GFL Environmental 2026 Q3 Earnings Call

Thank you, operator. Good morning, everyone, and welcome to today's call. I am joined this morning by Luke Pelosi, and together we will be reviewing our results for the third quarter and updating our guidance for the year. The exceptional performance we delivered in the first half of the year continued through the third quarter, allowing for another top-to-bottom beat of financial expectations. The ongoing quality and durability of our operational performance, coupled with the closing of SECURE, allows us to raise our guidance for the third time this year and provides for an extremely compelling set-up for 2027 and beyond. Organic revenue growth accelerated 100 basis points over the second quarter, driven by core pricing ahead of expectations and 50 basis point improvements in both volume and commodity prices. Landfill volumes turned positive, including both C&D and special waste streams.

Although we believe that construction development and expansionary manufacturing investment remains tempered, we remain well-positioned to participate in the eventual recovery of these activities. Volatility in fuel prices continue to impact revenues, costs, and margins. Third quarter diesel prices accelerated another 10% over the second quarter and were over 60% higher than the prior year. Our fuel surcharge mechanisms have proven effective at recovering the direct impact of higher diesel costs, although we are seeing a greater degree of indirect cost increases coming through transportation, spare parts, and other cost categories. Our industry-leading margin expansion would have been significantly greater if not for the impact of these fuel prices. Non-fuel related cost of sales and SG&A cost intensity trended lower on a year-over-year basis for the seventh consecutive quarter and was achieved despite headwinds from M&A and higher landfill operating costs.

This ongoing trend highlights the positive impacts from continued improvement in labor turnover and our ongoing focus on cost discipline. These benefits are in part rising from process optimization, along with the realization of self-help opportunities across our portfolio. Nowhere are these impacts more apparent than in our adjusted EBITDA margin, where we delivered an industry-leading 125 basis points of underlying adjusted EBITDA margin expansion. To be able to raise our margin guidance for the second time this year, despite the challenging macro environment and significant headwinds from fuel costs, is a testament to the effectiveness of our strategies. The third quarter also saw us closing on the SECURE acquisition. When we underwrote the acquisition, we were impressed with SECURE's market-leading platform of a difficult-to-replicate critical waste infrastructure asset in the familiar and attractive western Canadian market.

The transaction was also highly financially compelling, accelerating the achievement of our multi-year financial targets we laid out at Investor Day, and enhancing our balance sheet and free cash flow profile to allow our maximum capital deployment flexibility. Since the time we announced the acquisition, we believe that the macro outlook for SECURE's business in the markets in which it operates in has materially improved and should provide for further upside to our investment thesis over the medium and long term. Integration of the SECURE business is well underway, and we remain confident in the ability to achieve the CAD 25 million of underwritten cost synergies in the near term, with opportunity for an incremental CAD 25 million to CAD 50 million of previously referenced synergies around disposal and cross-selling. In addition to SECURE's physical platform, we are equally excited about the people and talent that have joined our team.

As previously announced, Allen Gransch was appointed to our COO on September 1st. Allen brings a proven track record of operational excellence that directly complements our long-term growth strategy. Across his nearly 20 years at SECURE, Allen was instrumental in establishing and implementing the company's strategic direction, including leading through transformational change, driving operational execution, and building high-performing teams. Allen's proven leadership capabilities, extensive experience overseeing a large-scale diversified waste management platform, and his broad skill set will make him exceptionally well-suited to advance GFL's operational and growth goals. Furthermore, with Billy Soffera staying on in a senior strategic advisor role, we will continue to get the benefit of his deep expertise as he remains actively involved in leading many of our corporate-wide value creation initiatives. Before I pass the call over to Luke, I will walk through the quarter in more detail.

I want to take a moment to discuss the ongoing strategic review. You would have read in the press release that the special committee has provided bidders with a final deadline of November 9th to deliver their updated proposals. I will tell you that we have undergone a very thorough process. We always find it useful to have highly sophisticated third parties come in and take detailed looks under the hood of our business. Fresh sets of eyes are critical to their perspectives of what they view. While we have found that such processes are time-consuming and disruptive, the strong interest from globally recognized institutions is a testament to both our team and the platform we have built. Assets of this scale and quality have scarcity value. The special committee, in conjunction with their financial advisors, are continuing to evaluate the best path forward for the company.

We expect to have a decision very soon, so stay tuned on that front. However, regardless of the path forward, the confidence we have in absolute earnings growth year-over-year, medium and long term, should be a source of material equity value creation. While the committee completes its review, our team continues to remain focused on optimizing our proven operating model, including delivering on the Investor Day commitments of achieving low to mid 30% adjusted EBITDA margins and free cash flow conversion in the mid 40% range. The quality of our base business has never been more solid. The risk-adjusted growth profile has never been better. We have the right assets. We have the right people. We have the proven effectiveness of our execution, and we are going to continue to win. We are going to keep fighting until we have done so.

I will now turn the call over to Luke to walk through the quarter and guidance for 2027.

Thanks, Patrick. Good morning, everyone. Looking at the details of the quarter, Q3 revenue grew 27% over the prior year, driven by a 5.7% price, a 50 basis point sequential improvement in volume, and incremental contribution from both surcharges and commodity prices. M&A added nearly 19%, mainly from the Frontier and SECURE acquisitions. Q3 volumes were nearly flat or approximately CAD 10 million better than the second quarter. At the beginning of the third quarter, the restructuring of a large multifaceted recycling contract in Western Canada removed our obligation to provide brokered transportation services on a pass-through basis. This resulted in a CAD 13 million reduction in quarterly revenue, albeit with minimal impact to profitability. Excluding the impact of just this one contract, volumes for the quarter would have been positive 60 basis points.

As Patrick said, the volume performance was supported by the return to positive volumes of both C&D and special waste at our landfills. C&D landfill tons were up 4.5%, the first quarter of positive volume since early 2025. This result was helped by the one-time cleanup of a closed transfer station in Western Canada, but even absent that benefit, C&D volume was modestly positive. Roll-off pulls were flat in the quarter as activity remains tempered. As a result, our volume outlook remains cautious. Q4 volumes are expected to decelerate on the lapping of EPR transition contracts in Canada and exiting certain ancillary services in the Midwest, with underlying base volumes remaining relatively flat to modestly down.

Third quarter cost of sales before depreciation, amortization, and integration costs as a percentage of revenue improved 70 basis points, excluding the impact of direct fuel costs and over 100 basis points when factoring in indirect fuel costs as well. SG&A cost intensity also improved 70 basis points when excluding D&A and transaction costs. The ongoing realization of efficiency in labor and R&M costs, as well as operating leverage on our corporate segment, continues to highlight the effectiveness of the cost optimization strategies we laid out at our Investor Day. As expected, fuel costs were a drag on operating costs and margins. Average diesel costs were up over 60% in the quarter and spiked even higher in the first half of September, which resulted in a $5 million headwind to our original Q3 guide.

We now expect the impact of elevated diesel prices to result in roughly $125 million of incremental costs for the year as compared to our original guidance. Adjusted EBITDA margin for the quarter was 31.5%, 30 basis points higher than expectations and nearly flat with the prior year, which was the highest margin in our company's history, despite the meaningful headwinds from fuel costs and M&A. Elevated landfill operating expenses, primarily tied to leachate transportation and disposal costs, were also a headwind to margins. Excluding these headwinds and considering that improved commodity prices were a 20 basis point margin tailwind, underlying consolidated margins were up 125 basis points from the prior year. Adjusted free cash flow was $272.5 million, over 50% greater than the prior year. This result was 15% better than guide, partially on account of the one-month contribution from SECURE that was not previously contemplated.