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GFL Environmental Inc
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Hello, everyone, and a warm welcome to the GFL Environmental Third Quarter Earnings Call. My name is [ Myrna ], and I'll be coordinating the call today. [Operator Instructions] With that, I have the pleasure of handing over to your host, Founder and CEO of GFL Environmental, Patrick Dovigi. Please go ahead, Patrick.
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 third quarter and updating our outlook for the remainder of the year. I'm joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into 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. We have prepared a presentation to accompany this call that is also 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, who will start off on Page 3 of the presentation.
Thank you, Luke. Once again, the tremendous strength of our business and the effectiveness of our growth strategy drove performance in excess of expectations. The capabilities of the leading asset base we've assembled, coupled with our rigorous discipline around capital deployment, continue to drive exceptional high-quality growth that we believe will lead to industry-leading free cash flow generation and equity value creation. The headline numbers for the quarter were revenue was up 43%, adjusted EBITDA up 48%, solid waste adjusted EBITDA margins up 110 basis points. Even more impressive than the headline numbers on their own are the underlying driving factors. Solid waste pricing continued to accelerate and was 4.3% for the quarter, 20 basis points ahead of plan. As we said in Q2, our proactive approach to pricing earlier in the year has allowed us to stay ahead of the broad-based contemplation we're seeing in the business. I know there's a lot of talk about labor pressures in the market, and while that's clearly real happening, our job is to manage through that. A couple of things that we think have helped us do our job. The majority of our operations are in secondary markets. And our experience is that the labor pressures in those markets have not been as acute as they have in urban areas and wage inflation in those markets, especially in Canada. That is really just one of -- was one large secondary market, except for a few pockets which has been lower. Also, our brand. We cannot underestimate in today's climate that the employees want to be part of a company like GFL. So we find that we are able to attract a strong pool of talent to our brand. At the same time, operating in the current labor market is more expensive, and that's where pricing has come in. We proactively used pricing to cover the incremental cost pressures. And while our results to date have been exceptional, we're even more encouraged by the pricing opportunities we see on the horizon, particularly as it relates to CPI-linked revenue resets and the return of pricing on attractive commercial volume in many of our slower to reopen Canadian markets. Solid waste volume growth was also ahead of plan at 2.4%. U.S. volumes were high 2s with particular strength in our Midwest markets. Canadian volumes saw a 2% increase despite ongoing restrictions in many markets through most of Q3. We think these delayed Canadian dynamics should set up with a tailwind in 2022. As the remaining restrictions are lifted, we anticipate realizing volume recoveries in Canada like we saw in the U.S. throughout 2021. Commodity values once again provided a tailwind. And the overall strength of our recycling business, coupled with changing regulatory landscape, continues to support our favorable outlook on the opportunity set within this line of business. Solid waste adjusted EBITDA margins were 31.7%, a 110 basis point increase over the prior period despite a drag from recent M&A. Luke will walk through the components of the margin walk, but substantially all the margin expansion is organic. Realizing pricing in excess of our internal cost inflation, focus on cost controls, productivity and the real operating leverage from our tuck-in M&A program continues to drive margin. And we remain optimistic on the speed which we will be able to realize our stated margin targets. Finally, liquid and infrastructure continued to show recovery during the quarter despite the slower-than-anticipated reopening activity in Canada, where the bulk of this revenue is derived. Both segments had significant sequential margin expansion over the second quarter as we saw operating leverage associated with the volume recovery. The earlier-than-anticipated closing of tariff years significantly increased liquid waste revenue during the quarter. But as expected, it was realized at a dilutive adjusted EBITDA margin, offsetting the substantial organic margin expansion in the base business. The third quarter also saw us continue to pursue other strategies for value creation. Year-to-date, we deployed approximately $2.2 billion into 37 acquisitions to acquire approximately $735 million in annualized revenues, more than 2.5x the amount we suggested at the beginning of the year. Our pipeline continues to be robust, and incremental transactions will likely be completed prior to year-end. We think our approach to M&A continues to establish us as an acquirer of choice in certain markets. And when coupled with our rigorous focus on returns on invested capital, this will lead to outsized value creation opportunities as we move into the future. We also continued our capital redeployment strategy, realizing an incremental $95 million of proceeds from the disposal of noncore low contribution solid waste assets in the Midwest, bringing total process -- proceeds realized for the year to approximately $155 million, nearly twice our stated target at the beginning of the year. We've identified a whole host of high-return opportunities to deploy this capital and anticipate being able to reinvest more than half of these proceeds before year-end. Our strategy for deploying this capital includes investments that support our sustainability strategy, like advanced sorting technology that we are installing at our MRFs that drive operating efficiencies and improve material recovery rates. Our continuing investments in automated side loaders and onboard safe driving technologies support our strategies to attract and retain drivers. These are early days for many of these investments, and we expect to see them paying off longer term and achieving our targeted margin expansion. And finally, we continue to work on our balance sheet. Our highly successful notes offering and 50 basis point rate improvement on our credit facility during the quarter demonstrates the continued support we have from our institutional debt investors, a group whose trust we've built over many years of successful execution. We will continue to leverage our ever-improving credit quality to reduce our cost of capital, drive incremental free cash flow and create equity value. When you put it all together, the quality of the results for the quarter, combined with our favorable outlook, support us raising our guidance for the second time this year. I'll pass it to Luke, who will walk through details, but our guidance for revenue, adjusted EBITDA and adjusted free cash flow are all being raised. And although we're going to wait until February before providing 2022 guidance, effectively the launch-off point for 2022 also increases and sets us up for revenue growth of better than 15% and adjusted free cash flow growth well in excess of 20%. I will now pass the call over to Luke, who will walk you through the details of the financial results. And then I'll share some closing perspectives before we wrap up and turn it over back to the operator for questions.
Thanks, Patrick. I'll pick up on Page 4 of the presentation. Revenue increased over 43% compared to the prior year period. This was ahead of our July guidance and driven by outperformance across solid waste pricing, volume, commodity prices and contribution from M&A. Infrastructure organic growth turned positive for the first time since the second quarter of 2020. And liquid waste benefited from the Terrapure acquisition effectively closing 2 months earlier than anticipated. Similar to our comments on the recovery of solid waste volumes in Canada, we expect improving strength in the recovery of both of these segments as restrictions in Canada continue to ease. On Page 5, you'll see adjusted EBITDA for Q3 of $415.8 million at a margin of 28%, an increase of 90 basis points over the prior period and up 110 basis points sequentially over Q2. We're particularly pleased with this result when considering the backdrop of rising labor and input cost inflation as well as the reintroduction of certain discretionary costs such as travel and entertainment, incentive compensation and certain professional fees that were all a headwind to margin. Solid waste margins of 31.7% were 110 basis points ahead of the prior comparable period and 80 basis points up sequentially over Q2. 100 basis points of the margin expansion was organic and driven by our pricing programs and operating leverage and volume recovery. Commodity pricing was a 90 basis point tailwind, but this was substantially offset by a 70 basis point drag from fuel prices and a 10 basis point headwind from M&A. Liquid waste margins increased 50 basis points sequentially over Q2 and nearly 300 basis points organically over the prior year period before considering the margin dilutive impact of the contribution from Terrapure in the quarter. Over 85% of Terrapure revenue is currently reported in our liquid waste segment with allocations between the segments to be revised in 2022. Terrapure's liquid waste revenue came in just below mid-20s margin, but we continue to see a path to bring that up to the segment average. Infrastructure and soil margins improved 190 basis points sequentially from Q2 and 90 basis points period-over-period as volumes turn positive, and we're able to leverage the relatively fixed cost structure of the segment. On Page 6, you can see adjusted cash flow from operating activities of $250 million, inclusive of $95 million of proceeds from our asset sale. Once again, we're including these excess proceeds in our adjusted free cash flow rec as we intend to redeploy most of these dollars before the end of the year. And therefore, these proceeds or a portion thereof will be used to offset the over and above growth capital we expect to deploy before year-end. While there will be some lumpiness from quarter-to-quarter, the annual free cash flow reconciliation will include a normalized level of capital expenditures for the business. During the quarter, we've normalized for $35 million of working capital related to recent M&A, which we believe is better characterized as part of the purchase price. Note that an inaugural holiday in Canada on September 30 impacted working capital by approximately $15 million as compared to the prior year. Turning to Page 7. As previously announced, we were once again successful in accessing the debt capital markets to raise capital at attractive coupons and amended our credit facility to, among other things, tighten the borrowing rate by 50 basis points, all consistent with our strategy of leveraging our ever-improving credit quality to drive the lower cost of debt. During the quarter, we deployed approximately $1.1 billion into 14 acquisitions. And post quarter end, we deployed an incremental $900 million for another 8 acquisitions. Net of the contribution of one business sold as part of a divestiture, we expect to generate annualized revenues of approximately $735 million from these acquisitions. We anticipate approximately $450 million of this rolling over into 2022, and this amount would further increase to the extent there's any incremental M&A completed before the end of the year. As anticipated, net leverage at quarter end modestly stepped up with the acquisition of Terrapure. The cash on hand at quarter end was largely used to fund the M&A in October, and we continue to have ample liquidity to support our growth goals. Additionally, during the quarter, we entered a definitive agreement, which gives us the right to issue up to an aggregate amount of USD 300 million of preferred shares before the end of the year. We will draw on this equity commitment as needed to allow us to continue executing our growth strategy while maintaining our previously stated leverage targets. On Page 8, we're showing the drivers of our updated guidance. For the year, we're now expecting revenue of $5.4 billion, a $150 million increase over the guidance we provided in July when measuring midpoint to midpoint. The components are laid out on the page, but the growth comes from price, volume and M&A contribution, all exceeding our previously communicated expectations. For the year, we're now expecting pricing at 4.25 and volume in the mid-2s, both about 25 basis points higher than our July guidance and an encouraging launch-off point for 2022. From this revenue, we expect adjusted EBITDA of $1,440 million to $1,450 million, a $37.5 million increase over July's guidance, again, measured midpoint to midpoint. In terms of CapEx, recall the guide at the beginning of the year was a base CapEx of $510 million. With the first half growth of the business, we increased this to $525 million in July and are now increasing to $540 million, in line with the outsized growth of the business. On top of this number, we guided on the opportunity to redeploy proceeds from asset disposals into attractive growth opportunities. Our original guidance for this opportunity was $50 million to $100 million of incremental spend. As of today, we think we'll be at the high end or more of this range, a terrific outcome as this investment will drive high-quality incremental growth in 2022. Now all of this incremental spend was being covered by the proceeds from asset disposals. So although there would be a gross CapEx number of $640 million, the $540 million plus $100 million, the net CapEx would remain at $540 million. We have been extremely successful in our portfolio rationalization program, realizing $170 million of proceeds to date from asset disposals and asset divestitures with the possibility to realize more before the year is done. Including 100% of these proceeds in our year-end adjusted free cash flow reconciliation would yield a net CapEx number of $470 million and effectively overstate our free cash flow for the year. So at year-end, we will include an adjustment to exclude excess proceeds from disposal and normalize the net CapEx number to somewhere around $540 million. On working capital, the new guide has us going to a use of approximately $35 million to $40 million as compared to nil in the original July guide. This is over and above the M&A-related working capital investment. And all of this yields an adjusted free cash flow of $525 million to $530 million, a $10 million to $15 million increase over July's guide despite the incremental $50 million investment in CapEx and working capital. We're not going to specifically walk through Q4, but you can do the math and see the implied results at the midpoint is approximately $1.415 billion of revenue, a 26.1% adjusted EBITDA margin, a 90 basis point increase over the prior year. This is based on pricing of low 4s and volume of 0.5 point to 1 point, both above our July guidance. From a modeling perspective, I think many continue to underestimate the expensive seasonality in the business. And therefore, there's a recalibration of dollars between Q3 and Q4. For Q4 implied free cash flow, the normalized CapEx dynamic I just spoke to complicates the simple full year less year-to-date math. The Q3 year-to-date adjusted free cash flow number of $512 million is inclusive of excess proceeds from disposal. Excluding $70 million of these proceeds from the $512 million and then bridge into the full year number will give a better picture of Q4 on a stand-alone basis. And lastly, while not going -- while we're not going to provide our guidance for 2022 until we meet again in February, where we're already sitting with nearly 8.5% top line growth from rollover, and we anticipate the constructive macro backdrop to support organic price and volume of better than 6. So as Patrick mentioned, there's a clear path to 15% plus top line growth before considering anything incremental to what we have today. With that, I will turn the call back over to Patrick.
Thanks, Luke. As we continue to deliver on the road map, we've laid out for the business since the IPO, we are also focused on advancing our sustainability initiatives. Consistent with the commitment that we made in Q1 last year to improve the diversity of our Board, we announced today that our second female Director, Jessica McDonald, will be joining the Board as our seventh Independent Director in February of next year. Jessica's appointment to our Board is part of our broader commitment to promote greater participation of women across our organization through our Women in Waste program. With the COP26 Summit this week focusing the world's attention on the need to move to a lower carbon future, we have never been better positioned to provide the services that will help us achieve that goal, including through our recycling initiatives and the development of renewable natural gas projects at our landfill. On our last call, we told you that we had set up GFL Renewables as our vehicle to unlock significant value in landfill gas to energy projects and to accelerate the conversion of our fleet to CNG. We continue to make significant progress on this initiative and in the quarter, expect to announce projects at a number of our landfills prior to year-end. Demonstrating our growth recognition as a leader in sustainability, next week, GFL will be participating in Vision 2045 to share our vision for a greener future with 50 other business leaders from around the world. All of GFL achievements that Luke and I have talked about today are a reflection of the incredible hard work and dedication of all of our employees. It is our employees' dedication and passion to achieve our vision to be green for life that allows us to continue to deliver quarter-over-quarter on our commitment to build long-term value for all of our stakeholders. I will now turn the call over to the operator to open up the line for questions.
[Operator Instructions] Our first question comes from Tyler Brown of Raymond James.
Can you guys hear me? Sorry. Hey, just real quick, can you guys just reset us on how much of your new $5.4 billion revenue base is tied to CPI? And just any color on how that breaks down between the U.S. and Canada?
Yes. So round numbers, Tyler, if you think today, there's about $1 billion now that all the recent M&A is sort of rolling into base, that's what a CPI linked. And that's roughly 90 -- 85%, 90% is in your residential line, and the rest is on post collection. So roughly $1 billion that about 40% of which will reset in Q1 then Q2 is pretty low, sort of 10%. And then Q3 is another big reset. So from a cadence through the year, that's how you think about the timing of which that hits. And then when you look, that's about roughly, I'd say, 75% in the U.S. and balance of Canada, maybe 70-30.
Okay. Okay. Yes, very helpful. And then I know it's a little early. Pricing has been strong. I think it accelerated sequentially. But when you think about that [ '22 ] 6% price plus volume organic revenue expectation, how do you kind of envision that being composed? Is it just 4% price, 2% volume? Or does it feel that the price could be a bigger part of that mix?
I mean, pre-COVID, as you know, we were saying where the sort of 3.5% to 4% price, and we're going to migrate to the top end of the range. I think when you look at the backdrop today and with CPI, I mean, if you're moving that $1 billion from the typical sort of 2%, you're moving that up to 3, 4, somewhere higher with a little bit of incremental support on the commercial and post-collection lines, I think you can add 100 basis points to that pricing number pretty easy. So maybe you're now in that sort of 4.5 to 5 range going into next year. So I think as the quarter and year plays out and we see those resets and the overall continued acceleration of pricing, we'll have a better view in February. But I think it's something better than 4. And just how much better, you'll have to give us a couple of months before we come back to you.
Okay. All right. I can do that. And then just my last one here. So Patrick, I mean, obviously, acquiring revenues has been a big part of the story, but it is interesting to see all the divestitures. Obviously, it happens time to time for everybody. But how should we think about your divestiture program? Is this something that's a bit more one-off? Or do you have a process where we're going to see this kind of year in and year out and just kind of churning the assets? I'm just kind of curious big picture there.
No. I mean, I think we identified when we've acquired some of these businesses of market that I think we're not overly strategic to us. And these assets were the higher and better use for some local players that could do something better with the asset than I think effectively we could. I mean, from our perspective, if it doesn't work strategically, we're not going to go into specific market to sort of build it. And I'm more focused on -- if you look at where we've divested these assets, it's been largely sort of around urban market, where there's a lot of competition. And in some of these markets, I don't think the market needs another -- needs a fifth player, right? If you got 3 of the large strategic plus a big regional player, I mean, what's GFL going to add to that? So I think it just makes sense for us to exit and focus those dollars and redeploy them into a certain market. I think by and large, I think over the course of the next 12 months, we should have the entire book rationalized to a point where we feel comfortable with the base that we have.
Our next question comes from Walter Spracklin of RBC Capital Markets.
Perhaps we could start. I think it was Luke, maybe Patrick that mentioned Terrapure on the margins of 20%, certainly lower than what you've done before. But you indicated that you hope to get it up to the average. Can you give us some indication as to what type of initiatives are you going to do to get that up to the average and how quickly that would occur? Do you think it will be front-end loaded or whether it's a little longer duration?
Yes. So Walter, it's Luke speaking. The comment I made was specifically talking about the liquid waste walk. So recall, Terrapure is part liquid waste, part solid. The solid components are extremely high margin. And so the underwritten pro forma for Terrapure, was about a 28% margin. When you break that out, you had a liquid business, a large landfill that was sort of high 30s, pushing 40. And then the liquid waste component was sort of lower 20s. So the comment in the prepared remarks was that the liquid waste revenue came in at sort of low -- just below mid-20s, which is right in line with expectation. And the solid waste, which is in another 15% of revenues in our solid segment, that came in at the sort of high 30s. And that was actually accretive to Canadian solid waste margins. So Terrapure is right in line with where we anticipated being. I think the liquid waste component of the business as we rationalize those facilities and harvest the synergies and opportunities we expected, you'll see the Terrapure liquid component become neutral to accretive to our existing liquid waste segment. And the solid component is already accretive.
Okay. That's great. And in terms of your capital plan, obviously, you've done a lot of acquisitions so far. And you're getting a better sense of the condition of some of the assets you're buying. Can you give us a bit of a peek into next year's capital program? Is there any reason based on now that you've had a chance to review that we would see any major change in cadence for CapEx in 2022? Or would you consider it kind of consistent with the growth in your business and the growth in the acquisitions that you've seen historically?
I think we can -- Walter, it will be consistent with what you've seen this year. I mean, we'll look opportunistically as we talked about the question of Tyler's, there's some proceeds, continue to rationalization, take those dollars and redeploy them into markets where we see opportunities to develop some post-collection operations or conversion to CNG or redeploying those capitals into new municipal contracts throughout the Midwest in some of these business units where we only acquired sort of commercial front-load businesses in landfills. So nothing out of the ordinary, and I think very consistent with what you saw this year.
Okay. Perfect. And just last question here. When we look at free cash flow and the cadence there, we kind of looked at high 600s into next year. Anything that would change that now that we're a little closer to 2022? Or is that the kind of ballpark that you'd indicated before, is that the kind of ballpark that we should be considering for next year?
Yes. I think that's the right zip code. I mean, I think from our expectations of today, most likely, I think from our perspective, we'll be working on making that number better. But I think from where we sit today, that's the right zip code to be.
That's awesome. Okay. Congrats on a great quarter, guys.
Thanks, Walter.
Our next question today comes from Hamzah Mazari of Jefferies.
My first question is just on the renewables and landfill, the gas strategy. Just remind us how big that could be again? I think you quantified it previously, but maybe some more detail. Are these equity stakes you're going to take? Are you going to own the whole thing? How do the projects ramp? Is it all RIN exposure or fixed price offtake? Maybe it's too early there to talk about, but just talk about -- just a little more detail around that strategy.
Yes. So I think we've mentioned previously, Hamzah, that we have about 18 landfills that will perform part of this program. Our initial focus is on the first 5 to 6. Our expectation is that we will sign definitive agreements on 5 of them prior to year-end and then on the sixth one sometime in early Q1. I think when you look at it, the number we put out initially was sort of in the $75 million to $100 million of free cash flow that will get generated from the 18 projects. I think that number is conservative from what we're seeing today. We'll stick by that. But I think from our perspective, it is. I think we expect we'll probably sign right around this time. It's taken a little bit longer. I mean, these are 20-year agreements that we're committing to. And I think we're just taking the time to make sure we effectively get them right. I think to your question on what happens with the fuel, I mean, as everyone knows, this is an evolving market, and I think all of us as landfill operators have a goal at the moment. This is a fuel that everybody wants and historically, a big focus on the transportation market to sell the gas into, which is where the RINs played a big part of it. But I also think there's another large part of the market that's growing, which is supplying permanent sort of industrial, commercial, manufacturing facilities, right? And a lot of these factories, et cetera, that are looking for their own ESG-type initiatives are looking for long-term supply agreements. And I think the delay in us is just finding the happy medium of the supply agreements and making sure that we lock them in and lock them in at the right price because we're going to be stuck with them for 20-plus years. But I think there's upside to the number we've given you in the past. I think we structured them very simply. We're going to get a normal royalty off the top like any other gas provider, but we also are sharing -- we're doing 50-50 joint venture projects. And we're going to share in [indiscernible] these entities. So we're making the royalty off the top but then sharing in the profitability of the entities below.
Great. And my follow-up question is really around operating leverage. You talked about labor inflation. You managed through that pretty well with price adjustments. But maybe if you could talk about labor availability. There's been a lot of service businesses where labor availability has been an issue to capture demand or it's hurt operating leverage. So as you look forward, how are you going to manage through labor availability issues in some of your markets? Maybe some of the secondary markets is less of a concern. But just talk through that. And then can you continue to adjust pricing as inflation ramps?
Yes. There's a lot of questions in there. I think where we sit today, I think yes, labor issues and challenges are definitely real. I think when you talk about pricing and labor, I think it's all sort of part of the same conversation because at the end of the day, our business is very simple. We're paid to pick up waste. If we don't pick it up, we can't put the price increases, and we're bringing in a lot of churn in that book of business, right? So I think they're all sort of tied together. But if you pick up the waste, you can generally charge whatever you want. If you think about subscription residential or commercial, a customer doesn't really care whether they're paying $17 or $18 a month or they're paying $25 a month. At the end of the day, they just want you to pick it up when you say you're going to pick it up and then that will afford you the ability to charge what you want. Yes, labor is tight, but at the end of the day, this is what we're paid to do. And I tell our guys that all the time. And I generally say people don't leave the companies they work for. They actually leave the boss that they work for, right? So it's on our guys and the regional management to be accountable and keep our guys engaged and retained and retain who we have working for us today. So you are right. And you got to be selective about new business because it's not a robust labor market today where you can grab in different pools. And so when you're winning new business and you're winning new municipal contracts, you better make sure you're getting at the right price because there's going to be some wage replacement that goes into it. We don't need to practice. So we're -- this is a for-profit organization, and that's what we're sort of focused on now.
Last question, I'll turn it over. Patrick, where do you see the business much longer term? I know you've given free cash flow numbers out there. I don't expect you to update those here. But just where do you see the business longer term? There's been a ton of M&A. You're growing organically mid-single digits plus delevering the balance sheet. You're integrating those assets. Are you going to grow at the same pace? How should we think about this business longer term? Just answer that; however, you want.
Yes. I mean, I think what you're going to see is much of the same going in the future. I don't think anything is going to change. I mean, I think when we look and we did the IPO in March of 2020, our plan was very simple, that we believe we could take EBITDA from roughly $1 billion to $2 billion over a 5-year period. I think we thought we could take free cash flow from $300 million to sort of $700 million to $800 million over that period and continue to drive margin expansion in the tune of sort of 200 to 250 basis points from where we were in 2020. I think from our perspective, we've -- we will exceed all of those targets. And I think our new goal is getting free cash flow to closer to $1 billion. And I think when you layer in this RNG opportunity that starts rolling in, in 2023, plus all of the recent moves that we've made over the last 18 months, I think you get -- we've reset our bogies internally. And the new bogey is to get to that $1 billion of free cash flow. And I think we can do that over the next sort of 2.5 to 3 years fairly conservatively. And I think M&A, when you look at the organic opportunities, the industry has never been healthier from a price and a volume perspective. M&A opportunities continue to be very exciting. And I think when you look at our footprint now in the U.S. and Canada, we used to do sort of 15, 20 deals a year. We're doing 20, 25 deals a year. This year, we're on pace to probably do 40-plus deals a year. So I think you can sort of couple that all together and then layer on all of the refinancing of the balance sheet that just -- that drives incremental free cash flow out of the business. I think we're very well positioned. So I think we're just going to keep doing a lot of what we've done.
Our next question comes from Mark Neville of Scotiabank.
Great quarter here. Maybe just to wrap up the conversation on free cash flow, you're guiding the 5 25, 30. But if we were to fully sort of account for the divestitures, you're probably going to printing something closer to 600. Is my math correct?
Yes, that's exactly right, Mark. As I said in the prepared remarks, look, rationalization program has been extremely successful, and there's excess proceeds. So if you take where we end the year, the net CapEx number could be as low as 450 or 460 with all the proceeds. So I'm normalizing by excluding a portion of those to sort of 540. If you were to include all the proceeds, to your point, you'd be at a number sort of 600 to 620.
Okay. And on the GFL Renewable opportunity, I'm just curious when I'm thinking about CapEx for next year. Is there a big capital requirement next year for these first 5, 6 projects?
No. I think the way -- I mean, it sort of look back into the structure that we're finding, it shouldn't be a large CapEx spend. That's it. I think if we do some of these offtake agreements that we're thinking, that will require very little equity to fund the build-out of the project.
Okay. Okay. And then maybe just on price for next year. With Canada finally starting to reopen, presumably, there's some good opportunity to go after some price in commercial. And just given the resets when they happen next year, the idea -- should pricing sort of accelerate through the year versus where you're entering the year?
Yes. I think that's what we've seen throughout 2021, which I think is atypical. The normal industry would be Q1 being the peak and then steps down. But Mark, I think that's right. With the dynamic of the CPI resets coupled with recovery of attractive price-centric commercial volumes, I think that upends the typical cadence. And so certainly, I think the first couple of quarters and then again with our sort of roughly 30% of the book resetting in Q3, that will provide support to Q3 pricing as well. So I do think similar to 2021, 2022 has the opportunity for continued acceleration of pricing as opposed to the Q1 peak that you might normally see.
Right. And sorry, just in terms of the Q4 guide, while we're talking about Canada, does that assume sort of better kind of volume acceleration in Canada sort of just given certain reopening in commercial and stadiums and the like?
It was really based on the exiting of Q3. So I mean if we go further, but I mean we're there, like Toronto. I mean, I went to a hockey game. Things are coming back. I mean, we're still not in the offices, but as you know, it's resembling normality again. So it's reflective of today. I mean, if all of a sudden, everyone went back to the offices tomorrow, that would be upside. I -- the chances of that happening before 2022 seem pretty remote to me.
Good quarter.
Thanks, Mark.
We have a question from Michael Hoffman of Stifel.
If 59 is the run rate at year-end based on what you have in hand, you shared that you're going to be 6% or better organic given that we're in the business of modeling, and we can't wait until February. That settles us without any M&A 625, kind of $1.7 billion in EBITDA, which would be flat margins year-over-year. So that's not assuming any margin expansion and about $700 million in free cash flow. Is that -- are those rates places to start, and then we'll see what you can do?
Yes, Michael, I'd say you have 5.4. So put the 6% on that plus that the 8.5 or 9 of rollover. So that gets directionally, that's sort of 6.2 number. And then everything else, you said, look, that math is -- I mean the math is accurate. So yes, I think in reality, we hope we don't push margin expansion beyond where we are. The free cash flow conversion story that I know we hear us keep saying, it's real. I mean if you look, last year, free cash flow conversion as EBITDA was low 30s. This year, we're guiding to high 30s. Next year, that math you just described, I think you're 40. And then later on, the continued M&A and the other sort of self-help Patrick was saying, you go north of that. So that's where the math is going to shake out. I think directionally, your sort of top line in the right sort of zip code. But again, you can do your temporary model now, and I'll refine it for you in February.
Great. And then given all the changes in the mix, can you walk us through how to think about seasonality now and what we should be doing in our models? What's the way to think about a step down seasonality in 4Q and then into 1Q?
Yes, it's a good question, Michael. And again, we're doing all of our -- finalizing all of our budgets for next year, inclusive of all the recent M&A and recalibrating that because obviously, as we continue to add revenues in the sort of more southern regions, that tempers the previously existing seasonality curve. But the growth in the Midwest is certainly adding to it as well. And Terrapure has a significant seasonality curve just because of the nature of that business is such. So historically, let's say, at the top line, you had sort of roughly 20% in Q1, you jump up to sort of mid-20s in Q2. Q3 is by far the peak at 26, 27, even 28 if you look at this year's path. And then Q4 is then down to that sort of low 20s. That's the historical curve. I think modeling that is probably in the right zip code. And again, I can then give you the refinement in February.
Okay. That's fair enough. And then in liquids, were you a net beneficiary of what's going on in the used oil market that helped some of the performance of the 4% organic?
No. I mean, I think we always seem to pick the wrong index. I think historically, we were tied to Motiva, and then when there was always -- it was all the IMO 2020 stuff and then there was all the volatility in Motiva, The Street not really understanding Motiva. We switched to a WTI index probably 2.5 or 3 years ago. So when you look at our spread, we haven't got really any -- we haven't got any material spread expansion over the course of the last couple of years. I mean, it's been relatively flat on a year-over-year basis.
Okay. So the importance of that is that this is -- you did it the old-fashioned way, lots of little customers seeing increased a little bit of business?
Yes. I mean [indiscernible]. Look, the Motiva, I mean, Motiva went from $1 to $2 in the lows. Today's Motiva is $4 to $4.25. So The Street -- the rebates to the Street really haven't changed all that much. And I think the refiners are capturing all of that margin, which is great for them. But we've never been in that game. We've been -- this has been a service offering that augments the rest of our environmental services. So I think we're just happy maintaining that existing spread that we had previously.
Right, right. And my point was the 4% reflects that lots of small non-oil customers showed some incremental improvement. That's the positive message that didn't get carried on the back.
That's right.
Our next question comes from Jerry Revich of Goldman Sachs.
I'm wondering if you folks wouldn't mind just talking about the opportunity that you see in recycling, either from a greenfield or M&A standpoint? Can you talk about what your pipeline looks like there?
Yes. I think from our perspective, we're -- listen, we're not -- we're looking to build new facilities around markets where we have a significant amount of volume, right? So we think about a bunch of our operations in the Southeast and then you look to the Midwest, they're up into Michigan, real opportunity is for us to greenfield some sites. I think, obviously, with extended producer responsibility trickling into Canada, that over the next 16 months to 18 months is going to play out in terms of capital investments we'll need to make in new recycling facilities outside of the ones we already own in specific markets in Ontario. So I think the model continues to be attractive, and the revenue-sharing agreements continue to work with producers and municipalities and customers. There'll be a continued focus of ours to deploy dollars into those type of opportunities. But when I look at greenfield opportunities, probably we have 4 to 5 facilities that we want to build over the next 18 months.
And then, Jerry, I'd just add, retrofitting the existing facilities, another area, retrofitting, adding latest technology, whether it's robots or more and more optical eyes. The ability to improve recovery and what that does to rates, particularly at today's levels, coupled with the labor efficiencies, there's very attractive returns from those type of investments. And so that's also another area that we're actively pursuing across our existing facility base, in addition to the greenfield opportunities that Patrick referenced.
Terrific. And then separately, I'm wondering, can you just flesh out for us your M&A pipeline in a little bit more detail? What's the pipeline look like today? What's the mix of assets that you're looking at within that pipeline and your level of optimism about getting enough activity in the fourth quarter to essentially issue the preferred shares that you gave yourself the option to do?
Yes. So pipeline continues to be robust between Canada and the U.S. I mean, I think -- from our perspective, in the base case, we probably acquired another sort of $50-ish million of revenue. It could be upwards of up to $100 million of revenue, this sort of roll over that you would see rolling into sort of next year on an annual basis. So a lot of conviction around still continued M&A through the back half of the year.
Okay. And lastly, Patrick, you mentioned the various mechanisms to monetize landfill gas. It looks at least optically that the economics are most attractive to pipeline that gas. And I'm wondering if you could just comment on what the returns look like for the other monetization options that you folks laid out and the option to not connected to the pipeline, I guess, suggest limited pipeline infrastructure in those areas, I would guess. But maybe you could flesh that out for us.
Yes. So I mean, different ways, the pipeline, obviously, whether we put in the transportation market or when we put it into the industrial manufacturing facilities that are sort of looking to buy this or in the pipeline that are looking to put a portion of gas in other pipes that's green gas. I think what you'll see is there'll be a hybrid of all of those different agreements. I think when you look at it very simply, obviously, extremely attractive returns on invested capital profile. I mean, I think when you look at them today at today's pricing, you're probably in a 2- to 2.5-year paybacks on those facilities on 20-year agreements. So they will be very accretive to the sort of overall structure that we currently have today.
Our next question comes from Kevin Chiang of CIBC.
Maybe I can just ask on the 2022, the 6-plus percent organic number you provided. You do highlight some of your markets have lagged in the recovery. I guess we're sitting in one of them. Does that organic number assume that, that volume spread between markets that have recovered more fully, that's closed? Or are you assuming that there's still kind of a lag into 2022? And if we were to see -- and if that is the assumption, if we were to assume there is a convergence, any sense of what that upside to volume could be if all your markets kind of go back to normal next year?
Yes. So Kevin, it's Luke. I want to reiterate that we're not giving the sort of guidance today. What we're saying is I think the backdrop supports something better than 6. So I'm trying to say that we are very optimistic about what '22 is going to look like. We don't know the -- what it's going to be as of yet. Every sort of month that passes well, so a better perspective. So when we come in February, we'll give you a number. It's going to be better than 6. Just how much better sort of remains to be seen. So the intent was to say, hey, it's looking positive, and we're very optimistic. I think it was more -- even if you only use 6 with what we've done, we're already at a 15% number for next year. So that was more the intent as opposed to trying to anchor us to sort of 6. It's going to be a number better than 6.
It's good to leave a little meat on the bone. [indiscernible]
Yes, Kevin, I think, look, the simple math is the pricing, if pricing is almost 3.5 to 4 for us, with the backlog cannot go to 4.5 to 5 and then if all that volume comes back, you could have a couple of points of volume on top. And you put that together, you can get to a number of 7 or 7 or better. But we're going to get back to you with exactly the way we think that's going to be shaking out at that time.
That's fair enough. That's actually very helpful color. And then my second question, can I ask on the U.S. solid waste margin. So up sequentially -- up year-over-year and sequentially. And you saw an elevated level of M&A, and I think you've come in at a lower margin. So just wondering, what's your legacy U.S. -- like if I were to take off the acquisition you pulled it in, in the third quarter, give a sense of what your run rate base U.S. solid waste margins would be. They seem to be a lot higher than maybe we would all have thought a year ago. And maybe if I extend that further. Does that kind of change how you think about your multiyear consolidated margin expectations even when your account for mix?
Yes. So a lot in that, Kevin. Look, if you think about our U.S. margin business -- our U.S. business, the M&A was a drag to the base. If you think about the base -- I mean, they're all pretty close. If you think about the base in the low 30s sort of 32% thing. You got to remember, Q3 is the peak, right? So it's not reflective of the year as a whole. But I think we have rerated, and you have that business at north of 30% margin. And I think as we go forward and leverage the asset base that we have just organically, there's going to be real operating leverage in there. So you got to remember, we have underutilized post-collection assets. There's very high flow-through as we go and sort of build out the collection networks and densify that. So you put it all together, we came out and Patrick mentioned it in his prior response that we came out and gave an idea of a 24% margin business to say we add 200, 250 basis points, bringing that up to a blended margin business and sort of 27, 27.5. I think now that bogey has gotten higher, and we can take this business to sort of high 20s. And I think the solid waste leverage, operating leverage is going to be a point of it. You're going to bring that blended solid waste segment into that low 30s. And then liquid and infra are going to get to those stated targets as well. So it's not just, I think, solid waste U.S. I think solid waste U.S. started as a high relative margin business. It's also bringing up the Canadian segment as well as the liquid and infra is all going to contribute to getting to that new level, high 20s, which is where we think we're going to take this.
That's very helpful color. Congrats on a good quarter there.
Thanks, Kevin.
Thanks, Kevin.
Our next question comes from Tim James of TD Securities.
Just wondering if you could comment or update us a little bit on plans and the opportunity around the Terrapure, the Stoney Creek landfill facility in particular. I know that was kind of an exciting opportunity to get your hands on that. Just talk about sort of where that stands and what the opportunity is there as you look at it today?
Yes. I think from our perspective, with the GTA being sort of slow to recovery, I think there's real opportunities as a bunch of the industrial manufacturers generated this waste come back online, not to mention a pretty large internalization opportunity for us to be able to internalize certain waste and soil that historically have been going to landfills other than that. But we've been using other third parties. So that process has started, but I think as we roll into 2022, we think there's material upside coming from that side for us.
Okay. That's helpful. My second question, I mean, just your execution, it seems like it's going so well here overall. You're securing M&A opportunities. You've now got this R&D initiative underway. I mean, things look very promising, obviously, as you've identified. I mean, if you were forced to say where the greatest challenges are in the business today, what would you or could you point to?
I mean, we've been doing this for 15 years, right? It may seem like a lot for people sitting on the outside of -- now eyes on the company as this is a public company, but this is sort of in the DNA. I mean, I think where it always is, is the bottleneck is always around integration, right, and sort of pacing that out both from a regional perspective and just a function perspective. So that's always where your sort of bottleneck is in terms of continuing to ramp on the M&A front. The beauty of where we are is we have 9 provinces in Canada, 27 states in the U.S. today. And we have regional management teams there that know GFL systems, et cetera, which is far different than what we had 10 years ago as we were building all of those out. So now that those are built, the M&A program really is pretty seamless because we're tucking these businesses into existing markets where we already own businesses. So I continue to tell people the biggest threat in all of our businesses, the cybersecurity. We were cyberattacked in 2016, cyberattacked on a daily basis all of us. And I think just continuing to stay on top of those risks around that part of the business will be prevalent for us. But as far as I'm concerned, I feel very good about where we are. Obviously, on the inflation front, keeping an eye on the labor and the supply chain stuff, just ensuring that we get the parts we need to run our business and get the equipment that we need to run our business. So far, we've been in a very good spot. I would say our procurement department has done an excellent job of staying on top of that and ensuring we get what we need and ensuring that we have the parts to maintain our trucks. But by and large, I think ourselves and the company and the industry as a whole is in a very good position today.
Our next question comes from Michael Feniger of Bank of America.
Just on that last comment, Patrick, I'm just curious on the labor side and supply constraints. Clearly, you guys managed it well. I'm just curious, as you've moved into Q4, have you seen any signs of that easing? Or is it just not getting incrementally worse at least when you think about some of those labor and supply constraints?
Yes. Labor is definitely eased. I would say the peak was spring, summer. And I think just the natural cadence of the businesses, right? Like people just need less people over the winter and coming into the spring. So I think that's definitely eased. But as a lot of the government program just starting to come off, we definitely seen it ease. Our focus now is on ensuring that we can come back in spring of 2022 that we're staffed appropriately, and you have the right bodies and the right people in the right seats. Supply constraints, listen, it's lead times, right? And I think, again, our guys have done some of it, and kudos to them. They are a lot smarter than me on a lot of these pockets. And I think with our relationships with a lot of the OEMs and suppliers, they were very forthcoming just given the size of customer we are to them and letting us know the appropriate lead times, whether it's brake pads, whether it's hoses, et cetera. Like all of the things we need to run our business on a day-to-day basis. They talked a lot and said, hey, what do you need because we're experiencing 6- to 10-week delays on this sort of stuff. So where historically, you could get that stuff in 24 hours. So I think our guys were proactive, one out, bulk purchased what we need to purchase for the existing business and been able to manage through it so far. In terms of where that's going, listen, I find a crystal ball, I can tell you. I have no idea. I don't know how the world has gone -- gotten such a mess over the last 12 months. But I mean, hopefully, we're coming out the other end of it, shifting starts, other things start, and we get back on the sort of right program here in the next 6 months.
Makes sense, Patrick. And then on just the pricing, you laid out the CPI reset. I'm just curious in terms of big picture for you guys as we enter 2022 on the price front. If you put a price increase to one of your commercial customers, let's say, March, April, May, are you willing to go back to implement another price increase? Or is the strategy to let those CPI resets happen, you're managing business and you'll wait for your normal annual price increase? I'm just curious how you think about that as you go in 2022 with -- yes.
Yes. So big difference between open market and the contractual CPI annual adjustments that you'd see on municipal contracts. Fortunately -- unfortunately, on the municipal ones, you have to wait that year anyway. So there's no choice. But listen, on the open book of business, if things materially change, I think -- and you're providing great service, I think customers are -- know and understand maybe will have to pay more. Obviously, we like to work with our customers as much as we can. But at the end of the day, these are real cost pressures that we're all experiencing. So I think we wouldn't be shy to go back out and put through a PI if we saw the real need to in order to sort of maintain some extraordinary inflation measures that we hadn't predicted when we put through the first price increase earlier in the year.
That's great. And just lastly, can you just remind us the sensitivity to your earnings from recycling in those commodity prices? I believe contracts are a bit different than your peers or maybe it's a bit different when you say Canada and U.S. Can you just flesh that out? That would be great.
Yes, Michael, this is Luke. We have roughly 800,000 tons that we have some volatility on in terms of the back end. Now more and more the change in the dollars we're getting, we're rebating back to the customer. But if you think about it today, a good math is $0.60 on the dollar we are keeping. Of those 800,000 tons, if the blended basket is going up $1, I'm getting $0.60 for that. That's the rough math, although I would say it continues to migrate. And when we talk in February, we'll give you the latest sort of view as to where we are at, at that time.
Our final question today comes from Rupert Merer of National Bank Financial.
Just a couple of quick follow-ups on RNG to start. Patrick, you mentioned the first 5 or 6 RNG assets you're looking at $75 million to $100 million of free cash. Can you confirm that's your 50% share? And when you talk about the time frame for these to come online in 2023, how quickly should we expect this? Is that staggered through the year? Or we sort of earlier or later in...
So I think you will -- yes, the $75 million to $100 million is the right number. I think the lion's share of that will come in through various parts of the year in 2023, and you'll have a full run rate. I think the number will be higher by the time we get out to 2024 because we'll bring on those incremental landfills over the course of 2022 beyond the 5 to 6 that I just spoke about. But you'll have real a little -- probably $8 million to $10 million coming 2022, a good chunk of numbers in 2023 and then full run rate in 2024 for probably the lion's share of the projects.
Okay. Great. And I imagine the first 5 or 6 are the best projects opportunities you have. What are the next 5 or 6 look like after that as far as...
I'm not sure -- they are the simplest to execute. For some of these have electrical contracts that have to come out of, some require incremental infrastructure, some require expanded pipelines to be able to get to the site. But if you think about the first 5 or 6, we're talking about, there are roughly, call it, 25,000 SCFM of gas a day. I think, conservatively, the other ones would sum to the same. So the opportunity could be double the size if we were able to execute on them all.
And then the follow-on opportunities, are those 2024 story? Can you bring them on that quickly?
I think we will sign up some of the others for sure over the course of 2022, right? So they would also come online sometime in 2023 with the full run rate in 2024.
All right. Very good. And then quickly, Luke, can you talk about the sensitivity you have to fuel prices right now and how we should be modeling that going forward?
Yes. I mean, look, we are roughly 50 million liters a quarter of fuel that we're going right now. And our recovery, we are not nearly as advanced on our recovery of fuel cost as sort of we could be. So as we continue to progress on that strategy, we're covering more and more on the offsetting. But today, we have a high degree of exposure. We're probably mitigating sort of 20% of the price volatility, and the rest is sort of falling through. Now incremental CNG conversion as we continue to do that is also going to drive improvement, but that's sort of where we sit today.
This concludes today's Q&A session and also concludes today's call. Thank you all for joining. We hope you have a great rest of your day. You may now disconnect your lines.