Republic Services Inc (RSG) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the Republic Services Fourth Quarter 2017 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 Nicole Giandinoto, Vice President of Treasury and Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us. I would like to welcome, everyone, to Republic Services Fourth Quarter 2017 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 that we discuss today is time-sensitive. If, in the future, you listened to a rebroadcast or rerecording of this conference call, you should be sensitive to the date of the original call, which is February 8, 2018.

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 the discussion of business activities, along with the 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, Nicole. Good afternoon, everyone, and thank you for joining us. We are pleased with our fourth quarter and full year results, which exceeded the upper end of our guidance range. In 2017, the team achieved strong growth in price and volume, delivered high single-digit growth in earnings and free cash flow per share, improved return on invested capital by 40 basis points and increased cash return to shareholders by over 30%. Our robust financial performance continues to demonstrate the effectiveness of our strategy and our ability to create long-term shareholder value.

Highlights of the quarter include adjusted EPS of $0.61, an increase of 7% over the prior year; earnings were positively impacted by strong event-driven volumes and a net $0.03 benefit from lower taxes. Fourth quarter total revenue increased 7.6% and includes over 5% organic growth, the highest level we've achieved in 9 years.

Core price was 4.1% and average yield was 2.4%. Volumes increased 2.7%, our growth in volume continues to be broad-based and remains strongest in the event-driven portion of our business.

Energy services revenue was $46 million, nearly 2x prior year's revenue. And adjusted EBITDA margin of 27.2% was in line with our expectations.

Turning to the full year. Adjusted EPS was $2.43, a 9.5% increase over the prior year. EPS exceeded the high-end of our upwardly revised guidance range by $0.04. Adjusted free cash flow was $934 million and exceeded the upper end of our guidance range. On a per-share basis, adjusted free cash flow increased 7% over the prior year.

Total revenue was $10 billion, an increase of 7% over the prior year. Core price was 4.1%. Average yield was 2.5%, the highest level achieved since 2009. Volumes increased 1.8% over the prior year and included double-digit growth in event-driven landfill volumes. And finally, we invested $437 million in acquisitions in 2017, and our '18 pipeline remains strong.

Throughout 2017, we continued to deliver on our promises to key stakeholders, including 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 that meet their wants and needs. Some of our accomplishments during 2017 included the following: First, to meet the demand of our customers, we expanded our recycling processing capabilities through the acquisition of ReCommunity. Our customers have told us recycling is important to them and have demonstrated a willingness to pay. Additionally, to ensure the sustainability of recycling, we have transitioned approximately 85% of our processing volume to a more durable fee-based model.

Second, we continued to refine and optimize our digital platform to improve the online customer buying experience. We saw double-digit growth in online sales and customer satisfaction ratings.

Lastly, we completed the transition to our 3 state-of-the-art Customer Resource Centers. These centers are designed to enhance the customers' experience through a more professionally trained customer service team, improved technology and additional communications channels.

For the communities we serve, we remain devoted to delivering safe, convenient and value-driven solutions while being good stewards of the environment. In 2017, with respect to safety, we continued to see a favorable reduction in employee incidents, and our performance is over 40% better than industry average.

On the sustainability front, we were named to the gold standard of sustainability rankings for a second consecutive year. We were the only recycling and solid waste company in North America to be named either the Dow Jones Sustainability North America or World Index. For our employees, we aim to be an employer of choice. One where the best people come to work. We accomplished this by creating an environment and a culture in which all individuals feel welcome and valued, by training and developing our employees throughout their careers, and by offering fair and competitive wages and benefits.

We've been investing in these areas for several years and our employees have told us, they see the difference, which is the true litmus test to the impact that we're making here at Republic. For example, in 2017, we were named to the Forbes America's Best Employers list. We received the Glassdoor Employees' Choice Award, and we are recognized by Ethisphere as one of the world's most ethical companies. Additionally, we have a best-in-class employee engagement score, with high participation rates, and our internal work continues to outperform industry and competitor benchmarks.

And finally, for our shareholders, we remain committed to creating long-term value, and 2017 was a perfect sample. Our strong financial performance included high single-digit growth in earnings and free cash flow per share and a 40 basis point improvement in ROIC. We returned $1.1 billion to our shareholders through dividends and share repurchases, representing a cash yield of over 5%. And lastly, in October, our board approved a $2 billion increase in our share repurchase authorization. This demonstrates the confidence we have in our ability to grow free cash flow and increase cash returns to shareholders while maintaining our investment-grade credit rating.

Before turning the call over to Chuck, I'd like to make a few comments on tax reform. As a statutory tax rate payer, we benefit substantially from tax reform. We believe we have the responsibility to invest and deploy additional cash flow in a manner that will provide meaningful and long-term benefits to our employees, customers, communities and shareholders. In 2018, we expect cash tax savings of approximately $190 million. As I mentioned earlier, we've been steadily investing in our people for years, and tax reform provides us the opportunity to accelerate some of these benefits. Over the next few years, we plan to invest a total of $200 million back into the business, specifically in our fleet and frontline employee facilities. We believe these investments will benefit people for years to come.

With respect to our fleet, we will focus on replacing older trucks to help mitigate rising maintenance costs or increased complexity, reduce vehicle emissions, improve employee engagement and maximize the benefit of bonus depreciation. We will also be upgrading our frontline facilities to enhance the work environment for our people, specifically locker rooms, break rooms and training facilities. This will help us continue to increase employee engagement and improve our ability to attract and retain employees.

Through data analytics, we know that as employee engagement increases, safety improves, turnover declines and productivity rises, all of which directly benefit earnings and cash flow, ultimately creating long-term value.

I'll now turn the call over to Chuck.

Thanks, Don. Fourth quarter revenue was approximately $2.6 billion, an increase of $181 million or 7.6% over the prior year. This 7.6% increase in revenue includes internal growth of 5.6% and acquisitions of 2%.

The components of our 5.6% internal growth rate are as follows: First, average yield increased 2.4%. Average yield in the Collection business was 2.8%, which included 3.8% in the small-container business, 2.4% in the large-container business and 2% in the residential business. Average yield in the post-collection business was 1.5%, which included landfill MSW of 2.1%. Total core price, which measures price increases less rollbacks, was 4.1%. Core price consisted of 5.1% in the open market and 2.4% in the restricted portion of our business. This is the fifth consecutive quarter we've seen a sequential improvement in restricted core price.

The second component of our internal growth rate is total volume, which increased 2.7% over the prior year. Volumes in the Collection business increased 20 basis points. Within the Collection business, large container volume increased 2.3% and included a 3.7% increase in temporary C&D hauls and a 2.1% increase in recurring hauls. Residential collection volumes decreased 1.2%. The decrease was expected and resulted from not renewing certain contracts that fell below our return criteria.

And finally, small container volume decreased 50 basis points. Small container volumes included a 110-basis-point impact from intentionally shedding broker work, which we view as nonregrettable. Excluding these losses, small container volumes increased by 60 basis points.

In the post-collection business, which includes landfills and transfer stations, third-party volumes increased 9%. Landfill volumes increased 16.5% and included growth in special waste of 37.9% and C&D of 31.6%. MSW volumes decreased 1%. The strong double-digit growth in event-driven landfill volumes will create a difficult comp in 2018.

The third component of our internal growth rate is fuel recovery fees, which increased 50 basis points. The increase relates to rise in the cost of fuel. The average price per gallon of diesel increased to $2.87 in the fourth quarter from $2.47 in the prior year, an increase of 16%. The current average diesel price is $3.09 per gallon.

The next component, Energy Services revenue increased 60 basis points. The growth in Energy Services revenue is primarily due to an increase in drilling activity in the Permian Basin, where we are well positioned.

And the final component of our internal growth is recycled commodity revenue, which decreased 60 basis points. The decrease in commodity sales revenue primarily relates to reduction in recycled commodity prices. Excluding glass and organics, average commodity prices decreased 7% to $1.25 per ton in the fourth quarter from $1.34 per ton in the prior year.

Next, I will discuss changes in margin. Fourth quarter adjusted EBITDA margin was 27.2%, which compares to 27.9% in the prior year. The change includes: a 40 basis point increase in landfill operating costs, a 50 basis points headwind due to a change in revenue mix from acquisitions and related integration costs and a 30 basis point headwind from recycling. Excluding these items, we had 50 basis points of margin expansion from strong open market pricing and volume growth, demonstrating the operating leverage in our business. 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 interest expense was $93 million and included $11 million of noncash amortization. Our adjusted effective tax rate for the quarter was approximately 32% due to favorable tax settlements and tax planning opportunities. The net impact of these tax items increased EPS by approximately $0.03 during the quarter.

Year-to-date adjusted free cash flow was $934 million. Free cash flow exceeded our expectations, primarily due to bonus depreciation. On a per-share basis, adjusted free cash flow increased 7% over the prior year.

Before I turn the call back over to Don to discuss our 2018 guidance, I want to briefly discuss an accounting change in 2018. Beginning this year, certain payments to customers that were previously recognized as cost of operations will be reclassified to contra revenue. Examples of these payments include recycled commodity rebates and franchise fees. The change will result in lower revenue and expenses, but no change to EBITDA. The impact of the accounting change has been incorporated into our 2018 guidance, which is detailed in our 8-K filing.

I will now turn the call back to Don.

Thanks, Chuck. Before going to Q&A, I'd like to review the highlights of our financial guidance.

In 2018, we expect adjusted earnings per share to be in the range of $3.05 to $3.10, which is consistent with the preliminary outlook we provided last October, adjusted for the benefit from tax reform. This represents 27% growth in earnings over the prior year, or 12% growth after normalizing for the change in taxes and recycled commodity prices.

We expect adjusted free cash flow of approximately $1.1 billion, which is also consistent with our preliminary outlook, adjusted for the benefit of tax reform. This represents 21% growth in free cash flow per share or 13% growth on a normalized basis. We expect annual revenue growth of 4% to 4.5%. This includes average yield of approximately 2.25%. We expect the open market pricing environment in 2018 to be relatively similar to 2017.

Next, we expect volume to be essentially flat versus the prior year. In 2017, event-driven volume -- landfill volumes increased 20% due to several onetime large soil jobs and hurricane-related cleanup work that we don't expect to reoccur in 2018.

And finally, we expect revenue growth from acquisitions of 2%. This relates primarily to tuck-in acquisitions and roll-over impact from 2017 transactions. Next, we expect an adjusted EBITDA of 28.8% to 29%.

2018 net capital expenditures are expected to be approximately $1.1 billion. Given the strength of our 2018 deal pipeline, we anticipate investing over $150 million in tuck-in acquisitions.

And finally, we expect to return approximately $1.2 billion of total cash to shareholders through $450 million in dividends and $775 million in share repurchases.

In summary, the current economic backdrop and industry fundamentals, combined with our robust acquisition pipeline, position us well to deliver another year of strong financial results. The investments we are making for the benefit of our people, customers and communities will provide positive results and create long-term value for our shareholders.

At this time, operator, we'll open the call to questions.

(Operator Instructions) And your first question will be from Hamzah Mazari of Macquarie.

This is actually Mario Cortellacci. I'm filling in for Hamzah right now. Could you give us a sense of service increases versus decreases in the commercial business? And are you seeing any changes in the competitive dynamics in the segment?

Yes. So no change. We would -- just as we've said over the last couple of quarters, sort of the net-net of increases, decreases are still positive, trending in the right direction. No real change in competitive behavior. As I said just a minute ago in my closing comments, the fundamentals of the business are strong with a really good macro growth environment as a backdrop. So again, that's what positions us, as we said, I think, well for '18, and just another good year.

Perfect. And then just a quick follow-up and I'll turn it over. On U.S. tax reform, do you see -- do you expect any change in labor inflation? And could you walk us through how much of the cost structure is labor? And do CPI contracts offset any labor headwinds that there might be?

Yes, so look, overall, our labor cost increases over the last several years have been pretty consistent. So I'll start with that as a backdrop. Even when the recession was sort of at its worst, deepest, longest, we continued to adjust our people's pay. So we continued to give raises throughout periods of time, frankly, where other employers were not giving raises. We continued to improve benefits. We continued to work on the work environment. So we don't see necessarily for us a big change coming. We put a lot of effort into employee engagement and to make it a great place to work, and we put a lot of work into making sure that our frontline people and all of our people, frankly, are paid according to market and fair to market. So it's not like we've got this sort of pent-up issue. Having said that, wages -- direct wages are about 20% of our total revenue and if you add-in -- that's driver, frontline, if you add-in the maintenance wages and part of SG&A, that's people, it's about 30% all-in. And we've done a good job managing these costs, and we've done managing our benefits while still providing competitive and good benefit programs. So that's how they keep me up at night. I think we're going to manage through it fine. And then with CPI coming up, that just gives us additional help, right? So we've been sort of the victims, if you will, of an artificially low CPI environment and we've done a good job of holding our margins pretty strong through that. As CPI improves, we'll get some benefit. Remember, a little bit of inflation ultimately is a good thing for us. So I remember the days when inflation was sort of 3-ish percent. We saw that flow through our business pretty well. So that's not worrisome.

The next question will come from Tyler Brown of Raymond James.

Chuck, so I'm curious, on the 130 -- or 110 to 130 basis point expected improvement in the margins, just how much of that is simply the mathematics of the revenue recognition impact?

It's 100 basis points, Tyler.

Okay. So apples-to-apples, margins are -- you're looking for some modest improvement. But can you talk about some of the pluses and minuses in the margins as we think about next year? So I think we have the call center consolidation, maybe some easing landfill costs, I know we have dilution from ReCommunity and then commodities. But can you kind of give us some color there?

Yes, absolutely. So when you think about commodities, think about a headwind of about 20 to 40 basis points. When you think about change in mix, primarily due to the ReCommunity acquisition, think about 30 basis points. So that would tell you, the math would tell you then that you've got 80 basis points of expansion just coming from the business, and part of that, as you had mentioned, is because of the CRCs.

Yes, if I could just add something, Tyler. We're expecting to see margin expansion in all lines of our Collection business in 2018. So that is the benefit of having great market position, of building density market-by-market and, again, that good macro backdrop. So we expect to see that operating leverage to continue to come to the business.

Okay. Very helpful. And then just real quick, Chuck. You had given a longer-term EBITDA margin guidance goal, I suppose, of 30%. But given this change, is it just simple math to assume that it would be more like 31%?

How about if I take that, Tyler? Yes, we -- as I always say, let us get to 30% and then we'll get to 31%. But yes, it's just simple math. Remember, the 2 big things that have kind of kept us down in the margin department had been this -- the CPI headwind, right, and sort of fluctuations in commodities. And we had shared with you last year pre-tax reform that if not for those 2 issues over the last several years, we'd be sort of above 31%, right? So that 30% is sort of realistic target. But just for tax, we're still going to move the margins forward and, again, a little bit help from CPI and our sort of we got an internal program we call sort of Reimagine Recycling as we make that business better and more sustainable economically. We're going to get there.

The next question will be from Brian Maguire of Goldman Sachs.

Just on the topic of recycled commodity prices. They started the year off lower than a lot of people thought, and I think they actually moved a little bit lower in the last month or so. There's some speculation that China is just going to maybe not grant as many import licenses this year. So just wondering if you could provide more thoughts on that market and what your updated assumptions are on pricing and when and if you think prices might recover here.

Yes. So we got a $1.35 a ton in the plan for the year sort of through 2018. January's a little weaker than that, $1.20 a ton. So our budget is $1.35 and we think, based on what we know about the business, that it will come back through the year. And so we still feel pretty safe with that assumption of using $1.35. Well, let me just speak a bit about China, right? So we historically have told you that about 30% of our fiber moves to China. Over the last several months, we've been moving fiber to different locations. And now today, this minute, only about 10% of the fiber goes to China. So we've kind of isolated that issue, if you will, for the time being. Having said that, I'll remind you, that we've always felt and we always do produce a pretty good-quality product. And so our recycle bale, et cetera, are pretty easy to move. We've never had to inventory material; we've never had to landfill material. So anyways, we've actually opened new markets in Europe and in other parts of Asia. So we feel pretty good about where we stand from a sort of a supply chain freight movement perspective. And then the free market's going to work. And ultimately, the increase for consumer packaging, we think, will drive -- mark the price back to where it belongs. And frankly, some of the bad actors that caused this problem in the first place, and we weren't one of them, they're going to have to get their act together and then sort of the whole market improves. So we're still pretty positive.

Okay. And one follow-up, if I could. Just thoughts on how you would redeploy this sort of windfall you're getting from the tax benefits and the proceeds there between dividend, share repurchases, incremental CapEx, more growth, more employee compensation. And just sort of related to that, are you seeing a change in what the M&A targets you have are asking for, for their businesses as a result of the tax reform? Or is it too early to tell how that would impact the M&A landscape?

All right, so that was a pretty long question and I'm going to give you a really long answer, how's that? Let's go back in time, right. So last fall when we gave our preliminary outlook, right, about that same time, we also -- our board also approved a new stock buyback plan of $2 billion. So at that time, you could sort of presuppose that if we, and we always do, right, sort of meet our goals around stock purchase -- repurchase. So last year, we were saying, look, between the stock repurchase program and the -- sort of the dividend practice of the company, that we expected over the next 3 years, '18, '19 and '20, to return $3.5 billion to shareholders, okay? Going forward, the next 3 years, $3.5 billion. The 4 years preceding that, we returned $3.5 billion. So 4 years leading up to this year, up through '17, it was $3.5 billion or $4 billion; now we're saying we're returning $3.5 billion over 3 years, and that was pre-tax reform, right? So we're staying true to that. And with tax reform, there is your question, what are we going to do with the windfall? So as I said in my comments, it's $190 million a year, because we're a statutory payer, and I also said, by the way, that we think the pipeline for acquisitions is pretty robust. So I'll come back to that. First of all, I said in my comments that we're going to spend about $200 million of that right back into the business. So in 2 ways. One in Fleet. So we've got this One Fleet thing going, it's great, it's working out well, we expect to continue to age the fleet a little bit over time, but at the same time, we've got a lot of trucks that we sort of inherit through acquisitions that aren't really up to our standards. We have trucks that really weren't maintained very well from the beginning of time. We'll probably going to buy some of those ages down. So we get a really good return on that by basically putting new trucks on the street. So we're going to use some of that cash flow, that newfound cash flow, to infuse new life into the fleet. So that's going to be good for our productivity, our safety, good for our frontline people because as you know, the office that our drivers have is the truck. So our drivers should love that. Secondly, facility. So the $100 million is back into the facilities. And specifically, for our frontline people. So we are going to -- but we put together a plan now to go into our facilities and really start to upgrade break rooms, locker rooms, better locker rooms for our women employees, as we have more and more female drivers, and training space. And we take training very seriously. We want to make sure that we've got a really great professional place for our frontline people to come to work to start their day so we can send them off like professionals and a great place to end their day. So we think that is the highest and best use. That, frankly, benefits the frontline employee directly over the long haul, and these are -- again, we have a low turnover. We have a lot of employees with us 5, 10, 20 years, they're going to love that. It benefits the local economy because we'll be hiring local contractors to the work. So that's infusion into the economy. And it's good for our owners, because, as always, I'm a broken record, but we run the business for the long term, and my job definition is create long-term, sustainable value. And we think that's the way to do it. The remaining cash, hopefully, the pipeline continues, and we spent over $400 million in 2017, and I said in my comments emphatically that we're going to spend over $150 million in 2018, and we've got a little extra cash to buy some EBITDA. So anytime we can continue to buy reoccurring cash flow in the business that we like and that we're pretty good at running, that's what we're going to do. How's that for a long answer?

I got my money's worth on that one, so I'll turn it over now.

The next questions will be from Andrew Buscaglia of Credit Suisse.

So I just want to touch on the volumes. So you're exiting the year at a pretty good volume run rate yet your guidance is only flat to up 25 basis points. I might have -- hopefully, I didn't miss this in the comments, but why such a cautious view there on volume?

It's really because of the special event volumes that we had in 2017. When you think about special waste in Q4, there being 37.9%, I can never remember a number that large before. So that just creates a bit of a comp for us. But let me explain it this way, also, Andrew. If you strip out the broker and the event business, then the volume growth in 2018 will be closer to 1% to 1.25%.

Okay. Okay, yes, that's helpful. And then just given the macro backdrop here, people are on edge with the markets and given your leverage, I mean, can you remind us with regards to your debt how much is fixed here? If there's anything you can do on the variable that you're looking at potentially? And maybe any interest expense guide that you can provide.

Yes, so we're about 81%, 82% fixed, the rest is floating. And we're going to constantly look and we have constantly looked at making sure that we have the appropriate view in terms of liability management. And we'll see what happens in terms of rate increases in 2018. But I'd also say that we've already contemplated a couple of rate increases in 2018 in our guidance.

Okay, let me add to that. We continue to believe that our optimal leverage, debt-to-EBITDA leverage, is right about 3x. And anywhere between 2.5x to 3x works for us, and so as long as we can continue to put money to work in the market to buy good business, to invest in the business, maintain our leverage at a very acceptable rate of 3x, and, to Chuck's point, manage that portfolio as well as he and the treasury team do, it's a good place to be. So we're in pretty good position. Remember, too, right, again, a couple of things. Always remember, our business is a little bit different, right? Necessary service, long views into the incoming cash flows because of the large percentage of our customers that are on contract, long views in the outflows of cash because of the stability of CapEx and some of those cash flows or outflows. So -- and also, we like the economy right, right? So the economy is doing well now, if the economy flutters a little bit, which we don't anticipate in '18, we get a pretty good warning sign. And we get the sort of benefit from the ongoing housing and those kind of things that starts. So that's one of the good things about the waste space. So we're in pretty good place.

The next question will be from Jeffrey Silber of BMO Capital Markets.

Earlier this week, I believe, there was some information came out of the EPA about the proposed settlement for the West Lake Landfill. I just was wondering if you can give us a little bit more color in terms of things we should be watching on that front.

Yes, really not a lot more color here. I would just -- I would have you look to the public statement that Bridgeton Landfill put out. That's really the statement that you need to check out and review all the facts that you need. I would just add, really, the punchline and that is given the landfill did not generate this material nor did the landfill transport the material, our belief is that the landfill, it doesn't really have much ultimate financial responsibility and it should be limited. So that's really what you need to really focus on and the rest of it is in the public statement.

Okay, fair enough. And just circling back to the recycling issue. I think you had previously stated that a $10 per ton move in the commodity price had roughly a 3% impact on earnings. I just want to make sure that, that still holds. And I think you had also stated earlier when we talked about the potential impact of OCC price declines this year, I think it was a $0.04 to $0.05 impact on earnings. Again, I just want to double check if that's still accurate.

Yes, so actually, the sensitivity has changed a little bit because of tax reform. So now a $10 change in recycled commodity prices changes EPS by approximately $0.04.

And I'm sorry, the OCC impact on prices?

Yes, Jeff, this is Nicole. OCC makes up about 45% of the fiber through our materials that we sell. And if you think about the impact of pricing into 2018, like you said, we said $0.05 to $0.06. Now with tax reform, that goes up a little bit. So call it, like, $0.07 to $0.08.

The next question will be from Noah Kaye of Oppenheimer.

Congratulations on receiving those sustainability awards. Nice accomplishment there. Just listening to you talk about the planned incremental investments in the fleet, certainly, we've heard a lot and read a lot about fleet technology data, safety, tech. I'm just wondering, is there anything that you're seeing and if so, maybe a couple of areas where incremental technology is helping you see a better ROI to making those investments in newer, younger fleets? Is there something there about the new fleets, or is it just that they're younger? Because I think certainly getting your perspective as one of the largest vocational fleet owners will kind of clarify for folks what incremental technology, whether it's the alternative fuels or call it advanced driver safety, could mean for your business?

Okay, that's a mouthful. So as it relates to alternative fuel, right, we've been pretty busy over the last several years moving portions of our fleet toward CNG. And we'll continue to do that over time. And today, 19% of our fleet runs on compressed natural gas. So we started out by building more fueling centers and then kind of consolidating more and more spend into those spaces, so we'd get the maximum benefit. As it relates to other technology, we, for years, have used camera technology and what I would call sonar technology, like you have in your personal car that gives you an audible warning if you're backing up close to something. As far as technology within the truck that comes from manufacture, there's some really great telematics-type technology that we can use today that comes with the truck that helps us monitor maintenance, other things, those are great tools, integrate well with us. We've always used a computer-based routing system to route our trucks, and we will over the next few years begin to move more and more technology into the cab. And frankly, that will help us from a productivity perspective, even from a safety perspective, but more and more even to connect us to customers. So we'll continue to go down that road. As it relates to things like autonomous vehicles, we've talked about this a little bit, there's several levels of autonomy. And so just like in your personal car, things like lane change warnings and those kind of things, those are now starting to be developed by Class A truck manufacturers. We will put those to work in our trucks, and I think, personally, we're quite a ways away from full autonomous vehicles. And I think, frankly, our industry will be one of the last industries to go that way. And one of the reasons is consider the fact that it's not only a truck going, like, down the interstate like somebody going from Des Moines to Omaha, but our trucks have to stop, every so many feet, somebody has to get out and open a gate and move a container and that would, frankly, take 2 automated or autonomous vehicles to do that work. So now you really start to see kind of what we're up against. But we are, I'll tell you this, the 7th largest vocational fleet in the nation, we've got some very good fleet professionals on our team, and we are at the table talking with manufacturers, not only chassis, but also body manufacturers, to take out weight, to improve longevity and all those things. So we're not phobic about it, we're just being realistic and practical, and we're going to invest where there's a good ROI, and we're going to keep pace with these developments. So right now, what we've got cooking for 2018 is baked in the guidance we've given you and as we accomplish these goals and we get past to sort of the next developments or the next investments we'll make in fleet, we'll keep you updated and we'll let you work those into the numbers when it's time.

And maybe a quick one for Chuck. I mean, how should we think about the cash tax rate now as a percentage of book? And is the 27% rate kind of the right effective rate over a multiyear period? Or do you think you need some tax planning to further lower that?

27% is the rate that we're guiding to and that's your appropriate rate for 2018. But having said that, we continue to look at opportunities to lower that rate.

The next question will come from Michael Hoffman of Stifel.

The cash tax rate, can we get that, is what percent of book is -- do you think you're going to be as a cash taxpayer?

75%. 75%.

All right. Your capital spending is up about roughly 10% year-over-year. So just want to make sure I understand the commentary about the $190 million in cash tax savings reinvest in facilities and fleet. So part of that, the 10% year-over-year increase includes that, includes probably some extra sell development because you had so much landfill usage, and then more kind of -- more normal overall spending rate.

Yes, look, add growth in there, Michael. Yes, because we had pretty good growth in the year, right? So we had growth, you hit that. We've got a little landfill development, which is good, and part of it is growth, and -- but it's still kind of hanging in that 10% of revenue range, right? And then, as I said, as you pointed out, $25 million-ish or so next year in the -- redeploying some cash into facility upgrades for our frontline people and a little bit of fleet infusion here to get that ball rolling.

Which I think then answers my next question. So $190 million is the savings, but your free cash flow is only up $165 million relative to the guidance in 3Q. So the difference, that $25 million in difference is what you're reinvesting year-over-year?

That's right, Michael. That's right.

You know the math.

Okay. Corporate rate savings out of the $190 million versus accelerated depreciation, how do I think about -- like, is there are more to play around with an accelerated depreciation or is the $190 million the right number for good?

Yes, so think about this way, Michael. The federal rate's probably $180-ish million and then you get about $50 million of bonus depreciation on top of that for the year. But then you've got a couple of negatives that you need to contemplate also. One, is lower state tax deductions, right, because you got less of a shield. And the other one is changes to the deductibility of certain expenses, right? So you've heard about change in deductibility of like meals and entertainment. So all of that nets out to the $190 million.

Okay. All right, that's very helpful. And then just to be clear, if I were to take 3.75% off of the revenues and expenses of '17, that's the way -- and I could do that just to be able to have -- see the comparable, keep the EBITDA as the same number but the revenue comes up 3.75%, and then I can look at what my sort of comparable margin is 1Q '18 versus '17 when I reflect revenue recognition.

Yes. It's about 100 basis points both years, Michael.

And spread evenly throughout the whole year or is it lumpy?

Yes. It's more or less spread out evenly.

Okay. All right. And then within the context of the acquisition environment, how much of this is sellers worrying that in 3 years, all this tax benefit goes away and they better get this done now?

First of all, I think that's 5 questions, Michael, but okay. Yes, so look, here's to our position. I think most of the selling that we're seeing just, frankly, happens to be companies who are getting to that cycle in their timeframe, okay. And here's what I always try to say. Look, if someone started a business 10 years ago and they're still at a point where they got the energy to build the business, maybe they're at a certain age or whatever, a little bit of tax reform isn't going to push them at the age of 35 or 45 to sell their business, and they'll probably not going to do that. But if you've got a business that you're already in the window, you're already thinking about generational planning, you're already thinking about, "Hey, my whole life's work and my -- I'm the third-generation in my own family's work and it's time to monetize this." Then, yes, I think maybe the tax reform might push you forward. But you've got to be in that decision point. I mean, here's the thing, it's a great business, and we've got -- there's a lot of small companies that we buy, tuck-in acquisitions. We buy some really nice companies that have run a long time, I mean, where people have put their heart and soul into it, they've built really nice businesses and they not just going to walk away from them just for a couple of percent. But you get it through in the window, this may be what they have been waiting for. So we'll certainly be ready to do that. We've got really good people out there talking to companies who are thinking of selling today. That's why I said the pipeline -- when I say the pipeline, it's not hearsay, it's people we've already talked to, it's people that we think are in the position to make a decision. So that's why we're confident in it. But I don't think this, by itself, will cause each and every person to move. Remember, too, the smaller the company is, the less taxes they pay. Frankly, very small private entrepreneurs, they're not paying a lot of income tax today. And their businesses are almost designed that way. So this doesn't really create a windfall for them.

The next question will be from Michael Feniger of Bank of America.

Just curious on the volume. So I think you mentioned underlying volume growth of 1%, 1.25% in 2018. Is that a deceleration from what we finished with 2017? I would just think with the housing activity, the big growth you're seeing in special waste, which is typically a lead indicator, why are we not seeing a step up maybe in the underlying volume growth? Or is the mix of the volume growth changing?

Yes, I think the fact that the volume growth is pretty consistent year-over-year, so in 2017, we reported a growth of 2.5%, and that includes really strong special waste volume, C&D volumes. Some of that actually coming through from the hurricanes also. So when you factor all of that out and you kind of look at it on an apples-to-apples basis, I think the volume growth year-over-year is pretty consistent.

Yes, so right. We've got the special waste we mentioned in the remarks, and we still have a broker volume that we're walking away from. We still have a couple of national accounts that just, they're not making it for us. And we've got a couple of residential customers out there that we haven't been able to convince to pay us what we deserve, and we're going to have to walk away from those accounts in 2018. So we're still taking a very strong approach to making sure we're getting the right return on the work we're doing, the right return on the investments we're making. And that's going to continue. Meanwhile, again, we always say it, you look at the cash flow. The cash flow is the story. And so we're getting our fair share of growth. As I said earlier in Q&A, we expect margin expansion in all of our lines of Collection business. Some of that is coming from growth. Some of that is coming from good pricing. Some of that is coming from productivity. But the business is healthy, strong, and we're making other very intentional decisions around volume to make sure that we're only doing what we're getting the right return for.

That's great. And just on the margin guidance and the -- expecting 10 to 30 bps of expansion. I mean, how should we be thinking about that through the cadence of the year? I think in the fourth quarter, you're still seeing this landfill operating cost still kind of elevated. We have the mix of the acquisition. Could you just tell us how we should be thinking about maybe the first half or second half with that margin guidance?

Yes. Keep in mind that first half, we're coming off of commodity prices that were really strong, first half of last year, kind of circa $160 a ton. So we would say that you're going to see the majority of the margin expansion towards the second half of the year.

Okay, that's great. And just if I can sneak one in. Just on the open pricing. I think you said open pricing should be flat in 2018. I'm assuming that what that means is, I think, open pricing was up 5%. So that's the kind of rate you guys would be expecting in '18 with restricted prices moving up. Or do you think open pricing is starting to hit that ceiling? Is that 5% number just kind of where kind of as high as we can take it?

Yes, I don't know if it necessarily hit that ceiling yet. I think that, obviously, 5% core growth on the open market is very, very strong. But Don had mentioned before a little bit of inflation, and not only does that help you in the restricted portion of the business, it also helps you a little bit in the open market. So I think that we've got a little bit of room to go there.

Yes, look, when customers are seeing inflation in their business, right, they're not just seeing it from us, they're seeing it from other suppliers and it makes it easier to have the conversation about what price adjustments are possible and necessary. So a good -- we've always maintained that a reasonably consistent inflation is good for our business, and if you look historically, it always has been. And as CPI moves higher side, it helps us in the fixed portion. It clearly carries over, and historically has, in the open market. So again, we think the future is strong as it relates to that. So when I hear about a little bit of CPI happening, I feel good about it.

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

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

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending this presentation. At this time, you may disconnect your lines.