Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- GFL Environmental Inc (GFL, Financial) reported better-than-expected financial results for the second quarter, demonstrating the highly predictable and recurring nature of its business model.
- Solid waste pricing and volume exceeded expectations, contributing positively to the company's performance.
- Operating cost inflation is moderating, particularly in labor rates and repair and maintenance expenses.
- The company successfully exited low-quality revenue streams and non-core service offerings, which positively impacted margins.
- GFL Environmental Inc (GFL) increased its adjusted EBITDA guidance to $2.24 to $2.25 billion and adjusted EBITDA margin to 28.4%, reflecting strong operational performance and effective value-creation strategies.
Negative Points
- The Environmental Services segment experienced lower large-scale event-driven response work compared to the prior year, impacting overall performance.
- The company faces increased costs of risk, which have been a headwind to margin expansion.
- Adjusted free cash flow, while improved, is partially offset by $25 million of incremental interest costs, now expected to be $500 million for the year.
- The sale of the Michigan residential collection contracts resulted in a sequential revenue step down from the second quarter.
- The company anticipates a more conservative view for the back half of the year due to lower volume of large event-driven work in the Environmental Services segment.
Q & A Highlights
Q: Can you provide more color on the interest you've seen for potential asset sales and the decision-making process?
A: Patrick Dovigi, CEO: We've seen significant inbound interest from both strategic and financial sponsors. Given the valuation gap, we believe running an auction process is the best way to maximize value. We plan to launch this process in September and expect it to move quickly, aiming to complete it by the end of the year.
Q: Can you break down the updated 2024 guidance and the factors contributing to it?
A: Luke Pelosi, CFO: The updated guidance includes a $30 million increase in adjusted EBITDA, driven by solid waste pricing, volume, and favorable commodity prices. The Environmental Services segment's lower large-scale event-driven work is offset by positive contributions from M&A and the Michigan portfolio sale.
Q: What is driving the 170 basis points margin expansion in the 2024 guidance?
A: Luke Pelosi, CFO: The margin expansion is driven by the quality of our assets, price-cost spread, synergy realization, and deliberate volume strategies. The Michigan sale and improved commodity pricing also contribute to the margin increase.
Q: Can you explain the divergence in organic growth between Canadian and US solid waste segments?
A: Luke Pelosi, CFO: The Canadian segment benefits from catching up on pricing and investments in recycling and EPR initiatives. In the US, intentional shedding of low-return business has impacted volume growth, but we expect robust organic growth in both segments going forward.
Q: What is the expected timeline for the Environmental Services (ES) sale process?
A: Patrick Dovigi, CEO: We aim to launch the auction process in September and complete it by the end of the year. The process should move quickly due to the sophisticated nature of the potential buyers.
Q: How do you view the potential for margin improvement in 2025 and beyond?
A: Luke Pelosi, CFO: We expect another 100 basis points of margin improvement in 2025, driven by ongoing price-cost spread, RNG and EPR contributions, and the benefits of intentional shedding. We anticipate solid waste volumes to be flat to marginally up next year.
Q: How are employee attrition, training, and safety expenses trending?
A: Patrick Dovigi, CEO: Employee turnover has decreased to just above 20%, down from mid-20s last year. We aim to reach mid to high teens, similar to pre-COVID levels. Safety expenses are also trending positively.
Q: Are there any back-office systems or common areas that need to be split up for the ES sale?
A: Patrick Dovigi, CEO: There are minor overlaps in treasury and HR, but overall, the separation will be straightforward and not an impediment to the sale.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
