Republic Services Inc (RSG) 2016 Q4 法說會逐字稿

Good afternoon and welcome to the Republic Services fourth-quarter and full-year 2016 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Brian DelGhiaccio, Senior Vice President of Finance.

Good afternoon and thank you for joining us. I would like to welcome everyone to Republic Services' fourth-quarter 2016 conference call. Don Slager, our 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 we discuss today is time sensitive. If in the future you listen to a rebroadcast or a recording of this conference call, you should be sensitive to the date of the original call, which is February 16, 2017. 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 expressed 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.

And 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, Brian. Good afternoon, everyone, and thank you for joining us to discuss our fourth-quarter and full-year 2016 performance.

Our fourth-quarter results cap off another solid year. Our financial performance continues to reflect our focus on executing our strategy, designed to profitably grow our business, manage our cost structure, generate consistent earnings and free cash flow growth, and improve return on invested capital.

During the quarter, adjusted EPS was $0.57, which represents an increase of 14% over the prior year. Core price was 3.5% and average yield was 2.2%. Average yield remains above 2%, even with below-average contribution from CPI-based pricing. Volume growth was 50 basis points, or 90 basis points excluding the impact from approximately one less work day. Our volume performance was in line with our expectations. And finally, EBITDA margin expanded 70 basis points to 27.9%. As expected, most of the improvement was due to a reduction in SG&A costs and leveraging operating cost while growing units.

Turning to the year, adjusted EPS was $2.22 and adjusted free cash flow was $885 million. Both performance metrics exceeded the upper end of our guidance ranges. Core price was 3.3% and average yield was 2.1%. Full-year volume growth was 1%. This is the fourth straight year of simultaneous price and volume growth.

And finally, EBITDA margin expanded 20 basis points to 28.3%.

Importantly, throughout 2016 we continued to deliver on our promises to our key stakeholders, which include our customers, communities, employees, and shareholders. For our customers, we strive to provide the highest level of customer service and are committed to developing differentiated and superior products.

Some of our accomplishments during 2016 include the following. First, we expanded our product offerings on our e-commerce platform. Customers are purchasing small container, temporary large container, and residential subscription services online. This technology addresses the evolving needs of our customers' buying preferences and provides a lower-cost sales channel.

Second, we improved the capabilities and functionality of our customer portal and mobile app, with approximately 1.8 million customers now enrolled. This represents an increase of over 50% from the prior year.

And third, we opened three customer resource centers, designed to enhance our customers' experience through a more professionally trained customer service team, improved technology, and additional communication channels. We've already transitioned approximately 50% of our call volume to the new centers and expect the transition to be complete by the end of 2017.

For the communities we serve, we remain devoted to delivering safe, convenient, and value-driven solutions while being good stewards of the environment. With respect to safety, we continue to see a favorable reduction in employee incidents and our performance remains over 40% better than the industry average. On the sustainability front, we are recognized as the industry leader with awards from the Dow Jones Sustainability Index and Carbon Disclosure Project that are both best in class.

For our employees, training and developing our people is a priority and we strive to be the employer of choice. Over 33,000 employees recognize the progress we have made and have told us they see the difference. For example, in 2016 we saw the largest gain in employee engagement since we began measuring employee engagement five years ago. And employee turnover continues to improve. Our driver turnover rate is at its lowest level in four years.

And for our stakeholders, we remain committed to creating long-term value, and 2016 was a perfect example. Our strong performance included EBITDA margin expansion, high single-digit earnings and free cash flow growth, and approximately 20 basis points of ROIC improvement. We returned $819 million to shareholders through dividends and share repurchases, representing a cash yield of approximately 5%. And finally, we delivered total shareholder return of approximately 33%, which is nearly triple that of the S&P 500 average.

I am proud of our many achievements during 2016 and remain encouraged by the underlying strength of our business. I want to thank the entire Republic team for their hard work and execution. Chuck will now discuss the financial results in more detail. Chuck?

Thanks, Don. Fourth-quarter 2016 revenue was approximately $2.4 billion, an increase of $89 million or 3.9% over the prior year. This 3.9% increase in revenue includes internal growth of 3.6% and acquisitions of 30 basis points.

The components of internal growth are as follows. First, total average yield grew 2.2% over the prior year. Average yield in the collection business was 2.7%, which includes 3.8% yield in the small container business, 2.4% yield in the large container business, and 1.6% yield in the residential business. Average yield in the post-collection business was 1%, which includes landfill MSW of 1.7%. It should be noted that a majority of our third-party landfill MSW business is with municipal customers that have contracts containing price restrictions.

Total core price, which measures price increases, less rollbacks, was 3.5%. Core price consisted of 4.7% in the open market and 1.5% in the restricted portion of our business.

Second, our total volumes increased 50 basis points over the prior year, or 90 basis points, excluding the impact from approximately one less workday. The following discussion of volume excludes the workday impact. Volumes increased 2.2% in the large container business. Volumes decreased 40 basis points in the small container business and 70 basis points in the residential business. Small container volumes include a 110 basis-point impact from intentionally shedding certain work performed on behalf of brokers, which we view as non-regrettable. Excluding these losses, small container volumes would've been -- would've increased 70 basis points.

The decline in residential volumes was expected and resulted from not renewing certain contracts that fell below our return criteria. Residential volume performance increased 40 basis points sequentially, as some of the losses from earlier in the year are beginning to anniversary. The post-collection business, made up of third-party landfill and transfer station volumes, increased 2.7%. Landfill volumes included growth in C&D of 14% and special waste of 1%. MSW volumes were consistent with the prior year.

Third, fuel recovery fees decreased 10 basis points. The decrease resulted from lower fuel prices at the beginning of the quarter and the lag in our fuel recovery fee. In the fourth quarter, the average price per gallon of diesel increased 2% to $2.47 from $2.43 in the prior year. The current average diesel price is $2.57 per gallon.

And finally, commodity revenue increased 1%. The increase in commodity revenue includes higher processing fees charged to third parties and an increase in recycled commodity prices. Excluding glass and organics, average commodity prices increased 24% to $134 per ton in the fourth quarter from $108 per ton in the prior year. Fourth-quarter total recycling volume of 626,000 tons was down 2.5% versus the prior year. Cost of goods sold was up 20% from an increase in rebates paid for recycled commodities.

Now we will discuss changes in margin. Fourth-quarter adjusted EBITDA margin expanded 70 basis points to 27.9%. The improvement included a 90 basis-point decrease in SG&A cost, partially offset by a 20 basis-point increase in cost of operations. The 90 basis-point decrease in SG&A was primarily due to higher levels of incentive compensation and legal costs in the prior year. Fourth-quarter 2016 SG&A expense was in line with our expectations at 10.5% of revenue.

The 20 basis-point increase in cost of operations is due to an increase in fuel expense, primarily due to the larger CNG fuel credits recorded in the prior year. In 2015, the full-year CNG fuel credit was recorded in the fourth quarter, whereas in 2016 the credit was recorded ratably. This timing difference increased fourth-quarter 2016 fuel costs by 40 basis points. Excluding CNG credits, fourth-quarter 2016 gross margin expanded 20 basis points. It should be noted that CNG credits expired at the end of 2016.

On a full-year basis, EBITDA margin expanded 20 basis points to 28.3%. SG&A costs decreased 50 basis points to 10.3% from 10.8% in the prior year. We believe SG&A costs will continue to decline to 10% of revenue within the next couple of years. I want to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing.

Fourth-quarter 2016 interest expense was $90 million, which included $12 million of non-cash amortization. Our adjusted effective tax rate for the fourth quarter was 35.8%, which was favorably impacted by tax planning opportunities. The net impact of these tax items increased EPS by approximately $0.02 during the quarter.

Full-year adjusted free cash flow was $885 million. Cash flow exceeded the high end of our guidance range due to lower than anticipated cash taxes of approximately $30 million. Excluding the benefit from cash taxes, adjusted free cash flow would've been $855 million.

Now I will turn the call back to Don.

Before going to Q&A, I will discuss our 2017 financial guidance. The details of our guidance are included in our 8-K filing.

We expect adjusted earnings per share to be in a range of $2.32 to $2.36, which is consistent with the preliminary outlook we provided last October. Our expected performance represents high single-digit to low double-digit earnings growth, after excluding an $0.08 headwind from an increase in our effective tax rate. We anticipate adjusted free cash flow to be in a range of $875 million to $900 million, which is also consistent with our preliminary outlook. Our expected performance represents high single-digit to low double-digit growth, after excluding a $90 million increase in cash taxes.

We expect annual revenue growth of 4.5% to 5%. Selected components of our revenue guidance include average yield of approximately 2%. We expect the pricing environment in 2017 to be relatively similar to 2016. Volume growth in a range of 1% to 1.25%. Contribution from recycled commodities of 50 to 75 basis points, and acquisitions of 50 basis points. This relates primarily to tuck-in acquisitions and the rollover impact from 2016 transactions.

We anticipate adjusted EBITDA margin to be in a range of 28.5% to 28.7%. This represents 20 to 40 basis points of margin expansion over our 2016 performance. 2017 net capital expenditures are expected to be $975 million, or 9.9% of revenue. We anticipate investing approximately $100 million in tuck-in acquisitions, and we expect to return approximately $900 million of total cash to shareholders through $450 million of dividends and $450 million of share repurchases.

In summary, the fundamentals of our business remain strong and supportive of continued profitable growth. The investments we are making in our business and the solid execution of our strategy are producing positive results and creating long-term value. We remain focused on delivering consistent earnings and cash flow growth, improving return on invested capital, and increasing cash returns to our shareholders.

At this time, Operator, I would like to open the call to questions.

(Operator Instructions). Brian Maguire, Goldman Sachs.

Good afternoon. It's Derrick Laton on for Brian. Just a couple questions on the M&A front. It looks like you guys ended up spending maybe $60 million for tuck-ins in 2016. Just curious if this was maybe a lack of sellers here or maybe you guys just being patient with regards to valuations. And then, also, just for your target for 2017, is there maybe some upside here, given where things ended in 2016?

A couple things. I like your choice of word, patience. We are, I guess, somewhat conservative on the side of acquisitions. We are not going to do bad deals just to hit an acquisition target goal.

So we have confidence in the pipeline. We had to walk away from a couple of transactions late in due diligence when we found things that we didn't think were acceptable, so we're going to buy good companies and good recurring cash flows. So there's the patience for you.

As it relates to 2017, we've got a strong pipeline. We've got a number of deals in advanced stages of due diligence already, so again we are confident that we will put $100 million to work intelligently in 2017. And as we always say, we've always got a little more capacity if there is more out there, but we are only going to buy things that fit, and we think the pipeline will be good for us this year and the $100 million is just a good place to start.

Great, that's helpful. Thank you. Maybe if I could just shift gears quickly to the recycling side, I noticed on your outlook thing it should be maybe 0.5% to 0.75% increase for 2017. Could you maybe provide some color just kind of on how the recycling market is looking for you guys currently? And then maybe the cadence for that 0.5% to 0.75% increase, are you kind of expecting that mainly in Q1 and Q2?

Yes, so what we do there is what we do every year. When we give guidance, and this is something we've done, again, historically for as long as I can remember, with things like fuel and commodities, we just try to peg the rate at the time we conclude our budget.

So we've used $140 per ton average for our commodity price throughout the year. We want to stay away from speculating what the markets may or may not do, because you know some of these things tend to be volatile. We can provide you the detail of what happens for every $10 of improvement and what that means to EPS; if you need that, certainly we can have Chuck provide that for you. But that's the way we do it. We think that's the smartest way to approach it, rather than for us to try to forecast with a crystal ball here.

And just to put some more color around that, as Don mentioned, as we have disclosed in the past, a $10 change in the average commodity price is worth about $0.03 in annual EPS. Now it's important to keep in mind that that's based upon our average mix of materials, and OCC makes up the broad -- the most of our mix, but it's only 45% of the mix overall.

Got it. That's really helpful. Thank you, guys.

Hamzah Mazari, Macquarie.

Good afternoon. Thank you. Just a question on landfill volume expectation for 2017. You know, Don, what's baked into what we are expecting on the landfill volume side? I know overall volumes are 1%. Just any thoughts qualitatively or quantitatively would be helpful.

I think just directionally, as the broader economy recovers, we're going to see just continued improvement in our small container business. That will help drive our landfill volumes. We will see continued improvement, we think, in the C&D business, certainly. We have strong trends coming out of Q4; we think those continue into next year, certainly not only for our own volumes, but the third-party volumes that come to our site.

So, there's no new big deal on the horizon, but special waste is pretty sort of normalized, I would say, going into next year. So I think just everything that we've laid out for our guidance, we think just strong underlying fundamentals continue to drive the business forward.

Great. And just to follow up, you've made a lot of technology investments and ramped those up. Just curious, what inning do you think you are in in terms of seeing the benefits from some of the technology investments longer term, whether it be route density or other areas you've invested in? Just curious if you're in early innings or later innings. Thank you.

We would classify it as early innings. So we are very happy with the course that we've charted. We're getting a lot of positive feedback from customers, from our own teammates, employees, but we are going to be continuing to invest down that road and build out the digital platform. But we are early in the process.

Great. Thank you.

Tyler Brown, Raymond James.

Good afternoon, guys. Hey, Chuck, so in the past you guys have noted that the velocity of margin improvements really will ultimately be arbitrated by CPI recycling prices and, I guess, volume. So as we look at it, all of those things are kind of moving in the right direction and I think you even have a tailwind from some hedge rollovers here in 2017. And you obviously guided to the 28.5 to 27; that's great.

But I don't get the sense that that's really outside of what your original expectations were back in Halloween. So, I'm just curious, big picture, if there is something that's working against the margins that maybe doesn't give you confidence that maybe the margins can improve more than 20 to 40.

A couple things to keep in mind is that, first of all, CPI lags. So whatever we print then in 2017, we won't see the benefit of that until the second half of 2018. So that's the first item.

The second item is that you talked about the rolloff of the fuel hedges. What we need to keep in mind also is that the CNG credit goes away, so that's something that was available to us in 2016, but that doesn't repeat. And also right now, we are looking at overall higher fuel prices. So thinking about the margin then, so we are talking about the 20 to 40 basis points of margin expansion. Think about 10 basis points of that coming from commodities, the rest coming from the core business, 30 basis points or so. So we see that as pretty strong and sustainable growth.

(multiple speakers) chime in here, too. Tyler, we also -- we will see the benefit, the full benefit, of the CRC consolidation not until 2018. So that will layer in as well.

And just overall, we are talking about guidance that has high single-digit to low double-digit expansion, both in cash flow and EPS, right? So we've got a pretty strong margin built in, and I think the signs are positive. So we've got more tailwind than we do headwind at this point. So, that's a good thing.

Right, right, no, it feels like good momentum there. So, Don, I've got to ask you about maintenance and repair. So if I look at M&R, I think it was up only 2% year over year, which I think is the lowest level of inflation that we've seen in that line since maybe 2011. And I'm just curious if you are viewing this as maybe a big inflection as one fleet is finally starting to really permeate through that line, or how should we think about that maintenance and repair line kind of going forward?

You are right on, Tyler. We are seeing the benefits of one fleet. As you know, all of the divisions now have gone through it. We will finish certifying those remaining divisions that went through it fourth quarter of last year, but we got good results from one fleet in Q4 and we expect to see those continue into 2017.

So, the initiative is paying off. And, remember, it's not just showing up in the R&M line; fleet reliability shows up in customer service. Good customer service shows up in price. Reliable fleets show up in the lowest driver turnover we've seen in four years, so there's a lot of other benefits.

And then, of course, the icing on the cake is the CapEx savings. So we've saved $100 million so far as we've begun to very methodically age the fleet, extend the useful life of the fleet, and we've got about another $100 million to go. So one fleet is a success in our minds and it's going to continue to pay dividends, and fleet reliability as it builds is going to continue to show up in other parts of the business for us.

All right. Great, guys. Nice quarter, thanks.

Andrew Buscaglia, Credit Suisse.

Hi, guys. Congrats on a good quarter. So I got to ask. I noticed you tucked in a little bit of energy services guide. I would think that you would keep that in your back pocket, but you must feel pretty confident that could have somewhat of an impact. Remind us how big that is right now as a percentage of revenues (technical difficulty)

It's about 1% right now in terms of overall revenue. And what we've guided to is about 25 basis points of increase in that line of business during 2017.

Okay. And what's your assumption there, just, I don't know, in terms of the energy market? Are you assuming things improving or just staying up where they are?

Pretty much consistent with where they are right now. We are beginning to see some rig increases, especially in the Permian Basin, so that's what gives us the confidence to call out the 25 basis-point increase.

And you're right to point out things look better in that direction than they have historically. So, again, as I just said to Tyler, there's more wind pushing us than in our face this year, so it's a good way to start the year off.

Definitely. And yes, the other topic or the other topic du jour is your tax rate. Your stock certainly is reflecting some optimism there. Have you guys had conversations around this, about what you would expect, and how are you thinking about any sort of benefit here?

I'll ask your one -- I'll answer one question directly. We have a lot of conversation about it because, as you know, we are a statutory payor. And so if and when there is some type of tax reform, we likely stand to be a beneficiary of that.

So, don't know when that will occur or how it will occur, and, as you know, there are probably a number of levers that get pulled. So we are not counting any of that just yet, but we certainly have to think about how it might impact us, and so we'll have to take the same wait-and-see approach that you all do. But if there is some movement there, it's good for us.

All right. Thanks, guys.

Corey Greendale, First Analysis.

This is Ken Wang on for Corey. Thanks for taking my question. So we understand Las Vegas is about to start the process of negotiating an extension with you, in part because they want single-stream recycling. So, just wondering, can you share any insight into the renewal process, how much capital you expect you may invest for single-stream recycling, and the likelihood of the contract going out to bid?

As a rule, we don't discuss individual contracts or individual contract terms, and certainly not when we are negotiating contracts. So, I can't do that for you.

But I will just tell you that more broadly we've got great relationships there in and around Las Vegas. Our people do an outstanding job and we've got a strong track record there and the best assets in the marketplace. So, ultimately we think the business there will continue to perform inclusive of those contracts that are coming up. But that's all I can tell you about any contract that we are in the midst of negotiating today.

Thank you.

Noah Kaye, Oppenheimer.

Good afternoon. Thanks for taking the question. Maybe we can start with the commercial business. Really seeing again nice growth in small container and large container, I think particularly small container given the intentional shedding of business. With that, can you maybe update us on where your current commercial churn rate is, and have we maybe reached a point where most of that rationalization and shedding of unpopular volumes is done?

Yes, so let's focus on a couple of things. The defection rate -- or, more positively, the retention rate is 93% across our business. And so, there hasn't been a material movement in that. It takes a lot of transactions to move that number in a meaningful way. But the retention is very strong.

Our pricing yield in Q4 was 3.8% in the small container business, which is the highest level it's been in seven years. I think that further underscores just the strength of that business, also starts to show up, frankly, in our fleet reliability, the great job that people are doing, I think the value of the products, some of the digital platform that we've initiated with customers. So, feel pretty good about that.

As far as the growth there, we've had decent consistent net unit growth in small container. Again, if you factor out the non-regrettable losses, in Q4 we grew 70 basis points in that business. It's one of our best lines of business, so to speak. And as it relates to 2017, we will see about the same amount of shedding of business there that we saw in 2016. So, we are being very methodical and very intentional about moving away from business that is broker business, frankly, and business where we are not face to face with customers.

That's very helpful. And then, as I think you pointed out, everyone is having a lot of conversations about tax reform, and wondering if that has in any way impacted some of the conversations around M&A. Certainly with some family-owned businesses, one can imagine that there could be very meaningful consequences of potential tax reform. Has that impacted in any way the timing of some of your M&A activity, and would you expect it to potentially be a benefit going forward, once we get more clarity?

I don't think it's really impacted anything to date, because there hasn't been any tax reform and nobody knows what it would be. So, if I were selling my business today based on some empty promise of tax reform, I probably wouldn't do it. So, we are not seeing that kind of activity.

I can see a potential for somebody making a decision, but I think that wouldn't be the only thing that drives our decision. I think if people are in a window of thinking about selling their business, then they could use tax reform or some new tax consequence as the reason to finally make that final determination. But I don't think it's the one and only decision -- or the one and only decision point that people will use.

I think there's been a lot of talk about that. I think it's much to do about nothing at this point. But, thankfully, the pipeline for acquisitions looks strong, and if there is some kind of tax reform that's meaningful, it can only make it potentially stronger, not weaker.

Thank you so much.

Michael Feniger, Bank of America Merrill Lynch.

Thanks for taking my question. I know that you're forecasting the average yield of 2%, and it's actually trended down. 2015, it was 2.3%; 2016, I think it was around 2.1%. I know that 2016 had that headwind from CPI because around 20, 30 basis points from the low CPI of 2015. Can you just walk us through why the yield is still drifting slightly lower? Shouldn't the CPI headwind at least be abating by the time the second half of the year?

By the time the second half of the year comes around, that's true. But you got to remember that we still have the first half of the year where we are dealing with a CPI of 0.1%. So that's a significant headwind for us.

That makes sense. And I know there was a lot of discussion so far about the pipeline on the M&A front. If you go through the due diligence, and I understand to be patient, to be patient, but I'm wondering is there any point where maybe you decide to step up that buyback amount and say it's more -- it makes more sense maybe just to buy your own shares at this valuation?

Look, we talk repeatedly and frankly for years with people about what we call a balanced approach to using free cash flow. And I think, frankly, most of our owners would like to see us continue to, one, invest in the business, and invest in organic growth and invest in M&A when we can buy cash flow, reoccurring cash flow, at the right multiple.

And that's what we do with our tuck-in program. So tuck-ins are the very best way to get the fastest return on those investments. They have the lowest risk. They are the easiest to integrate and so on. So as long as those tuck-ins are there, and they are quality companies with quality revenue, a quality customer base, we are going to continue to do that. That is a very good use of cash for the business.

And part of that balanced approach, then, is with the remainder of the cash, a balanced approach to dividend increase and buyback. And we buy back 2%, 3% of our shares, generally, annually. So it's that formula, if you will, that we have been using over the past many years that we've been doing this, and it's that very formula that I think has helped driving the appreciation in the stock and in the market cap of the Company, so I would argue that it's working very, very nicely.

So we are going to continue to do that, and if and when a larger opportunity comes along, we always tell people that we've got the flexibility with our balance sheet to go after a larger deal if one comes along. There are some very nice companies that could consume $100 million purchase price all by themselves. We are certainly prepared to do that for the right opportunity, and if something like that comes up, you will be hearing about it.

That's perfect. Just lastly, guys, C&D showed some pretty strong growth in the fourth quarter. I think it was up double digits. From what you're seeing so far in January and February, are the trends still intact in that part of the business?

C&D has been a really good business for us. I'll give you a couple data points. One, remember, we've talked a lot about household formation driving the business, that drives business formation, so as C&D is continuing, that's going to set up more small container growth in the future, which we are excited about, certainly.

But if you look at the household formation in total, we are still lagging nationally the 50-year average. So we think there's a fair amount of growth yet to be had there. We are very well positioned and very focused on getting our fair share of that growth. At the same time, we are growing both price and volume in that space. So in the temporary large container business on a combined basis of price and volume, we've got 4.8% volume growth, and even in permanent business.

So, the business is very healthy. The supply and demand economics are working the way they should in a rational environment, and so the business should continue to post good results for us certainly through 2017 and I would say likely well beyond that.

Thank you.

Michael Hoffman, Stifel.

I have a question with regards to free cash, just to -- it sort of walks back towards this leverage question everybody keeps asking. So you posted an 885 this year, 2016, but it's held by cash taxes. If I smooth the cash tax conversation, 855 looks like what, if taxes are all the same? Would it be fair to say 855 goes to 965 to 990 if cash taxes were the same in both periods?

Just think of it this way is when we take a look at the cash tax as a percent of provision, in 2016 it was about 79%. We expect that to move to about 90% to 95% in 2017, so just that differential creates about a $90 million cash tax headwind. So (multiple speakers)

So what I was getting at, maybe margins aren't moving as much as some are wringing their hands about, but the fact of the matter is the operating leverage through to cash is actually pretty good, if cash taxes were all things being equal.

Said another way is that on a similar cash tax as a percentage of provision basis, the free cash flow is growing high single digits to low double digits, which is very strong.

Right, okay.

Let's say it another way, that's the strongest -- as far as from a guidance perspective, the strongest guidance we have given in I don't know how many years, both EPS and free cash flow growing at high single digits to low double digits. So, the business is moving ahead, we're getting the operating leverage, and it is showing up in the cash. That's your point.

That's what I was trying to get to. So, back to a mix question. Where do you think you are in -- and this is back to your comment about household formation begets business formation. So where do you think you are in your model catching up to the household formation trend in the commercial collection side, which is your best margin business, so that's sort of that other hand at your back on the margin opportunity is that new business formation, that service interval upgrades, the service -- new adds versus losses, all of those patterns. How do you think about where you are, your Company, relative to the [1.5] in housing starts.

I think we are still in early innings on that. I think probably maybe you even thought that we would be further faster, just the way the economy would work. But I think there is still plenty of room to go.

We still are -- household formation is only, what, 1 million, 2 million, [250], so I think there's a lot of room to go yet. And as far as service increases versus decreases, that trend has been positive now for a year. So, all signs are really good there, again, so again that is one of our best businesses. So as we see broader recovery, we are going to see that in small container, we are going to see that in MSW landfill, two of our higher-margin businesses that are going to continue to push us towards that 30% margin that we know is at some point achievable.

Okay. And then, Chuck's comment of the 40 -- or 20 to 30 basis points is the garbage company and then the 10 is commodities. That 10 -- that 20 to 30 turns into 25 to 35 to 30 to 35 is what's happening, right? That's the way to think about it as I look out in 2018 and into 2019 and 2020 if this pattern keeps holding.

I think that that's fair. We believe we are going to continue to see margin expansion over the course of the next several years because of all the factors that we talked about, including the increase in volumes that we are seeing in our small container business.

So think about the comments. So we gave you volume, we gave you price, we split it by market vertical, but don't forget about all the other metrics we gave you about improving engagement, improving net promoter score, improving driver turnover stats, improving safety. All of those other underlying metrics are all pointing in the right direction.

So all these investments we are making in creating the Republic way and working on the team, and all these other things we're doing with pricing tools and so forth, all of that is taking hold. One fleet, as I talked about with Tyler, all those things still have additional upside, as well as a broader and more positive economic outlook. So we feel really good about the underlying trends, we feel really good about the rational industry, and we feel good about what 2017 and 2018 could look like, although we are certainly not giving 2018 guidance today, Michael.

Yes, not to mention what's happened with CPI and how we going to get a bump up in our pricing second half of this year, and then what we might be able to print here in terms of CPI in 2017 and how that will impact us second half of 2018.

So remember, as we mentioned, we don't get the full benefit of the CRC again until 2018, and while we've been working really well and the team has been very successful in moving to the alternative index, if CPI rises, that's just a natural lift across a pretty big part of our business. We get back to now a very fair escalator very quickly if we get that CPI lift. So that's another thing that will trend in our favor, we think, over the next couple of years, based on everything we are seeing.

And if I could squeeze just one in, the capital spending assumes growth for your win of the zones in Los Angeles?

It does. That's correct.

And it's ratable through the year, right? You are ramping at the pace of full absorption.

More or less.

The spend for that contract, it might be more weighted towards second half of the year, but pretty close to half now.

Thanks a lot. Congrats on the numbers.

Joe Box, KeyBanc.

Hey, guys. So just quickly on the energy services side, is it fair to say that the 25 basis points of contribution is all volume driven or are you guys starting to see some price improvement? And then, maybe just from a high level, if you could just talk to some of the changes that you guys have made at this business. I'm sure you guys have changed the mix since you bought it and you've probably added some muscle, so maybe just a little color on what the business looks like today from a margin standpoint versus when you bought it.

As far as the mix goes, remember when we bought it, it was primarily an infrastructure business, disposal, TRD. A very small part of that business was transportation, and so the mix is largely the same.

We have added some capacity in and around disposal, which has been one of the reasons that the business is building. And as far as what we've done to the business, we've made it more efficient, we've made it operate better, we've improved turn times to facilities, we are trying to be the facility of choice, those kind of things. We've brought some of the Republic way concepts, as you can imagine, and operations into that business.

So, the team proved very quickly that we could operate the business and, frankly, operate the business better than it was being operated. So that gave me a lot of confidence. The rest of the noise is just about the market, but we never saw real price erosion in the business and that's primarily because we bought good assets in good geographies, and, of course, the Permian really is performing well.

So as volumes come up, those volumes are going to come in at a higher margin, which it's going to behave very much just like our solid waste business does. We've got the assets, we've got the people in place, and we can handle a lot more volume without adding a lot of other cost. We'll just basically take advantage of the operating leverage. So that's what we see for 2017.

Sure. Do you think you could actually see some price improvement in 2017 or is that a little out of reach?

Look, we believe in supply and demand economics. It works very well in our business. And we are very well situated, again, geographically, so that, as markets improve, should give us some pricing power as well.

Got it. Thanks, guys.

Al Kaschalk, Wedbush Securities.

Good afternoon, guys. Hope you're doing well.

Doing great.

I wanted to follow up on the energy services side. So is that something you are comfortable with looking at expansion or deploying some capital at the right price?

We've done a little bit of that, Al, not in a huge way, but done a little bit of it. And, again, we are comfortable with the business, and as I just got done saying, we run the assets well, we got a really good team on the ground there, so I feel good about that.

It's just really a matter of where's the opportunity and is the opportunity in the right location. It's really not that much different than the solid waste business. We want to have good market position, and so for the right opportunity, we could. But after even saying that, it's still just a really small piece of our overall business. It's less than 1% of our business, and it will never be a really, really big piece of our business around here. But it doesn't make it not important. We will just be opportunistic if we can be.

And we're not -- there's not another platform acquisition out there that's available to us, and I don't know that we would be interested in that. What we are looking to do, really, is to tuck in other assets around our existing infrastructure.

That's correct.

That's very helpful. Glad to hear that.

I'm going to try this question and see how we go, but worth shooting for on a Thursday afternoon. How long or how much more, and this may be -- you can broaden this out to someone other than RSG, if you'd like. How much further do we have to go through on this regrettable losses in terms of purging the business? Maybe said differently, why don't we get rid of the business that's not profitable? Is there a fear of vertical integration? Is it market specific and therefore you can't do it all at once? What's holding us back?

Well, there's a couple things. First, there's contractual obligations. So we don't break agreements with customers. Even if we are in a situation we don't like, we do our best to negotiate our way through it. We never just walk away from a customer when we've got a contractual obligation. So that's first.

Second, we think very strategically about our business. And so, the decision to move away from some of the broker business is a strategic decision. And we know what that -- we think we believe or we think we know what that outcome will do for our business overall. So we are doing that in kind of a ratable, methodical way over time. It just makes sense.

So we put a lot of thought into it. We may be at this for another year or two. And then, we will be through it, and at the same time, because we have the capture tools in place, because we have PBS training in place, because we have better controls, we're making better decisions at the point of sale, we won't be finding our way into this business again because we have a control point in our national accounts group, a portal, if you will, that puts controls on which type of third parties we choose to do business with or not. Again, we won't find ourselves in this situation again, and so we are just doing it in a methodical way and in a way that supplements our strategy and doesn't hurt our strategy.

So, that's as simply as I can put it. I guarantee you it makes sense and it's the right way to go.

I wasn't questioning that. I was just trying to appreciate -- not having run a business, Don, sometimes we don't appreciate some of those things. Shifting gears to -- are you able to add any more color on the LA business that was won, zones? Is there more forthcoming?

Again, I'll just say this. The main point, I think, that should be important to people is when this opportunity developed, we certainly put a lot of time and effort to it. We had a great team on the ground. We've got great relationships there in LA.

We ended up protecting and actually expanding our previous market share there. As you know, we've got great assets in the market. We are the only company that has a landfill in the County of LA, and so we want to make sure we continue to find a way to utilize our vertical integration of opportunity and advantage there, which we have done. We are happy with the zones we have, and, again, we actually did a little better than the market share we had and it's going to be accretive to the business. So we are excited to get started with the city there and I think it's going to be a great outcome overall.

Are you able to -- with the guidance you provide, I assume this is included in there?

It is included, but you can imagine, right, the thing starts kind of halfway through the year. There's a lot of startup costs. So it's not going to do much for us in 2017. By the time we get it all sorted out and stood up, we will see some more benefit from it in 2018.

Okay, I'll look for the trucks. Thanks.

At this time, there appear to be no further questions. Mr. Slager, I'll turn the call back over to you for closing remarks.

Thank you, Amy. I would like to thank all Republic employees for their hard work, commitment to serving our customers, dedication to operational excellence, and upholding the Republic way. Thank you all for spending time with us today, have a good evening, and be safe out there.

Ladies and gentlemen, this concludes the conference call, thank you for attending. You may now disconnect.