Republic Services Inc (RSG) — Q4 2018 Earnings Call Transcript

Good afternoon and thank you for joining us. I would like to welcome everyone to Republic Services' fourth quarter 2018 conference call. Don Slager, our President and CEO; and Chuck Serianni, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties, and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive. If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 7th, 2019. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings; our earnings press release, which includes GAAP reconciliation tables; and a discussion of business activities, along with a recording of this call, are all available on Republic's website at republicservices.com. Also included in our press release are unaudited supplemental schedules that include the pro forma view of fourth quarter 2017 revenue and costs had we adopted the new revenue recognition standard as of January 1st, 2017. During today's call, all references to changes versus the prior year are based on the 2017 pro forma figures, which are comparable to 2018 results. Finally, I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website. With that, I would like to turn the call over to Don.

Thanks Nicole. Good afternoon everyone and thank you for joining us. We are very pleased with our strong finish to 2018. Full year 2018 EPS was $3.09 and in line with our guidance range. Free cash flow was $1.2 billion and exceeded the upper end of our guidance range. Total acquisition investment was over $200 million. Total cash return to shareholders was $1.2 billion, and total shareholder return was 9% compared to the S&P 500's negative return of 4%. The team delivered these results despite a $145 million headwind from the recycling business. We accomplished this by capitalizing on solid waste trends to drive both price and volume growth, strengthening our market position, and improving route density through acquisitions, executing our plans to mitigate recycling headwinds in the short-term, while advancing our long-term strategy to transform the business, and efficiently returning cash to our shareholders. Turning to fourth quarter highlights, we delivered double-digit growth in earnings per share, invested $87 million in value-enhancing acquisitions, and divested $79 million of non-strategic assets. We also returned $284 million to shareholders through dividends and share repurchases. Throughout the fourth quarter, the pricing environment continued to be favorable. We achieved core price of 4.3% and average yield of 2.7%, our highest pricing level in nearly a decade. We also achieved an all-time low customer defection rate of sub-7%. We attribute these accomplishments to our laser focus on enhancing the customer experience and delivering superior service. Additionally, we successfully converted 27% of our CPI-based contracts, representing $660 million to a waste-related index or fixed rate increase of 3% or greater. These waste indices are more closely aligned with our cost structure and continue to run higher than CPI. During the quarter, we also continued to see underlying volume growth in our collection and disposal businesses. Excluding the impact of non-regrettable losses and a difficult special waste comp, total volume increased 90 basis points over the prior year. Our recycling business also improved in the fourth quarter. The team continued to tightly manage operating costs and increase recycling collection and processing fees. As expected, the current market conditions continue to serve us as a catalyst to transform recycling into a more durable and economically sustainable business. Additionally, we opened our first next-gen recycling processing center in Plano, Texas. We call it next-gen because unlike a traditional processing center, where we primarily sort and remove items that are not recyclable, here, we are leveraging state-of-the-art technology to extract items that are recyclable. This positive sort configuration allows us to produce a higher quality product with less labor. The facility also includes a 5,000 square-foot learning resource center for the community, so residents can learn the proper way to recycle and reduce their environmental impact. Our partnership with the City of Plano is an example of our new recycling business model. We are paid an appropriate fee to process the material and the majority of the commodity value is rebated back to the community. This contract structure enables us to invest in new technology while earning an appropriate return on our investment. Lastly, given we operate one of the largest vocational fleets in the U.S.; we are continuously evaluating innovative approaches and technologies to improve the performance, economics, and environmental impact of our trucks. Earlier this week, Mack Trucks announced our partnership to design and test electrification in a fully integrated garbage truck with zero diesel propulsion components. We are proud to be partnering with Mack and optimistic that this will result in a significant step towards an even cleaner, more efficient fleet. With that, I'll now turn the call over to Chuck to discuss our fourth quarter financial results in greater detail.

Thanks Don. Fourth quarter revenue was approximately $2.5 billion, an increase of $65 million or 2.6% over the prior year. This increase includes internal growth of 2.3% and acquisitions of 30 basis points. The components of internal growth are as follows. First, average yield increased 2.7% and was the highest level we've seen since 2009. Average yields in the collection business was 3.4%, which included small container of 3.2%, large container of 4.5% and residential of 2.6%. In our post-collection business, average yield was 1.5%, which included landfill MSW of 2.1%. The majority of our third-party landfill MSW business is with municipal customers that have contracts containing pricing restrictions. Total core price, which measures price increases less rollbacks, was 4.3%. Core price in the open market was 5.1% and in the restrictive portion of our business was 2.9%. The second component of internal growth is total volume. As expected, total volume decreased 70 basis points over the prior year. Excluding the impact of non-regrettable losses and a difficult special waste comp, volume growth would have been 90 basis points. Volume in our small container business decreased 80 basis points as anticipated. This includes 130 basis point headwind from intentionally shedding certain work performed on behalf of brokers, which we view as non-regrettable. Excluding these losses, small container volume would have increased 50 basis points. Volume in our large container business increased 80 basis points. And volume in our residential business decreased 1.9% due to our strategic decision not to renew certain contracts that fell below our return criteria. Next, turning to landfill volume. Landfill MSW volume increased 7.2%, while special waste decreased 11.6% and C&D decreased 10.7%. The decrease in special waste and C&D volume was due to a difficult comp in the prior year. In 2017, both special waste and C&D volume grew over 30%. The third component of internal growth is fuel recovery fees, which increased 70 basis points due to the rise in the cost of fuel. The average price per gallon of diesel fuel increased to $3.26 in the fourth quarter from $2.87 in the prior year, an increase of 14%. The current average diesel price is $2.97 per gallon. The next component, energy services revenue, was flat versus the prior year, which was in line with our expectations. In the Permian Basin, where we are well-positioned, drilling activity remains steady. The final component of internal growth is recycling processing and commodity revenue, which decreased 40 basis points. The change in revenue primarily relates to a decrease in the number of tons sold and lower recycle commodity prices. This decrease was partially offset by the new recycling processing fee rolled out to our open market recycling collection customers. This fee contributed 35 basis points of pricing. It's important to note that our average yield of 2.7% does not include this benefit. Excluding glass organics, average commodity prices decreased 15% to $106 per ton in the fourth quarter, down from $125 per ton in the prior year. Next, I will discuss changes in margin. In the fourth quarter, adjusted EBITDA margin decreased 80 basis points to 27.4% from 28.2% in the prior year. This included 10 basis points of margin expansion from the solid waste business, which was offset by a 40 basis point headwind from recycling and a 50 basis point headwind from one additional work day. Fourth quarter 2018 interest expense was $96 million, which included $10 million of non-cash and amortization. Our all-in tax rate for the fourth quarter was 20%. This includes an adjusted effective tax rate of 12% and a non-cash charge of approximately $30 million related to solar energy investments that qualified for tax credits. Fourth quarter adjusted EPS was $0.80 and increased $0.19 or 31% versus the prior year. EPS included a $0.12 benefit from tax reform. Excluding this benefit, EPS would have increased 11%. Adjusted free cash flow for the full year was $1.2 billion and cash conversion was 42%. Free cash flow exceeded our expectations primarily due to better than anticipated improvements in working capital. During the year, we improved both DSO and DPO by approximately two days. This improvement provided a one-time benefit to free cash flow. Looking ahead, I'd like to review the highlights of our 2019 financial guidance, which is consistent with the preliminary outlook we provided in October. For the year, we expected adjusted earnings per share to be in the range of $3.23 to $3.28. After normalizing for taxes, our guidance represents double-digit growth in earnings per share. Next, we expect adjusted free cash flow of approximately $1.125 billion to $1.175 billion. Included in our free cash flow guidance is a working capital headwind of approximately $45 million and $50 million of incremental capital we are investing for the benefit of our frontline employees as a result of tax reform. Excluding these two items, our guidance represents high single-digit growth in free cash flow per share. Total annual revenue growth is expected to be 4.25% to 4.75%. We expected adjusted EBITDA margin to expand by 30 to 50 basis points over 2018, demonstrating the operating leverage in our business. Furthermore, given the strength of our current pipeline, we anticipate investing approximately $200 million in tuck-in acquisitions. 2019 net capital expenditures are expected to be $1.2 billion. And finally, we expect to return $1.4 billion of total cash to shareholders to $500 million of dividends and $875 million of share repurchases.

Thanks Chuck. Our strong finish to the year positions us well for continued growth in 2019. We'll achieve this growth by securing price increases in excess of our cost inflation, growing volume for the seventh straight year, continuing to transform the recycling business by transitioning our municipal recycling customers to a more durable, fee-based pricing model and educating customers on what and how to recycle through our recycling simplified campaign. We'll be executing our strategy of profitable growth through differentiation to attract and retain the best people, enhance the customer experience, and drive additional operating leverage through the use of technology. And finally, effectively deploying capital to fund profitable, organic growth, invest in value-enhancing, and consistently and efficiently returning cash to our shareholders through dividends and share repurchases. At this time, operator, I'd like to open the call to questions.

Hey good afternoon.

Hey Tyler.

Hey Tyler.

Hey. I see in the guidance that you're anticipating an increase of 25 to 50 basis points on processing fees and commodity sales. The RISI data released yesterday indicated a decline in fiber prices. Can you provide some clarification? It seems like there is still a push on processing fees, but it's a bit unclear. Specifically, what are your assumptions regarding recycling prices in the guidance?

Yes, the guidance is around $505. I understand it's currently a bit lower than that, but considering how this typically progresses throughout the year, we believe it will recover by mid-year. Over time, we expect to average it at the appropriate rate. Therefore, we may be underestimating that figure.

Okay, and Don, I know you probably dislike getting that question as much as I dislike asking it. So, in that vein, do you think that, over time, Republic will really, for all intents and purposes, eventually inoculate itself from commodity price changes, really pushing the risk down to the waste generator? And if so, how long do you think that process might take?

I appreciate your use of the term inoculate, as we are focused on that concept. To illustrate, consider our new contract with the City of Plano, which exemplifies our approach. We believe the best way to proceed is to ensure we are compensated fairly for both collection and processing, meaning we expect a return that is sustainable for us. The contract includes a provision addressing contamination, which places that responsibility on the cities and communities, while they still benefit from the remaining commodity value after accounting for contamination. This arrangement seems fair. We've made recycling increasingly accessible for our customers and are committed to being a responsible environmental partner for those who want to contribute. However, if customers do not wish to take responsibility, that is their choice. We will only invest in recycling initiatives that offer genuine sustainability and profitability, and that remains essential to our strategy. We are experiencing success, and there are various types of customers. We have engaged in discussions with our 1,100 contracts; some have immediately accepted new terms, while others have declined, and some are still deliberating. We’re in the midst of follow-up talks, and we will continue to advocate for these changes. Honestly, any operator would be foolish to commit to recycling under the old model given the significant global changes we're facing. Our team effectively identified the problem back in 2018 and accomplished substantial progress that will carry into 2019 and beyond. We anticipate greater success in 2019 compared to 2018, which contributes to our confidence. We are changing the recycling model. People express a desire to recycle, but it will require every homeowner to pay approximately $1 more weekly and invest about two additional minutes of their time each day toward responsible recycling practices. If they are unwilling to do that, we will gladly offer trash service instead, as we excel in that area.

All right. Yes, that's really good. And then one last question about the volume guidance of zero to 25 basis points. Can you discuss some of the factors influencing that? I thought you were mostly past the broker coal lane. I don't believe special waste has any significant comparisons. Honestly, it doesn't seem like there should be a zero volume environment. So, could you explain what is behind that outlook? Is it simply a cautious approach or is there something more specific at play? Thanks.

Yes, there is a headwind associated with the special waste that we have going from 2018 back into 2019. So, that's part of the reason why that volume growth is more muted. And at the end of this year, we're going to be about halfway done with shedding of brokers. But if you extract that out of the equation, if you remove broker volumes and those event volumes, the volume growth is closer to one to one in a quarter.

Okay, perfect. Thank you.

Yes, let me add to that. We are observing strong pricing as well. We are very deliberate about our pricing strategy and aware of the trade-off between price and volume. For example, in our temporary roll-off business, if we can achieve an increase in price due to strong demand, we might be willing to accept a slight reduction in volume for that reason.

Right. Okay. Thank you.

Great.

Hi, good afternoon Don, Chuck, and Nicole.

Hey Brian.

Hey Brian.

Hey Brian.

Hey. A question on just the interrelationship between the CapEx and volumes because it seems like the CapEx will be up again and I thought of, in the past, the model being a little bit more like 10% of sales. It looks like we're going to be in that 11% to 12% range, 10% of sales if we're getting roughly 1% volume growth. And totally appreciate walking away from some broker business and some residential business that doesn't meet your return hurdles. But I would have thought, with that would have come actually maybe some reductions in CapEx or shifting of trucks from less productive routes to more productive routes. So, can you help me maybe understand where this CapEx is being spent and where that number could be heading over time and in kind of a flat volume environment, why it should be so high?

Yes. It's important to note that within our capital expenditure guidance, there is $75 million allocated for spending related to tax reform, which we plan to reinvest in the business for the benefit of our frontline employees. If you exclude that amount, the capital expenditures would be approximately 10.5% of revenue, aligning with our previous communication to the market about our expected levels following revenue recognition, which has historically been closer to 10%. This aligns with our belief regarding our long-term average.

And this will be the last year with that sort of outsized spend on employee stuff?

Yes, we have one more year, specifically 2020, where we plan to spend about $100 million continuing the same efforts. However, it's important to remember that we discussed this back when tax reform was first enacted going into the fourth quarter of 2017.

Got it. And then just one more question regarding the tax rate in the fourth quarter, which was a bit lower than your guidance. I was hoping you could clarify that for us. Additionally, thinking about the guidance for 2019, I see that the EPS is aligned with what you mentioned earlier, but it appears the tax rate might be slightly lower. I’m just a bit confused about that. Perhaps I'm interpreting it incorrectly, but it seemed to be 24% compared to the earlier 27%. I'm trying to grasp the details surrounding that.

Yes, so both in 2018 and again, in 2019, we're going to benefit from solar projects, these investments that we're making that come with tax credits that we're able to utilize in order to reduce our effective tax rate but also to reduce our cash taxes. So, just to put that in context for you, 2018, our effective tax rate was 20.7%, and then we had a certain non-cash charges associated with those solar projects that are included below operating income, right? So, if you think about those two items together, then the net tax rate, including both of those, are just closer to 22.8%. As we go into 2019, our effective tax rate is 24.2% and then we have about 3.1% in non-cash charges related to those solar projects. So, once again, if you put those two together, you end up with a tax rate of about 27.3%.

Got it. So, you're going to include those non-cash charges in the EPS.

That's included in our EPS guide, yes.

Good evening. Thank you. My question is just around the cost side, specifically, how you guys are managing labor cost inflation, labor shortage. What's baked into your guidance there? I realize employee turnover is lower for you because every driver wants to work for Don Slager, but just any thoughts in terms of cost inflation?

Yes, so our overall inflation, we think, for 2019 is kind of in that two and a half range. Labor will be a little higher than that. We do have pockets where we've got some labor shortage just because maybe there's local economic issues. Our turnover is essentially flat year-over-year. It's up a little bit with the growing economy, that's to be expected. We're not sitting on our hands. We're still working hard to improve the work environment. Chuck mentioned some of the investments we're making in facilities and specifically around employee facilities, locker rooms, training rooms, et cetera. So, there's some labor pressure with long-haul trucking, which will impact our costs in and around transporting waste from our transportation to our landfills. We're dealing with that. But we're also doing a great job in and around with our procurement team. They've got goals this year. There are some spend categories that we historically haven't looked at. So, we'll dig into those, and we'll find some savings in there as well. But the driver shortage, so to speak, isn't keeping us up at night. We're working hard to retain and attract the best people, and I think we're on a good track. Landfill ops is going to be another part of the story. The leachate expense is going to be about flat year-over-year to what it's been this year, and that really is related to leachate because of just changes in POTWs or public treatment works that are changing their technology and starting to raise prices on leachate disposal. That's something we can manage through and it's something we can price for. But I think that's going to be something, again, that affects all people in our business. And so I think, more than likely, you'll see more companies turning to some kind of price action to recover some of those costs.

Great. And just my follow-up question, on pricing, you guided 2.75%. It feels like that's the highest price since 2009 or just prior to waste or downturn because you guys are late cycle. Anything different in this pricing environment that you see versus prior to the downturn? Clearly, there's a lot of changes in this space over the last, I don't know, 10 years or so. Any thoughts on how this pricing environment is different, Don? Thank you.

When organic growth is strong, it creates a better pricing environment for the industry. I've always maintained that when there's solid organic growth, pricing tends to improve. The rising capital costs and complexity of the business provide reasons for pricing adjustments that may not have been present before, which gives us a slight lift. Additionally, the Consumer Price Index has moved in our favor, and we are de-risking our CPI portfolio by transitioning to alternative indices that are beneficial for us. Currently, we have converted $660 million of that portfolio. We are also actively working on recycling, engaging in contract renegotiations, and implementing new pricing strategies, which will contribute positively. We have initiated a recycling processing fee to add some additional support. While some of these measures aren't fully rolled out yet, we anticipate that they will start to take effect over the course of 2019 and into 2020, providing us with significant upside potential. Regarding customer pricing, we have improved our approach and are more strategic. Our customer defection rate is below 7%, the lowest in the company's history. We are focused on enhancing customer experience because simply raising prices isn't enough; we need to boost customers' willingness to pay. Therefore, we are dedicated to improving service levels, fulfilling our commitments, enhancing our products, enhancing our fleet, and ensuring we have the best team on the front lines. All of these efforts contribute to our pricing power, and we will continue to focus on them. As you noted, we are experiencing the best pricing in a decade, a trend that has been building over the past few quarters. We are quite confident in our ability to maintain these levels in 2019.

Great. Thank you.

Good afternoon. Thanks for taking the question and great to hear about solar project and electric trucks. Always nice. I wanted to ask you about the outlooks. You're reiterating the components of the preliminary outlook you provided in November and I think surprised by that. Investors have come to expect that consistency from you. The final numbers look to be the same. But has anything changed in the last three months within your assumptions, whether it's on volume, price, M&A or the cost side? And I ask in light of what is still a very sort of dynamic macro situation.

What's changing in the macro environment is that last year, we focused heavily on the issues related to China. However, we are no longer dependent on China. Our team has made significant efforts to shift materials to new ports and open new transportation routes. All the materials we collect are processed and recycled ethically. We have overcome the operational challenges, and we are now settling into a new cost structure. In terms of growth, we have consistently stated that our growth is tied to population growth, which drives housing and business formation. When the population, jobs, and wages grow, waste generation increases as well. Therefore, as long as housing starts remain stable and consumer spending is positive, we believe we can continue to grow. We are pleased with this outlook. Regarding capital spending, our capital expenditures are quite stable. Apart from the boost we received from government tax reforms, we allocated about $200 million to enhance our facilities for employees, particularly those working on the front lines, like garbage truck drivers and landfill workers. Improving their work environment is our priority. This expenditure shouldn't have come as a surprise, as we previously discussed it. The business itself is relatively slow-moving, which may be frustrating to some, but it also provides predictability. Thus, our guidance aligns with our preliminary outlook because we have a strong understanding of our operations. Looking forward to 2019, the pace at which we can restructure our recycling business will depend on customer sentiment, market adjustments, and competitor actions. However, our determination has never been stronger, and we are making significant progress, demonstrating sound strategies that resonate with customers. We are optimistic about the business, supported by a solid team, and we are off to a strong start.

Thank you for that. And just to come back to the labor question, I was really struck by the labor and benefits line. Expenses were up just 3% year-over-year. Obviously, that's a significant improvement in your cost containment. Anything you would point to in terms of kind of an improved success containing those labor costs? Anything we could think about going forward? Because, obviously, we saw a lot of growth over the first three quarters of the year and what you are sort of suggesting for 2019 suggests kind of a deceleration of labor cost inflation.

I'll credit our operating leadership for focusing on productivity, efficiency, and safety. Employee engagement is a significant priority for us. We conduct a nationwide employee engagement survey annually, and we receive an 85% response rate, which is double that of industry leaders. Our engagement scores are high because our employees trust that we will listen and respond to their opinions. We genuinely aim to make this the best workplace for our employees, and that mindset significantly contributes to our success. Our operating leaders reinforce this philosophy throughout the organization. Each year, we benefit from the initiatives we implemented in previous years. We are continually automating the residential fleet and making improvements in various areas, and our One Fleet initiative continues to yield positive results. We no longer discuss One Fleet extensively, but it has become an integral part of our operations, enhancing our reliability. More reliable trucks lead to more efficient operations and happier drivers. We will keep progressing with the Republic Way, and over the years, we continue to enhance the initiatives we introduced two to three years ago. While no single new initiative may be groundbreaking, the cumulative effect of these improvements truly makes a difference. We will keep building on these efforts. Thank you for the acknowledgment.

That's right. Thank you.

Hi guys. Thanks a lot for taking my questions. Really excited to be joining the group here. I just wanted to touch on the M&A front. The $200 million planned investment seems to indicate an above-normalized year, again, in 2019. That's expected. So, just hoping to get an idea of the profile of the discussions underway with your targets. Is it the usual singles and doubles? Or is there a good probability we might see something towards the upper end of that range in terms of target size?

It all depends, right? We wouldn't mention $200 million unless we were confident we could achieve it. We have a strong pipeline and a capable development team, with many competent people who have been part of the business for some time. We don’t rush to sell because we acquire high-quality companies. Typically, you won't sell a great company unless someone offers a significant price for it. When the right moment arrives in your business lifecycle or personal plan, and it's time to realize the value of your efforts or a life event occurs, that's when we buy those good companies. We have maintained consistent multiples over the years and are not overpaying for acquisitions. There are many excellent companies of various sizes that we would love to have the chance to add to our network. Our role is to understand the owners' situations and ensure we can make a purchase. We have built momentum over the past few years and are eager to pursue substantial deals, depending on the timing for sellers. When sellers are ready, we are ready. We excel at integrating businesses and are primarily focused on tuck-in acquisitions since they carry lower risk and yield quicker and better returns. However, we are open to exploring new markets, especially if we can achieve scale and vertical integration over time. We are careful about our acquisition activities, particularly in the exploration and production sector, where there might be a few opportunities worth considering. We are very diligent regarding the return on investment for these deals, consistently weighing the best use of cash, whether that be acquiring more cash flow at the right multiple or buying back our own stock. We are confident in our company's value and the value we plan to create over the next three years, always considering the intrinsic trade-offs. This balanced approach includes cash allocation, dividends, buybacks, maintaining a robust capital structure, keeping our debt in check, and having sufficient resources for further acquisitions.

I understand, thank you. My next question is about the differentiation strategy. You mentioned customer experience and their willingness to pay. Could you share some examples of how this strategy has given you additional pricing power? I would like to gain a clearer understanding of that.

We have invested significant effort in understanding our customers through our marketing groups. We likely allocate more resources towards customer insights than our competitors, focusing on what our customers think and want, which helps us prioritize various aspects. While some insights are clear, others require deeper understanding. We are exploring digital opportunities to enhance the ease of doing business with us. Our digital channel for residential subscriptions has performed well, with new business entering at a higher price point compared to traditional methods. Customers are willing to pay for convenience and reliability, which will increasingly be a focus for us as we embrace digital solutions, both in our operations and connections with customers. We believe customers appreciate these enhancements as they simplify their lives. Ultimately, our top priority remains to ensure that garbage collection occurs safely and reliably on schedule while being a responsible environmental partner, and we excel in that area as well.

Okay, great. I really appreciate the time and insights. Thanks very much.

Thank you for taking the questions. Don can you share with us where in the business model we're going to see the effect of the operating leverage? Is this going to be mostly OpEx or this mixture of OpEx and SG&A as we work through that 30 to 50 basis points of operating leverage?

Yes, it's primarily related to operating expenses. We do have some savings in selling, general and administrative costs coming up. However, I want to emphasize that we face two main challenges. One is cash flow; we want to be cautious about how much cash we invest in initiatives each year because we can only manage a limited amount of change at once. With 35,000 employees, it's important to guide them in a unified direction and ensure they all embrace the plan. We can't overwhelm them with too many new initiatives. On the other hand, there's pricing involved; we're aiming to set prices that can outpace inflation. In previous years, that wasn't possible, but now we have the momentum to achieve that. Better operations lead to happier customers, which in turn supports better pricing.

And then on free cash flow, I appreciate the talks something about $200 million in the quarter. $225 million spending over three years is sort of the $50 million, $75 million and $100 million, so we invest into employee base. If I get to strip that away in working capital timing things, how do I think about, one, what's the baseline free cash flow I'm starting with? And what's the sustainable growth rate? Your thoughts about that sustainable growth rate at that cash flow.

Okay, let me clarify this for you, Michael. If we consider our reported free cash flow for 2018, which is $1.178 billion, and then exclude approximately $45 million from working capital, which we view as a one-time occurrence, along with the $50 million for capital investments related to tax reform, we arrive at $1.083 billion. I would regard that as the baseline. Comparing that to our guidance for 2019 indicates a growth of about 6% in free cash flow year-over-year.

Okay. That's what I was trying to get at, is that's probably a good sustainable number. If I'm talking about a 4% at the top, getting the 6% at the cash is kind of a good relationship.

Yes, that's right.

Okay. And then just one more thing. What's your share count in your EPS guidance? Go ahead, sorry.

Yes, the share count at the end of the year is 323 million shares. We expect it to decrease by about 2.5% during 2019 due to the execution of the share repurchase program.

Okay. And then in the 4.25% to 4.75% for total growth, so 1% is acquisition, is that all rollover?

Michael, it's both in year and rollover. So, we do have a little bit of the $200 million that we're investing this year is going to benefit us this year.

Right. So, if those get done earlier, that's the upside to that number, is what I was kind of getting at.

Sure.

Yes, okay. Thank you.

Thank you.

Good evening. It's Henry Chien calling for Jeff. I wanted to follow up on the earlier question about your cost structure. Beyond natural operating leverage, are there specific areas in the business, particularly related to the technology you mentioned, that could help improve the long-term margin structure?

What's your definition of long-term?

The next few years, so beyond next year.

Okay. Look, there's a lot of upside left in the business, right? I mentioned just something like One Fleet, where we don't talk about it much anymore. Internally, we do quite a bit. Obviously, we measure it against the standards. But there'll be a moment when all new trucks come in. Every truck we have will have been sort of brought into life under the One Fleet banner, and we'll even have a better fleet situation than we have today, right? So that day is out there, but that is long term. Some of this technology, we're excited about this thing we've got going on with Mack on the EV but too early to tell, right? But that's why we're spending time and effort on this because technology has a real place in the future. We talked a little bit about technology in our new Plano next-gen recycling facility. There's sort of some technology yet beyond that, sort of robotics and things like that, that we're testing. So, I will tell you this. I think there's a lot of opportunity yet with our digital operations initiative, and digital platform is kind of our fifth pillar of our strategy. But what I wouldn't want you to do is sort of run away with that too soon because we're involved in the conversations. We're involved in pilots and tests. We're involved in evolving technology where we can. And as we get sort of the magic formula, we'll be talking more about it, and then at that point, we'll be layering it into future guidance. But it's more right now for you to know that there's upside here, and we're working on it. And there'll be a moment when it comes to realization, and we're going to have a lot of talk more about it.

Okay, great. Sounds good. Thanks so much.

Good afternoon everyone.

Hi there Steve.

If I could just continue on that question with respect to fuel recovery fees, looks like you, in your prepared remarks, noted a pretty significant sequential decline in fuel costs here in the first quarter. And I know that typically there's a lag between your recovery of increasing cost, which is certainly something that I think you faced over the past several quarters. So, as we look for 2019 and your cost versus those fees, can you give us some color there?

Let me begin by saying that the fuel recovery fee isn't really a significant topic on its own. The purpose of our fuel recovery fee is to provide a fair way to mitigate the risks associated with fuel price volatility that we've experienced at various points in our history. It acts as an internal hedge against fuel prices. While it fluctuates and can occasionally disrupt our margins due to timing differences, in the long run, it doesn't have a substantial impact on us. It neither helps nor harms us; it simply offsets the volatility. That's the perspective.

Yes. I would like to add that we expect the fuel fee to increase in 2019. This is mainly due to a couple of factors. First, the CNG tax credit provided us with a $0.03 benefit in operating expenses and a $0.01 tax benefit in 2018, which will no longer be available. Additionally, we had some hedges in place during 2018 that have since expired. As a result, we anticipate that fuel costs will be slightly higher in 2019 compared to 2018.

Okay. So, in other words, that cost, you wouldn't expect any significant difference from the 25 basis points that you have built into your revenue guidance for fuel.

Yes, that's correct. I mean, if you think about it, the 25 basis points that the revenue goes up; you'd have a corresponding cost increase, maybe a little bit more because the CNG tax credit isn't tied to the fuel recovery fee. And that's the only disconnection you might have in there.

Okay. And then my second question, my follow-up is just, once again, an extension, I think, of the discussion that you had with Tyler on volume. Through 2018, essentially, your volume declined. So, from a comp standpoint, going through 2019, do you expect your volume to kind of play out through the quarters, I guess, in opposite or in mirror to what happened in 2018?

Yes, I would say that it would be relatively close to what happened in 2018. The only thing I would say that we would need to be cognizant of are some of the quarters where we had especially heavy special waste volumes and C&D volumes coming into our landfill. That could skew the numbers a little bit.

Got. Yes, yes, first quarter of 2018.

Yes.

Okay. Thank you.

I'll just add some color to that. We have a good outlook for growth this year and we've got a good handle on, again, our sales efforts with our good sales tools and a great sales team. We think we're winning our fair share of new business. And at the same time, we're going to maintain the discipline to walk away from some business. We do have some municipal contracts out there that, frankly, don't perform very well for us. We're the incumbent; so we know all the costs and we know all the pressures. And when we're the incumbent and we know that there's no profit or not a reasonable return in these things, we're going to probably walk away from some contracts. That's baked into that number, right? So, that's going to continue. That's no different than it was in 2018. So, you got to make sure you understand that. That's going on behind the scenes net of net. So, we're looking for our teams to either bring these contracts back around to profitability or move the equipment and the assets into utilization in other parts of the business. So, that's the guide we have.

Yes, okay. Thank you for the color.

Thank you for taking my question. Can you clarify the 30 to 50 basis points margin expansion expected in 2019? Is this likely to occur later in the year, and how should we consider the quarterly performance, especially with challenging recycling comparisons in the first quarter?

Yes, I would say that it's pretty well distributed throughout the entire year. You're right. We have a little bit of a headwind associated with the recycling in Q1. So, we need to keep that in mind, but other than that, I would say it's pretty well evenly spread.

Okay. And then, yes, I would say that it's pretty well distributed throughout the entire year. You're right. We have a little bit of a headwind associated with the recycling in Q1. So, we need to keep that in mind, but other than that, I would say it's pretty well evenly spread.

Yes, Michael, to clarify, you're correct that we experienced a headwind in Q1 due to it being the highest priced quarter of last year. Looking ahead, as Don mentioned regarding pricing, we anticipate that momentum will increase as we renegotiate and secure agreement on price increases from more of our recycling municipal customers. This growth will accumulate, with Q3 expected to be our strongest quarter, where expansion occurs. This is how you can view the distribution.

Okay. That's helpful. And then did you say earlier in your comments that you had 10 basis points of margin expansion of solid waste in the quarter?

That's right. That's right.

Yes, I'm just curious. If you're discussing the removal of non-essential contracts and stepping away from some residential contracts, which tend to have low margins, and considering we're seeing the best pricing in a decade, wouldn't we expect that number to be higher at this stage in the cycle?

Yes, keep a couple of things in mind. One is that we faced a challenge related to special waste. The other is that we experienced slightly higher costs from our landfill operations. This is affecting the growth we mentioned.

Okay. And just lastly, that makes sense. On then on average yield, the 2.75%, like how much of that is just automatic from 2018, is just automatic from the CPI uplift? And how much of that is pushing on the open side?

Yes, about 10 to 15 basis points is coming off of CPI.

Okay. Thanks guys.

You're welcome.

Thank you.

Thank you, Denise. In closing, I would like to thank all Republic employees for their hard work, commitment, and dedication to operational excellence, and of course, creating the Republic Way. Additionally, I'd encourage everyone listening to this call to take a few minutes and visit recyclingsimplified.com. It'd be good for everyone to learn how and what to recycle this very day. We all have an opportunity to do our part to create a cleaner and healthier environment. Thanks, everybody, for spending time with us today and be safe out there. Have a good evening.