GFL Environmental Inc. (GFL) on Q1 2023 Results - Earnings Call Transcript
Operator: Hello, and welcome to the GFL Environmental 2023 Q1 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions]. I will now like to hand over to Patrick Dovigi, Founder and CEO. Floor is yours. Please go ahead. Patrick Dovigi: Thank you, and good morning. I would like to welcome everyone to today's call and thank you for joining us. This morning, we will be reviewing our results for the first quarter. I'm joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details. Luke Pelosi: Thank you, Patrick. Good morning, everyone, and thank you for joining. We 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 will 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: Thank you, Luke. Our exceptionally strong first quarter performance once again showcases the quality of our assets and the capabilities of our team, and sets us up for another year of industry-leading organic growth. Exceeding our own expectations for revenue, adjusted EBITDA, margin, and free cash flows, our results clearly demonstrate the highly successful execution of the value creation strategies we've been communicating to you since we went public. For the fifth quarter in a row, we realized double-digit organic revenue growth across both our segments, contributing to nearly 30% top-line growth in the first quarter. Solid Waste core pricing was 12.6% the highest in our history and an acceleration of 270 basis points over the record pricing we realized in the fourth quarter. The impact of our open market pricing strategies, fuel surcharge initiatives, and the acceleration of price increases on CPI linked revenue, all combined to yield a core price level higher than we anticipated, setting us up to exceed the 8% minimum price level on which our 2023 guidance was based. The positive Solid Waste volumes we realized in both of our geographies were also ahead of our expectations and speak to the quality of our market selection and the resiliency of our business. Additionally, the rollover of 2022 Solid Waste M&A also exceeded our plan. Our Environmental Services segment once again delivered results significantly ahead of our internal expectation, realizing over 25% organic growth in the quarter, and continuing to demonstrate the merits of our strategy in this segment. Our previously discussed focus on pricing quality added to the substantial double-digit volume growth that has been ongoing since the second half of 2021. As I said last quarter, we remain extremely optimistic on this segment's growth prospects and operating leverage opportunities given our focus on quality of revenue and asset utilization. Adjusted EBITDA grew 24% in the first quarter, and margins were nearly 50 basis points better than plan as our diligent focus on optimizing pricing and on our cost base continues to drive our higher underlying profitability. The $441 million of adjusted EBITDA was ahead of our expectation and attributable to the broad-base revenue outperformance and operating leverage across both segments. The margin impact of higher fuel costs that were a focus on most of 2022 continued to be mitigated by the ongoing implementation of our fuel cost recovery program, which allows price increases to drive operating leverage. The quarter saw almost double-digit unit cost inflation, which was in line with expectations and is expected to ratably step down as the year progresses. With that said, repair and maintenance cost headwinds continue to linger. Our record price increases overcame these cost pressures and drove nearly 200 basis points of organic Solid Waste margin expansion when excluding the impact of fuel and commodity prices. As we look forward to the balance of the year, we're seeing positive signs in labor and commodity prices and which would shape us up to have a tailwind to the guide. The strength in the first quarter further solidifies our high degree of visibility on the widening spread between price and cost inflation, and makes us optimistic that we should be able to meet or exceed the high end of the already industry-leading margin expansion we included in our full-year guidance. For adjusted free cash flow, Luke, will talk through the moving pieces, but at a high-level, the front end loading of working capital investment and capital expenditures result in a plan that was negative in the first half and positive in the second half. The first quarter results were better than our plan. We are actively trying to pull forward receipt of every truck and piece of equipment we can in response to the repair and maintenance cost pressures, a strategy that we anticipate will drive incremental profitability as we move forward. In addition to outstanding financial performance, the first quarter also saw material progress on our portfolio rationalization initiative. On our last call, we told you that we would -- we had identified three distinct non-core markets for divestiture. As of this week, we have signed definitive agreements for all three, and we now anticipate total gross proceeds of CAD1.6 billion over a CAD100 million more than we had said on our February call. We expect one of the transactions will close as early as next month and the other the balance of the two to be closed by the end of Q2 or the end of the third quarter. The net proceeds from the transactions will be used to pay down our floating rate debt. The divested assets represent approximately $110 million of adjusted EBITDA at mid-20s margin, and the transactions are expected to be immediately free cash flow accretive as the interest in CapEx savings more than offset the divested adjusted EBITDA. Because of the mid-teens multiple we were realizing on these sales, the transactions are de-levering by nearly half a turn. The high degree of visibility that we now have on the transaction timing, combined with our exceptional first quarter operating performance, solidifies our conviction that we will end the year with net leverage that is less than 4x. We are committed to achieving this leverage target by year-end and expect further deleveraging in 2024 and beyond. We think that this will position us to secure investment grade rating over the medium-term. On the ESG front, in Q1, we continue to make progress on our RNG project pipeline. With the large of these projects in our Arbor Hills facility in Michigan and is expected to start production in Q2 of this year. We hired our first director of diversity, equity, inclusion and belonging. This month we expect to begin to see positive impact on employee retention and engagement as we continue to rollout our DEI&B roadmap and the other employees focus programs that we talked about in our last Sustainability Report. Also, this month we announced the appointment of Sandra Levy to our Board of Directors. Sandra is a great addition to the Board with her HR and legal background combined with her experience as an Olympian. We expect she'll be able to provide some good insights to management as we continue to foster our already strong culture at GFL. Lastly, Joy Grahek, our EVP of Strategic Initiatives, who has been with GFL since the early years will be recognized as one of the five inaugural women who inspire at Waste Expo next month. To sum it all up, the quarter delivered industry-leading financial performance that exceeded our plan and at the same time saw material advancement of our ESG-related initiatives. Once again, I want to thank each and every one of our 20,000 employees for all that they do to allow GFL to continue to achieve these exceptional results. I'll now pass the call over to Luke, who will walk through the quarter in more detail and then I'll share some closing comments before we open it up for M&A -- Q&A. Luke Pelosi: Thanks, Patrick. Our company Investor Presentation provides supplemental analysis to summarize our performance in the quarter in a consistent format to what we previously provided. Page 3 summarizes the bridge between our guidance and actual revenue, with outsized underlying price volume fundamentals combining with M&A outperformance to drive a result more than $100 million above the original guide. Note that the M&A outperformance is primarily related to the rollover of 2022 M&A as the contribution from new 2023 M&A excluding the Heartland deal, which was included in the base guide was approximately only $5 million. While Environmental Services continues to materially outperform and consistently surprise to the upside the quarter's overall outperformance was almost equally driven by Solid Waste where pricing, volume, and M&A rollover were all ahead of our expectations. Core Solid Waste pricing accelerated 270 basis points from Q4 with double-digit pricing in both our geographies and high-single-digit price in the typically lower price residential collection and post-collection service lines. This result is largely attributable to CPI linked revenue, finally starting to reset at prices commensurate with the cost inflation environment, a dynamic that is expected to provide pricing support for quarters to come due to the inherent lag in the mechanics of the underlying contracts. As Patrick said, the strength of the first quarter pricing provides conviction that will be do better than the 8% pricing that was included in the guide for the year as a whole. Page 4, shows the bridge for Solid Waste adjusted EBITDA margins compared to the first quarter of 2022. As anticipated, the decline in commodity prices in our MRF business was 125 basis point headwind to margins year-over-year. Recall our guide assume commodity prices remain at January 2023 levels. While this pricing was broadly in line with first quarter actuals any improvement from here will be upside. Although, fuel costs decreased sequentially from Q4, the increased diesel costs over the prior year continue to be a margin headwind. However, the ongoing improvement of our fuel costs recovery strategies yielded a 35 basis point improvement the net margin impact from higher diesel prices as compared to the fourth quarter. Excluding the impact of commodity and fuel prices, Solid Waste margins expanded 190 basis points on a same-stores basis. A 65 basis point acceleration over the spread in Q4, and as Patrick said, a result that reinforces our optimism in being able to meet and exceed the already industry-leading margin expansion we included in our base guide. And while the positive benefits of using fuel surcharges to mitigate the margin impact of fuel price volatility are clearly evident in our results, Page 5 highlights that we still see a substantial opportunity for further improvement in this area. We remain highly confident in our ability to conclude the first phase of this initiative by June of this year, two quarters ahead of the original plan, and we remain committed to pursuing the additional upside of Phase 2 throughout the second half of 2023 and beyond. We continue to lag the industry in this area due to the rapid growth of our platform in recent years that anticipate meaningful improvements to margin stability and quality as we close the gap to industry peers. Adjusted free cash flow for the quarter was negative $55 million, approximately $35 million better than plan, despite $25 million of unanticipated cash interest payments solely due to timing. On this point, interest rate volatility during the quarter led to the decision to accelerate the timing of our variable rate interest payments, which resulted in effectively four months of cash interest payments in the first quarter. This is purely just a timing difference, and Q2 will see cash interest $25 million less than planned, and the first half as a whole will be in line with the guide. When thinking about the cadence of free cash flow, in addition to the seasonality and adjusted EBITDA, the quarterly variances in free cash flow are primarily attributable to working capital and capital expenditures timing. On working capital, we typically see an investment in the first quarter, a larger investment in the second quarter, and then a substantially equal and offsetting recovery in the second half, predominantly in the fourth quarter. The current year first quarter investment was anticipated to be greater than the prior year in light of the material revenue growth, particularly Environmental Services, which has a higher DSO profile. For capital expenditures, we typically see a front end loading in the first half and then a ratable step down in the second half. For the current year, the front end loading was expected to be even more pronounced by virtue of the $50 million rollover from 2022, and the active strategy to take delivery of new trucks and equipment early as mitigation to lingering R&M pressures. Incremental CapEx tied to recent M&A that is effectively purchased price, but as it was incurred post-closing also present itself as CapEx in our reporting. As a result of these dynamics, the adjusted free cash flow was expected to be negative $90 million in the first quarter, and the actual results are significantly better than our plan. Reported net leverage was $4.97 at the end of the quarter. Looking forward, achieving adjusted EBITDA and adjusted free cash flow at plan would organically reduce year-end leverage to low-4s, and then the divestiture transactions will reduce leverage an additional 40 basis points resulting in year-end net leverage that starts with the three. This is the starting point to achieving an investment grade rating in the medium-term. In the meantime, once our leverage is reduced and maintained at these lower levels, we anticipate material credit rating upgrades prior to the maturity of most of our existing debt, providing opportunity for near-term borrowing costs and improve free cash flow conversion. We will wait until the second quarter to update our guidance, but based on the strength of Q1, we certainly see a path to be at or above the high-end of our ranges. In relation to our expectations for the second quarter, we typically realize just over 25% of annual Solid Waste revenues in the second quarter and 26% to 27% of the revenue plan for Environmental Services, which translates to approximately $1.975 billion of consolidated revenue expected for the second quarter. In terms of margins, with the toughest margin comp behind us, we remain optimistic that margins can accelerate to the low to mid-27s or approximately 70, 90 basis points expansion over the second quarter of 2022. At the segment level, this assumes Solid Waste margins of between 30.5% and 31% and Environmental Services margins of almost 30% with corporate margins comparable to Q1. The guide then contemplates further margin expansion in the third quarter before stepping down in the fourth quarter as per the typical cadence of the business. That yields the Q2 adjusted EBITDA expectation of $535 million to $545 million. To continue the walk to Q2 adjusted free cash flow, in Q2, we are expecting CapEx of approximately $300 million, cash interest of $110 million, and an investment in working capital and other operating cash flow items comparable to Q2 of the prior year are about $130 million combined, for an adjusted free cash flow of about nil. It's worth noting that this backend loaded free cash flow cadence, primarily driven by working capital seasonality and CapEx timing is in line with the expectations and assumptions underlying our original guidance to which we remain committed. I will now pass the call back to Patrick who'll provide some closing comments before Q&A. Patrick Dovigi: Thanks, Luke. I wanted to conclude with a few thoughts on where we are today and where we are headed. We've now reported as a public company for 13 quarters. With each quarter, the impact of the strategies that we have been talking to you about since our IPO in March of 2020 have been clearly demonstrated. We have always been confident in our strategy, in our ability to execute. I've said this many times before, and I'll say it again. We have built the best team in this industry. We are all driven to make the business better every day, and we deliver on what we say we are going to do. That's our culture, and it can be felt across GFL. All of these pieces, including the effective strategies we use to lever the cumulative impact of both organic growth and M&A programs, these have been in place for a long time. We didn't adopt a new strategy when we went public. We are consistently applying the same strategies that we have used to create billions of dollars of value for shareholders over the past 15 years. When you look at what's in front of us, here's what I see. The optimization of pricing to provide sustainable durable price cost spread. The rationalization of the portfolio to focus on the most attractive markets, the de-leveraging and associated financial leverage, the ramp up of RNG, all the self-help levers we can pull to improve asset utilization and cost efficiency, and the runway for further M&A and the opportunity for industry-leading growth along with material improvements to our margins and free cash flow conversion is undeniable. So from where I sit, I would say, we're just getting started. I will now turn the call over to the operator to open the line for Q&A. Operator: Thank you. [Operator Instructions]. Our first question today comes from Kevin Chiang from CIBC Wood Gundy. Your line is open. Operator: Our next question comes from Tyler Brown from Raymond James. Your line is open. Operator: Our next question comes from Michael Hoffman from Stifel. Your line is open. Operator: Our next question comes from Jerry Revich from Goldman Sachs. Your line is open. Operator: Our next question comes from Walter Spracklin from RBC Capital Markets. Your line is open. Operator: Our next question comes from Rupert Merer from National Bank. Your line is open. Operator: Our next question comes from Stephanie Moore from Jefferies. Your line is open Operator: Our next question comes from Stephanie Yee from J.P. Morgan. Your line is open. Operator: Our next question comes from Chris Murray from ATB Capital Markets. Your line is open. Operator: Our next question comes from Devin Dodge from BMO. Your line is open. Operator: Our next question comes from Michael Feniger from Bank of America. Your line is open. Operator: Our final question comes from Michael Hoffman from Stifel. Your line is open. Operator: This concludes our Q&A. I'm going to hand back to Patrick Dovigi, Founder and CEO, for any final remarks. Patrick Dovigi: Thank you very much everyone for joining the call this morning and we look forward to speaking to you after Q2. And again, thank you to everyone for their sort of continued support and always available to take calls, et cetera, for the balance of the day. But thank you very much. Operator: Ladies and gentlemen, today's call is now concluded. We'd like to thank for your participation. You may now disconnect your lines.GFL Ratings Summary
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GFL Environmental Inc. Reports Q1 2024 Earnings: Key Takeaways
GFL Environmental Inc. (NYSE:GFL) Q1 Earnings Conference Call Highlights
GFL Environmental Inc. (NYSE:GFL) recently held its first quarter earnings conference call for 2024, shedding light on its financial performance and future outlook. The call, led by Founder and CEO Patrick Dovigi and CFO Luke Pelosi, was a significant event for investors and analysts alike, attended by experts from top financial firms. Despite the anticipation, GFL reported break-even earnings per share, missing the modest Zacks Consensus Estimate of $0.01 and marking a notable decline from the previous year's earnings of $0.06 per share. This underperformance, with an earnings surprise of -100%, starkly contrasts with the previous quarter's -77.78% surprise, indicating a challenging start to the year for GFL.
However, it wasn't all disappointing news for GFL Environmental. The company managed to surpass revenue expectations, posting $1.34 billion for the quarter ended March 2024. This slight increase from $1.33 billion a year ago, and beating the Zacks Consensus Estimate by 1.82%, suggests that while earnings fell short, the company's overall revenue growth remains steady. This performance is particularly noteworthy given the company's position in the competitive Zacks Waste Removal Services industry, which has seen GFL's shares decline by about 7.6% since the beginning of the year, underperforming against the S&P 500's gain of 5.6%.
The stock's current trading dynamics offer additional context to GFL's financial health and market perception. Trading at $32.78, the stock has experienced a decrease of 1.97% or $0.66, with fluctuations between a low of $32.395 and a high of $33.89 on the day reported. This volatility reflects the market's reaction to the earnings report and the broader challenges facing the waste removal industry. Over the past year, GFL's shares have seen highs and lows, from $39.055 to $26.87, indicating a turbulent period for the company. With a market capitalization of approximately $11.95 billion and a trading volume of 1,750,490 shares on the NYSE, GFL's market activity underscores the investor interest and the critical eye with which the market views its performance and future prospects.
Looking ahead, consensus estimates for GFL Environmental paint a cautiously optimistic picture, with predictions of earnings of $0.27 per share on revenues of $1.52 billion for the upcoming quarter. For the current fiscal year, earnings are expected to reach $0.80 per share on revenues of $5.94 billion. These projections, set against the backdrop of GFL's recent performance and the broader industry challenges, highlight the crucial period ahead for the company. As GFL navigates the competitive waste removal services market, currently in the bottom 43% of over 250 Zacks industries, its ability to meet these forecasts and address the issues highlighted in its first quarter earnings will be key to regaining investor confidence and achieving market stability.
