the course of the next sort of 12-18 months.
Okay. Last one for me. Given the data you shared on your script, Luke, it feels like there's about CAD 8 million of real cost impact from fuel. Will the fuel surcharge cover everything from this point forward, and then the rest of the year you'll work at making up the CAD 8 million?
Yeah. Mike, that's right for Q1. I think, you know, you do have a timing lag when you look at the spike in diesel. March was the majority of it, and then the pace at which you can sort of recover. When you peel it all back, I mean, we're viewing fuel as a meaningful opportunity for GFL. I think when you look at the industry, the mechanisms that are in place and tried, tested, and true for recovering increased fuel costs, they exist. We just have opportunity within our book to implement incremental quantum of that amongst our sort of customer base. Today, we're probably recovering 40%-50%. If you look at what best in class looks like, it's a much sort of higher number than that.
In addition to the actual fuel cost itself, like managing the consumption, I mean, if you look at our fuel cost, I think in the P&L was sort of a mid-5%-6% number. I think we have some of our peers in the industry that number is sub 3%. Now, that's a function of CNG and other sort of measures, but again, there are opportunities available to us. We foresee the fuel in totality, while there may be some noise from sort of quarter to quarter this year, is ultimately to be a great tailwind for GFL as we look towards, you know, what the profitability of this business can become. Yes, this year there's a bit of a go get that we're chasing after.
You know, if prices were to stay where they are today, you know, you probably have a $25 million-$35 million hole that you would have to get through incremental open market pricing or incremental surcharges that aren't there. Now, we're confident in our ability to go out and execute that. When we give our updated guide at Q2, we'll have incremental perspective on what we think any hole would be. I think on the dollars per side, you're covered. The question is how much of that margin impact can you overcome? We're feeling quite bullish about what our opportunity set looks like.
Okay. Thank you very much for taking the question. See you in Vegas next week.
Thanks, Michael.
Thanks, Michael.
Our next question is from Walter Spracklin of RBC Capital. Your line is now open. Please go ahead.
Yeah, thanks very much. Morning, everyone. So I just wanted to come back on volume, but a little bit further out and noted you know in the U.S., we're past the reopening part. To the point, Patrick, that you said it's behind us in Canada, it's way behind in the U.S. but still volume has accelerated. I asked that to one of your peers, and they mentioned that there was you know despite the view out there that volume for the industry is flat, the larger players have an opportunity to gain share through investment in technology and just simply offer better service. Is that something you ascribe to as well?
Can we see sustainably higher volume on a go-forward basis longer term by virtue of size and service compared to your smaller peers?
I think it's possible. I mean, I think you're seeing some uptick, particularly on the municipal side, you know, as new tenders come out and municipalities have had, you know, some interesting experiences with some of the smaller players that probably haven't performed and have had labor challenges and have had equipment challenges. You know, we're seeing some opportunities certainly on that side. Obviously on the IC&I side, there's still recoveries to come in both Canada and the U.S. I mean, I don't think we're fully recovered. Yes, I think there is some, certainly some opportunity. You know, what that level is, I mean, I don't think it really moves much in the models. You know, whether that's 50 basis points, whether that's 100 basis points, you know, I don't think it's a material needle mover.
Yes, I think there's opportunity certainly, you know, for the short term here that we're gonna see some elevated levels on the volume side.
Okay. On the Green Infrastructure Partners, obviously that's a great opportunity for you. There's a nice interest that your shareholders have in that partner in that venture. How will we follow the progress of that roll-up strategy? Is that something you'll be updating on? Where have they started out of the gate now, or is this something that's gonna ramp toward more toward the end of the year? What would be the cadence of the progress of that roll-up strategy, and how do you envision updating us on the success of that strategy?
Yeah. I think most likely we'll give semi-annual updates on just what the, you know, what's happening with the business. Probably we won't do it every quarter, but we'll, you know, have a brief update on a semi-annual basis. Obviously on an annual basis, we'll give you the sort of full update. Listen, there's a lot of opportunity in that business. There was a lot of opportunity when we owned it. Obviously, we chose to allocate capital to other opportunities we had within, you know, the environmental services space and our solid waste space, as you're seeing on the amount of dollars we're deploying. You know, I think it's gonna be a very favorable outcome for our shareholders. We're starting right away. I mean, the team is active.
We're in active dialogue on six opportunities in that LOB, and I think again, all of those things that were in the pipe that we didn't opt to allocate capital to because of all the opportunities we had and obviously being cognizant of leverage and other things, we opted not to deploy those dollars. Now in the private vehicle, those dollars will be deployed. Obviously as a private company, you know, there's different financing structures available to us through that. You know, would minimize the equity need within that business. Eventually, you know, like we said, we will take that business. Our plan is to take that business and create another public company out of it.
You know, we've put the wheels in motion already to start, you know, drafting prospectuses and other things. You know, it'll go on in the normal course.
Walter, just to clarify a point that Patrick made. You know, while the company is private, we'll be reporting under the equity method accounting. On a quarterly basis, there will be certain disclosure, but based on the materiality of that to GFL as a whole, it's probably not gonna give the color that folks might be looking for. What we've contemplated, what Patrick alluded to, is on a semi-annual basis, provide a more robust sort of update in one of our type investor decks, so individuals can get the information above and beyond the, you know, what the financial statement disclosure. Because while private, that disclosure unto itself probably won't provide all the color that folks are looking for.
Yeah. That's perfect. Just the final one here from me. Luke, you updated the guidance to reflect the kind of mark to market of the M&A activity to date, but you didn't, now the net debt guide for year-end, does that hold even with the updated M&A guidance? In other words, the fact that you didn't change it is it does consider and contemplate the M&A pace you've done, or is that net debt also to be updated in the next quarter or when you do your more formal update later on?
Yeah. Walter, the net debt number, the leverage will need to get updated to reflect the M&A. Recall the guide, I think, said de-leveraging of 50 basis points from 4.75 to 4.25 with no incremental M&A. To the extent there was incremental M&A, that would temper the pace of de-levering, although de-levering is still capable because of the power of the free cash flow. In light of the quantum of M&A that we've been able to achieve so early in the year, you know, I think this will be another outsized year of M&A, it looks like. With that, the ending leverage level will be different than that guide that contemplated no M&A, although, you know, we still are sort of committed to the overall direction from de-levering that we've communicated.
Again, when by the time we get to Q2 and we speak, we'll have better visibility on how the year as a whole plays out with some of those base business considerations. At that time, we'll refresh our views as to where we think year-end leverage could end.
Got it. Okay. That's all my questions. Thanks very much.
Thanks, Walter.
Thanks, Walter.
Our next question is from Kevin Chiang of CIBC. Your line is now open. Please go ahead.
Hi, thanks. Thanks for taking my question. I just have a question on pricing and more specifically, you know, when you acquire these businesses, like you made 21 acquisitions here to date. When you acquire these businesses, how, what's the delta between the pricing they're getting in the market versus, you know, maybe what you'd find acceptable? Like, are you finding that they're pricing similar to what you would be doing? Is there a negative delta there? If it is the latter, just how quickly can you reprice that book so that, you know, margins or, you know, the return on invested capital is where you want it to be kind of as soon as possible?
Sure. Yeah. I mean, typically the smaller, which I took the larger ones, you know, away. I think it's obviously bifurcated by customer base and what the contract structure is of the contracts that they have. You know, what history tells us and we tell most is that the lion's share of the smaller ones, particularly, you know, these call it 20 acquisitions that we did between, you know, CAD 1 million-CAD 30 million of enterprise value, typically don't have, you know, fuel escalators that work properly, typically don't have proper environmental surcharges. So there's definitely a, you know, good pricing opportunity within those books of business. You know, with our model obviously of, you know, integrating these within 30 days of close and putting them on our platform, that pricing will effectively take place within the first 60 days of the acquisition.
I mean, obviously it's subject to the contract, but generally, that's what we're seeing today, that there is a very large pricing opportunity within those books, you know, just based on bringing the surcharge levels to where they should be.
Okay. Actually that was my follow-on question. Luke, you've talked about kind of the opportunity there to kind of reset some of these surcharge programs. You know, where do you see the hole? Is it primarily from recent deals you've made and to the extent that those small players weren't, you know, proactively implementing these surcharges? Is that really where you see the opportunity or the parts of your legacy book that you think you can also clean up here, just given the inflationary environment?
Kevin, it's across both those buckets. I mean, we were talking, you know, pre-COVID about the latent pricing opportunity in the legacy book, and a big component of that was tied to the surcharge program. Then as Patrick just alluded to, some of the, you know, recent M&A, while the business books may be priced well, many don't have the surcharges at the levels to which is more sort of customary in the industry. I mean, when you look at what the art of the possible is here. I think there's some peers that are well established in this that cover dollar for dollar or maybe even more in certain respects. We're probably at a position today where we're covering 45-50 cents on the dollar and with a timing lag.
I think there's a real opportunity as we move forward to, you know, not reinvent the wheel, but simply just to get to the place where a lot of our peers already are. You know, I think that's a important consideration when you think about where the path for us as we go forward versus those that perhaps have already optimized, you know, their profitability in this regard.
Okay. That's helpful. Then just last one for me, I know you're not giving me or you'll update us on the second quarter. Can you remind us again, you know, when you set your base, your base outlook for 2022, you know, you're obviously tracking ahead on pricing. Can you remind us what you had assumed in terms of where the underlying recovery would be? I guess maybe this is more of a Canadian question because we were facing, you know, more challenging times back in January and February.
You know, are we through that recovery—like, what your base level of recovery assumption would have been as we sit here today and, you know, is there a way to level set, I guess, what you would have assumed in terms of, you know, I guess what the economy looked like post-Omicron, just to give us a sense of maybe what potential upside could be, I guess, when you update that base business?
Yeah. Kevin, I think, you know, certainly Q1 played out better than anticipated from a volume perspective in Canada. That was most prevalent in the environmental services segment, and we're delighted to see that recovery starting to materialize. I think it was Michael Hoffman earlier making the comment, "Well, Canada, now it's May. Is it summer? Should we therefore continue to sort of drag our feet till September?" That's the sort of one unknown that we have because as much as we had this momentum and clearly last night at the hockey game, people are out and enjoying, you know, the freedom once again. Is there going to continue to be just a delayed draw because, you know, we're finally entering into summer?
I think going back to my comment about our desire to reserve our update timing to when we speak in late July, you know, the next couple months will tell. We do think it is something better than what the guide was based on what we've seen thus far and what the next couple months look like. How much that upside may be, you know, remains to be seen. What I'd say for Q2 specifically, and I alluded to this earlier, originally because of the strength of Q2 2021, we thought of this Q2 as sort of flattish, where now I think there's a path for Q2 to be sort of plus 100-125 basis points, right, on volume. You know, that's the near term look.
How it plays out for the year as a whole, I think we're asking to wait until we come back in July, and we'll have better visibility at that time.
Well, we're feeling pretty bullish about what the rest of 2022 looks like from our perspective. I think it'll be a favorable outcome given the trends we're seeing today.
No, obviously, you guys, you know, starting to get off on a strong note there. Congrats on a good Q1, and I'll leave it there. Thank you.
Thanks.
Thank you.
Thanks Kevin.
Our next question is from Tyler Brown of Raymond James. Your line is now open. Please go ahead.
Hey, good morning, guys.
Good morning, Tyler.
You guys too. Hey, just wanna make sure that I've got it. Number one, Luke, to be crystal clear, only 40% of your book has a surcharge mechanism on it today?
Patrick alluded to this, Tyler. Sometimes what happens when you have a new sort of customer that's coming on that has no surcharge at all, we'll introduce a surcharge, but it just starts at a fixed amount, right? A low fixed amount to recover, and it doesn't properly have the flex mechanism. Earlier days and all through 2021, you saw we were reporting price and surcharges together as a number because much of that we were going out and getting that initial base level surcharge was effectively just like a base PI. What we now need to do, and, you know, I give credit to Greg Yorston and the team that are actively doing this, is now pivoting those to the proper flex model that you recover incremental as the price moves. The starting point is getting something in there, and then you move from there.
When you look at it all today, we're recovering 45 cents on the dollar by virtue of those in the solid waste business alone. You know, our environmental services has a bit of a natural sort of, hedge. You know, that's where the opportunity set lies. It's to now take a bunch of those surcharges that exist and get them to the proper sort of, you know, ones that pivot in response to market pricing.
Right. I'm gonna wildly oversimplify this, but isn't this a pretty easy quick fix? I mean, this is a very common practice.
Yes.
Couldn't you just kind of code it in pretty quickly?
Yes. It's you know, I think you have wildly oversimplified it, but yes. You know, that's why when I'm talking about the opportunity here, it's not like we need to go out and do something. As you said, this is a common practice. It just you know, takes some coordination to get that all sort of in place. You know, that is what the effort. I think the pace at which we'll be able to pivot and recover incremental dollars will be impressive to folks. You know, that's why let's see how we can you know, execute over the next couple of months and then hopefully come back with some good news when we speak in the near you know, next couple of months.
Okay. That's helpful. Then on GIP, I just wanna make sure that I have it all here. Number one, that transaction has fully closed. That happened in April. You got CAD 225 million for your contribution, and you retain about a 45% stake in the new entity. Is all that correct?
Correct.
Now that GIP is fully funded and that Coco deal is closed, what is the pro forma EBITDA? More importantly, what is the pro forma leverage so that we can kind of ascribe value back based on whatever multiple we think is appropriate, et cetera, et cetera?
It's the round numbers are CAD 100 million of EBITDA on a pro forma basis for 2022. Pro forma leverage on the business today is roughly four...
Well, you could pick, I mean.
Hi, folks.
Yeah. I would say mid -4s.
Mid-4s of EBITDA.
Leverage, right?
Yes.
We'll just call it roughly, there's like $850 million-$900 million of debt on it today.
Okay. All right. That's extremely helpful. Luke, can you just kind of give the high level?
Tyler, if you look at the
Yeah.
If you look at the industry, I mean, those things trade anywhere between sort of, you know, 10-14 times, depending on what the asset is and where it is. This business, you know, on a pro forma basis, will be the gold standard in terms of industry-leading margin profile, industry-leading free cash flow profile for that business. You know, this is a, you know, mid- to high-teens margin business, when the industry is like at sort of, you know, 10%-13% margin.
Okay.
There's a significant amount of M&A opportunity that's gonna come behind that.
Yeah. Okay. All right. Yeah. Updates will be appreciated as time goes on. My last one here, just Luke, can you-
Yeah.
Kind of give the high level pieces through the solid waste margin walk from 31% to 29.9%? Just thinking about things like fuel, M&A, commodities, et cetera.
Yeah. Tyler, the walk this quarter is a little unique just based on what I'd call the anomalous margin profile of the prior period, right? For the reasons I articulated in the prepared notes, you know, the 31% was arguably 150 basis points higher than it ought to be when you think about the normal seasonality cadence. That was a whole confluence of factors that benefited the margin profile of the Q1 2021. If you think about it in the context that there's this sort of roughly 150 basis points of this anomaly component, you then walk through, and you have 105 basis point drag from fuel pricing. You're offsetting that by commodities to the tune of sort of roughly 85 basis points.
You have a sort of, I think we were saying 30 basis point drag from acquisitions. Right. If you just look at those three pieces, you then, you know, are left with this delta of what I'd call the normal course underlying margin expansion, you know, from the overall operating leverage and pricing strategies of the business.
Yeah, that's kind of my point. At a core level, margins were slightly up.
Yeah. I think, you know, in this inflationary environment, to be able to do that is a real testament. You know, I'd say it's a testament to the industry. Because again, like I know everyone's reporting, and there might be some slight sort of pressure, but overall, I think it's a testament that the industry and the pricing available to it can more than cover the cost inflation drive margin. There may be a temporary timing difference in a quarter when fuel runs up in the last 30 days, you know, to sky-high levels. On balance, you know, when you peel it all back, the operating model and the operating leverage is there, driving underlying margin expansion by the strength and quality of pricing that's available.
Okay, perfect. Appreciate the time, guys.
Thanks, Tyler.
Thanks, Tyler.
Our next question is from Jerry Revich of Goldman Sachs. Your line is now open. Please go ahead.
Yes. Hi, good morning, everyone.
Hi, Jerry.
Hi, Jerry.
Hi. I'm wondering if you could just expand on your comments, Luke, on the landfill gas investments being ahead of plan. That's nice to hear. I think you had spoke about one plant starting up in the first quarter of 2023, another one in the second quarter. You know, what's the updated timeline and, you know, how quickly do we get to the full earnings run rate in those operations once they do commence?
Yeah. Jerry, I think the, you know, original guide, you can contemplate that we said the capital deployment would be mostly in 2023. It looks like, you know, the pace at which these guys are moving, there'll be more opportunity to deploy that capital earlier in 2022. If there was originally gonna be $25 million, that number could be, you know, upwards of, you know, $75 million-$100 million within this year. Now, that incremental CapEx with the incremental $90 million proceeds of disposal are still covered from a net CapEx number for this year, so no change there, but would just be sort of accelerating that path. Your comment about, you know, the first projects coming online in the first half of 2023, that remains accurate where we sit today.
I suggested that everyone just think about that as coming online late 2023, just so we, you know, build in a little bit of buffer. I think where we sit, there's a path for that to be earlier in the year, and we'll therefore enjoy the benefit of that free cash flow within 2023 as opposed to it just being a 2024 number.
Yeah. I mean, we obviously targeted the biggest, you know, SCFM sites today, you know, to come online first. Those, the plan is to have those sort of up and online by April. From their perspective, there's like a three-month commissioning, you know, timeframe that gets them, you know, fully sort of optimized in their models by sort of, mid to late June.
Okay. Super. And then can you update us with your thoughts on spot market versus contract rates? You know, OPAL Fuels spoke about having some European offtake agreements in the mid-30s which was nice to hear. I'm wondering how the offtake market's developing in your view. You know, it's been a nice move in the spot market for both RINs and Henry Hub gas prices since you originally made the investment decision. Any thoughts to what you intend to hedge versus term out?
Yeah. I mean, again, we're not an energy company, so we're still of the mindset that we are going to enter into some long-term offtake agreements. You know, we're being a little bit patient at the moment, just given the, you know, material moves in the voluntary market. What I mean by the voluntary market is really just sort of large corporations that are focused on ESG type initiatives that are looking to significantly reduce their carbon footprints. You know, we're in negotiations and in talks with a lot of the voluntary market. You know, we'll float a certain amount, so we'll have some volatility with the RINs.
You know, our model still internally is to fix 60%-70% of the revenue stream coming out of those facilities, so we don't get the quarter-to-quarter volatility, and have to explain to investors about why our cash flow estimates, etc., changed based on sort of where the RINs are. I mean, this is a material amount of money. You know, like I said, we said with the initial ones, there's $115 million-$125 million of incremental free cash flow. The reality is when you look at all the sites combined, that number can grow to easily $150 million-$200 million.
You know, that's a material amount of money, which from our perspective, you know, you buy this for the stability of the industry, not to be energy traders. We plan on locking in a significant amount of that gas in terms of long-term contracts.
Patrick, is that market developing? You know, I think it's been in the early stages of ramping at least people's willingness to take long-term deals. Can you comment on how that market's developing?
Yeah, the market's I mean, it's changed so much even in the last 8-9 months since we started talking about it, right? I mean, I think from our perspective, the rates have moved up, which they should have obviously as RINs moved up. You know, when you look at what RINs are forecasted for next year, those forecasts come down a bit, but that doesn't change much. It's really just again, protecting yourself in the downside and sharing in some of the upside. You know, the way these new longer term agreements are, you know, we'll have a floor price, but then we will share in the upside beyond, you know, a certain price, and that's what's being negotiated today.
Super. Yeah, just to shift gears, Luke, right now with your accounting systems, you have really good visibility on, you know, inflation on a real-time basis. I'm wondering if you can comment on what was the inflation cadence year-to-date and any differences between US and Canada and, you know, any signs of a potential moderation based on what you're hearing from your purchasing teams outside of diesel of course.
Yeah. I mean, obviously the diesel component, Jerry, has really skewed everyone in sort of Q1. If you take that out of the mix, I mean, at the end of the day, labor is really what's sort of driving. As we've said throughout last year and remains true today, we've seen it less in Canada versus U.S. as much as the secondary market versus the primary market, right? In the dense urban areas, we've seen greater wage inflation than we have in our sort of secondary markets. I think that's tempered the impacts on our business versus, you know, what it otherwise may have been. As expected, Q1 was a high number. I think all in it was low 6s in terms of the wage inflation. That is based on the, you know, comp of Q1 2021.
I think more telling is the rate of acceleration sequentially from the prior quarter, which was, you know, sub 50 basis points, right? If you look throughout 2021 quarter-over-quarter, you had 200-300 basis point increases as we were feeling the pinch, and now we're starting to lap all of that. I think Q1 was the peak. Q2 will still be elevated, but as you get into Q3 and beyond, I think at the current pace, you're gonna see those sequential decreases you know, significantly reduce and therefore be in a path where, you know, we could end the year where, you know, probably a little bit higher. If the original guide for the year was sort of 4%, low 4s, you're probably a little bit higher than that, but you're gonna see the pricing respond to, again, more than cover.
Yeah. Appreciate the discussion. Thanks.
Thank you.
Thanks.
Our next question is from Hamzah Mazari of Jefferies. Your line is now open. Please go ahead.
Hi, this is [audible] filling for Hamzah. Could you just comment, you know, on specifically how much of your book of business is CPI indexed and, you know, sort of how those contracts are structured and then what CPI book is running, you know, versus open market?
Yeah. About $1.1 billion-$1.2 billion of the book of business in terms of revenue is tied to CPI linked. That's spread across just 800-900 contracts, most of which are in residential collection. We also have other post-collection ones linked to that. The resets of that book of business happened roughly 40%-45% in Q1 2025, 30% in Q3, and then the balance is sort of spread between Q2 and Q4. The reset mechanisms can be based on a point in time. Many of them are based on readings sometime before the contract reset. A January 1 pricing may actually be based on what the levels were at June 30 of the prior year, for example.
That's often set up like that way, so municipalities have visibility into what their sort of upcoming budgets look like. You think about that book normally running at a sort of blended sort of 2% number. You're seeing that book today more at a sort of 4%-5% number. Certain contracts are now resetting that are tied to, you know, meaningful components on diesel at much higher rates than that. A lot of it is still lagging the current inflationary environment. I think in reality, the real benefit on that book of business will only be realized in earnest by 2023. We're happy with where it's going. There's still a lag, but we just view that as opportunity and upside as we go forward from here.
Okay. Got it, that's helpful. Could you just comment a bit on, you know, labor turnover and like sort of what you're seeing there, I guess, you know, the assumption on labor inflation for the year?
Yeah. The labor turnover in Q1, and you got to remember there's this meaningful seasonality component of what we're seeing. Versus the comps of last year, there's been meaningful improvements for sure. You know, I think Q2 and Q3 is really where the story will be told. I think the material friction that was being experienced in the sort of peak of last year has definitely subsided. We're going into the busiest season with a much better turnover rate and a complement of drivers that we think, you know, positions us far better for success than what we experienced in the second half of last year. You know, as we've said, it's really sort of May through July that will really sort of tell the tale.
We're feeling good, but when we come back and speak to you at the end of Q2, we'll have a sort of better perspective on exactly how it's playing out. On the labor inflation rate, you know, I think I just provided that color in the previous question.
Got it. Thank you.
Thank you.
We have no further questions, so I will hand back to our hosts for their closing remarks.
Well, thanks everyone for joining the call. I'm looking forward to seeing everybody at Investor Day in New York. For those not attending, look forward to speaking to you after our second quarter. Thanks very much for joining.
This concludes today's call. Thank you for joining. You may now disconnect.