GFL Environmental Inc. (GFL) Earnings Call Transcript & Summary

Thank you for joining us, and welcome to the GFL Environmental Inc. Third Quarter Earnings Call. Before we begin, I would like to remind everyone that this call will include forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. These statements are subject to a number of risks and uncertainties, including those set out in GFL's filings with the Canadian and U.S. securities regulators. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those expressed or implied in the forward-looking statements. These statements speak only as of today's date, and GFL does not assume any obligation to update these statements. This call will also include a discussion of certain non-IFRS measures. A reconciliation of these measures can be found in GFL's filings with the Canadian and U.S. securities regulators. [Operator Instructions] I will now turn the call over to Mr. Patrick Dovigi, Founder and CEO of GFL. Please go ahead, Mr. Dovigi.

Thank you, operator. Good morning, everyone, and welcome to today's call. I'm 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 setup 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 remain 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. Nonfuel-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 improvements 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 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 of 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 multiyear 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 and 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 $25 million of underwritten cost synergies in the near term with opportunity for an incremental $25 million to $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 1. 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 the senior strategic adviser 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 9 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 can be critical to the perspectives of what they view. And 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 advisers are continuing to evaluate the best path forward for the company. We expect to have a decision very soon, and 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. And we are going to keep fighting until we've done so. I'll 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 $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 broker transportation services on a pass-through basis. This resulted in a $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 [indiscernible] landfills. C&D landfill tons were up 4.5%, the first quarter of positive volume since early 2025. This result was helped by the onetime 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 the 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 [indiscernible] 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 1-month contribution from SECURE that was not previously contemplated. With the closing of SECURE and the ongoing quality of our financial performance, we are once again increasing our guidance for the year. Assuming current FX, commodity and diesel prices, we now expect the following amounts for full year 2026. Revenue of $8.055 billion to $8.075 billion, adjusted EBITDA of $2.49 billion to $2.495 billion and adjusted free cash flow of $1.02 billion, inclusive of cash interest of $455 million and net CapEx of $910 million. Adjusted EBITDA margin increases 40 basis points over our previous guide to 30.9% despite the significant headwind from elevated diesel prices, which are assumed to continue for the balance of the year. Absent the run-up in diesel prices, full year margin would have been over 31.5%, an increase of more than 150 basis points over the prior year. As always, the updated guidance does not include the contribution from any further M&A in the year. Our latest guidance represents annual growth of over 20% in revenue, 25% in EBITDA and 35% in adjusted free cash flow, industry-leading growth metrics by a material margin. Even more impressive is the fact that our setup exiting this year gives us a high degree of visibility to produce similar levels of industry-leading growth again in 2027. I will now pass the call back to Patrick, who will provide some closing comments before Q&A.

Keeping the prepared comments intentionally short today as we think the results speak for themselves. I will just reiterate that our focus is singular and our path forward is clear. We already have a great setup for 2027 and any improvement to the macro environment will be incrementally additive. I will now turn the call over to the operator to open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Sabahat Khan with RBC Capital Markets.

I guess thanks for the comments on the -- where the process stands. Maybe for you, Patrick, I guess, ultimately, sort of you founded the company, have a sense sort of how the process here evolves. Maybe if you can share some thoughts on ultimately what do you kind of want to do here? What are your thoughts on the process that's going on?

Yes. I mean, good question. I think ultimately, we want to keep winning and having fun, whether that's sort of publicly or privately. I think when I look back, we're coming up on our 20th year anniversary, and we were actually reminiscing the last few days just in terms of how the company was founded and went out to one of the original sites, and that was employees -- I mean, it's amazing. The same employees are there that were there 20 years ago when sort of acquired the first business, went back to the same scale that I used to work at on the weekends that you look at what's been built here, it's an exceptional team. And I've looked at -- gone back and sort of scratch my head and looked at the original private equity partners and sort of Genuity and Healthcare of Ontario pension plans and then [ Jeffrey Keenan ] and [ Neil Aaronson ] at [indiscernible] backed us and then [ Scott French ], [ Mark Rubenstein ], [indiscernible] backed us with the HPS team, which is now sort of at BlackRock, and then you had Ontario [indiscernible], GIC and BC Partners backing us in sort of 2018 as private companies. And I look at the returns that were generated for private equity shareholders and us alone. And I think they believed in this management team and had the philosophy that winners win and winners will continue to win. And whether that's -- whether we do that publicly or privately, I think that ability is there for us to continue winning. And I look at us going public in sort of March of 2020, the tombstone on my guess, first trade was just over $17. And today, we're roughly 3x higher than we were in 2020. So it's worked publicly as well. I mean I think the challenge in the public market is sometimes you have to make unpopular decisions for the short term. And I look back to this year, secure for some just not knowing what it was, was maybe an unpopular decision, and we had to do that over the last number of years. But over the long run, and I think if you look at the equity value that's been created for our shareholders, it's been substantial. And sometimes those unpopular decisions are unpopular in the short term, but over the long term, we're going to continue to drive material equity value. And so selfishly as a private company, us and the management team would make a lot more money. We would probably have to not manage the quarter-to-quarter movements if we had opportunity to spend a little bit more on CapEx because that was the right thing to do or do a little bit more M&A and bring up leverage temporarily. That makes the business easier to run. The contrary to that is the liquidity opportunities that exist in the public markets. And I look back, it would have been very difficult for us to execute on SECURE if we were a private company. So those are the negatives of that. That being said, when prices get dislocated like they were for a long sort of period of time, listen, there's a lot of smart capital sitting on the sideline that identifies winning management teams with a winning business in a great industry that they don't get the opportunity to buy those often. And I think I look at the stock price today, I mean, when we give the sort of breadcrumbs for 2027, like Luke was sort of mentioning you're going to get into. I mean, today, the business is trading at somewhere between 12x and 12.5x 2027. You just can't buy businesses of that size and scale for 12x to 12.5x. And you look back to what we've done since 2020, even going public, when we went public, the business was roughly $950 million of EBITDA. Today, the public company is about -- for 2027 is going to be about $3.125 billion to $3.150 billion in that sort of range. You have our ES business today, which we look at sort of the budget for 2027, roughly a $675 million EBITDA business, of which we own just under 40% of. And you have the GIP business today that's roughly for 2027 is going to be roughly $350 million of EBITDA. So you put all those sum of those parts together, we took $950 million of EBITDA and grew to almost $4 billion of EBITDA over the last 5.5 years to 6 years and tripled the stock price in an environment where we think the stock from a multiple perspective is materially undervalued. So listen, I sit here, I said a lot, again, at the end of the day, this management team is going to continue winning and having fun. When I look at now the secure platform that we've added and what's happening in Western Canada, what's happening all over Canada. We just have multiple levers that are going to drive incremental value over the coming years. So whether that's public or private, either way, we're going to win. And when I look at free cash flow per share in a normal growth algorithm over the next 5 years, there's no path to which I don't think that free cash flow isn't close to a double. So free cash flow doubles over the next 5 years, what is that going to do to our sort of equity value if we remain a public company. And if we go private and because that's the decision that the special committee makes to bring that to a shareholder vote, then we have -- again, we've lived that world for 14-plus years as well, and we know what that entails. But I think I'm fine either way. I think there's been a lot of great shareholder engagement, which has been great. We have a lot of great shareholders. And albeit some have different perspectives, they're all very valuable -- input that they have. And you have a very core group of shareholders that obviously who may have a little longer-term thinking in the back of their head and again, see the path forward to that there's material equity value creation sitting in front of them. And then you have other shareholders that might be a little bit short term that are prepared to take some capital at a lower price off the table and find the next opportunity. So the shareholder engagement we've had over the last couple of months has been excellent. And it's been enlightening. And the best part is everybody has been very supportive. So we'll see how it unfolds over the next week. But from my perspective, either way is a win, some pros and cons on both sides, and we'll see where it goes. But it's been a great exercise to go through anyways with these people sort of looking -- taking a deep dive in the business. So we'll see what happens.

Great. And then maybe just following on the last comment there, I guess, with the new sort of fresh eye that you alluded to taking a closer look at the business, has there been sort of anything uncovered in the business that you and the management have learned? And then maybe just on sort of the feedback from your shareholders, is that kind of the bigger buckets some are thinking maybe longer term, this thing thing public. Can you maybe just show us some additional color on what sort of the shareholders are coming back to you with as the process has gone on?

Yes. Listen, I just look at -- again, when you have world-class investors that see businesses across multiple sectors, I mean, their input is valuable, right? And I just look at a couple of tools that were flagged to us just in terms of when they bring in, again, not mentioning names, but they bring in sort of a Chief Revenue Officer of one of another strategic that is now working as a consultant and coming in and looking at our -- looking at our overweight charges, there's significant pricing opportunity still within the base business. So that, again, gives us a high degree of confidence that there's significantly more upside here. Implementing tools like [ Harvey ] on contract management and keeping customers accountable to their contracts, et cetera, or we were just using it specifically on the legal side and picking other tools that will just -- again, all things that are just additive and incremental to our business that will make our business better. And which again just gives us more confidence in terms of the operating plan sort of moving forward. And again, going back 6 months, not to sort of harp on this, but the initial reaction when we bought SECURE was negative from some of the shareholders that really didn't understand Western Canada or the SECURE assets you had some of these organizations that were out actually looking at that opportunity independently because they love the scarcity value of those assets and the business that was being built and the amount of organic opportunities that existed to put capital at high returns on invested capital organically sort of in Western Canada. And again, sometimes you need to -- in order to be good, you need to be lucky, and we're a little bit lucky just given the timing of when we did the SECURE acquisition and then what's happened in the macroeconomic backdrop with the Middle East and Iran. And now with -- as everyone is seeing with our new Prime Minister in Canada, parties want to make Canada an energy sort of superpower and sort of break down the barriers of the red tape that we've historically had in Western Canada to be able to sort of expand that and put Canada back on the map again. So that will create sort of incremental opportunity. Again, for us, that wasn't underwritten. So all those things give us a high degree of confidence in the plan sort of moving forward. And I think, again, going back to your point on shareholders, yes, you have top 10 shareholders, again, some longer-term thinkers and other shorter-term thinkers. Think shorter-term thinkers happy to take less money and sort of move on and look for other opportunities versus some of our Page 1 shareholders that have a perspective that GFL is worth sort of well into the 60s. And if you're going to continue executing on a plan, which they have no reason to believe we won't, given our track record over the last 20 years, both on the GFL side and now the recently acquired SECURE, that's going to yield an exceptional result as well. And again, free cash flow doubling over the next 5 years per share, again, you can do the math on what that does to the equity value. And if we get the multiple expansion that we believe we deserve as we come out of this potentially this AI trade that has affected the entire sector over the last sort of 12 months, I mean, I think you're going to have a winning successive public company as well. But yes, I think it's been great to have the interaction with shareholders. It's been great to get new eyes on the company and have a lot of great discussions with new shareholders, both in sort of Canada, U.S. and Europe as well as Asia and the Middle East. We've had just a lot of great dialogue, and it's great to get a lot of that out there and put GSL on the map with a lot of different investors. And I think, listen, whichever way it goes, we're fine. And it will just -- but we want to bring the process to finality and sort of move on with whatever the decision that the committee and one of our largest shareholders decides to make.

Your next question comes from the line of Tyler Brown with Raymond James.

Just curious on how we should think about pricing into next year. I mean it sounds like you got some inflation creeping back in, particularly in indirect fuel. But how should we think about maybe pricing accelerating into next year? Because if I read between the lines, Patrick, it seems that maybe the take-private diligence has increased your conviction on pricing opportunities longer term? Just any thoughts there would be helpful.

Yes. I mean I think we have identified sort of incremental opportunity. As you know, we like to under-promise and over-deliver. And I think that's just another lever for us to continue doing that. And again, like I said, when we look at the sort of value creation opportunities that we laid out at our previous Investor Day, I think as we -- just again, as AI tools continue to come on, as incremental pricing opportunities continue to come on, again, that's just additive in sort of terms of the long-term plan. And maybe that -- while it was going to wind down in sort of '27, '28, those initial equity value creation plan, maybe we can [indiscernible] extend them with some of these sort of incremental opportunity and some of these other incremental AI tools that will allow us to, again, have a deeper dive into our actual customer base, looking at what each customer contract has, what we're allowed to do under each one of those contracts and summarizing in a form that allows us to basically better manage our business. And I think this is just relying on tools that are coming to the market. Every day, there's a new shiny object, but we're just trying to focus on the four or five things that will actually create that value without a lot of disruption.

Tyler, I'd just add sort of Patrick's comment. If you think about the upside incremental price we articulated originally, we said it was $40 million to $80 million to capture over the next sort of 3 or 4 years. That's what we had said at Investor Day. I think what Patrick is suggesting and we're feeling highly confident is that price is something greater than that. Now the ultimate magnitude will sort of remains to be seen. But I think between '25 and '26, you're seeing our out-performance as we are realizing those, what I call, surcharge opportunities. Now going into '27, you have to remember this year, we're getting meaningful support at the price line from some of this EPR-related transition, right? And that you're going to lap in '27. And so I think you kind of got to back that out of your calculus. If our headline price this year is going to be a [ low 6 number ]. If you were to back out the EPR benefit, that would be more sort of low 5 to mid-5 number. So I think in a headline number, you might not see acceleration. But underlying, we continue to see an opportunity to take our normal course algorithm of pricing at a spread above our cost inflation and then achieving something greater as we are catching up to parity with where our peers are. And I just think the runway for keep adding something greater keeps sort of getting extended as we're sort of going out.

Okay. Yes. That is extremely helpful. And then, Luke, just in the release, you guys reiterated your commitment on getting to that mid-40% free cash conversion that you guys laid out at Analyst Day. If I look at your guide for '26, it looks like you're going to be around, let's call it, 41%. And if I put the pieces together, it's a little bit scary, but if I do, maybe that's like 43%, 44% next year. I don't know if you could confirm that. So when we talk about that mid-40s, is that more a 45%, 46%, 47%? Or what is the art of the possible in that number over the next few years?

Yes, it's a great question, Tyler, and you've always been good at math. And we think that is the sort of direction of travel. Now I'll just caveat this year's number of 41%, you're getting the last 4 months contribution of SECURE, which has like working capital recovery and a little bit of sort of abnormality because it's not a full year, right? So I think if you really the pro forma where we're at today, you're probably more at a 39%, 40% number exiting this year. Now we go into next year, we think there's going to be expansion on that. Now I will have a ramp in cash taxes as becoming a larger cash taxpayer. But I see the path of next year being in that sort of 41% to 42.5%. I think that's what we had articulated pro forma for SECURE to be. And we'll continue to grow from there. I mean if you think about the whole 2027 framework, this year's growth being 20% revenue, 25% EBITDA, 35% free cash. With the setup going into next year, you have the opportunity to almost sort of replicate that. And you think about that, I mean, the top line growth organically is going to be mid-single digits. Now the exact pricing number, exact volume number remains to be seen, but that's going to be a number greater than 5%, right? You think about the M&A rollover already in hand, you sort of have 15% in hand. So you're entering '27 with a 20% plus revenue number. If our '26 guide is $8.055 billion or $8.65 billion, 20% growth on that in the next year, that brings you to a $9.7 billion to $9.8 billion number, right? Now if you look at the margin line, what we have said and continue to prove is we have industry-leading organic EBITDA margin expansion. So if the industry has been doing 30 to 40 basis points, we sort of do 2x that, putting you at a 50 to 60 basis point organic margin expansion. The rollover impact of Secure should be roughly another 30 to 40 basis points. You have already a setup for, call it, 100 basis points of margin going into next year. That takes this year's 30.9% closer to 32% for next year. So if you take $9.7 billion to $9.8 billion of revenue at 32%, that should be that $3.12 billion of EBITDA that Patrick sort of referenced in his sort of commentary. And then if you apply that sort of 41% to 42% free cash flow conversion, and that's just assuming the normal course drags the EBITDA across CapEx, interest, et cetera, that puts you at like a $1.3 billion plus free cash flow number. And I think there's a high degree of conviction in that, and it just sort of grows from there. So we're feeling very confident in that framework we previously laid out. And I think with the avenues of upside we keep speaking to as you get to '28 and beyond, I'm not ready to sort of cap what that ultimate free cash flow conversion number could be because I think there's runway to keep going north.

Your next question comes from the line of Kevin Chiang with CIBC.

Kevin, I'm not sure we can't hear you. Maybe you're on mute.

Can you hear me?

Yes. Now we can hear you.

Perfect. You've alluded to this a few times, just the upside to SECURE given some of the opportunities in Western Canada. Just wondering how -- if you're able to frame that as you think of what that upside could be relative to what you thought at the time of acquisition. If you look at some of the projects being proposed and if all goes well, let's say, you could have a 50% increase in kind of crude oil egress. One, is there a way to frame that upside? And then two, how do you think about your own capacity within SECURE to absorb that growth? Or does that require incremental investments as these development projects move forward?

I think it's a combination of both. Obviously, the waste assets we own can continue handling more volume generally. So again, that is just sort of all incremental upside. And I think Again, what Secure did very well, which I think was underappreciated by the public markets was the amount of opportunity they had to deploy capital with very high returns for their customer base. And as their customer base continues to expand operations, that affords the ability to deploy incremental capital into incremental opportunities at sort of high returns. And, again, East West pipelines, North South Pipelines, again, that is just going to be plus coupled together with some of these LNG projects and terminals, all of those are just going to drive incremental activity in Western Canada. And can I quantify that exactly today? No. Do I know for sure that that's going to drive incremental volumes? Yes. I mean, we've seen this movie before. And not only [indiscernible] only help the SECURE business, but it will help all of the industry in Western Canada because it just, again, the macro sentiment in Western Canada, when it's positive, the flood gates open. And I think from a macro perspective, you're going to see a lot of great activity, not only around sort of our business, but even sort of whether that's in the Lower Mainland or whether it's in Edmonton, Calgary, et cetera, just that is going to drive incremental volumes and activity throughout the entire sort of region. So again, that was never the thesis for doing the acquisition because we like to on its own. But I think sometimes, like I said, in order to be good, you got to be lucky. And I think just given what's happened in the Middle East and some of that tension, I think that's -- and what's happened, obviously, with the U.S. and tariffs and the Canadian government now looking to sort of focus inward versus outward, that is driving sort of incremental opportunity. And we're seeing some of these opportunities already. I think the challenge for us, going back to being a public company, you go back to being a private company, public market is very prescriptive in terms of how much CapEx you can spend in a year, et cetera, growth versus maintenance, et cetera. But I think we have to look at these opportunities as the same way we would look at an M&A transaction. And what are the returns, what are the paybacks and bucket some of these growth opportunities potentially as an M&A transaction, maybe you dial back some of your M&A spend to deploy more capital into some of these organic opportunities that we see that ultimately will drive higher returns on invested capital. So that's something we're thinking about and looking at as a company. And we -- listen, we are going to continue doing what's best for shareholders and what's going to drive the sort of highest return for our shareholders, again, whether sort of public or private. But again, those opportunities are going to continue to persist, not only in the secure book that we acquired, but also within our existing book, particularly in Western Canada.

Kevin, I'd just add, when we underwrite acquisitions, and maybe this comes out of our days of sort of higher leverage, while we look for upside cases, we really want to diligence downside cases, right, and see what that could be in a really draconian negative scenario. And for SECURE, while we very clearly articulated in the performance has shown, they don't -- not exposed to short-term volatility the downside risk was if WTi went down below $50, $45 a barrel for extended periods of time, that would, in time, lead to sort of lower production and activity in that part of the world, which could in time degrade earnings. I think where we sit today have the benefit of a very high degree of confidence that over the near, medium and probably longer term, the opposite is going to be true and the level of activity and production and therefore, opportunity for SECURE assets is greater than otherwise. So to Patrick's point, quantifying what that upside looks like today is -- we're not prepared to do it, but it's something greater than what our underwriting case was, and we were really happy with our underwriting case.

Yes. And when [indiscernible] and Allen founded SECURE back in 2007, the actual year we started, remember, they started with nothing as well and organically built that business. So I mean, I think underappreciated how exceptional the team is there in looking at and identifying organic opportunities to build and scale that business. So again, you will see over the long run that this -- all of these -- if you look at all the regions we're operating in today, 10 provinces in Canada, 26 states in the U.S., we have a very unique ability here over the next number of years to really win. And I think you're going to continue seeing us deliver these type of results sort of year-over-year.

That's helpful. Maybe just a follow-up. Luke and Patrick, you've highlighted a strong organic growth pipeline and levers as we exit 2026 here. Just with the bigger EBITDA footprint, the step-up in free cash flow conversion, you painted, call it, a normalized M&A year being roughly $1 billion of capital deployment. Does that change next year, just given the improved liquidity profile, given some of the acquisitions you made in 2026?

Yes. If we continue to be a public company, depending on the stock price, I think moving into '27, you now have the unique ability to add share buybacks into a more material way in the sort of capital allocation plan. So yes, I mean, that's the beauty of the inflection point of where we are. If you look at the free cash flow growth and ramp, I mean, I think we have the ability to do a multitude of things just depending on where we are sort of in the cycle. But yes, I mean, in theory, for sure, again, if we look at the M&A and the organic opportunities that we'll have in sort in Western Canada, we will have materially more capital to deploy with the free cash flow profile now of the added SECURE business into the sort of portfolio. And as our business continues to grow, we'll sort of look at that. So I think we have multiple levers available to us in order to pull depending on what the situation is at the time.

And Kevin, I mean, as you're well aware, but now with the enhanced size and scale, the leverage impact of capital deployment is far more muted than it was before. And just illustratively, all other things being equal, if you end '26 at mid-3s leverage through EBITDA growth and free cash flow generation, you would delever sort of 30 basis points, 40 basis points going into next year and coming down to sort of a lower 3s number. If you deployed $1 billion into M&A of 8x just for round numbers, that would impact leverage by 15 basis points or 18 basis points. And so just to say the balance sheet capacity to now do that incremental capital deployment has never been greater. And so I think to Patrick's point, just providing us maximum flexibility in being able to execute on our strategies while very squarely adhering to the newer leverage philosophy that we adopted a couple of years ago.

Your next question comes from the line of William Grippin with Barclays.

My first one, and I get this may be difficult to address, but Patrick, you referenced in the past that sort of having visibility to kind of a path to monetizing this incremental equity value creation in the case of a take private, was kind of an important factor for you and I think the company. But I'm just curious, how are you thinking about the possible options and maybe how that could be structured now as this process seems like it's progressed a bit further?

Sorry, I'm not understanding the question. Monetizing what, sir?

Realizing this incremental equity value creation, right? You had in the past talked about maybe [keeping] IPO in the business if it gets [indiscernible] right?

Yes. So I think -- I mean that's the question. I think some of these -- if you are going private, I mean, that's obviously a big question in terms of do you create all this value sort of over the next 4 to 5 years and then take the business back to market and then public investors would miss out on that sort of value creation over the next 4 to 5 years and get the business back when it's probably 2x the size, right, if that's a path. Or I think what's -- I think as these private vehicles get more sophisticated and it's more sort of long-dated non-closed end funds where it's sort of perpetual equity in continuation type vehicles where the money is just -- there's no closed-end fund nature, maybe the business actually never goes back to the market, right? So -- and then just given the amount of free cash flow that the business generates, you could find ways to continue [indiscernible] down stakes to incremental LPs as they come in at sort of different times. So I think that's always a challenge in a go private, one of the negatives. I mean the liquidity, like we talked about, is one of the positives of the public market. The negative part of the private markets is there's less certainty on sort of liquidity at various points in time. Now that's more of a Patrick issue. I think that is solved for employees in other ways. I mean we've done that for 14 years. So this is not an employee issue. This is just like, hey, how do you monetize sort of your 28-plus million shares over time? I'm not a seller, so not really 47 years old. That's not really -- I'm not looking for Freedom 55 or Freedom 65 yet. So -- but I think over time, you need to think about that in the event that was. But I think there are products available that allows for that under these new constructs.

All right. I appreciate that color. And my follow-up here, you referenced an increase in Landfill operating costs in the prepared remarks. It's not the first time we're hearing about that this quarter. I'm just curious sort of what are the drivers there? And how are you thinking about your ability to recover those through price and to the extent there's any lag potential margin impact?

Yes. Well, I mean, I think starting point and a lot of people talking about leachate, it was very wet in many areas, right? And that's just a quarter-over-quarter difference that Michigan had x inches more rain than last year that can drive incremental leachate. So that's part of it. But I think what you're also just sort of seeing is as leachate management processing leachate is becoming more front and center, people are getting more sophisticated with where leachate should be going. Sometimes that's incurring further transport costs to get it there and the sort of light. So I think this quarter isn't necessarily reflective of a structural material ongoing headwind. It was about $6 million in this quarter. maybe sort of 3/4 of that is, call it, more sort of timing onetime and sort of 1/4 of that cost is just sort of incremental cost of [ trans ] and processing. But I think we have the benefit in an industry that we all sort of suffer the same fate, if you will, and that as incremental [ regs ] or other reasons drive operating costs higher, we need to recover those. And you'll see us through our various pricing and other mechanisms ensure we're getting appropriately compensated for these sort of critical services that we're providing. So I think longer term, like anything, incremental sort of cost will just add to the broader base of cost inflation on which we use to set our overall pricing. But in a given quarter, you can get some mismatch between that cost incurrence and subsequent price recovery. But in time, I wouldn't expect you to have the same sort of headwind that you had and you'd be pricing above your cost inflation as we do for all of our costs.

Your next question comes from the line of Trevor Romeo with William Blair.

I had one on SECURE kind of the performance in the quarter. I was wondering if you could maybe talk about how much it contributed in terms of revenue and EBITDA. And anything you can kind of say on the maybe volume price split or just the core Disposal business versus maybe some of the other businesses in the quarter?

Yes. So I mean, again, we have 1 month of SECURE revenue contribution. It was around $150 million of revenue. It was just over $50 million of EBITDA, so sort of call it mid-30s plus EBITDA margins. You had that $25 million to $30 million of the free cash flow performance came from SECURE. Now sort of 1 month, I don't think is actually reflective, right, from a CapEx timing, working capital timing, et cetera. But I think the contribution, SECURE's profile for the year was they're going to do sort of $550 million of EBITDA and $1.5 billion of revenue. And I think they're very handily positioned to sort of being able to deliver that. The distribution of that revenue across their Services is as we've previously sort of articulated, is a small sort of percentage of overall profitability coming from the sort of other lines of Specialty Chemical and Energy Infrastructure, but the majority of those revenues is the typical sort of waste and waste processing. And so I'd say sort of right in line with expectations. the team's Q4 outlook is in line with expectations, and we're finalizing budgets into 2027, but everything is turning out as anticipated with the opportunity for upside that we were previously speaking about.

And then maybe just a quick follow-up on kind of the -- follow-up, I guess, on M&A looking into next year and beyond. I mean if we're kind of thinking about a higher interest rate world, just curious for your thoughts on maybe how that influences your kind of aggressiveness on M&A as well as maybe the willingness among targets to sell if that's another incremental headwind for them. Is that kind of an incremental positive for you with maybe more targets coming to market?

Yes. I mean I don't think it's material enough that it really affects that much. I mean, yes, been move in interest rates. But when I look at our borrowing costs, like sort of in a worst case today, you're probably 100 basis points to 125 basis points wider today than you were maybe 6 months to 8 months ago. But from our perspective, that's not a forever thing, and we have mechanisms that I think can reduce that with swaps and other things sort of longer dated as well. So again, it's something to think about. I don't think it's sort of that material. And I think when I look at some of these larger recent sort of businesses that have come to market that are sold on sort of the ES side, I mean you have ES businesses still continuing to trade at large size and scale between 13x and sort of 15x depending on sort of the market. And so I don't think it's really materially affected values all that much. But yes, something you obviously keep in consideration. And I think if we think there's going to be perpetually higher rates for a long period of time, then that may factor into that. But again, when we look at running that model, we obviously -- when we're looking at our returns, we model in what the actual cost of capital is. So it does get factored in and -- but we have to take a longer-term view on what we think rates are going to do. But yes, it factors in.