GFL Environmental Inc

TSX:GFL

Hello, everyone, and thank you for joining the GFL Fourth Quarter 2024 Earnings Call. My name is Marie, and I will be coordinating your call today. [Operator Instructions]

I will now hand over to your host, Patrick Dovigi, Founder and CEO, to begin. Please go ahead.

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 fourth quarter and providing our guidance for 2025. I'm joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.

Thank you, Patrick. Good morning, everyone, and thank you for joining. We have filed our earnings press release, which includes important information. The press release is available on our website.

During this call, we'll be making some forward-looking statements within the meaning of applicable Canadian and U.S. securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and U.S. securities regulators.

Any forward-looking statement is not a guarantee of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date, and we do not assume any obligation to update these statements, whether as a result of new information, future events and developments or otherwise.

This call will include a discussion of certain non-IFRS measures. A reconciliation of these non-IFRS measures can be found in our filings with the Canadian and U.S. securities regulators.

I will now turn the call back over to Patrick.

Thank you, Luke. The quality of our asset base and the strong execution of our committed employees once again drove industry-leading organic growth for the year. In Q4, for the second quarter in a row, we saw 300 basis points of margin expansion. At the same time, we exceeded our internal expectations for growth across revenue, adjusted EBITDA and adjusted free cash flow.

The momentum of our financial performance gives us conviction in our key value creation strategies. One, generating durable price cost spread; two, focusing on the quality volume; three, benefiting from improvement in employee turnover; four, optimizing our platform through improved asset utilization; five, realizing contribution from our sustainability-related investments; and six, capturing synergies from accretive M&A within our existing footprint.

We believe our continued focus on these strategies will provide significant runway for further value creation over the coming years. The previously announced sale of our ES business is on track to close on March 1. As we said in January, this transaction facilitates the acceleration of several of our key financial objectives while preserving the opportunity to participate in expected material upside through our retained equity in the business.

The sale leaves us with an enhanced balance sheet that will provide us with incremental capital deployment optionality, creating capacity for additional M&A activity and also, for the first time, allowing us to do share buybacks and increase dividends to become meaningful drivers of our shareholder value creation. Higher return on invested capital organic growth initiatives will continue to be prioritized.

We deployed $300 million in incremental growth investments in 2024, consistent with our 2024 capital allocation framework. We intend to deploy $325 million of incremental growth capital in 2025, mainly comprised of the final investments required for the EPR contracts we've been awarded. By the end of 2025, cumulative investments into EPR will total approximately $600 million, with approximately $50 million remaining to be spent in 2026 and 2027. This material step-down will free up cash flows for other deployment opportunities such as share repurchases.

M&A activity in 2024 was lower than what we would have done as we focused on the balancing both accretive organic growth investments and deleveraging our balance sheet. We closed 11 transactions, all of which were small, except for the vertically integrated asset we acquired in Florida in the second quarter. This asset was highly complementary to our existing footprint in the fast-growing Florida market.

In Q4, we also saw the positive volume contribution from the broader network we have created in Florida that facilitated a higher level of participation in hurricane cleanup efforts. Our pipeline remains robust, and we see many similar opportunities to densify our existing networks and improve asset utilization through tuck-in M&A across our existing footprint.

For 2025, we are, once again, guiding industry-leading organic growth across all of our financial metrics. Recall that in 2024, we laid out an extremely detailed plan, raised that guide multiple times throughout the year and beat our expectations on all fronts. We see multiple avenues of upside to our current guide that gives us confidence in our ability to meet and potentially exceed the expectations for the year that Luke will walk through in detail.

And we view 2025 as just the beginning. We believe we have an exceptional multiyear outlook, and we look forward to walking through the details at our Investor Day on February 27 at the New York Stock Exchange.

I will now turn the call over to Luke for additional color on the quarter and the 2025 guide, and then I will have some closing remarks before we open it up for Q&A.

Thanks, Patrick. Consolidated revenue for the quarter of $1.986 billion was ahead of our guidance. Fourth quarter Solid Waste organic growth accelerated to 7%, excluding the impact of the divestitures, driven by Solid Waste pricing of 6% and volume of positive 2.3%, 75 basis points better than planned and a 310-basis-point sequential improvement over Q3.

The return to positive volumes was expected in the fourth quarter as we anniversaried most of the impact of our targeted volume-shedding initiatives. Hurricane cleanup activity and the accelerated commencement of EPR-related activity were the main drivers of the volume outperformance versus plan.

Decreases in energy prices reduced fourth quarter revenues from fuel surcharges as compared to the prior year, and lower commodity prices in the quarter were a headwind to revenues as compared to our guidance, although to a lesser extent than we historically would have experienced as our transition to EPR continues to mitigate our exposure to commodity price fluctuations.

Environmental Services revenue was down 2.2% compared to the prior year, inclusive of the impact of lower used motor oil pricing, lower soil volumes and a tough comparison arising from large-scale event-driven revenue realized in the prior year period. Excluding the impact of these 3 items, segment revenue was up 2% versus the prior year.

Adjusted EBITDA margins were 29.1% for the quarter, 300 basis points higher than the prior year, consistent with our guide. Solid Waste adjusted EBITDA margins were 33.4%, a 270-basis-point increase over the prior year, inclusive of the dilutive margin impact of the extra workday as compared to the prior year and increased cost of risk as well as the impact of reclassification of certain costs that were recognized in the corporate segment in the prior year period. Commodity and fuel prices, FX and M&A and the impact of recent divestitures were tailwinds to margins.

Environmental Services adjusted EBITDA margins were 28.9%, 390 basis points ahead of the prior year despite headwinds from used motor oil pricing. Recall, we had a fire at one of our facilities in December of last year, and that reduced Q4 2023 profitability. The lapping of this event was a tailwind to margins, as was the timing of incident claim costs and performance compensation accruals.

Adjusted free cash flow and adjusted net income were $360 million and $86 million, respectively, both ahead of expectations. Q4 cash collections were negatively impacted by Canadian postal strike in December, creating a headwind to working capital in the quarter, an investment we expect to recover in 2025.

We deployed $51 million of incremental growth CapEx during the quarter, bringing the total for the year for incremental growth CapEx of $298 million. Together with the approximate $590 million we deployed into M&A, total capital deployed into these growth initiatives was $890 million, in line with the $900 million cap we guided to in our initial capital allocation framework at the beginning of 2024.

With the significant strengthening of the U.S. dollar versus the Canadian dollar in the fourth quarter, our net leverage at the end of the year increased to 4.06 due to the translational impact of revaluing our year-end debt stack at the year-end FX rate of 1.44. If you recap the year-end balance sheet and the full year's adjusted EBITDA at the FX rate of 1.35 on which our guidance was originally based, year-end net leverage would have been 3.85, exactly in line with the target we committed to at the beginning of last year.

As Patrick said, we expect the ES transaction to close March 1. As previously indicated, we intend to repay approximately $3.75 billion of long-term debt shortly after the closing of the sale, giving rise to annual cash interest savings of just under $200 million. We also plan to use up to $2.25 billion of the proceeds to opportunistically pursue repurchases of GFL shares with a view to reducing the current overhang as well as reducing our current diluted share count. Pro forma for the planned use of the ES proceeds, net leverage is expected to be approximately 3x.

Looking forward, the strength with which we are exiting 2024 and our outlook for 2025 sets up guidance better than the initial framework we provided in Q3. In the press release, we provided guidance both on a status quo basis as well as pro forma for the divestiture of ES. As we have a high degree of conviction that the ES sale will close this coming weekend, the focus of our guidance will be ex ES, and that is what I will walk through now.

Top line growth is expected to be 6% to 7%, yielding $6.5 billion to $6.55 billion of revenue. Underpinning this growth is 5.25% to 5.5% price, which we are implementing in response to our expected cost inflation of low to mid-4s. As we have said, we believe price-cost spreads over the next 5 years can be structurally higher than they were in the past due to the highly disciplined industry backdrop as well as incremental pricing opportunities unique to GFL given the relatively nascent stage of our price discovery versus our peers that are more mature in this area.

Partially offsetting the price growth is 30-basis-point headwind from commodity prices and fuel surcharges. Note that the continued deterioration in commodity prices since November has created a headwind versus when we provided our initial framework for 2025, albeit to a lesser extent than typical, thanks to the reduced commodity price exposure resulting from our EPR transition.

On volume, we are assuming roughly flat at the midpoint, plus or minus 25 basis points for the year. The volume assumption underlying the initial 2025 framework provided in November was slightly higher than this, but we're being conservative in light of the severe winter we've seen across many of our markets that we will expect will impact Q1 volumes.

FX is assumed to be 1.41, which adds 200 basis points, and net M&A contributes negative 80 basis points, which is largely the result of the Michigan divestitures that we completed in Q2, partially offset by the small rollover of the modest M&A we did in 2024. Excluding the impact of the 2024 Michigan divestitures, expected revenue growth is over 8%.

For the third year in a row, we are guiding an industry-leading 100 basis points of adjusted EBITDA margin expansion. Consolidated adjusted EBITDA margin is expected to be 29.7%. Solid Waste margins are expected to be 33.8% to 33.9% and corporate costs of 4.1% to 4.2% of revenue. The step-up in corporate cost intensity is not due to an increase in cost but rather reduced revenue as a result of the sale of the ES business. We expect meaningful leveraging of the corporate cost segment as we grow our top line, both organically and through M&A over the coming years.

Commodity prices and the RNG ITCs previously recognized in the P&L in 2024 are 45-basis-point headwind, whereas M&A rollover, the Michigan divestitures and FX are a 45-basis-point tailwind, meaning the 100 basis points is effectively underlying organic margin expansion. Again, as we have transitioned to EPR, our recycling business is structurally less sensitive to commodity prices due to the higher proportion of overall recycling revenues derived from processing fees.

Adjusted free cash flow is expected to be $750 million. For the walk from adjusted EBITDA, we expect normal-course CapEx of $700 million to $725 million net of cash interest of approximately $350 million, approximately $200 million lower than what it would have otherwise been as a result of the use of the ES proceeds, and $125 million of other cash flow items, mainly ARO and cash taxes. The $325 million of planned growth capital is excluded from the guide.

Free cash flow conversion as a percentage of adjusted EBITDA increases 230 basis points to 38.7% as we push towards our near-term goal of free cash flow conversion that starts with a 4. We believe we have a clear line of sight to industry-leading rates of improvement to our free cash flow conversion, which will be a key focus of our discussion at this week's Investor Day.

As Patrick mentioned, the post-ES delevered balance sheet allows for the reignition of our M&A strategies that have been tempered over the past 18 months. Our pipeline remains robust, and the incremental M&A completed during the year will be upside to our guide. I want to highlight that our M&A program can be executed without having a significant impact on leverage, thanks to the power of our financial model, which provides dependable organic delevering each year through adjusted EBITDA growth and consistent strong free cash flow generation.

Specifically, as it relates to the first quarter of 2025, we expect consolidated revenues of approximately $1.52 billion at approximately 27.1% adjusted EBITDA margin, which implies a 100-basis-point expansion over the prior year pro forma for the ES sale. Q1 adjusted free cash flow pro forma as if the ES sale occurred in January 1 is expected to be about 0, less than the prior year, largely on account of the timing of cash interest payments and anticipated investments in working capital and CapEx.

I will now pass the call back to Patrick, who will provide some closing comments before Q&A.

Thanks, Luke. As we said in January, I don't think our setup has ever been better. We have proven that we can execute on our strategic plan, and we believe that we have laid out the foundation for long-term growth and value creation for all shareholders.

Our go-forward strategy remains simple and clear. We're going to continue to generate industry-leading organic growth in part from the near-term ramp-up from EPR, RNG and the other help -- self-help strategies I described in my opening remarks. We're going to improve free cash flow conversion, execute on our robust M&A pipeline while maintaining leverage in line with our targets and continuing to progress towards an investment-grade credit rating.

We're going to broaden our capital allocation strategy to include share buybacks as well as increased dividends. At our Investor Day, we will expand on each of these items and demonstrate why we believe that GFL is uniquely positioned for industry-leading financial performance over the near term.

I always want to end with thanking our employees. Our continued success would not be possible without their tireless hard work and dedication, and I want to thank each and every one of them for their continued contributions.

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

[Operator Instructions] Our first question comes from Sabahat Khan of RBC Capital Markets.

Okay. Great. Maybe before getting into the operation, just a broader question on capital allocation here. Your guidance at the time of the ES announcement was for pro forma leverage to be around 3x. Maybe if you can just update us on sort of the capital allocation priorities as we look ahead to the closing on March and kind of there forward.

Yes. Thanks, Saba. As we said and Luke mentioned in his comments, we expect to close on the 1st and then receive the capital on March 3. I think it's going to be twofold, initially. As we said, $3.75 billion roughly is going to go to repay debt, and that's going to be a combination of revolver, term loan as well as some payable bonds that exist. I mean the term loan revolver will be done fairly instantaneously. The bonds will take a couple of weeks. But certainly, before the end of the quarter, that debt will be repaid.

And then we're going to turn our attention to share buybacks. I think from our perspective and the Board's perspective, the stock continues to be undervalued here. We think when we look out later into '25 into '26, given all the investments we've made around EPR, RNG, I mean we've given a conservative guide. And with the organic expansion we're expecting, coupled together with the M&A, the Board thinks that the stock is materially undervalued here.

So what you're going to see from us is twofold. You're going to see most likely in the next 24 to 48 hours, normal-course issuer bid, which we've applied for exemptive relief to get -- to buy back up to 10% of the public float. So that -- and then there will be a combination of doing that. And I think from our perspective, we can -- depending on the rolling volume calcs on the U.S. line, we could -- will be buyers of probably 350,000 to 500,000 shares a day up to that. And on the Canadian line, we can buy probably up to 65,000 to 70,000 shares a day on the Canadian line.

In conjunction with that, we are also finalizing now that we have clarity on the closing, we expect to have clarity on how we're actually going to buy back shares that Luke referenced in terms of the overhang from the private equity shareholders, meaning Ontario Teachers', GIC and BC Partners. So we expect clarity on that from the OSC over the next sort of week or 2 as well. So that will also be a combination.

So between the 2 of those, we expect that we'll be able to buy back the $2.25 billion worth of shares that we had articulated when we announced the transaction.

Okay. Great. And then maybe just on some of the margin commentary that Luke shared for 2025. Maybe you can just dig a little bit deeper into the -- maybe the self-help levels. I know you'll get a bit more detailed at the Investor Day. But maybe for 2025, what are some of the levers that are driving this margin improvement for this year and maybe the stuff that we should wait for, I guess, over the next few years that you'll maybe take later this week?

Yes, it's a great question, Saba. But obviously, we're really pleased with the setup and being able to come out with industry-leading margin expansion yet again.

If you think about the drivers, as you know, I always like to talk about the exogenous factors, if you will, and if you think about the guide, you have 100 basis points of underlying Solid Waste margin. If I think about commodities and fuel with where we sit today, it's about a 20-basis-point drag. And then last year, the sort of recognition of RNG ITC that ended up in EBITDA is another 25-basis-point drag. So you got 45 basis points sort of against you.

Now the good guys. M&A, albeit a small amount, is accretive, and that's 5 basis points. The FX today is 5 basis points, and you got sort of a 30-, 35-basis-point benefit from the Michigan divestitures.

So the good guys and bad guys articulated there a bit of a wash. So really leaving this 100 basis points of underlying as really organic margin expansion.

And now to your point, on the self-help levers, I mean, if you think about a price-cost spread, we're thinking of cost inflation sort of low to mid-4s against the sort of price number of that kind of low to mid-5s. So you're banking on 100 basis points of spread there, which effectively gives you 60 basis points of margin expansion coming out of that spread. So you really have another sort of 30 to 40 bps coming from the self-help levers.

And what I'd say, Saba, is what gets us excited, it's not any one thing. It's really all of the things contributing, right? And so you have the benefits of EPR and RNG rolling on. You're having the benefits of continued sort of fleet and asset utilization. You're having the benefits of the employee turnover, the quantification of which is multifold, but you see it from onboarding cost, but productivity, cost of risk, et cetera. So what gets us excited is the sort of incremental contributions from each of these levers working in concert to yield these sort of industry-leading results.

So on Thursday, we'll talk about each of those levers in a little bit sort of more detail as to what we think the art of the possible can be. But safe to say, we have a high degree of conviction that the realization of those benefits ratably over the next couple of years is going to continue to deliver exceptional results at the margin and, more importantly, free cash flow conversion line.

We have a question from Patrick T. Brown of Raymond James.

It's Tyler. Can we just start a little bit more on the EBITDA bridge? So if we started pro forma Solid Waste plus corporate, I think you're at, call it, $1.76 billion. But just how much is FX? And then how much is EPR and RNG laying in this year? And I think you've got maybe some corporate, a little bit that goes with ES as well. But can you talk a little bit about the puts and takes?

Yes. So that's right, Tyler. I think if you take out -- I'll do the bridge of revenue, and then we can talk about margins. But if you think about a starting point bridge, you have roughly [ $6.150 billion ] of revenue last year pro forma if you back out ES, right? Now you have $100 million roughly from the Michigan divestitures. So if you want to sort of normalize, you would take that out. And so you're at roughly this sort of [ $6.050 billion ] sort of ex ES.

So from that, what we're saying at the top line, as I said, is 5.25% to 5.5% price. You're getting volume of sort of plus or minus 25 bps, so assume that sort of 0 at the midpoint. You have in commodity price sort of minus 25 bps. Now that would have been significantly higher when you think about how the actual underlying index has moved. But as we've said, the benefit of sort of EPR transition moving to fixed fee processing model is shielding us from some of that volatility. But nonetheless, you got a 25 bps drag from the commodity price component.

M&A rollover is 80 bps, which is really an 80 bps positive from the small amount of M&A, offset by the 160 bps of Michigan. So depending on if you start with the [ $6.150 billion ] number or [ $6.050 billion ], how you treat the divestitures.

And then on top of that, to your point, that FX of 2 points, right? So we're saying an FX assumption of 1.41. Now realize that is lower than where we are at today. And as we set our guide, we always like to sort of pick the prevailing interest rate and use that as the basis for the guide. There's been a lot of volatility in FX as of late, and there continues to be. So with a bit of the balancing target for sort of conservative purposes, we just took the sort of 1.41 rate.

Worth noting or reminding folks that the sensitivity of the revenue line is about $30 million per point of FX and about sort of round numbers, $10 million at the EBITDA line. So if you were to recast this guide at, say, something I think today's FX might be close to 1.44, that sort of 3-point difference would yield an incremental roughly $100 million of revenue and over $30 million in EBITDA just for sort of context there.

So that's the sort of revenue bridge, saying you're putting it all together at the EBITDA line, I think you're right. You start with roughly [ $1.760 billion ] of EBITDA in 2024 pro forma for removal of ES. And then you can think about the natural fall-through of each of those components as they work towards the EBITDA line.

RNG and EPR, the specific items you called out, are ramping up in their contribution. RNG will go from a sort of roughly $30 million -- $25 million, $30 million contributor in '24 upwards to sort of $50 million in '25. And then EPR, as we said, we're going to have to -- we originally thought we'd have about $10 million in '24. With the outperformance we had in Q4 and the way of the commodity price movements, there was closer to sort of $20 million realized in '24. As we said, you get sort of roughly $35 million to $40 million lift of incremental coming into '25. And again, that's sort of helped with the sort of margin walk.

And then the last piece just to note is what EPR is uniquely doing is it is shielding us from the downward pressure we would have otherwise seen as it relates to commodity price decline. So we're still feeling some of it but not as great as we otherwise would have. So you effectively get this incremental lift or preservation of your EBITDA base by virtue of that move to the sort of fixed fee processing model.

So those are the moving pieces. Obviously, there's many other puts and takes underneath that, but those are the sort of broad strokes that we think are working out to that guide we just laid out.

Excellent. Okay. Lots of good detail. Appreciate that very much. Patrick, can we talk quickly about GIP? Can you just give us some updated financials there, maybe EBITDA, the leverage profile? And then now that you've got kind of ES behind you, what's the plan to monetize that asset maybe over the next couple of years?

Sure. Yes. So 2024 was a great year. Finished in sort of low $200 million of EBITDA. We have a plan this year for approximately $225 million of EBITDA as a plan. We have 3 M&A transactions lined up for that business. So again, back on plan, which is great. Interestingly enough, we have had a significant amount of reverse inquiry into that -- about that business, particularly on the success that came from the ES transaction.

So it is something we're going to look at and explore. Would it be a full outright sale? No, because I think there's a significant amount of value creative -- creation opportunities within that business, particularly coming out of this crazy inflationary environment. But it is something we're going to explore. And maybe there's a partial liquidity event that comes with that business, but we're going to explore that post closing the ES business. But it's on track, performing great. Valuations in the sector sort of have never been better. So we're feeling very good about it and very confident about it.

We have a question from Kevin Chiang of CIBC Wood Gundy.

Luke, maybe just on the margin guide for the year and maybe for the first quarter. I think you're calling out about 100 basis points for both. I guess I think the margin cadence through the year, I would have imagined Q1 would have been tougher. Just you called out winter, and I suspect commodity prices. I know EPR helps here, but commodity prices, the comps are probably tougher to start off 2025. Just I guess, how do I square a pretty good margin lift in Q1, which looks maybe is your most challenging seasonal quarter with the full year outlook also being 100 basis points?

Yes. It's a great question, Kevin. Thanks for it. I mean, so if you think about H1 versus H2, I mean, H1 has the benefit of this Michigan divestiture, right? And just goes to show the power -- Patrick mentioned the comment about focusing on quality of volume, right? And the benefit in Q1 of not having that sort of lower-quality volume is roughly sort of 65 basis points, right? So providing a lot of support to offset, I think, one, the commodity and other sort of exogenous type factors, but also the sort of seasonal component.

Now if you think about the commodity ramp for last year, I think it's important to understand the cadence there because recall, it was really a Q2 into Q3 ramp when the prices took off. So Q1 over Q1, we actually have a slight lift on commodities at the margin level, and that actually turned sort of negative as you get into the sort of back end of the year.

And it's also just the sort of quality of the underlying sort of margin expansion that's happening sort of ratably, right? And so you're seeing that come through in each of the quarters. We anticipate being able to have the right term of industry leading, I keep saying, but this very impressive organic growth across each of the quarters. I think Q3 is going to be the toughest. Just by virtue, if you go back and look at what you're lapping, that was a record-breaking quarter for us. But the H1 is certainly benefiting from, again, with the outsized contribution from the sort of divestitures as well as just the cadence and timing of some of the exogenous factors on commodity.

That's very helpful color. I apologize if I missed this. I did notice a step-up in your organic growth in the U.S. up to 5.8% on a -- I guess, on a pro forma basis versus what you're tracking in Q3 and, I think, through the first half of '24. Anything to call out there in terms of the step-up in the fourth quarter?

Yes, Kevin, I'd say if you look at the U.S. sort of specifically, I mean, both markets have been contributing sort of at the price line in a very sort of satisfactory manner to us, a little bit of outsized price in Canada as you're getting new municipal contracts rolling on and you're getting the sort of price increase sort of benefit from that.

I'd say the really strong story in the U.S. in Q4 was the sort of volume piece, right? And again, as you lap the sort of intentional shedding and you think about how that's materializing in volume, I mean, the U.S. volumes increased 360 basis points sequentially from Q3, right? Q3 was negative 1.9%, and that increased to 1.7% in Q4. Now part of that was the anniversary. Part of it was strong success in the sort of hurricane cleanup efforts that we're able to participate in, thanks to our optimized platform in those regions. So that certainly sort of contributed to the step-up there where you were otherwise seeing negative volumes during the year.

We have a question from Bryan Burgmeier of Citigroup.

Maybe just digging into RNG a little bit. Do you expect to lock in any RIN pricing for this year? And are you able to maybe provide an earnings sensitivity to RIN prices just so we can mark-to-market that throughout the year? And then after the $325 million in growth CapEx, is it possible to say how much you think could be left for '26 and '27?

Yes. So this is Luke speaking. I'll speak on the first point or the second comment about sensitivity. If you look today, we're assuming RIN pricing in around the sort of $2.40 level, roughly with what we have online. Every $0.50 of RIN prices would drive roughly $15 million of EBITDA. Now at maturity, every $0.50 of RIN prices drives about $50 million of EBITDA. But obviously, with the sort of lower volume of MMBtus that we've yet to have in the system, today's sort of sensitivity is a little bit lower.

I'll pass it to sort of Patrick as you think about sort of the locking in of pricing.

Yes. So long-term locking of pricing, obviously, we don't feel like today is the right time. But as the year progresses similar to the last Trump administration, we think that it will find a level set in place. And I think from an industry perspective, we think $2.75 to $3 is probably still the long-term number. That's what all the people a lot smarter than me think.

That being said, we're going to forward sell all of our RINs for the year. So our expectation is that we don't see much volatility from that because everything will be presold for the year in the near term.

And Bryan, on the last -- on the CapEx piece, each year, the sustainability spend has been roughly sort of 2/3 EPR and other and then a sort of 1/3 RNG. If you look after this year, there's probably another sort of $100 million, $150 million of sort of net CapEx that's going to come out of our pocket as it relates to RNG over the sort of '26 through '28 levels. So I think that overall spend comes down considerably from today's levels. There will still be some as it relates to finalizing those last RNG projects.

Okay. Understood. And then last question for me, and then I can turn it over is I know guidance doesn't have any kind of incremental M&A in there. Just curious if you've either closed any deals this year and then if you think maybe last year's $600 million in spending is like a decent proxy for '25. Or maybe we should just hold tight until the Investor Day for more details. I'll turn it over.

Yes. I mean we'll -- listen, I think we've closed one small deal this year. The expectation is post getting the dollars that the M&A program is going to ramp up to what it was before. And I think we typically guided to somewhere between a spend of sort of anywhere between $500 million to $700 million. I think the upside case is probably closer to $1 billion. But in that ZIP code is what our expectations are getting back to a normal year versus last year.

Obviously, last year was an abnormal year just because we had the capital allocation framework, balancing the EPR, RNG spend, coupled together with M&A, coupled together with delevering. Now that that's all behind us, we'll get back to normal course and do what we do best and continue to execute on the strategy that we've deployed over the last 17 years. But we'll have a very good update for you at Investor Day on Thursday.

We have a question from Jerry Revich of Goldman Sachs.

This is Adam on for Jay today. Just one follow-up on M&A. It sounds like the pipeline remains robust. Can you just talk about the mix of opportunities in the M&A pipeline from a standpoint of Solid Waste business lines or geography?

Yes, it's going to be a combination of U.S. and Canada in existing markets where we're currently operating that densify existing markets where we already own a substantial amount of postcollection assets. And I think you're going to see that move throughout both Canada and the U.S.

I think from a dollar-weighted perspective, you're going to see more dollars get deployed into the U.S. just because of the size of opportunity and where we're looking to expand a bunch of those operations, again, around markets where we have landfills, recycling facilities, transportation. But my expectation is probably something like 75%, 25%. 75% of dollars go to the U.S. 25% of dollars go to Canada.

Great. And then can you just talk about your assumptions for recycling prices in the guide and update us on how we should think about sensitivity to recycling prices based on risk-sharing mechanisms in place today?

Yes, Adam, it's Luke speaking. I mean, we exited 2025 at roughly about CAD 180 per sort of Canadian tonne when you look at where the sort of markets were. I think one thing to note when you look on a year-over-year comp is that during periods of price volatility, I mean, we ultimately sell at a spread above the market price, right? And when you have periods of rising prices, we're often able to sort of increase that spread that we're able to realize and then the inverse as prices decline.

And why I highlight that is when you look at the 2024 average rate, it's about CAD 200, CAD 205 per tonne -- per Canadian tonne. It's about $25 delta when I think about the $180 exit rate but our realized rate during '24 was significantly higher than that because of that sort of price volatility. And you're looking at more like a sort of $40, $45 delta in terms of the sort of pricing year-over-year on which our guide is based.

Now at the roughly 1 million tonnes that we have, that would have implied like a $45 million headwind. The reality is today, we're seeing a significantly lower headwind than that because, again, as I mentioned, fixed away from volatile commodity-based contracts to fixed fee processing model.

So today, where we sit, it's roughly every $10 change is going to be about a $5 change in EBITDA, the flow-through. And as we progress through '25 and '26, that exposure will reduce even further from there. But that's how I would think about the setup for 2025 as we sit today.

We have a question from Devin Dodge of BMO.

So I wanted to start -- ask a question about the OTPP-appointed directors stepping down. I think the investor rights agreement allowed teachers to appoint a Board member as long as it owned more than 5%. Just based on the buyback with the proceeds from ES that you've talked about before, I don't think Teachers' would fall below that threshold. So just wondering if you could provide a bit of color behind the Board change and if there is any read-through to the planned buyback activity?

No. No change in the read-through. I think from our perspective, as we said, looking at Board composition, we've approached both of the sponsors and thinking about what the long-term view is on the Board, how that Board representation is going to play out, particularly given that the levels that they're going to be at post the buyback and then allowing the company to set itself up to go out and think about a long-term Board and again, recruiting individuals that would go on the Board in replacement of that's more of the sponsor type, right?

And as I said previously, our expectation was that Ontario Teachers' would come off in sort of early 2025, which is happening now. And obviously, with the sell-down, our expectation is that one of the BC members will come off as well.

So I think the way the investor rights agreement reads is they have the right to appoint it. It's not a necessity. And then just given how close they'll be to the threshold post the buyback, the expectation was we got one of them out of the way now, and we expect the other one. We're in process now of working with our external advisers as well as the current Board on what that Board is going to look like and what new members will be appointed to the Board. So that's all in process as per plan.

Okay. Good context. And then maybe just a modeling question, so it might be for Luke here. But the repayment of lease obligations on the cash flow statement, look, there's been a fair bit of quarter-to-quarter volatility. I think it was almost 0 in the quarter. Just wondering if you could provide some color on what's driving some of that noise in that line item and what that should be on a go-forward basis and the mix between operating and finance leases.

Yes, Devin, it's Luke speaking. On a go-forward basis, if you think about it, it's roughly like $100 million, $120 million per year amount. And I say that is U.S. dollar denominated. You get some FX sort of volatility in that.

The operating versus finance, as you know, like it doesn't really sort of exist under IFRS per se. So it's not a classification that we have readily available. I think of it sort of roughly, call it, 75% if you think about operating, which is buildings primarily, it's like offices and some of our key facilities that are leased, and the other balance would be equipment type financing amounts.

Okay. And maybe just the volatility. Can you help me understand just the -- is it the timing of payments? Or what's driving some of that quarter-to-quarter volatility?

This year, what you had is equipment, specifically corporate aircraft lease that you had typically under a lease and you had upfront payments for replacement aircraft being made, and then we received a reimbursement in Q4 as it pivoted into a regular loan for those payments. And so you just had some puts and takes within the quarters as a result of those amounts.

We have a question from Konark Gupta of Scotiabank.

Just wanted to understand, Luke, what's your expectation for the cadence for net leverage as the year progresses? And I'm asking this like from a perspective of you have obviously, the capital deployment for the sustainability, the ES sale will happen in the next month or so, and then you have some M&A as well happening. So I mean how do you see the ebbs and flows of the net leverage as the year progresses?

Yes, Konark, it's a great question, and obviously something we're going to pivot towards being very proud to report on as opposed to historically. Maybe it wasn't always the case. But if you think pro forma for the transaction, you have roughly sort of 3 turns right out the gate. And then as you go forward from here, I mean, ex M&A, I'll start, it's just the sort of natural sort of deleveraging that happened throughout the year, between Q2, Q3 and then Q4. You bounce around in and around there, but you're going to end the year otherwise at 2.9x on an organic basis. And that's inclusive of the sort of growth CapEx, et cetera.

Now the actual sort of cadence from each of the periods, typically, H1 is a bit of a heavier investment on both working capital and CapEx. I mean H1 will be roughly $100 million working capital investment, and you spend sort of 55% to 60% of your total CapEx spend. So from a free cash flow perspective, H1 is a little bit more of investments. You will see a slight uptick in Q2 on that sort of pro forma number. And then that ratably recovers through Q3 and Q4.

Inclusive of potential M&A, which would be all be additive to the guide at the EBITDA level, that could impact leverage depending on the timing of when those deals close. However, what I would say, and I highlighted in the prepared remarks, the relative impact of M&A, either the size and overall sort of EBITDA and free cash flow generation of the business is much more muted today at the leverage line. Specifically, if you look at it, you can spend about $500 million at 7.5, 8x on M&A, and that would impact leverage by roughly sort of 15 basis points.

So that's part of our excitement of the story of this inflection point that's been reached, whereas you can execute on the M&A strategy and still maintain leverage at this desired level. So that's something that we've historically been able to do and gives us great sort of conviction in our ability to sort of balance the various sort of interest in driving equity value creation as we go forward from here.

That's great color, Luke. If I can follow up quickly. We have seen -- one of the companies in Canada was trying to redomicile in the U.S., and then they pulled back. I'm just wondering, like with the ES sale transaction, is there any consideration to change anything on the headquarter side of things or from accounting perspective, whether to go to U.S. GAAP or not?

Yes, nothing -- no decisions obviously have been made. Again, in the Investor Day, I think you'll see us lay out what the 2 paths are for that. I think from our perspective, index inclusion would be great. I think when you look at where we sort of sit in the rankings for the TSX 60, I would say we're pretty close in Canada to probably be one of the next, obviously, industrial names that would go into the TSX 60. Obviously, there's some larger companies like Fairfax and -- particularly, Celestica on the technical side, Fairfax on the financial side. And it looks like we would be next from what everybody send us in terms of data going into TSX 60. Obviously, industrials and TSX 60 are underweighted today. So it's going to be a question of what the committee there thinks in terms of what goes in next.

But given our market cap and trajectory and sort of float where it's moving to, our expectation is that -- as someone comes out, we'll probably be 1 of the next 2 or 3 that would go in. Maybe the next one that goes in, we don't know. As far as us looking at it, obviously, with a substantial amount of our revenue now in the U.S., that is probably an avenue that's available to us as well. Although it's not as clear, obviously, we would never reincorporate in the U.S. We think that's not possible. I mean anything is possible, but from a tax efficiency perspective, it's not efficient. So that would never happen, but there are paths, and there are other examples of companies that have reincorporated their head offices to get U.S. industry inclusion as well as checking the box with about 8 other things.

So again, that's something we're obviously actively looking at today. It's a question of what opens the broadest base of investors. I think either path is good. I think currently, we're focused on the Canadian TSX 60 path. But at the same time, post the ES divestiture, we'll look at both, and we'll make a determination as to what -- where we see the most amount of value that can be added to our name over time and where we can get the most amount of flows of buyers and shareholders into our name. So both in progress, I can give you a pretty good summary at the Investor Day on Thursday.

We have a question from Chris Murray of ATB Capital Markets. As we are not getting any audio from Chris' line, we will move on the next question. We have a question from Brian Butler from Stifel.

Just first one, starting off on maybe pricing when you talk about -- you gave good color on kind of cadence on some items. Could you talk maybe about pricing cadence through the year for 2025 in that 5% to 5.25%?

Yes. Brian, great question. It's Luke here speaking. I mean, I think in a typical year, you're going to see the cadence come out with the highest print in Q1 and then kind of ratably stepped down from there. Now obviously, that's predicated on our current assumptions of how the year played out. But I think as we've demonstrated before, to the extent cost inflation behaves differently than anticipated, we will go back and revisit that for the strategy because, again, we're going to continue to ensure that we get paid an appropriate sort of rate of return on the services that we're providing.

But where we sit today, we kind of start at a higher 5s. Middle Q2 and Q3 is in that's sort of mid-5s, and you end the year at that sort of lower 5s, and that's what's going to blend to that sort of 5.25% to 5.5%.

The one thing I'd just remind everyone on pricing, it's just the way the pricing cadence works. We already have sort of 70% to 75% of those price dollars pretty much locked in post Q1. So again, I think the downside on that number is de minimis, and it's really a question of whether cost inflation behaves as anticipated that will drive the need to potentially explore incremental price.

Perfect. Great. And then second, you gave super strong outlook kind of going into 2025. What do you guys see as kind of the biggest challenges for 2025, being that fundamentals seem in a good place, a lot of self-help levers to pull? What kind of needs to be overcome, if there is anything?

Yes. I don't think you see anything material in front of us. I think the business has become very predictable as you've seen quarter after quarter after quarter. I would say weather maybe in Q1 a little bit more impactful than probably the previous last 3 years, particularly in Canada Northeast. But again, just looking at what's -- how the business performed even through that, we're almost -- we're 2/3 of the way through basically Q1. So we feel pretty -- we feel very good about Q1.

I would say the only unknown out there potentially is there's all this tariff noise. Again, from our perspective, we think it has a de minimis impact on anything. Does it change potential capital requirements depending on if OEMs have to put through some incremental surcharges, which then I think would force us to go back to the market to push through more price? But other than that, we feel very good about what we put forward.

Again, from our perspective, pretty simple. Again, we put out industry-leading organic margin expansion, which, again, as Luke said, again, conservative. Our expectations are we're going to do better. Organic growth, same vein. Again, from a free cash flow conversion perspective, again, post repaying the debt, we put out on the street is sort of like 38.7%. Again, our expectation is doing better. We want to get that into the sort of low 40s as we've talked about. And again, the M&A pipeline, zeros model. So again, multiple levers for upside to the guide, feeling very good about where the year is starting, put ourselves in a great place.

And then as the RNG and EPR investments that we made over the last 2 years come into fruition, really starting in sort of '26, again, see multiple levers for growth, and that's why the Board has taken the position that they have and authorized the sort of normal-course issuer bid and allowed us to be, post receiving the dollars, on the first to be active buyers in the market of our own stock, which is a first for us. So we think we're feeling very good about '25, and things are shaping up exactly the way we anticipated.

We have a question from Tobey Sommer with Truist Securities.

This is Sid on for Tobey. I believe the guidance assumes cost inflation in the low to mid-4% range. I'm curious if that's what you saw in 4Q or if you're anticipating some easing there.

It's a great question. This is Luke speaking. Again, if you think about what drives our sort of overall cost inflation, mostly sort of labor and transportation-related costs. We've seen sequential easing as we move through all '23 and then into '24. We're being, I think, appropriately conservative in the 2025 guide just by nature of the current sort of uncertainty on the trajectory of inflationary paths, right? Because we -- the direction of downward seems to have sort of stabilized, and I think there's talk of potentially things sort of moving back the other way.

So I'd say it is based on what our current experience is and where we're exiting, but not necessarily giving consideration to potential incremental reductions from here. So if you see a lowering cost inflation as you go forward, that could yield some sort of upside to the guide.

But as we said, the theme is sort of conservatism. I don't see a lot of sort of risk to that number playing out being materially higher, absent, as Patrick said, some tariff potential causing issues, but that would likely be more on the capital side, right, because that's potentially our concern if there's a tariff situation that maybe some of your CapEx in the short term gets a little bit more expensive. But I think the risk that the cost inflation is materially higher than that sort of low to mid-4s is pretty de minimis where we sit today.

We have a question from Stephanie Moore of Jefferies.

This is Harold on for Stephanie Moore. So I guess on the progress to investment-grade rating post the U.S. transaction, you get down to 3x pro forma leverage. So I guess what else needs to be done as you guys move to that investment-grade rating up after you collect the capital from the divestiture?

Yes, not in our control, obviously, when we do that. Obviously, the expectation is we're going to get significant upgrades in time. When ultimately we get to investment grading -- investment-grade credit rating is really up to Moody's and S&P. Typically, they like to see the numbers roll through over sort of a 12-month period. So -- but in the meantime, we'll get material credit rating upgrade. So a little bit unknown, but obviously, squarely in our sight now post the debt repayment next week.

Got it. And I guess just on the guide, what are you seeing on open book price and versus restricted book? And then on volumes, I know they're expected to be flattish. But if you could talk about intentional shedding versus expectations on specialty waste industrial, are you expecting an improvement there? Are you expecting specialty waste and C&D volumes to remain kind of in line with 2024 levels?

Yes, Harold, Luke speaking. So on the pricing side, we really -- you're definitely seeing the collection, which is really your open market commercial collection business is stepping down from the levels you realized in '23 and '24 as can be expected in response to that sort of cost inflation stepping down. So you're still at a sort of 6%-plus number on your blended collection, which is higher in your commercial industrial book and a little bit lower in your residential. The residential tends to be that CPI linked, what you call restricted.

And then the part that gets us sort of excited is the continued sort of new floor level of close to mid-single digit from post collection, right, because historically, the postcollection piece has been the one that sort of dragged down your blended pricing. And I think you hear this concerted narrative from the industry that we can't give away our sort of postcollection assets and capacity at below our sort of cost of servicing those lines of business. So continue to see strength in both the collection and the postcollection line, albeit a step-down from '24 and '23 and doing so in conjunction with the step-down in cost inflation.

In terms of the volume, I'd say intentional shedding activities are largely behind us. There's always some, but relatively de minimis where we sit today, what's baked in the '25 guide. As you ramp up back M&A, you obviously give rise to incremental volumes that don't meet your sort of thresholds. And so that could give rise to some incremental. But the guide today is really, I think you articulated really around the special waste, right? Whether it's hurricane cleanup or just general sort of special waste, there's puts or takes. A little bit of uncertainty with how the market is in '25 has brought some caution to that to the extent there is incremental volumes, that will all be sort of upside.

When you think about the margin walk, there is about a sort of 50-basis-point drag as a result of our assumptions around special waste. So there could be even more incremental upside to what we had previously said if that does play out as it did in the past.

We currently have no further questions. So I will hand back to Patrick for closing remarks.

Thank you, everyone, and much appreciated for joining the call and look forward to seeing everyone on Thursday at our Investor Day. And as always, if you have any questions, please feel free to reach out, and we're looking forward to speaking to everyone after Q1 and another successful quarter. Thank you so much.

This concludes today's call. Thank you for joining. You may now disconnect your lines.