GFL Environmental Inc. (GFL) Q4 2022 Earnings Report, Transcript and Summary

Good morning, or good afternoon all, and welcome to the GFL Environmental Fourth Quarter 2022 Earnings Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the floor over to Founder and CEO, Patrick Dovigi to begin. So, Patrick, please go ahead, when you are ready.

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 2023. 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 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.

Thank you, Luke. '22 was yet another exceptional year for GFL. We once again achieved double-digit industry-leading growth, an accomplishment even more impressive considering the economic uncertainty and cost headwinds that we experienced for most of the year. We believe that with the resilience of our growth, despite the challenges over the last few years, demonstrates the effectiveness of our strategies, the quality of our asset base, and our team's exceptional focus on value creation. Organic revenue growth was nearly 14% in Q4, topping a year of double-digit revenue growth in the prior three quarters in both our Solid Waste and Environmental Services segments. Solid Waste pricing was 11.5%, including fuel surcharges with core price of 9.9%, the highest in GFL's history. Core price accelerated 130 basis points over the record pricing we achieved in the third quarter and was 8.2% for the year as a whole, over 300 basis points better than our original guidance for the year. This outcome sets us up for an even more attractive launch up point for 2023 that we previously anticipated. We also realized Solid Waste volume growth during the quarter and the year, which we believe is a testament to the quality of both our market selection and our customer service. Environmental Services continued to materially outperform our internal expectations and substantially defied the seasonality we typically see in the fourth quarter for this segment. Our thesis underlying the Terrapure acquisition has clearly proven and recent tuck-in M&A further bolsters our competitive asset positioning. We believe our Environmental Services platform is already best-in-class with margins in the mid-20 range, materially ahead of the industry peers. Longer term, we see potential for the Environmental Services segment to get the high 20% margin levels based on our significant scale in Canada and greater focus on pricing and quality of customers. As we continue to focus on quality of revenue and asset utilization, we remain extremely optimistic about the segment's growth prospects and operating leverage opportunities. We grew adjusted EBITDA 17% for the fourth quarter. Our relentless focus on optimizing our pricing strategies and cost efficiencies are yielding the expected outcome. And you can see this in the margin results. Luke will walk through the margin bridge in detail, but the improvement over Q3 is significant. Our record-setting price growth drove 125 basis points of organic Solid Waste margin expansion in the quarter, when excluding the impact of fuel and commodity prices. Our fuel cost recovery program, which is still ongoing in development, continues to mitigate the margin impact of higher energy costs and allows our price increases to drive operating leverage. We are highly encouraged by the improving trends that we're seeing in our labor costs going into 2023. And although cost inflation still remains exceedingly high, repair and maintenance cost headwinds continue to linger, we believe that the worst is now behind us. Going into 2023 and beyond, we have high visibility that the impact of our pricing and surcharge strategies together with the expected moderation of cost inflation will result in significant opportunities for outsized margin expansion. And Luke will speak to this in more detail. Because of our greater visibility into 2023, we are excited to be able to increase the preliminary outlook that we provided just a couple of months ago. We now expect to generate adjusted EBITDA between $2 billion and $2.05 billion in 2023, and almost 20% increase over our 2022 results. Adjusted EBITDA margins are anticipated to expand over 100 basis points, a level we expect to be industry-leading, inclusive of headwinds from commodity pricing. Our guidance assumes approximately 8% Solid Waste price, flat Solid Waste volumes given some macroeconomic uncertainty going into 2023 and mid-single-digit top line growth for our Environmental Services segment. Our guidance assumes commodity and RIN prices based at current levels with any improvement over today's levels providing incremental upside to our guidance. The guide also does not factor in the impact of any additional M&A in 2023. We acquired approximately $480 million of revenue in 2022 and another $100 million in January, primarily consisting of a highly strategic asset for our Environmental Services segment in the U.S. Midwest. We've included the expected contribution from this asset in our guide, since the acquisition occurred so early in the year. Our M&A pipeline remains robust, and we expect that we will continue to have opportunities to deploy capital into value creating acquisitions, although we expect our total M&A spend in 2023 to be more tempered than the last few years, which I'll discuss more in detail later in the call. Any contribution of M&A in 2023 will be upside to our base guidance. December 2022 marked the 15th anniversary of the founding of GFL. I could not have imagined when I started this business that would be -- we would have achieved so much in the last 15 years. I believe that we have the best employees in the waste industry. It's their hard work and dedication that allowed GFL to grow into the solid sustainable platform that produced industry-leading results in 2022 and still have so much more room to grow in the coming years. I'll now pass the call to Luke, who will walk through the particulars of Q4 and the 2023 guide and then, I'll share some closing comments before we open it up for Q&A.

Thanks, Patrick. Consistent with prior quarters, our accompanying investor presentation provides supplemental analysis to summarize performance in the quarter and lays out the building blocks of our 2023 guidance. To provide more color on the fourth quarter, Page 5 identifies the drivers of $100 million of revenue outperformance versus our guidance, with the substantial majority derived from ongoing strength in our Environmental Services business, where we saw activity levels far in excess of seasonal norms. The quality of the Environmental Services platform we have built is clearly demonstrated by our customers' demand for our services, and we remain highly optimistic about our opportunities for high-quality organic growth in this segment. Rounding out the revenue bridge, continued outperformance of core price and recent M&A also contributed to the over $1.8 billion of revenue recognized in the quarter. As Patrick said, core Solid Waste price accelerated 130 basis points from Q3 to 9.9% in the quarter and as a result, provides us significant confidence that 2023 pricing will be at least 8%. The bottom of Page 5 shows the adjusted EBITDA walk for the quarter, which is inclusive of incremental IT costs to support our shift to the cloud and ongoing higher costs related to repair and maintenance expenses. Page 6 bridges Solid Waste adjusted EBITDA margins year-over-year. As anticipated, fuel and commodity prices remained a margin headwind as compared to the prior year. We were able to achieve a 45 basis point sequential reduction to the net impact from fuel prices, as the effectiveness of our fuel cost recovery strategies continues to improve. Excluding commodities and fuel, organic Solid Waste margins expanded 125 basis points on a same-store basis, an 85 basis point improvement over Q3 and an indication of the strong operating leverage occurring in the base business. Page 7 summarizes the ongoing improvements we have made in our fuel surcharge initiatives during the year. We are tremendously proud of the pace with which we have been able to ramp up this program. With the success we've had to date, we are confident in our ability to conclude the first phase of this initiative in early 2023, two quarters earlier than initially planned. As we see significant opportunity beyond the first phase, an opportunity we will continue to pursue throughout 2023 and beyond. As we've said on our previous calls, the industry has demonstrated the effectiveness of a mature fuel surcharge program. Our initiatives in this area are not breaking new ground. We are simply catching up to the industry standard. In Q4, we estimate the net impact of fuel was a 70 basis point tailwind to some of our industry peers' margins, a result 200 basis points better than the 130 basis point headwind we had in the quarter. We expect that the stability and quality of our margins will continue to improve as we close this gap. Adjusted free cash flow for the year was $691 million, more than the high end of our updated guidance range and more than 8% above our original guidance despite the significant headwind from fuel prices and interest rates that have rose subsequent to the beginning of the year. As anticipated, the $150 million invested in working capital during the first nine months of the year largely reversed during Q4. Partially offsetting this recovery was incremental working capital investment to support the revenue outperformance and recent M&A. On CapEx, recall our guide plan about $750 million to $800 million of net CapEx, excluding the $150 million normalization adjustment. At the low-end or at $750 million, that assumed about $880 million of gross spend across both our base business and RNG, offset by a $130 million in asset sale proceeds. In the end, gross spend was $830 million, as $50 million of planned CapEx was unintentionally shifted into 2023. Reported net leverage was 5 times at the end of the year. The increase over where we ended the prior year was mostly the result of the translational impact FX. On Page 8, we have provided a simplified constant currency presentation on net leverage. That slide shows the year ending one point below the prior year, again an illustration of our growth-driven delevering capabilities despite significant unprecedented headwinds and continued execution of our M&A strategy in the year. As we've said before, we are committed to deleveraging. As part of our 2023 outlook, we will lay out a path to ending the year with leverage that starts with a three, the achievement of which would further improve our financial strength and provide a basis for accelerated free cash flow growth. On Page 9, we have summarized our current debt profile to provide additional context when thinking about leverage. Subsequent to year end, we amended our $1.7 billion term loan B extending the maturity of our nearest term debt by two years. As a result, we've materially reduced the amount of debt maturity occurring in the next four years. We remain highly confident in the likelihood of receiving material credit rating upgrades prior to the maturity of most of our existing debt, providing opportunity for lower borrowing costs and improved free cash flow conversion. Looking ahead to 2023, Page 11 outlines the revenue bridge. Thanks to the strength of our finish to 2022, we're expecting at least 12% top line growth, inclusive of an expected 100 basis point headwind from commodity prices. Anchoring the double-digit increase is 8% Solid Waste price and surcharge growth, coupled with 3.5% to 4% rollover of already completed M&A. Given where we landed at the end of 2022, we have great visibility in realizing double-digit price in the first quarter and highly confident in the path to achieve 8% for price for the year as a whole at a minimum. The guide assumes relatively flat volumes across both segments given the potential for some macroeconomic uncertainty and the tough comp for Environmental Services in 2022. It also assumes no recovery of commodity prices and no incremental M&A. With the quality of our anticipated top line growth, we're expecting over 100 basis points of EBITDA margin expansion in 2023, over 200 basis points of organic expansion when factoring in the headwind from commodity prices and the impact of acquisition rollover. With our significantly improved ability to manage the margin impact of any changes in fuel prices through our fuel recovery program, we expect a substantial underlying operating leverage within our platform to shine through. Our guide does not assume the cost inflation reverses, but moderates on a year-over-year basis by virtue of lapping the tough comps, particularly in the second half of 2023. The margin expansion is anticipated in both of our segments, partially offset by a 50 basis point increase in corporate cost margin primarily related to incremental IT investments to support the migration of our systems to the cloud and provide added security and support the growth of the business. All of this translates to mid to high-teens EBITDA growth or $2.025 billion at the midpoint of the guide. The guidance assumes an FX rate of 1.34, 2 basis points lower than the 1.36 that was used for our initial 2023 thoughts provided last November. Recall that every $0.01 of FX impacts revenue by $36 million. At the free cash flow line, the biggest piece of the story in 2023 is cash interest, which increases $100 million to just over $510 million for the year, representing a 15% headwind year-over-year at the free cash flow line. Patrick will speak in a moment about how we expect to materially reduce our annual cash interest, which we expect will support over 20% growth in free cash flow in 2024, but 2023 is a recalibration year at this line item, as the full impact of the 2022 rate increase is realized. We also have the $50 million of delayed CapEx shifting from 2022 to 2023. Excluding this CapEx amount, the net free cash flow growth would have been 17%, inclusive of the 15% interest headwind. Total net CapEx included in the guide is approximately $810 million to $815 million, inclusive of approximately $40 million in incremental equity investment into our RNG projects. Our current expectation is that the availability of project level financing, combined with available investment tax credits under Inflation Reduction Act will significantly reduce the equity we need to contribute to these projects, further improving the return profile. The net result of the planned growth in adjusted EBITDA and free cash flow is for net leverage to reduce to low-4s before considering the potential acceleration of deleveraging through asset sales that Patrick will speak to. That's the math for the 2023 guide. When you think about the quarterly cadence, we typically realize 22% to 23% of planned annual Solid Waste revenues in Q1 and 18% to 20% of the plan for Environmental Services, which translates to just under $1.7 billion of total revenue in Q1. In terms of margin, we expect the first quarter will be the toughest comp. We're expecting a similar consolidated margin profile as Q4 around 24%, representing a 130 basis point compression to Q1 2022. At the segment level, Solid Waste margins are expected to sequentially improve over 100 basis points versus Q4, and ES margins -- Environmental Services margins are expected to be in the high-teens with corporate costs at sort of 3% to 5% of revenue. Subsequent to Q1, we expect margin expansion over the prior year growing sequentially from Q2 through Q4. I will now pass the call back to Patrick, who will provide some additional perspective on the priorities for 2023 and beyond.

Thanks, Luke. On Page 13, it summarizes our priorities for 2023. Driving operating leverage through our continued focus on pricing, improved asset utilization and cost optimization is first and foremost. Luke walked you through how we see a clear path over 100 basis points of margin expansion as a result of our ongoing efforts in these areas and we think the longer-term opportunity is significantly greater than that. When you consider the amount of M&A we've successfully undertaken over the past two years, there is a built in next leg up that can be realized as all these pieces gel together. All of the assets have been integrated into our systems and processes, but we know from our experiences over the years that there's still another layer of opportunity as the platform continues to solidify. We see 2023 as a year to allow all of the businesses we've absorbed into our platform to mature and to ensure that we're capturing all of the opportunities that present, including implementing our pricing strategies in addition to the other self-help levers available to us. We, therefore, anticipate a more tempered level of M&A compared to prior years, deploying somewhere between $300 million and $500 million into true tuck-in acquisitions that will continue to densify our platform and leverage our relatively fixed cost post-collection assets. We have a pipeline as robust as ever and would anticipate 2024 returning to more historical levels of M&A, but in 2023, we expect a more moderate level of M&A activity, while we focus on our other value creation initiatives. It is important to remember that we, like the industry, are coming off a number of banner M&A years with COVID also pulling the timing of some of those deals forward. Bringing our first large-scale RNG plant online is one of our main priorities and initiatives, and Page 14 illustrates the expected cadence of the 20 plus projects we are actively working on. While the in-year contribution to revenue and EBITDA for 2023 is relatively immaterial, you can see the significant ramp through 2024 and 2025. These projections have been updated to reflect today's pricing environment of approximately $2 (ph) and $2.50 natural gas. Any improvements from these levels would be additive to the amount shown on the page. Even using these historic low levels, this opportunity would increase our consolidated margins by approximately 140 basis points. In addition, the evolving financing structures and tax incentives that are available for these projects have made the economic returns even more compelling than originally estimated. Another key initiative is the potential for the further rationalization of our portfolio, as we focus on maximizing our return on invested capital. Though some of the larger acquisitions completed in the past few years, we've acquired assets and operations in markets, given their specific market dynamics and geographic positioning that were never going to represent key growth opportunities for us. We've identified three distinct markets. And since our Q3 call, we have run a process and have now signed LOI to divest of these businesses for at least $1.5 billion in gross proceeds. We expect to have definitive agreements for each of these three businesses signed by Q2 with the sales to be completed by the end of Q3. We believe that selling these assets and using the proceeds to pay down our floating rate debt best positions us for sustainable industry-leading free cash flow growth over the mid-term. Additionally, as shown on Page 15, the proceeds of these asset sales would delever the balance sheet to below 4 times, be immediately free cash flow accretive and materially accelerate the improvement in our free cash flow conversion and overall credit quality. As Luke mentioned, we expect these improvements will be reflected in improved credit ratings and lower cost of borrowing. We will provide updates on these asset sales as we progress. On ESG, as most of you know, we issued our 2021 Sustainability Report in late November that includes our full set of sustainability goals and targets for the first time. RNG is a big part of our achieving our near-term GHG reduction targets and as I've already highlighted how we are well on our way to implementing that as part of our plan. We've been saying since we went public in 2020 that we were going to follow certain fundamental priorities to continue to successfully grow our business and that the impact following these priorities would be to get us to industry-leading metrics. That's where we are today on the back of our outperformance in 2022. The business is set up for what we think is a once in a generation opportunity for outsized organic operating leverage, supported by momentum in our pricing initiatives. And in the upside potential for additional contribution for our demonstrated ability to do highly-accretive densifying tuck-in M&A, bringing our RNG projects online in 2024 and 2025 and the impact of these asset divestitures I just described, we think there is a clear path to achieving our best-in-class EBITDA margins and driving materially higher free cash flow and generate free cash flow of over $1.1 billion by 2025. I want to again recognize and thank our close to 20,000 employees for their exceptional commitment with GFL. It is their focus on building a sustainable company on providing these services for our customers with strong market pricing and above all, value creation for all of our stakeholders that has gotten us to where we are today. I want to thank each and every one of them for their efforts. I will now turn the call over to our operator to open the line for Q&A.

Thank you. [Operator Instructions] And our first question today comes from Walter Spracklin from RBC Capital Markets. Walter, please go ahead. Your line is open.

Thanks very much operator. Good morning, everyone. Just on the pricing, you've got some good trends. Can you hear me, okay?

Yeah. We can hear you.

Excellent. Okay. So just on the pricing, just looking at your book going into 2023. I know a lot of the contracts are tied to rates that reset at certain times. Can you talk to us a little bit about how much of your current projected 8% pricing is locked in for 2023 to give an indication of the certainty around that?

Hey. Walter. Good morning. It's Luke. I think we're really excited about our probability in achieving that when you think about 2022 and the abnormality of the pricing that happened throughout that year. And what I mean by that is if you think a normal annual pricing happens at the beginning of the year at ratably steps down well 2022 in response to the headwinds that we're seeing, you saw continued pricing activities throughout the back half of the year. And what that does is, set us up for an unusual amount of pricing rollover that you have virtual certainty on. And so we're entering 2023 with about 55% of that price already baked purely from rollover. And then you have about another 30% of your planned pricing that happens in January. So you basically where you sit today, have great line of sight of 85%, 90% of what that total price number is going to be in 2023. And I think that further bolsters our confidence that we're setting that as a minimum level.

That's fantastic. Okay. Moving over to M&A. And I know in past years, you've kind of given a target. I think last year it was around $500 million. You actually deployed $1.2 billion, so well above what you were targeting at the beginning of the year. But Patrick, you sounded -- you sounded this time that yeah, you're looking for $300 million to $500 million, but you do indeed believe that this is going to be a more tempered year. Can you talk a bit about the rationale there? I mean is this an intentional effort to deliver or is it just a function of the availability of acquisitions out there? Maybe it's a bit of both, perhaps give us a little color on the basis for why you think it will be a much more tempered year on the M&A side?

Sure. I think it's consistent with what we've done historically, Walter. I mean if you look back with sort of the growth of GFL over 15 years, there'd be significant rants over two to 2.5 years, and then we would spend a year digesting and then ramp it back sort of up. And I think going public in sort of March of 2020, we went public because we knew there was a lot of M&A opportunity, particularly large scale that we were well positioned for and we needed to delever in order to achieve that goal. When you look at what we've done, our plan back then was to double the size of the business over five to six years. The reality is, we doubled the size of the business over 2.5 years. So significant growth from $1 billion of EBITDA to over $2 billion of EBITDA in less than three years. All of that to be said, we're reacting to sort of what's happened in the market, and you've had this crazy inflationary environment. You had a real ramp-up in sort of interest costs. And I think from our perspective, driving the organic growth layering in these pricing initiatives into the sort of base business, letting the business of time to sort of just seize them a little bit, get our procurement programs, making sure they're all rationalized and spending the year to do that is going to lead to outsized organic growth. And we can have a moderated spend of sort of $300 million to $500 million this year and then really ramp that back up in 2024. So -- and I think all of that put together will position this business like Luke said, to grow at more than 20% plus free cash flow growth over the next sort of three to four years on an annual basis by putting in place all those pieces of the puzzle. We're very confident in that. Listen, if there is an exceptional opportunity that comes at, we're not going to obviously miss it for no reason just to say for this. But I think where we sit today, our focus is going to be on keeping that spend in the $300 million to $500 million barring something that comes up that we really, really want to do.

Excellent. That makes a lot of sense. And just a last quick one. The divestiture is the three LOIs, does that cover the entire $1.5 billion you're projecting or are you expecting more agreements to get up to the $1.5 billion?

No. So that -- so as we've highlighted in the past, it's three market areas. I can even update a little bit. One of the -- one of the transactions actually got signed last night. So we're down to two LOIs, one -- we have one definitive agreement. That one definitive agreement represents almost 50% of the proceeds. So the other two agreements will represent the other 50%. I would say the $1.5 billion is a conservative number. I think as you know, we've always been conservative. That number will probably be in excess of the $1.5 billion, but we've just taken a conservative view. But I think from our perspective, one agreement is now signed that represents over 50%, and we expect the proceeds to be more than the $1.5 billion.

Awesome. That’s great progress there. Appreciate the tie.

Thank you.

The next question comes from Michael Hoffman from Stifel. Michael, please go ahead. Your line is open.

Thank you very much, Luke, I was writing and didn't get the numbers, I'm sure. If I -- what is the CapEx number you said you're going to guide to? And how does that compare to the $780 million. Just want to make sure I understand this CapEx, right? $780 million is in your 2022 cash flow statement, what's going to be in the cash flow statement in 2023?

$780 million in the 2022 CapEx is excluding RNG, Michael. We've been talking about the numbers together. So we have $830 in the 2022 statement including RNG sort of spend on that. What we're saying for this year is that number will be comparable in that $830 range. You're expecting about $20 million of proceeds from asset small little asset sales, so you would have a net CapEx number of $810 million. And the comment about $830 million in both years being comparable, recall that 2022 had outsized spend because of the $150 million we received in late 2021 that we employed at the beginning of 2022.

And cash flow from ops is forecast at what for 2022?

Well, with $810 million to $815 million of net CapEx, that would imply cash flow from ops, about $1.5 billion before any adjustments.

Okay. So there are no adjustments then in the 2023 free cash flow then?

Well, we don't forecast end of year transaction cost that roughly what's been running $60 million to $70 million of transaction costs a year. We never include the forecast due to the uncertainty of the timing and quantum of those amounts. As Patrick said, with $300 million to $500 million spend, there would be a certain degree of that. But none of that is included in our forecast. So that would be a reduction to that financial statement presented cash flow from ops, the extent and magnitude of any transaction costs that we add back.

Okay. So it's a powerful statement though that you've got a -- your simple free cash flow in 2022 was about $350 million. You're doubling the simple free cash classic cash flow from ops less all capital spending, no adjustments. That's a pretty powerful statement.

I would agree, and I think when you consider being achieved in the construct of the inflation interest rate environment, I mean, you have a $100 million interest rate headwind. Now it's a very meaningful headwind of that cash flow number and you're still achieving those results. So yes, we're very excited about watching the free cash flow sort of come through as we had articulated it would.

Okay. And just to be clear, and I don't want to belabor this, if you had been able to spend everything you wanted to spend, you would have done $640 million, but this year would have been $750 million. It's as simple as that. It's not any more complicated, right?

Yeah, correct. I think there may have been a different opportunity on working capital. If you were going to come in that light than maybe you would have been a little bit more aggressive and been able to make that $640 million something a little bit better in 2022, but you're thinking about that exactly right, Michael.

Okay. And then bridging to the $700 million is working capital a source or use in '23?

Simplifying assumption, working capital is a modest source that offsets the modest use for cash taxes and landfill closure, post closure.

Okay. And then interest, we know, recycling is a headwind?

Recycling is a material headwind in 2023. We have assumed...

Right. And then fuel is... Sorry, I'm saying I'm -- probably been talking over you. What were you saying?

No. Yes. Recycling, we just -- we've assumed no improvement in the current levels. And so that represents a material headwind going into 2023.

And fuel is -- you've had a real fuel cost drag, not just a pass-through drag in '22. So that should be a tailwind in '23 because you're making up for that...

Yeah. So fuel using the end of 2022 rates, I think the price was roughly 8% below what your average fuel cost was in 2022. So that will be a modest tailwind at the cost line.

And then price and organic growth makes up the difference to get flat. So I mean they've got a couple of hundred million dollars of the headwinds getting offset by couple of hundred million with a positive, most of which is organic growth?

Correct.

Right. That's the other part. Okay. And then on your cash interest, Patrick, you're at 6.7% of revenues today. Your peers are 2.5% to 3%. You're going to take $100 million of that out going into '24 based on these asset sales. Basically, if I'm getting in line with the peers on a revenue percentage basis, it's -- I got $250 million I'm playing with it. What's the thoughts about when the next $150 million comes out?

Yeah. I don't know if it's going to come out. I think it's -- you're going to sort of grow into it as the EBITDA grows, you're going to grow into the sort of delevering process. But I think what we said is we are committed to exiting 2023 with a three in front of our leverage number. I think when you look at what the opportunity is now and what we're positioning ourselves to do is take this dutiful platform and mature into what you would see sort of normal course other public companies. And I think you sort of said it right in your note is, we are going to move to investment grade, right? So this squarely puts us on the path to do that on an expedited basis. It may take a couple of years post delevering because the rating agencies like to look on a sort of trailing basis. But we're going to get there. We pushed out, as Luke said, our term loan refinancing into 2027, what people seem concerned about earlier because of the maturity for the 2025 maturity. We renewed that at a lower rate than we currently had. And then as that all comes down, we think -- listen, I mean, you can look at Waste Connections refi their term loan at. They're investment grade, they refi their term loan at software plus 75 bps, 85 bps. Our term loans that software plus 300 bps. So there's material savings that are going to come from the capital structure over the next two to three years as we get to refinance the capital structure and lower leverage closer to 3 to 3.5 turns from the high-3s we're going to end this year at. So I think over the next couple of years, you're going to see that just beautifully gravitate towards everyone else is at this point. And that you're going to see a transfer of value from the debt holders to the equity holders, right? And that's going to be -- that's going to be very sort of powerful from an equity value creation standpoint.

Right. So from a modeling standpoint, if you hit the investment grade, just to follow this point, as you do the refis in 27 and beyond, the cash interest number theoretically is coming down on the same level of debt because you're going to have a better borrowing cost. And there's the leverage and -- the financial leverage into your free cash flow let alone the operating leverage.

Correct.

Okay. All right. That’s all I needed. Thank you.

Thanks, Michael.

The next question comes from Kevin Chiang from CIBC. Keving, your line is open. Please go ahead.

Good morning. Thanks for taking my question. Maybe just a clarification on Walter's earlier question. So if I look at the $1.5 billion of gross proceeds and the adjusted EBITDA that would be removed from the consolidated results. It sounds like you're transacting these about 12.5 times to 15 times that $1.5 billion includes the full, I guess, divestiture amounts that you've laid out on Slide 15 here.

Yes, Kevin, it's Luke. So I think on Slide 15, we're saying $100 million to $110 million of EBITDA potentially. So if you take the midpoint of that range at $1.5 billion, that's a 14 times forward number, right, because that's our 2023 guidance on those, it's probably 1.5 turn higher on a trailing number. And as Patrick said, there's probably an opportunity for proceeds slightly in excess of this, which would yield a multiple right in the middle of that mid-teens fairway that we had articulated the are possible as being.

Okay. That's excellent. It seems like -- I mean the gross proceeds, obviously, a large amount. It feels as though the assets that are being sold, maybe back in November, the quantum of EBITDA potential was a tad higher. Does that suggest there's more opportunities here to divest of noncore assets even after you kind of go through this more significant portfolio rationalization or have you kind of touched on all the assets you think you need to divest of or shed the markets that you don't think you're going to invest in to grow?

Yeah. I think the November comment came from the fact because we had a lot of inbounds over the last year about different parts of the business. I think when we sat down with all of our operators, we went through it, this is what we said we're going to do this once. There's going to be one big sweep, and this is what we were going to do. And this is what we sort of shuck out. And I think, listen, these assets, they're great assets. They just -- I think they're of a higher and better use to somebody else and in markets where either we're geographically sort of disadvantaged during their markets where there's multiple sort of strategies. And I just think when I look at the opportunity set of where we can deploy incremental capital into M&A and incremental organic initiatives, we're going to do it in other markets where we have the ability that we can grow at a much higher clip and have a better return on our invested capital. And I think when you look at that, that's what we're doing. So these assets will be perfectly situated in others' hands, who have a larger presence in those markets, and I think they will do very well with them. But from our perspective, they just -- they weren't a priority for us in markets that we were actually going to spend a lot of time in. So hence, we kill two birds with one stone, getting of those have a significant amount of incremental capital to grow in the markets where we want to grow. And at the same time, set us up on the path to delevering, particularly in an interest rate environment that's uncertain and it's going to set us up to expedite our ability to get to investment grade. So all those coupled together, we think will yield great equity value creation for all the stakeholders involved here. So that was the sort of rationale behind it. There is a significant amount of opportunity. So it's kind of -- it's not like if someone asked the question, did you do this because you wanted it just had to delever. This had nothing to do with delevering. Yes, it's a fill that requirement as well, but at the same time, it was just the right thing to do about where we want to deploy capital, and that's what we did. So our expectation is that we should -- like I said, we signed one definitive agreement last night after we actually reported, which leaves -- which is over 50% of the dollars we're going to be repatriating -- and then the other two, we expect over the next little while here, and we'll expect to close them between sometime in late Q2 and early Q3 as we go through the regulatory process. But for your benefit, we selected partners, and we've done all of that DOJ analysis to make sure going in that we didn't think there were any issues with anyone. That was a big part of the criteria in selecting who actually acquired the businesses. So it's a wonderful thing, and I think it's going to yield a great result.

I agree with you. And maybe just last question for me. Your organic growth within the U.S. Solid Waste business is tracking nicely ahead of what you're seeing in Canada. Just want -- is there anything to call out there? Is it primarily just you've owned Canada longer, so there's just more low-hanging fruit, I guess, from an organic growth perspective in the U.S. or are you seeing something different in the volume or pricing environment between the two countries?

Kevin, it's Luke speaking. I think it has more to do with our mix. If you think about when we talk about our CTI linked revenue, we have a greater proportion of that in our Canadian book of business in the U.S. And that has obviously been the tranche of revenue that has been the anchor to your blended price. So actually, I think when you roll into 2023 and you finally get those CPI resets breaking that mid-single digit level, you're going to start to see more price acceleration in Canada as we finally get that sort of catch up. So the pricing environment in Canada, we think is equally attractive on a like-for-like basis from service levels. I think it is the revenue mix that is driving that delta more than anything.

That make sense. Thank you very much. Thank you for taking my question. Best of luck in ‘23

Thank you.

The next question comes from Jerry Revich from Goldman Sachs. Jerry, your line is open. Please go ahead.

Yes. Hi. Good morning, everyone.

Good morning, Jerry.

Can we talk about price cost, just the cadence over the course of the year. You are obviously offsetting all of the inflation. So it looks like you're starting out with something like 10 points pricing, 10 points of inflation. And based on the margin guidance, it looks like you're planning to exit with 7 points of price, 3 points of inflation just directionally. But I'm wondering if we might be able to put a finer point on that and see how you folks are anticipating that spread as the year progresses?

Jerry, you did my work for me. You summarized it quite well. It is very much a tale of sort of two halves on the cost side where you start the year are I think Q1 is a double-digit number. And then it steps down sort of ratably throughout the year and it will really be an H1 versus H2. I think it's important to understand, in addition to the pure unit cost inflation, we're also just looking at removal or absence of some of these onetime costs that we incurred this year, like truck rentals as being an example. So when you're getting to that lower single-digit number in the back end of the year at cost, it's not just unit cost, but it's also just cost avoidance for some of these onetime costs we had, particularly in the back half of this year. At the pricing level, I think we're anticipating in the guide a more normal course pricing cadence what that is, is Q1 being the highest, and you're right, we're expecting double-digit number there. And then that ratably steps down, call it, 100 basis points, 125 basis points a quarter as you move through the year, which is the more typical pricing cadence. Obviously, if our assessment or expectations or cost inflation are different than what we just said, we are demonstrated an openness to go after more price in year, and we will continue to do so to the extent, and that's what's necessary to drive our appropriate return. But the guide today is predicated on that cadence I just described.

Super. And can we shift gears and talk about the divested asset where you have a definitive agreement. I'm wondering, Patrick, if you wouldn't mind sharing what the market position was of that asset? And what's the anticipated gain? Is it similar to the transactions that you folks did was at a year or so ago?

So it wasn't a significant -- sorry, yes, we're not going to let that market -- once I think we hop in everybody wants those definitive agreements are signed, and it's just from -- we have NDAs with everyone. But I think from that perspective, like I said, we had three markets which were the Colorado market, Pennsylvania, Maryland, Delaware and natural market was a market we were interested in sort of looking to divest. As for your other comment on what we acquired in the last years, what was that?

No. So you had a significant gain on your last sort of divestitures and you were something like number four or number five in the markets you divested. So I'm wondering if you could give us a...

Yeah. So in all the assets, we are three -- third or below. So there's two others that are larger than us in the market. So -- and their markets with sort of multiple strategies, right? So as you know, we've -- our experience has been -- we like to be in sort of duopoly type market, secondary markets. These are markets where we're divesting of -- we are third and fourth position. So we just didn't see a path to deploying incremental dollars into those markets to be able to grow them significantly from the position we already have.

Got it. Could you shift gears and talk about landfill gas. Thank you for the update on the earnings cadence. Can you just talk about the off take agreements and how those are trending. We're hearing that for voluntary markets, the market has remained in the 20s, even though Henry Hub has gas has obviously come in. I'm wondering if you could just comment on if you're seeing that as well? And just give us an update on your contracted status relative to the pipeline?

Yeah. So we haven't locked in anything sort of long term yet. Obviously, we've been sort of watching the tough settle, particularly around the E-RINs, et cetera, and then what was going to happen sort of the long-term pricing around RINs. We knew there was going to be some compression for sure this year. I don't think people expected $2 RINs, but I think $2.50 to $2.70 RINs was a lot of people were hoping. I think, again, as the voluntary market, demand continues to come on. We think, like you said, there's a lot of demand for having a long-term supply agreement. So as we move into getting these projects online in the near term, we will then look at sort of entering into somewhere between seven and 20-year agreements for a good portion of the fuel. But as of this minute, we haven't locked into anything yet. But you are correct, that pricing still exists and people are taking a longer-term view versus taking a view of the shorter-term movements.

And can I show you for your views on e-RIN, so it looks like the subsidy is going to have something like $0.30 to $0.40 per kilowatt hour free subsidies. I'm wondering with your footprint as it stands today, how much electricity do you folks generate from gas to electric. And how are you thinking about that opportunity? I know it's early stages, but we would love to get your thoughts.

Yes. Hey, Jerry. It's Luke. Look, we're excited with e-RINs as we view it as another incremental opportunity that's not sort of in our portfolio. I mean today, we have five landfills that have existing landfill gas electricity operating. Now those are under royalty agreements with third parties, but all those sort of roll off and at which time we can sort of revisit those under the sort of e-RIN landscape. And then there's other landfills. I mean, as you know, electricity build-out much less capital intensive than RNG. So we have some other sites that we're evaluating that may also be good potential sort of host sites. And so we've yet to quantify the benefits. As you know, we need to understand a little bit more where it's all going to sort of shake out. But this would be additive to our current sort of RNG and landfill gas related economics, and we're excited to monitor the progress, and we'll provide updates as we get more certainty there.

Appreciate the discussion. Thank you.

Thanks, Jerry.

The next question comes from Tyler Brown from Raymond James. Tyler, your line is open. Please go ahead.

Hi. Good morning, guys.

Good morning, Tyler.

Thanks for the detail. On the 100 basis points on EBITDA for new guide, can you just talk about some of those really pieces, specifically how much is commodities, M&A? And do you expect it to be an actual tailwind on this sale target range?

Tyler, we're having real difficulty hearing your line. I think you asked about the 100 basis point margin expansion. I'm going to respond to that. And hopefully, that was sort of the right question. So look, if you think about the 100 basis points, I mean, if you break it down by segment, right? Talking about our Solid Waste segment first, we're actually anticipating upwards of 200 basis points in Solid Waste when you think about the commodity headwind, right? So commodities, if you assume at the current basket price, it's about a $50 million headwind just from our sales of commodity. And that alone is about a sort of 60 basis point headwind at the Solid Waste margin line. We have incremental headwind in those locations where we use third-party disposal, right? And now that rebate. That part is often not talked about. We probably have another 15 basis point, 20 basis point headwind coming out of that. So Solid Waste anticipating a 150 basis point margin as is, you actually -- that's closer to 200 basis point when you think about the headwind coming from the commodities. Environmental Services, also anticipating a sort of 200 basis point plus margin expansion, I think it's actually mid-200s. And that's really a function of, as Patrick said, prioritizing quality of revenue over quantity and really starting to leverage the sort of fixed cost base structure that we have there. If you think about those two margin expansions in the segment, the third piece is the corporate cost bucket. As we said, we are anticipating incremental investment, primarily around IT-related costs in the corporate segment, and that's going to see an incremental sort of $30 million, $45 million spend in the year as we sort of bolster our sort of transition to the cloud and all the sort of securities associated with that. So you're going to see expecting that corporate cost bucket in that sort of 325 basis points, 330 basis points of revenue, which is somewhat offsetting that very strong organic EBITDA margin expansion in both solid and liquid M&A, I mean the rollover in fact, 3.5% to 4% top line. That's a slight drag, I'd call it, 25 basis point drag. I think it's what we have in the plan today coming out of that M&A. And then fuel, your last point, look, fuel cost sting alone, direct fuel pass-through, as I said, our surcharge is more mature and the fuel price actually slightly coming down. So not a significant impact there, a slight tailwind. But what we do have is this indirect fuel pass-through that was really prominent in the second half of 2022. What we mean by this is the third-party transport providers and disposal providers that came with incremental price to recover their own energy costs. Those represent a pretty meaningful headwind as we go into next year by virtue of lapping those costs that arose really in the second half. So we'll see how that plays out if energy prices continue to moderate. But net-net, aggregate fuel is a headwind as well. And so you take all those pieces together, the organic margin expansion underlying as a result of this pricing and operating leverage is quite significant.

Yes. Okay. Can you guys hear me better?

Yes.

Yes, much better.

Okay. Good. Yes. Sorry about that. I do want to switch gears just a little bit. Given that its year-end, can you guys update us on where GIPI (ph) EBITDA came in for the year? If you have any expectations for '23 and what that leverage profile looks on that entity. It's kind of hard to ascribe value for it without some of those financials. So could you just give us any help there?

Sure. Yes, that business this year will generate sort of somewhere between 165 and $170 million of EBITDA, roughly -- sort of roughly about 5 turns of leverage on that sort of where it shook out. I think when you look at that, and I'll just sort of reiterate the plan for that business, where we sort of sit today, that will grow -- they obviously had cost inflationary pressures as well for contracts they bid in 2021 that they actually had to do in 2022. So we expect for 2023, that business will do somewhere around $195 million to $200 million of EBITDA. We expect that we will acquire $65 million to $70 million of EBITDA this year in that business. Largely last year, we just spent on integration. We didn't do any M&A. We have three targets under LOI at the moment. So we expect that, that business will exit 2023 with somewhere around $270 million, $275 million of EBITDA on a path to growing that to $300 million. So if you think about the original plan, our plan was, hey, we're going to grow that to $300 plus million. We think that business, if you look at the comps, like rolled and others and what it's worth sort of private equity and the value creation opportunity from an M&A perspective, we think those businesses conservatively trade for somewhere between 11 times and 12 times which would roughly put that at around $3.5 billion of enterprise value. Net debt would roughly be $1.5 billion. So there'd be a combined equity of about $2 billion, and GFL loans just under 50%. So I think from our perspective, that gets us to the $1 billion of equity that we set out to create truthfully, that's nowhere to be seen today, but one day GFL shareholders are going to get a check. I'm very confident for closer to $1 billion. But that's the math behind it.

Okay. That is -- yes, that is super, super helpful. Okay. And then my last one here. If I look at the pro forma schedule on the proposed divestitures, it looks like they've run around 25% margins. The CapEx profile is 7% to 8% of sales. So if I just read those breadcrumbs, does that indicate that they're likely hauling operations? Or are there some vertically integrated markets?

It's a mixture of both. I mean a couple of the markets are hauling and transfer some are hauling only and then another market sort of vertically integrated as well. With a smaller lands. So but you're right, it's mostly -- it's more sort of on the hauling and transfer side.

Okay. Cool. Appreciate it. Thank you.

Thanks, Tyler.

The next question comes from Tim James at TD Securities. Tim, your line is open. Please go ahead.

Thanks very much. Good morning. I'm wondering if you could talk a little bit about the moving parts by market as you think about your volume expectations, your guidance for '23. Just thinking about different kind of expectations within commercial, industrial, residential and maybe any differences you see in the U.S. market versus Canada?

Yeah. Hey, Tim. It's Luke. Look, as presented in the prepared remarks that we're taking a conservative view on volumes, just in light of uncertainty. The reality is, as you can see throughout even the second half of 2022, I mean, our volume growth remains strong. I think it's a testament to our market selection as well as the sort of quality of service that we're seeing. I mean in a typical recessionary type environment, it's the C&D related volume, right, that drives up first, you see that the landfills and your sort of roll-off business. So the guide does assume more tempered sort of landfill volumes and fee collection. Although I would say that sort of together sort of a single-digit percentage of our total revenue fees. So it's not a material number. I think really what we're anticipating is broad-based across both of the markets, a general slowdown in the sort of commercial industrial type volume. Residential sort of remains strong and sort of a little bit more cycle agnostic. So it's really in those areas, but I would highlight, it is a conservative perspective based on the uncertainty versus indication based on what we're seeing in the current data.

Okay. That's really helpful. The Environmental Services business, the growth that you've reported last year, I mean, just a great performance. Can you comment, and I don't know if it's possible to talk about how much of that performance was overall market strength versus GFL-specific market share gains or opportunities that maybe you capitalize to outgrow the market?

I mean from Environmental Services, I mean, I think, listen, we had -- we were very opportunistic when we bought -- when we stepped in and bought [indiscernible] right? So we bought that. I think when others were scared of COVID and other things, and I think we bought that on an LTM number that was significantly affected by COVID at a very reasonable purchase price multiple, like just over 8 times. So you put that all together today and you look at the market position, you look at the synergy opportunities, you look at the diversification of our service offerings and being able to offer our existing customers services that tariffs be able to offer their customers and services that our existing GFO customers couldn't get because [indiscernible]. I think when you put that all together, that led to this outside sort of growth opportunity. In conjunction with keep in mind, we exited COVID for the most part in Canada in the spring of 2022, right? So there was a lot of pent-up demand as well -- but when I think you look at that business and you look at the scale we now have in Canada, the facilities we now own in Canada and what that's able to do in the service offerings, we're able to offer our customers and being able to sort of leverage that and leverage that fixed cost base of facilities, push price, et cetera. That's a sort of leading to that. And it's an already industry-leading margin business at sort of mid-20s. And my goal over the next two to three years is to get that to closer to 30%. We think we can do that. We think we have the power to do it. And I think when you look at the platform that we have, if we're selective about the markets we go and the focus on the revenue from the existing customers, I think that is going to yield an exceptional result.

Okay. That's really helpful, Patrick. And then just a final question. I just want to confirm my thinking just doing some simple math here. The asset sales plan for this year, they would be effectively slightly accretive once those sales are done to your Solid Waste margin percentage, but really have no material impact on the consolidated. Is that the right way to think about it?

That's right, Tim.

Okay. Great. Thank you very much for the time.

Thanks, Tim.

The next question is from Stephanie Moore from Jefferies. Stephanie, your line is open. Please go ahead.

Hi. Good morning. Thank you. I wanted to follow up on Tyler's question real quick here. I think you called out, obviously, some nice progress made on the fuel surcharge program and some other initiatives. But maybe you could talk about some of the other self-help initiatives just embedded in your margin guidance as you think of -- what do you think for this year. Thanks.

Yeah. So I mean, Stephanie, it's Luke, when you speaking of self-help, I assume you're talking about the three sort of levers that we identified at our Investor Day across sort of fleet conversion...

Exactly. Yes.

Pricing. I mean, we continue to make progress on those. I mean if you think about CNG fleet conversion, like our peers have demonstrated the power of moving off of diesel onto those alternative fuels. And it's something that we're excited about and deploying capital into. However, in light of all of the uncertainty that we've sort of spoken about, I think deploying excess capital today at today's leverage levels, et cetera, is just not something we've had an appetite for. So as we've articulated, we are currently just spending our replacement CapEx into those streams as opposed to outsized accelerated spend. As we move forward to the extent there's perhaps less a perception of leverage and therefore, a tolerance of perhaps spending some outsized accelerated capital, you could look at accelerating the pace at which we would do that conversion and repeating the benefits accordingly, but I highlight what we have included in the guide is our normal course replacement CapEx being favored towards CNG. So while you're getting some benefit, it's by no means the lion's share of this EBITDA margin expansion that we're talking about. That continues -- the complete conversion continues to remain an incremental leg up on margin expansion that we are slowly chipping away at today with potential design that sometimes in a few years out, we could then accelerate the realization of that opportunity.

Great. Thank you. And then just on the labor headwinds as you kind of look into 2023, I think what are you seeing in terms of maybe improvements in retention, I think wages remain high, but any kind of color on just labor expectations? Thanks.

Yes. I think one thing we track pretty closely is sort of voluntary resignations. And I think where we were, if you look sort of pre-COVID, we were sort of sitting around 18% to 20%. That one as high as sort of 30% to 32% in 2022. And I think that's moderated significantly now down to the sort of mid-20s and trending back sort of closer to sort of pre-COVID levels. I think it's now not become necessarily sort of a wage game. I think, obviously, with a lot of the last-mile guys starting to slow down where we saw a lot of pressure coming in some of the urban markets. That has largely subsided. I think we're moving to a more normalized wage increase model, and the retention has been very high through sort of later Q3 into Q4 and now into Q1. So as Luke said earlier in the script, I think from our perspective, that is sort of moderating now, and we think we're in a very good position to get back to sort of a more normalized state for the current environment. So we're pretty optimistic about where we sort of sit and I think it's certainly getting significantly better than it was in late 2021 and through the early half of 2022.

Great. Thank you so much for the time.

Thank you.

The next question comes from Michael Feniger from Bank of America. Michael, please go ahead. Your line is open.

Yeah. Thanks for taking my question. I know we're going a little long. I guess I just wanted to ask some of your comments, Luke, on first half versus second half. The costs you're absorbing in '23, obviously, low OCC right, rent-ramping. Can 2024 look like an outsized year in terms of margin expansion and free cash flow conversion? If not, like what would kind of hold back 24 from being an outsized year?

Mike, I think you're thinking about it exactly right. We anticipate 2024 to be another year of outsized organic EBITDA margin expansion, right? If you think about the way the pricing cadence is now going to marry up against what should be a moderating cost inflation and entering into 2024 was still better than mid-single-digit pricing. We think the organic algorithm there should yield another outsized year of expansion. And at the free cash flow conversion line, I think you said it exactly right. This year, I characterize it as a recalibrating year, right? Your free cash flow conversion by virtue of absorbing the extra interest expense is stepping down. We'll be in the sort of high-30s of EBITDA conversion. But when you roll into 2023 -- 2024, with the benefit of the divestitures, you're going to be back into a low-40s percent free cash flow conversion and then ramping up from there. So I know there's always a lot of focus on the guide for what it means in the next 12 months. But I think Patrick articulated in the prepared remarks, when we're going out to 2025, we don't see a path that is less than sort of $1.1 billion of free cash flow at approaching mid-40s free cash flow conversion and continue to have opportunity to go up from there. So I think you're thinking about it right. This is the year to absorb the interest cost, but thereafter, we get meaningful leverage as we go forward.

Very helpful. And Patrick, when you IPO-ed in 2020, there was a knock on the fact that you had lower solid waste exposure and some other, yet we're seeing other large public players starting to get more into environmental services. So I'm just curious, since we've seen some of these developments, are you observing in that market where there's -- there's a connotation of volatility, not as much discipline, if you're seeing any shift there over the last year or so, that's noteworthy.

No. I think Environmental Services is just -- I think, is where Solid Waste was 15 years ago, right? It's very fragmented across all the different geographies. You really only had one consolidator for a long period of time, which is Clean Harbors. But again, focused on different parts of the business. I think when you look at that business, it's the exact same as the Solid Waste business, and I've said this for like 15 years now. I mean maybe not everyone sort of as believe me, but I think when you sort of leverage in this regulatory environment and having these sort of moats, which are wastewater treatment plants, all our sort of TDI facilities, et cetera, all of these yield exceptional pricing power over time, right? As the regulatory environment keeps getting tighter, as these markets continue to consolidate, it's going to help with pricing power. There's a higher focus for customers on the regulatory environment. It makes it more and more difficult for the smaller mom and pops to sort of compete. So just because the amount of money you have to spend on infrastructure to be able to service the customer to meet today's regulatory requirements. So with that, I think this is going to be an exceptional business over sort of a long period of time. I think when you look at our business today, it's mid-20s margin running at sort of 8-ish percent CapEx. My goal is to get that, it's sort of closer to 30% and maintain that sort of CapEx level at 88.5%, and it will be the exact same free cash flow contributor as Solid Waste is to our existing business today. And I think that opportunity exists. And yes, I think we always -- people always ask the question historically about why we're in that business. Obviously, as Republic identified a similar opportunity that we had over time, I think it's become more of a normalized view. But I think where we sort of sit today, it will be a very similar margin business to our Solid Waste business, and it's going to be as good or better with the free cash flow contributor. So put all of those together, I think we've been cognizant I think under private equity ownership, important thing to note. When we were under private equity ownership, we were running leverage levels of closer to 6.5% to 7%. We really couldn't afford to be in cyclical-type businesses. So we really stayed out of the E&P space. So none of our business is levered to the E&P space. So with that, this is just a sort of normal core steady Eddie type business. Yes, it was abnormally impacted because of COVID, but that was because of the dynamic that we were levered to Canada and Canada was closed for two years. But outside of that, I think you're going to see our business continue to grow and be a great contributor to the GFL book of business for a long period of time.

Appreciate. Thank you.

Thanks, Michael.

Our final question today comes from Chris Murray from ATB Capital Markets. Chris, your line is open. Please go ahead.

Yeah. Thanks folks. So just a couple of quick questions on margins. Just thinking back to the fuel surcharge. I think Luke you mentioned that there's a delta of about 200 basis points between you and your peers. But in a flat to falling fuel price environment, you probably get it on the cost side. Can you just talk a little bit about do you think you'll be able to recap that whole $200 million sometime in '23? Or is it still going to take a little bit longer than that as you need contracts to roll over?

So to clarify, the $200 million is the gap of the impact in Q4, right? Because what I'm suggesting is we had a 130 basis point headwind where I get some of my peers probably had a tailwind of 50 basis points to 75 basis points. So 200 basis point gap in the impact. As we go into next year, what we have now established is a functional fuel cost recovery program. So the initial recognition of that is almost like a permanent price layer in our book of business that we will now enjoy the benefit from. Yes, if fuel prices fall materially off, you will give some of that back, but doing so in conjunction with a much lower energy cost in the P&L. So I think it was this year of initial recognition where we were sort of behind as we go forward, we think we are now better positioned to respond to volatile energy prices regardless of the dynamic going up or down.

Okay. And then just my last question, just on the Environmental Services business. You did talk about being able to grow margins up to the 30% by, call it, optimizing revenue, but you're also talking kind of mid-single-digit growth now. Are you intentionally starting to stead revenue? I mean historically, we've seen a pretty higher growth rate than that. But can you just talk about the kind of the price versus volume dynamic that you're willing to entertain to get those margins up?

Yes. I think, again, bigger focus on quality of revenue. And this is a specialty type trade, right? So our guys, again, hey, we want to get paid for the work we do and for the people we can do. We can't do all the work. So let's focus on the work we're going to get paid the most for. And for the customers that appreciate the work that we do for them in the basis and the timely basis that we do it on. So yes, we are going to push -- we are going to push that. We are going to push the quality of the revenue, and we are going to push price and surcharges in that space too. Listen, we looked at our overall fuel surcharge in that business, it was sitting at around sort of 5%. That should be at closer to 15% today. So there's opportunity just on the surcharge line there as well just to cover our existing costs. But again, pushing core price and surcharges in that space is going to sort of push that up as well as the quality of revenue and the customer base in that business.

Okay. And does that reduce volume as you think going forward or just flatten it out?

Flatten it out a little bit for sure. I think 2022 was an abnormal year from just a ramp in terms of the amount of volume that came and how fast it came just given the recovery from COVID. But yes, it will normalize and normalize just like the Solid Waste business would itself.

Okay. Fair enough. Thanks, folks.

Thank you so much.

We have no further questions at this time. So I'll hand back to the management team for any concluding remarks.

Thank you very much, everyone. I'm sorry the call dragged on a little longer, but we look forward to speaking to you after our Q1 results and appreciate all your support over the last number of years. Thank you.

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