GFL Environmental Inc

TSX:GFL

Earnings Call Transcript 2022-Q3

[Operator]

Good morning. My name is [Technical Difficulty], operator this morning. [Operator Instructions] I would like to welcome everyone to the GFL Environmental Inc's Results Call for the Third Quarter of 2022.

I will now turn the call over to Mr. Patrick Dovigi, the CEO of GFL. Please go ahead, Mr. Dovigi.

[Patrick Dovigi, executive]

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 guidance for this year. 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.

[Luke Pelosi, executive]

Thank you, Patrick, and good morning, everyone. 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.

[Patrick Dovigi, executive]

Thank you, Luke. The quality of our assets and capabilities of our team were once again highlighted in our third quarter results. The success of our pricing strategies and focus on cost efficiencies continue to drive double-digit growth even with the significant inflationary impacts that have persisted far longer than we originally anticipated. Organic revenue growth was over 15% with double-digit revenue growth in both our segments in the third quarter in a row. Solid waste pricing accelerated over 10%, including fuel surcharges. Solid waste volume growth was over 2%, excluding nonrecurring [ MRF ] revenues. Excluding surcharges, pricing was 8.6%, a 130 basis point sequential increase over Q2. We have achieved this result without the full benefit of the significant price increases we expect to realize in our CPI-linked revenue in the coming quarters.

Environmental Services realized organic revenue growth of 37% with almost all of our individual market areas exceeding expectations. The continued reengagement of our customer base that we saw in the first half of the year, the impact of our pricing strategies and the price of used motor oil contributed to mid-teens of this organic growth. Significant volume in our emergency response line of business, much of what we subcontracted to third parties, more than offset what we believe the temporary delay in soil volumes from a few large projects, primarily in our Mid-Atlantic soil business.

Overall, we're thrilled with the success of our integration of the Terrapure acquisition that we completed last August and are extremely optimistic about the opportunities ahead in this segment. We achieved nearly 20% growth quarter-over-quarter in adjusted EBITDA. We believe that achieving this level of performance in this environment demonstrates the effectiveness of our strategies. Persistent, broad-based cost pressures have continued to have significant impact, but our business has responded through the pricing and cost efficiencies to recover substantially all of those excess costs.

The extent of this cost recovery as well as the business mix impacted our adjusted EBITDA margins during the quarter. Luke will walk you through the bridge for our solid waste margins, but a high level, the impacts were seen primarily come down to fuel prices, and we were continuing to see record cost impacts. This quarter, we also saw significant increases in the pass-through of fuel costs from third-party service providers. As we said before, we're in the early stages of our fuel cost recovery program. We have begun to see significant benefits this year. As this program continues to mature, we see very significant opportunity to drive more price from our existing book of business and corresponding improvements to our EBITDA margins over the near term.

Margins were also impacted by significant cost pressures from the impact of higher cost third-party maintenance and increased truck rental costs from delays in spare parts and new truck deliveries. While these nonfuel cost pressures haven't subsided yet, we are beginning to see the signs that unit rate cost inflation is moderating and supply chain disruptions are starting to ease. We expect the impact of our pricing and surcharge strategies, together with moderating cost inflation will result in significant opportunities for outsized margin expansion through 2023 and beyond.

We completed another 6 acquisitions during the quarter, all smaller tuck-ins that added density to our existing platform. Year-to-date, we've acquired approximately $430 million in annualized revenue and continue to manage our robots and attractive M&A pipeline. On the ESG front, we will release our 2021 sustainability report later this month. The report will include our full set of ESG-related goals, targets and commitments for the first time, including our commitments to increase our material recovery services through investments in our network of processing facilities for recyclables. Our Arrow Road, North outside of Toronto, which is one of the most advanced material recovered facilities using the latest sorting technologies was named the 2022 Recycling Facility of the Year by the National Waste & Recycling Association last month.

On RNG, 5 of our projects are in active development. These first 5 are amongst the largest RNG projects in our portfolio and are expected to come online starting in mid- to late 2023 and produce a total of more than 6 million MMBTUs of RNG. We remain highly confident that we'll see these projects begin to generate cash flow in 2023 and continue to ramp up through 2024 and beyond. Another 7 sites representing approximately 7 million MMBTUs are under negotiation and upstarting development. And we have just received positive news that should allow for the development of our Moose Creek [ Vaughan ] in Ontario, which will produce approximately 3 million MMBTUs. We continue to evaluate development partners for the 9 other sites that we have identified for development.

I will now pass the call back over to Luke to walk us through the investor presentation, and then I'll share some closing perspectives before we wrap up for questions.

[Luke Pelosi, executive]

Thanks, Patrick. In our investor presentation, we have provided supplemental analysis to summarize the moving pieces in the quarter. If you turn to Page 3 of that presentation, what we have laid out our bridges between our implied Q3 guidance and our actual Q3 results, revenue on the top of the page and adjusted EBITDA on the bottom. While we hope the components are relatively self-explanatory, I would note the following: combined solid waste price and surcharges were nearly 30 basis points ahead of expectations in aggregate, but comprised of a different mix. As in certain instances, we saw opportunity to first lean in on base price before optimizing our fuel surcharges.

The outsized contribution from environmental services, subcontracted revenue was realized at dilutive margins and required an investment in working capital, but had no CapEx requirements and will ultimately be free cash flow accretive. Commodity prices averaged $250 in the quarter versus our expectation of [ $325 ]. And in addition to the pricing impact, we realized some incremental costs in those select markets where we rely on third-party processors for recycling collection business. A large-scale soil remediation project that we've been awarded was unexpected to be postponed until 2023, together with delays in other soil projects that we believe are supply chain related and temporary in nature.

Several of our third-party service providers, mostly long-haul transportation, passed on significant price increases in order to recover their own internal fuel cost inflation. We saw a modest amount of such increases in Q2, but we're faced with significant incremental increases in Q3. During the summer, we had fires at 2 of our MRFs in Canada, which resulted in near-term operating inefficiencies and excess costs. While the disruption will cause temporary cost headwinds, these were 2 of our older facilities, and these events will act as catalyst to build back better, which will ultimately generate highly attractive returns.

Turning to Page 4. We have presented a bridge for solid waste adjusted EBITDA margins year-over-year. As can be seen, fuel prices accounted for 175 basis points of margin impact, net of any benefits from surcharges. Commodity prices were 85 basis points of margin headwind, including 30 basis points from onetime MRF volumes that we knew would not recur. And M&A was another 25 basis points. Everything else was net positive, including overcoming the $5 million cost headwind from the MRF fires, which we believe is a testament to our business model when considering the incentive cost pressures.

Page 5 summarizes the sequential improvements we've made on our fuel cost recovery programs during the year. This was one of the areas of self-help that we identified as a priority at our Investor Day, and we are very happy with our rate of progress. These improvements are despite our decision to focus on base price instead of surcharges for certain customers, as I previously mentioned. We believe these decisions are right for the long term but have had the effect of delaying some of the anticipated ramp in fuel cost recovery. We continue to see significant opportunity from surcharges and are focused on optimizing our practices in this area.

On Page 6, we have laid out how we anticipate the balance of the year to play out. On the strength of the third quarter top line results, we are raising our revenue guidance to approximately $6.6 billion. This is largely a result of the Q3 outperformance and the impact of recasting Q4 at today's FX rate of 1.36 versus the 1.28 that was used for the last guidance update. We have assumed commodity prices of $150 for the remainder of the year. We are affirming our previously provided adjusted EBITDA and free cash flow guidance. As the strength in outsized pricing, volume and the impact of FX is expected to be offset by the impact of commodity prices, the [ tumor ] fires and the indirect fuel pass-throughs from our transportation and other third-party service providers.

On the bottom half of Page 6, we have fleshed out adjusted free cash flow in a bit more depth as there are a few moving pieces. The last row of the first column shows $318 million of adjusted free cash flow we reported for the first 9 months of the year, the reconciliation of which is provided in our filings. Included in the $318 million is $150 million investment in net working capital for the year-to-date period. The seasonality profile of our business is such that we typically see an investment in working capital over the first 9 months of the year and then a reversal by year-end. This year's working capital investment has been also impacted by the acceleration in revenue growth and to a lesser extent, recent acquisitions.

We anticipate the year-to-date net working capital investment to reverse in Q4, providing a significant tailwind to Q4 adjusted free cash flow. Also not shown on the page is that we now expect cash interest expense of approximately $410 million. That's about $10 million higher than the previously anticipated interest expense on account of the higher rates and FX rates. We also expect net CapEx of approximately $600 million to $650 million or $750 million to $800 million when excluding the $150 million normalizing adjustment for the excess proceeds from the divestitures that we received in 2021, but deployed in the current year.

The topic of normalizing adjustments is one that we understand to be an area of focus for certain users of our financial reporting. So on Page 7, we presented a summary of the components of our adjusted EBITDA from 2018 through today. As can be seen, the relative impact of adjustments has materially decreased over this period. Acquisition transaction and integration costs have consistently remained between USD 60 million and USD 80 million, despite the significant increase in adjusted EBITDA since we went public. We anticipate continuing to incur incremental transaction integration costs as we deploy capital to M&A. We continue to believe that adding these costs back is the best way to accurately depict the earnings potential of our existing business at any given point in time and will, therefore, continue to adjust these costs in the future. However, we expect that the relative weighting of these add-backs will continue to decrease consistent with the trend since 2018.

Leverage is another area that we know is a focus for many. Reported net leverage at September 30 was 5.19, but the increase was largely the result of the translational impact of the rapid devaluation of the Canadian dollar against the U.S. dollar during the last 2 weeks of the quarter. While this FX volatility had a significant impact on the Q3 balance sheet, it had minimal impact on our trailing earnings. If FX rates remain at current levels, the FX-related increase in net leverage will largely reverse on a go-forward basis as our U.S. dollar-denominated EBITDA is translated to Canadian dollars at the higher FX rate.

To facilitate comparison on a like-for-like basis, Page 8 sets out a simplified constant currency presentation of net leverage and illustrates our growth-driven delevering capabilities despite significant unprecedented headwinds and the continued execution of our M&A strategy. While we believe this year once again demonstrates the resiliency and financial strength of the business, we understand the current leverage levels are perceived as suboptimal, and we remain committed to reducing leverage over the near term.

On Page 9, we have summarized our existing debt profile to provide additional context for consideration when thinking about leverage. On the left of the page, we highlight that 2/3 of our debt is fixed rate with over 5 years of average term remaining. On the right, we highlight that we have no significant maturities for 3 or 4 years and that the majority of the amounts coming due in '25 and '26 are floating rate debt and therefore, already largely priced to current market conditions. Lastly, we highlight our expectation to receive material credit rating upgrades prior to the majority of a significant amount of our debt based on enhancements to our credit quality. So while we remain 100% committed to deleveraging, we're also highly confident in the capacity of the business to support our current debt obligations.

If you look at Page 10, we've laid out initial perspectives on 2023. When we think about recent price and volume trends together with anticipated CPI resets, we do not see a path where organic price and volume growth is less than high single digits. Add to this, the nearly $200 million of M&A rollover already in hand and the impact of current FX rates, and we're expecting a minimum of 12% top line growth, even after accounting for the assumption that commodity prices stay at today's levels for all '23. As Patrick said, we believe '23 will be a year of outsized margin expansion opportunity as the strength of recent pricing, together with the rollout of our surcharge programs continue against the moderating level of cost inflation.

We anticipate at least 100 basis points of margin expansion, inclusive of the headwind created by the decrease in commodity prices, yielding high teens growth in adjusted EBITDA in 2023. Adjusted free cash flow will be contingent on our finalized CapEx plans, but even in the face of mid-teens headwind from higher interest costs, which are expected to be approximately $490 million in 2023, we anticipate double-digit adjusted free cash flow growth. Consistent with past practice, our future outlook does not contemplate additional M&A. Any contribution from transactions that are completed will be incremental to what we've laid out currently.

On Page 11, we have illustrated how the potential 2023 performance would impact our leverage profile. This is a carryforward of the slides we presented at our Investor Day with the punchline being that the organic growth profile of the business is such that the business is expected to delever inclusive of any future M&A.

With that, I will turn the call back over to Patrick.

[Patrick Dovigi, executive]

Thanks, Luke. We're obviously really excited about our initial thoughts on 2023. And as Luke said, there are several paths to upside above and beyond what we laid out. We look forward to providing a more definitive guide when we report our Q4 results in February. And to circle back on leverage, I think it's important to remember why and how we got to where we are today. We went public in March of 2020 with leverage in the low 4s with a plan to double the size of the business from $1 billion of EBITDA to over $2 billion of EBITDA in 5 years. As you heard in our 2023 outlook, we believe we've achieved that goal by early 2023, doubling the business in 3 years. And yes, while leverage has modestly increased in the process, we have consistently said that our elevated leverage would be temporary, and we would delever once the core building blocks were in place.

We're doing that just now. Despite all these headwinds we saw this year and we are committed to continue down this path. Our organic growth alone will get us there in a couple of years as much as we feel comfortable with the current balance sheet, as I've often said, we are shareholders first. We fully understand the impact of maintaining leverage at the current levels and are absolutely committed to reducing leverage to a level more consistent with industry norms. I think I say this on every call, but as I watch our business perform quarter-over-quarter, I have never been more optimistic about our future and the ability of team Green to continue delivering.

I will now turn the call over to the operator to open the line for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Michael Hoffman with Stifel.

[Michael Hoffman, analyst]

It feels like afternoon after 5 earnings calls in a row. Luke, can you help us with what is the dollar impact in '22 of the total fuel direct and direct that you cannot recover yet and that you just show the power of this, what you could recover on a dollar basis in '23 as you keep making progress.

[Luke Pelosi, executive]

Yes. So Mike, I think that's a great question because that's really the focus of what we're seeing at the margin level. If you think about fuel this year, you probably have around $150 million increase driven by price and price alone, right? So taking out volume growth and taking out the acquisitions. And you started the year recovering $0.30 of that by the -- and where we're at today, we're closer to 75% on a run rate basis. So when you blend that all for the year, you're probably going to be recovering through the surcharge mechanism, 40% of those dollars, let's say.

Now when you go into next year and we continue to mature the program, I think the industry has clearly demonstrated an ability to recover all of those dollars and perhaps some of the incremental -- indirect dollars as well. So that's why we're highlighting the magnitude of that opportunity and the margin accretiveness that it will initially be upon first-time recognition. I understand the subsequent to initial recognition, there can be margin impact moving up and down. But the first-time recognition, this is all accretive. And I think it's folks to -- important for folks to understand how much runway we have in this area.

[Michael Hoffman, analyst]

And just to be clear, the $150 million is just your direct increase in what you have to spend to buy fuel, net of adding new customers and M&A?

[Luke Pelosi, executive]

The $150 million, the $130 million of the direct fuel increase, Michael, are direct fuel cost and then I'm including $20 million in there of this indirect that we've highlighted just in relation to the third-party transport haulers, where we've had those fuel search charges passed on to us.

[Michael Hoffman, analyst]

Right. And ultimately, like you've said, the industry has shown its ability to recover all of its fuel cost incremental, and that's your goal, and that's the power of this. Is that $90 million of it is not being covered and that alone. Can you -- so you think you can cover that $90 million, all else being equal in 2023?

[Luke Pelosi, executive]

I think that the guys would want me to tell you is by exiting 2023, we could be at that level, but it will be a ramp throughout the year as we demonstrated the ramp during this year.

[Michael Hoffman, analyst]

Okay. Leverage is something everybody wants to talk about. I have 2 questions on it. On a constant currency basis, will your leverage at the end of the year be less than it was in 2021?

[Luke Pelosi, executive]

Michael, when we said that, you asked us that same question on the Q2 call. And at that time, we were looking at the plan for the balance of the year and not included with the commodity prices and not included was the impact of MRF fires and the incremental fuel. And so I think today, when we look at these incremental headwinds that have arisen subsequent to that. On a constant currency basis, we will be aiming to maintain leverage in those stated levels. And I just highlight that because I don't want to, at this point, say it's going to be exactly 4.74 or something lower than last year because of the existence of the multitude of headwinds. So I think we're going to be in that ZIP code. There's a path. But with the incremental headwinds since last time, I think it will remain to be seen exactly where it ends on the year.

[Michael Hoffman, analyst]

Okay. Fair enough. And then to your comment about the credit rating opportunity in the refinancing term 25%, which means you need to have the balance sheet in place by 24% to get the credit rating adjustments because they kind of do that once or twice a year. So are you looking to be investment grade or just one move shift on the 2 that you have? I'm just trying to understand your [ expectation ]…

[Luke Pelosi, executive]

I think that comment there and that bubble on the page over the later stuff, the 27s and 28s, the maturities for 25% and 26%, that's substantially all floating rate debt today. And what we're trying to highlight is the refinancing of those currently carrying them at largely market rates. And the expectation is you'd refinance those as something comparable. The comment was really more in respect of the portion of the debt stack that has those longer tails in the 27%, 28%, 29% range. That is the point at which we think we would have material credit rating upgrades.

[Operator]

Our next question comes from the line of Walter Spracklin with RBC.

[Walter Spracklin, analyst]

So I was wondering, look, you gave us some margin indication for improvement for next year. Can you repeat the number that you mentioned, but when you do, could you unpack it based on the headwind and tailwinds, particularly what would be the headwind from OCC based on current prices, what you're assuming is acquisition headwinds on a normal, based on what you're looking at for next year? And then obviously netted off with what you would typically look for in terms of annual margin improvement from efficiency gains to get to the net number that you mentioned?

[Luke Pelosi, executive]

Yes. So to start, we would assume no further M&A into next year, right? So our guide is always just reflective of what we own today. So anything we do incremental to today's businesses that we own would be additive. From a margin perspective, you saw even in this quarter, the ability of the M&A that we're doing to dilute or impact the margins are becoming less and less. So we think any impact from what we have or what we will do would probably de minimis. So what you're really left with is the biggest headwind that we're seeing today is obviously with the recycling pricing, we're assuming next year stays at this year's levels, about [ $150 ] for our basket of goods, that's Canadian per metric ton.

So if you're comparing to our peers a little bit different there. But that's about a [ $15 million ] headwind going into next year, right? And that's top line. And as you know, all flows to the bottom. So it's real. But I think the major offset to that is really the power of the pricing that we're realizing, and we think it's going to continue to accelerate into Q4. And then into next year is finally the CPI-related revenues start getting the proper catch-up price increases that we have been going without all of this year.

And if you do the math of lining that up against what we expect to be a moderating cost inflation, I think you'll see that if normal course organic margin expansion in this business is 20 to 40 bps or something to that we expect to be able to do multiples of that. So I think when you put that together, there's a path to get to the -- what we said in the press release of about 100 basis on the RNG, and that's net new for us, right? So that's going to be quite margin accretive and we're excited about that coming into the fold.

[Walter Spracklin, analyst]

I just want to confirm on the price. You mentioned that it's coming through and that's going to be a big offset or a good way to overcome some of those headwinds. And I guess based on what we're hearing from others, fourth quarter looks like it's going to remain at an elevated level, similar to third. And then if I understand you correctly, Luke, you're pointing to high single digit for next year, but perhaps correct me if I'm wrong, coming off a high year-over-year in Q1 and then kind of tapering down to some level at the end of next year? And what would you say is the long term -- you spoke about the industry long term on a pricing growth basis exiting 2023 and then going out on a long-term basis, how would you characterize your view on pricing?

[Luke Pelosi, executive]

I think it's important to step back and know that our pricing is in response to the environment in which we're operating in. I mean the cost inflation there is real. And I mean we talk about the sort of operating costs, but layer in interest rates, talk about what's happening in CapEx, et cetera. I mean the cost inflation is real. And I think you need to be -- I think our peer who reported earlier said something similar that you need to be in high single digits, if not sort of low double digits in this environment. And if this environment persists, then that's where you're going to continue to [ see as we ], because I think that's the math you need to earn the appropriate return on the capital that we're investing into this business. Obviously, if inflation materially moderate and so it's going back down, then you have an ability to sort of take your foot off the gas on the pricing lever. But we're going to be responsive to what we're seeing.

And I think you need to be at these levels in this environment. I think the reality is the unit cost inflation should start to moderate on the basis that I think all of the, call it, onetime catch-ups have happened. And I could be wrong, but I don't think you have another equal leg up from here as we go into next year. So the pricing is going to be pretty baked by the end of Q1, if you think about the strength of which we're exiting this year. And you should now be lining that up with an easing unit cost inflation. Where does the industry ultimately go? Again, I think it's constantly going to be responding to the cost of providing the services that we do and allowing us to generate an earning sort of appropriate return. So it's hard to say, but I think the continued consolidation and the continued focus and discipline along pricing, obviously, are constructive in ensuring that we, as a company, are able to earn those returns.

[Operator]

Our next question comes from the line of Jerry Revich with Goldman Sachs.

[Adam Bubes, analyst]

This is Adam Bubes on for Jerry Revich today. I had another question on how you're thinking about pricing in 2023. Just conceptually, do you feel like with the headwinds in recycling, we now need to push pricing even more on the collection and disposal side?

[Luke Pelosi, executive]

Well, look, I think as we articulated, a $50 million, $60 million headwind at sort of 100% flow-through margins from recycling is a real number. And so yes, you're going to need a lever to sort of pull and offset that. I think what also needs to be understood is that we are and continue to be actively engaged in the renegotiation of the sort of contract that generate a lot of that material, right? You've heard the industry talking about it and moving those away from commodity price-driven returns to more fixed processing fee models.

And we've been actively engaged in those discussions even before the recent sort of crash in the OCC pricing. And we anticipate fruitful benefits coming out of those stocks. Some sitting here in Toronto. It's one of the areas where the whole dynamic on sort of recycling is going to be changing. So Adam, short answer is yes. I think you'll look at other levers to pull to offset that headwind. But even within that line of business, I think you'll see incremental dollars coming from the continued sort of renegotiation and restructuring of those contracts to the new model of the fee-for-service approach.

[Adam Bubes, analyst]

Got it. That's helpful. And then really impressive organic growth in Environmental Services. It looks like a lot of that may be coming from higher UMO selling prices. So I'm just -- can you help us think about how you're thinking about the sustainability of revenues in this business as we enter 2023.

[Luke Pelosi, executive]

Yes. Adam, I think that's a bit of a misnomer. I think it's important to understand that the business has grown through [ Terrapure ] and organically where the used motor oil side of it sort of has remained relatively static. You think about used motor oil in a given quarter. We're probably selling 50 million to 60 million liters of used motor oil, and we're probably up in Q3, $0.09 or $0.10 per liter. So $6 million incremental revenue sort of coming out of that. The real growth and the real success of that was, as we had anticipated in our thesis of bringing the 2 businesses together was creating a one-stop shop for Environmental Services need that large customers could reach out to in all of the various markets. And that's really where we're seeing tremendous success. It comes in a whole swath of industrial services. But this quarter, one of the stars was just giving an emergency response.

There was a large spill in the sort of Southern U.S. and called upon us as one of many subs. And within a couple of days, we were appointed as the sort of main provider on that site and end up being sort of $30 million plus of revenue. And I think it's a testament to the quality of the service that we're providing and now the recognition of the capabilities of the GFL name. You got to remember, we're also still benefiting from the reopening effect in that environmental services lagged in 2021. So we are getting some of that benefit as well. But really, this is broad-based strength across our densified and expanded platform amongst all of our service offerings and used motor oil and that sort of external commodity-based component is actually a de minimis contributor to what we're achieving.

[Operator]

Our next question comes from the line of Tim James with TD Securities.

[Tim James, analyst]

I'm just wondering if you could maybe talk about how you manage base pricing versus surcharges. You mentioned earlier on that you were able to kind of lean into base pricing more in the third quarter. How do you think about the trade-off between the 2? Or is there one?

[Luke Pelosi, executive]

Yes, Tim, I think you always want to get your base pricing right on the notion that surcharges will sort of fluctuate and responds to the macro energy cost environment, but your base price should be appropriate to cover your cost and generate the return that you need. We've said for years of how we have an opportunity in our existing customer portfolio to sort of rightsize the pricing of many of the sort of customers that have come through acquisition, and we're doing exactly that. Someone made a comment that we should just flick the switch and do all the surcharges. The reality is it's not that easy and requires some mining of the contracts.

And as we're doing that, in certain instances, we're realizing that, that specific customer is not where the pricing needs to be. And we're focusing on that price increase first because, again, the base price will stick, and we need that to be an appropriate level for the service that we're providing. So in Q3, it resulted in a little bit less acceleration of our surcharge program than we had initially anticipated. But the trade-off is we got more in base than we previously wanted. And we'll take that outcome all day long because I think that base is what's going to drive the durability of the pricing where the surcharge is more just a mechanism to respond to a changing sort of volatile component of overall service offering.

[Tim James, analyst]

Okay. That's very helpful. My second question, I just wanted to return to an earlier topic about Environmental Services and then very strong performance there. You talked about it a little bit. Is it possible to dig into more how much of that is and maybe backing out the kind of skill that you referred to, but how much of the growth in strength is overall market versus sort of GFL specific opportunities? And maybe taking market share because of the platform that you've assembled there. And any comments specifically [ on how Terrapure's ] fitting into that would be helpful.

[Patrick Dovigi, executive]

Yes. So it's Patrick speaking. I think when you look at the business, I mean, the thesis played out exactly the way we thought it would. Remember, we bought that business in the middle of COVID. A lot of that business is obviously levered to Canada. Canada was in rolling shutdowns for effectively a couple of years. So when we looked at buying that business, we bought it off an LTM number that had significant sort of COVID impact. So I think when -- now it's come back, COVID is over that business, obviously, with the size, scale, platform, market positions we have in Canada has led to this outsized organic growth.

When you look at continued opportunities, we think those opportunities are going to persist sort of into 2023 and beyond. And we still think we're not even -- the synergy expectations we had on that acquisition is they basically far away sort of what our expectations were initially. And I think there's still a significant amount of continued opportunity that we're going to have. I mean we underwrote almost $20 million of synergies. We're through almost [ 25 ] of those today, and we think there's significantly more to come. And there's still a large pricing opportunity in that business.

So we think pricing and volume are going to be very strong. If you look at that business compared to the industry. Today, that business is running at mid-20s, 26% margins. We articulated that we think there's a path to get that business to high 20% to 30% margin, similar to our solid waste business, and that thesis hasn't changed. So that opportunity continues to be there. And I think just with our market position, particularly in Canada, it's going to get us there.

[Operator]

Our next question comes from the line of Stephanie Moore with Jefferies.

[Stephanie Benjamin Moore, analyst]

I appreciate the incremental color on just the margin expectations as we look to 2023. Could you maybe talk about how some of your efforts and investments, whether it's around route optimization, fleet automation, fleet enhancements and any other more company-specific actions and how those fit into your margin expectations for 2023?

[Luke Pelosi, executive]

Yes, Stephanie, this is Luke speaking. I'd say the guide that we've sort of given is really just relying on the singular lever of the fuel surcharge initiative as being one of those core self-help items we've identified. The fleet optimization, as you said, from alternative fuel conversion from automation, route optimization, that's obviously all ongoing in response to the inflationary environment and just our desire to optimize the business that we have. But I would think of that as being all incremental upside to what we are talking about today. I mean we'll come out with a specific guide when we talk in February. But I think where we're sitting today, we have a high degree of conviction that we're going to achieve what we've laid out just simply with the algorithm of our pricing versus our costs and giving consideration to the sort of externalities of commodity and FX. So I think those opportunity sets that we articulated at our Investor Day and continue to focus on remain there will be additive and incremental to what we are talking about and we'll be sort of realized through 2023 and the years to follow.

[Stephanie Benjamin Moore, analyst]

Great. And then maybe you can just touch a little bit on just the M&A environment, what you're seeing. Any change in activity or willingness from the sellers or competitiveness from -- on the buyer side as well?

[Patrick Dovigi, executive]

No. I mean I think, obviously, the market really hasn't reacted. I mean, typically, the arena we're playing is in smaller acquisitions. So valuations really haven't moved. They're still in sort of the same stated ranges of sort of 5 to 7x on the little stuff. The bigger stuff where you might see a little bit of movement, but we haven't seen much. I mean, the pipeline continues to be very robust. If anything, it sort of worked in the opposite where we've had -- we talk about sort of the leverage issue, sometimes I think people think we're just sitting around here not thinking about anything. But me as the largest sort of shareholder of this business, we're always thinking about ways of creating value and putting our shareholder had on first. And we've had -- people have approached us about buying certain assets that we have that we've always contemplated.

We're not going to make any [ rash ] decisions, but there's, call it, almost $150 million to $200 million of EBITDA that could be sold at mid-teens type multiples. So we could easily generate $2.5 billion to $3 billion of cash. If we wanted to, and you sell off some of these little assets throughout the existing business at very high multiples. So if anything, it's been the opposite. We've had people approaching us to pay significantly higher multiples than what we're currently trading at for our existing business. So not a lot has really changed on that front, but we'll see what happens as we continue moving on and the Fed continue to take in the approach that they've taken so far.

[Stephanie Benjamin Moore, analyst]

Right. And then just, I guess, a follow-up to that comment, as you guys evaluate whether you should sell or some of those assets, what kind of kept you to retain those where you stand today?

[Patrick Dovigi, executive]

Yes. I think from our perspective, it's always something you weigh and it goes into -- when you're building your plan, your strategic outlook. My perspective is we can't control the stock price. But what I can control is building a great business. And you build a great business, you're going to get paid for it, right? You may not get paid for it this month or this quarter. Last year, levered growth was great. This year, levered growth is not great. So we can't really make -- we can't make decisions based on what a computer wants to tell us for the day because the algorithms are saying, this is what we should do or you shouldn't do. My perspective is just continue building a great business.

That being said, we have assets, and we have a business that's worth significantly more than its value at today. That's the reality. You can't buy these businesses for 10x today. You couldn't buy our business, we couldn't buy high-quality business for 10x. And we have assets that are worth significantly less. So yes, if you want to stay a public company, it's interesting. We came under private equity world where today, we'd be underlevered in private equity world. In the public markets, people think leverage is too high because the industry comps use significantly lower leverage. So we can always have a philosophical discussion about leverage. But the reality is people want to see leverage lower.

And then you have a decision to make if you want to stay a public company, you go private or do you stay in public. If you want to stay public, you can look at selling some of these assets at [ 15-plus times ]. And just use round numbers, if you sold $200 million of EBITDA that people have expressed interest on and you generate $3 billion of cash and you repaid some of your most expensive debt. We'd say that average cost of debt today and the most expensive debt in our cap structure is sort of 6.5% to 7%. You basically get rid of $200 million of EBITDA, but we'd also get really $200 million of interest costs, right? And that's just sort of the flow-through.

So -- and then you move to investment grade really quickly, obviously, because you'd be levered in the low 3s and you significantly change the credit profile of the business, which then will yield a pretty good result on financing. I mean if you look at our term loan today, our term loan today is priced at sold for plus 300. If you look at Waste Connections did as investment grade, they just issued a new terminal last week had a range of plus [ 75 to 125 ], right? So it's 225 basis points to 250 basis points of upside that you can sort of see on that. So these are all things we're thinking about. We're certainly not sitting here thinking about nothing. We're sitting here we're thinking about building a great business, but we're also sitting here thinking about how we can make the business better and how we can drive higher free cash flow margins, et cetera. So all of those are -- all things are on the table at the moment, and we'll watch. We're not going to make a rash decision based on what the Fed says from week to week, but we know our business is exceptional and we know it's worth a lot more than it's valued at today.

[Operator]

Our next question comes from the line of Rupert Merer with National Bank.

[Louka Nadeau, analyst]

So Louka filling here for Rupert today. So at what level of interest rates, does the trade-off between pursuing M&A versus deleveraging your balance sheet starts favoring more the site of deleveraging.

[Luke Pelosi, executive]

I think it's important to understand that all of our deleveraging anticipated is really through growth in EBITDA, more so than the debt repayment, right? We're not entering into a mode in the next couple of years where we're anticipating material debt repayments. It's rather the deleveraging is coming from sort of growth. We are put out on the page where we show the impact of M&A and deploying x million dollars at reasonable valuations. And more and more, that tuck-in M&A is a de minimis impact to your overall sort of deleveraging path.

So if you took that $400 million that we're contemplating in that slide and put that to sort of deleveraging, you could take another sort of 20 bps out that much quicker. But I think in the long run, you'll continue to see the deleveraging coming from growth in EBITDA as opposed to actually interest paydown. Look, if rates went up into double digits, would that be a different conversation perhaps. But I think when you think about the vast majority of our debt being fixed the floating rate debt today priced in for yesterday's decision going to be in high 7s. At this level, I don't think it changes our M&A strategy. If we go materially higher from here, perhaps you'd have a different perspective, but we don't anticipate that in the modeling that we're doing.

[Louka Nadeau, analyst]

All right. And coming back to the Environmental Services. So you mentioned earlier that the recovery in Canada led to a good portion of it. Where do you see industrial collection and processing activity levels versus where they were pre-COVID or more like in a normalized state?

[Luke Pelosi, executive]

Yes. I think the reality is anyone who has anything to do with the energy sector today is actually amping up a lot of their sort of work because they want to make sure that they are up and running on a continuous basis as much as sort of possible. So we're seeing in Western Canada and some other stuff in the U.S. that there is just broad-based tie-in to that economy or that market. We don't service directly oilfield customers. But if you think about Western Canada pockets of Atlantic Canada just have that broad-based exposure. You're seeing a lot of activity. So we think, obviously, in Canada, sort of strong energy environment is good for the sort of market as a whole, and we're well positioned to benefit from that.

[Operator]

Our next question is a follow-up from the line of Michael Hoffman with Stifel.

[Michael Hoffman, analyst]

So an interesting thread on leverage and the idea of maybe divesting through asset sales, your -- I mean, one of the issues you have is your interest cost is 6% of your revenues. Your peers are in the 2s. So if you're not going to do it through asset sales, do you do it through equity? Does [ BCP ] let you raise equity and you get this there faster because clearly, that's the hangover on your multiple get your leverage down fast, your multiple goes up.

[Patrick Dovigi, executive]

Yes. I think -- I mean, what I said, we contemplate all of these different things. I think the reality is -- the short answer is you get there anyway, do you want to wait to get there in 2 or 2.5 years? Or do you want to expedite that, right? And I think some of that is some of the considerations you have to factor what the Feds you're doing and where rates are going, et cetera, and you look at sort of debt maturities. The reality is we don't really have any real material maturities for another sort of 5-plus years. The term loans, the term loan, which is floating today anyway. So there's no concern for me as the largest shareholders. I'll put my equity hat on in my own some. So you get there in 2 and 2.5 years. Do you want to expedite that?

If you want to expedite that, when I sell equity at these levels, -- absolutely not. I mean there's under no circumstance, what I sell equity at these levels. Why would I sell equity at these levels, if I can sell some assets that I have or 15 or 16x to expedite that. because that's sort of the true reflective value of the business today, right? So that's what you would do. People have expressed interest, like I said, in a couple of hundred million dollars of EBITDA that we have, yes, sure. You would instead of -- you get rid of a couple of hundred million of EBITDA, we'd also get rid of a couple of hundred million dollars of interest costs.

So it's not the worst oncoming you get you delever into the low 3s and you get moved to investment grade sort of relatively quickly. So that's a path. Just the best half, I don't know that answer today, but it's certainly an option that is on the table today. And I think for any investors I had a question about returns on invested capital, I think that would clearly [quash ] that thesis of a returns on invested capital because there'd be a material upside that comes from some of those. But it's all things we have on the table. Issuing equity at 10x 2023, just doesn't seem like a very smart or good use of capital, but selling some assets in the mid-teens could be. So if we decide that, that's a path that we want to go down. But all options are on the table at this point, but we'll watch to see what happens with the rate increases in the Fed sort of over the next couple of months, and then we'll sort of make a decision on that.

[Operator]

Our next question comes from the line of Chris Murray with ATB Capital Markets.

[Chris Murray, analyst]

So just maybe taking a different tack. Thinking about margins next year, you did mention the fact that you're looking for about 100 basis points year-over-year. But Luke, you kind of alluded to the fact that you might have some of the impact from RNG. Can you just talk about your best guess at this point about when the RNG projects might start working their way into the program? And what could the possible magnitude of some of those contributions look like over '23 or '24?

[Luke Pelosi, executive]

Yes. Chris, so what we said is by mid next year, we expect the first one to sort of be up and running from a contributing basis. I think in the first couple of months, there's a ramp. And so you put -- and then the second one to be up and running Q3, Q4 of next year and potentially another couple in Q4. So we've always articulated, I think that in your contribution for next year is a small dollars, maybe there's sort of $20 million to $40 million of contribution in year next year depending on that ramp. But it's what you can be having as a sort of launch-off point for 2024, which is what we've articulated as being the sort of first 5 projects in that first bucket as being the prize that we think to be entering 2024 with, right, which is roughly close to $100 million. The in-year contribution, though, again, we'll have better visibility when we give the official guide in early next year, but it's going to be in the order of magnitude, as I just described.

[Chris Murray, analyst]

Okay. That's fair. And I know there's been lots of questions about the puts and takes around the balance sheet. But I go back to Investor Day, and I think you laid out a case for about the balance between the pace of deleveraging versus free cash flow growth. But just really a question, when we look at your acquisition sort of in the quarter, again, I think you really talked about optimizing the footprint. You saw some tuck-ins here. So I guess a couple of questions about this. One, is this really how we should be thinking about acquisitions on a go-forward basis, which is really around optimizing the footprint and over time, you should be able to drive margins that way. And so we shouldn't be expecting larger or rate that deleveraging, if you so chose to.

[Luke Pelosi, executive]

Yes. There's a lot in there, Chris. I think it's important to go back, our strategy has always been to buy a [ plate ]. We've done exactly what there's been. There's been 15 to 20 larger businesses. 3 of those came since we've gone public, we're in reality. And that's where the modestly elevated leverage levels are a result of. We saw these pieces to put together to create what we believe to be now an industry-leading growth a bunch of white space for us, both to execute on that strategy. So I mean, your comment about the level of M&A in a given year, look, it's always difficult to forecast exactly. And if it makes sense, we want to be able to capitalize on it. Do we have anything in our pipeline today that is multibillion-dollar acquisitions?

No, it is the vast majority of everything is focused. We'll be densifying [indiscernible]. And if one of these leading businesses was to sort of come for sale and it needs sense for our model and footprint, then we'd want to sort of look at it. But I think suffice to say, the commitment to deleveraging is there. You heard it from Patrick, whether you do it organically, inclusive of M&A, or you accelerate that through potential sort of raising of proceeds, as Patrick described, remains to be seen. But I think the ability or the likelihood that our M&A of what we're acquiring materially impacts our deleveraging is unlikely. So I think there will be some. It does temper it, but not to a material degree.

[Operator]

And it's Stephanie Yee with JPMorgan Chase.

[Stephanie Yee, analyst]

I wanted to ask about the free cash flow for 2023. I know there was a caveat about it depending on the CapEx needs of the business. I was wondering if you can elaborate on what you are considering? Perhaps do you anticipate higher spending on trucks or perhaps the rebuilding of some of those MRFs. Just ask directionally, would you expect CapEx to be about the same level as '22? Or what are some of the things that are under consideration?

[Luke Pelosi, executive]

Yes. In truck spend, normal course, the rebuilding of the MRFs insurance proceeds. So it's something of that. It's really -- as we continue to develop some particularly some of our net newer markets, we're just seeing more and more opportunities for investment and foundational CapEx that could then serve for years of growth thereafter. I mean, MRFs, as we look across our footprint and the continuing sort of evolving dynamic of recycling in different markets. And there's a significant opportunity to build recycling facilities in many of our markets that are currently underserved by capacity. And that's something that's very interesting to us, particularly as you move to the better sort of service-based model that allows you to underwrite very attractive returns in that business.

So looking at items like that. The RNG, there may be some opportunities for us to augment the current partnership dynamics on certain of the sites and maybe take on something where we have a larger capital component of it and spend more dollars, but then generate more returns. So I would ring-fence the opportunities in above and beyond growth-oriented projects with the sort of ESG type plant that we see a whole host of. Obviously, we're mindful of this conversation that we're having about leverage at the sort of same time and sort of taking that into consideration. But that's what we're contemplating. We'll have a better view on when we report in February. Because really, I mean, if you think about the normal course maintenance CapEx for this business with normal course growth is sort of 10.5%, 11% number, right? That's where we've been. The question is, do we make the decision to deploy incremental dollars into some of the growth opportunities above and beyond that?

[Stephanie Yee, analyst]

Okay. That's very helpful color. And then just on the [ slow ] remediation business. With some of the delays in the projects being pushed out to '23, do you see that as the customer being more cautious in this economic environment, I guess, in your outlook, are you assuming that those projects would start up next year? Or you haven't baked that in?

[Luke Pelosi, executive]

We -- I mean, the vast majority of that is a singular site that they've built half of, and I think everyone fully expects them to continue with the other half, a large Fortune 500 sort of company in the mid-Atlantic area, building the second headquarters. So we see that as continuing. But I think the broader base comment is probably fair if we're entering into sort of a period of unknown that will there be a potential sort of softening in some of that. And that's possible. I think it's important to understand that the actual dollars from that line of business is relatively particularly with the growth of our industrial business is becoming smaller and smaller. We highlighted it in the quarter as it was baked into our guidance. And because the margin flow-through is so meaningful, it moved the needle in that regard, which is really the basis of the call out. But in reality, that business, particularly on the U.S. side, is becoming a smaller and smaller contributor.

So I think we have a base level of that business that's tied to maintenance-type activities, and we don't see that sort of going away. To the extent there is a downturn greater than what we're currently seeing, is there potentially some exposure in that business Sure. But I think the broader based strength of our other offerings are more going to offset as we look in 2023, the contribution that would potentially be lost.

[Operator]

Our next question is from the line of Mark Neville with Scotiabank.

[Mark Neville, analyst]

I just want to follow up on the upcoming asset disposition conversation. I mean, you talked about potentially selling $200 million of EBITDA, $3 billion on a free cash flow neutral basis. I mean that sounds great to me. I'm just ever debating this. What would be the reasons sort of not to do something like that and to keep those assets?

[Patrick Dovigi, executive]

The assets that you've assembled that are clearly high-quality assets like the rest of our business. The reality is what's your view? Are you a long-term holder or you a short-term holder. If you're concerned about short-term stock price, sure. But the reality is our business plan gets us to that leverage level in 2 to 2.5 years anyways. So that would be the -- that's the trade-off, right? Obviously, if look like Luke said, if rates ran up higher, the discussion changes, right? But these are real things that we've put on the table. We're not just sitting around here just hoping for the best and hoping for [ Mr. Powell ] to say he's not raising rates anymore. That's not what we're thinking. We're obviously of every sort of option on the table. That's a real option. That's one of the real auctions. There's other options, but that's one of the real options.

When you say, "Oh, should you raise equity to delever a bit. No, would not sell equity at these levels. They sell some assets before I did that at very high sort of multiples that people have expressed interest in over the last sort of 3 to 4 months. So that's really just a debate. Do you wait 2 or 2.5 years. Again, like we said, we can't control the stock price. We can only control building a great business. But or do you expedite that, and then use that extra firepower to go double down on the markets that you keep. Those are the debates that we have sort of internally.

[Luke Pelosi, executive]

Yes, Mark, I think, as Patrick said, if you own this business yourself and you're a long-term private owner, you wouldn't sell high-quality assets because you have such conviction in the ability to delever regardless. Now if you're putting on a different hat, the shareholder hat in the public equity market, that may drive a different decision.

[Mark Neville, analyst]

Yes. No, I appreciate that. I just had to ask the question.

[Patrick Dovigi, executive]

What I think - Mark, when you look at it -- yes, just quick. When you look at it, it certainly crystallizes the value of what you think -- I mean, from our perspective, and crystal like, you wouldn't be giving up very much, but you'd crystallize the value of what GFL is worth in sort of a base case. And if the real mark is solely just leverage, then that resolves all those issues, and there's sort of nothing left. And you move to IG, and you can refinance the rest of your balance sheet at IG type rates like everybody else. And you've expedited that. You did it in a few months versus a few years, right? So we're thinking about all these things. It's not something we've made a decision on today, but we're thinking about all of them, and we'll continue to think about them and update people as we sort of move forward in our decision and thought process.

[Mark Neville, analyst]

Yes. No, no. Again, I appreciate the difference between short-term, long-term. So I understand all that. So I appreciate that. Maybe just a last question, just on interest expense. I think if I do the math, it's sort of $115 million for Q4 cash interest. I annualize that, I get like $460 million. And then I mean you said $490 million, so you're building something into higher rates. Is that sort of roughly how we're thinking about interest next year?

[Luke Pelosi, executive]

Yes. Like the cash interest because of the way we lock in, enroll 3-month [ BAs ] you're not necessarily Q4, you're absolutely right. It's in that 115 zip code, but you're not actually feeling the full grant of all the recent rate increases. So if you take that into next year at the current prevailing rates for next year, you have an annual -- you have a $490 million expense. It's just more a function of the delay in which our cash payments are based on the prevailing rates a few months prior.

[Operator]

There are currently no additional questions waiting at this time. So I'll pass the conference over to Patrick Dovigi for closing remarks.

[Patrick Dovigi, executive]

Thank you, everyone, much appreciate for joining us this morning. We look forward to speaking to you in February when we report our year-end results and our guidance for 2023. Thank you.

[Operator]

That concludes the GFL Environmental Inc.'s results call for the third quarter of 2022. Thank you for your participation. You may now disconnect your lines.