Republic Services Inc (RSG) 2018 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the Republic Services First Quarter 2018 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.

And 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 First Quarter 2018 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 listen to a rebroadcast or rerecording of this conference call, you should be sensitive to the date of the original call, which is May 2, 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 a discussion of business activities, along with the 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 a pro forma view of 2017 revenue and cost as we adopted the new revenue recognition standard as of January 1, 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 our 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 extremely pleased with our strong start to the year. Through the team's relentless execution of our plan in the first quarter, we grew revenue, expanded EBITDA margins, produced over 30% growth in earnings and free cash flow per share and returned essentially all of our free cash flow to shareholders. The solid waste business performed exceptionally well in the quarter and contributed 140 basis points of EBITDA margin expansion over the prior year.

Within the solid waste business, we saw strong operating leverage in the disposal, small container and large container businesses. Additionally, as expected, SG&A as a percent of revenue decreased 20 basis points and landfill operating costs as a percent of revenue also decreased.

Overall, our first quarter results position us well to achieve our full year EPS and free cash flow guidance. Additional highlights of the quarter include: adjusted EPS of $0.74, an increase of 35%; adjusted free cash flow of $356 million, an increase of 48%; EBITDA increased $45 million or 7% over the prior year; EBITDA margin expanded 30 basis points to 28.8% despite a 160 basis point headwind from recycling; core price was 3.8% and average yield was 2.2%, both in line with our expectations. Average yield was strongest in our small container and large container businesses. A majority of these customers are in open markets, where we can leverage increases in demand for service, our enhanced product offerings and our digital platform. We now have approximately $570 million in annual revenue that uses a waste-related index or a fixed rate increase of 3% or greater for the annual price adjustment. These waste indices are more closely aligned with our cost structure and have historically run higher than CPI.

Volumes increased 2% and exceeded our expectations. We invested $26 million in tuck-in acquisitions in the first quarter and another $53 million in April for a total investment of $79 million to date. And finally, we returned $350 million to our shareholders through dividends and share repurchases.

Before turning the call over to Chuck, I'd like to make a few comments on our recycling business. First, it's important to keep in mind that our recycling processing and sale-of-commodities business is only 4% of total revenue. Second, despite a $0.06 headwind in the first quarter from lower commodity prices and higher labor costs on our sorting lines, we still outperformed relative to our expectations given the strength of our solid waste business. Third, we continue to believe recycled commodity prices will increase from April levels and have already begun to see clear evidence of this in the last couple of weeks.

And finally, we continue to make progress moving to a fee-based pricing model with a more equitable risk-sharing arrangement. We believe the current situation in China will serve as a catalyst in transitioning our municipal customers to this more durable model. Our customers have told us recycling is important to them, and we remain committed to derisking this core service offering and ensuring its sustainability for generations to come.

I will now turn the call over to Chuck to discuss our financial results. Chuck?

Thanks, Don. First quarter revenue was approximately $2.4 billion, an increase of $129 million or 5.6% over the prior year. The increase in revenue includes internal growth of 3.8% and acquisitions of 1.8%. The components of internal growth are as follows: First, average yield increased 2.2% and was in line with our expectations. Average yield in the collection business was 2.4%, which includes 2.6% in the small container business, 2.6% in the large container business and 2.1% in the residential business.

Average yield in the post-collection business was 1.7%, which includes landfill MSW of 2.2%. A 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 3.8%. Core price consisted of 4.6% in the open market and 2.5% in the restricted portion of our business.

The second component of internal growth is total volume, which increased 2% over the prior year. Volumes increased 1.9% in our large container business, and as expected, were essentially flat in our small container business. Small container volumes included the 90 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 have increased 80 basis points.

Volumes decreased 2.7% in the residential business. The decrease was expected and resulted from not renewing certain contracts that fell below our return criteria. The post-collection business, made up of third-party landfill and transfer station volumes, increased 11.1%. Landfill volume increased 12.7%, which included C&D of 5.7% and special waste of 35.9%. The strong growth in special waste exceeded our expectations and was due to a large project completed during the quarter. MSW volumes decreased 1.1% versus the prior year.

The third component of internal growth is fuel recovery fees, which increased 50 basis points. The increase related to a rise in the cost of fuel. The average price per gallon of diesel increased to $3.02 in the first quarter from $2.57 in the prior year, an increase of 18%. The current average diesel price is $3.16 per gallon. The increase in the cost of diesel was partially offset by CNG tax credits. The credits contributed $0.04 to EPS and included a $0.03 benefit in cost of operations and a $0.01 benefit in the tax provision.

The next component, energy services revenue, increased 40 basis points. The growth in energy services revenue is primarily due to an increase in drilling activity in the Permian Basin, where we continue to be well positioned.

And the final component of internal growth is commodity revenue, which decreased 1.3%. The decrease in commodity sales revenue primarily relates to a decrease in recycled commodity prices. Excluding glass and organics, average commodity prices decreased 31% to $112 per ton in the first quarter from $162 per ton in the prior year.

Now I will discuss changes in margin. In the first quarter, adjusted EBITDA margin increased 30 basis points to 28.8% versus 28.5% in the prior year. This included 140 basis points of expansion from the solid waste business and 50 basis points of expansion from the CNG tax credit, partially offset by a 160 basis point headwind from recycling. As a reminder, the 30 basis points of margin expansion does not include the benefit from adopting the new revenue accounting standard in 2018.

First quarter 2018 interest expense was $95 million, which included $11 million of noncash amortization. Our adjusted effective tax rate was 23.5% and was well within expected due to the CNG tax credit and unanticipated federal and state tax refunds. The refunds provided an approximate $0.02 benefit to EPS.

Adjusted EPS was $0.74, an increase of $0.19 or 35% over the prior year. EPS included a $0.12 benefit from tax reform. Excluding the benefit from tax reform, EPS increased 13% versus the prior year. First quarter adjusted free cash flow was $356 million, an increase of 48% versus the prior year. The growth in the free cash flow was due to strong growth in EBITDA and a favorable benefit from the timing of working capital and CapEx.

Next, we returned $350 million of cash to our shareholders through dividends and share repurchases. This included 3.5 million shares repurchased for approximately $236 million. And finally, as Don mentioned earlier, we remain comfortable with our full year 2018 EPS and free cash flow guidance given our first quarter results, the underlying strength of our solid waste business and our ability to continue to effectively manage our costs.

Now I will turn the call back to Don.

Thank you, Chuck. To conclude, we are very pleased with our first quarter performance. Strong solid waste fundamentals together with relentless operational execution resulted in double-digit growth in both earnings and free cash flow. This performance keeps us well positioned to achieve our full year goals.

Before opening the call to questions, I would like to congratulate the Republic team for being named to the first annual Barron's 100 Most Sustainable Companies list and recognized by Ethisphere as one of the World's Most Ethical Companies for the second year in a row. These awards serve as external validation of the strong ethical culture that we are building at Republic, which includes conducting our business with the highest levels of integrity and developing sustainable business practices to enhance long-term value creation.

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

(Operator Instructions) And our first questioner today will be Hamzah Mazari with Macquarie.

The first question is just on the pricing side. Don, maybe if you want to just touch on where do you think going forward you see the most opportunity on pricing. Is it on commercial collection or is it on landfill? Or is it simply higher inflation is going to lift all boats going forward?

Good question, Hamzah. There's a couple of things. One, CPI is on the rise, right? So CPI has been kind of dogging us here for the last few years. As you know, we've got this -- we've been kind of punished by this compounding headwind of low CPI on that big $2.5 billion book of business. So 2 things are happening there. One, as I said in my notes, we've got about $570 million of that $2.5 billion now converted to an alternative index or a fixed rate increase of 3% or greater. So that's happened, you're seeing that later into the business now. And so you'll continue to see the year-over-year benefit of that, and we're going to continue to go for more. As you've seen every quarter, we've improved that number. Second, absolute CPI is on the rise. I mean, there are -- people are now expecting about 2.5% CPI for the year. So as we get into the second half of the year, we'll see some of those contracts that are still tied to CPI start to roll over at a higher price. So that's great. The open market has been a very good place for pricing for us now for a number of quarters. We exited the year real strong. That's continuing now in the beginning part of the year. We think that's holding up fine. And frankly, historically, as CPI rises, open market pricing stays strong and frankly, improves. So that would -- that's a pretty good sign. Lastly, landfill pricing. It's still a little weak, frankly. I would expect that the landfill pricing would have rose a little faster than maybe it had because, again, just the high cost of landfills today, the higher cost of leachate, some of the costs that we're seeing in the business. We need to be revisiting our landfill prices and see what we can do there, starting to have those conversations with our municipal customers. Again, most of our third-party volume in the landfills comes through municipal customers. Again, they're tied to these long-term contracts that have been, again, subject to that lower CPI environment. So as we're having renewal discussions with those customers, we're introducing some of these higher costs that we're facing. So we'd like to expect over the longer term better pricing there. But overall, we're seeing pricing across the board. Again, we've got good tools. We use our Capture tool. All of our salespeople are equipped with their tablets. They're all using the system properly. Frankly, pricing churn has continued to be a great story for us. It's actually come down a little bit this quarter. We're seeing lower defection. So that's helping to drive price, and kind of all systems go. There's still some room to run here.

Okay, great. And just a follow-up question on just acquisitions. You mentioned $79 million year-to-date investment. You still have a target of $100 million to $150 million. But at the same time, the industry seems very bullish on M&A. Some of your competitors have closed significantly above that target in terms of deal flow. Is there anything you would sort of comment on in terms of RSG's focus is more return of cash? Or maybe there's antitrust issues in doing larger deals? Any kind of color you want to share on acquisitions and how you think about those?

Well, sure, I will start off by saying that the pipeline is still robust. We're seeing a lot of deal flow. We're getting a look at a lot of good, high-quality companies. The majority of the companies we're buying tend to be smaller. So the multiples we're paying are still in that 4.5 to kind of 5.5 range, very comfortable multiples. When we buy something a little bit bigger, the multiples get a little higher. You start buying more real property, infrastructure, permits, things that you spend a little bit more money for. I think the activity we've seen out there I think -- and maybe some of the other companies have made some bigger purchases than we have this year. I would tell you that we were in the hunt on a couple of those, so we're well aware of them. But maybe somebody -- maybe it was a better fit for somebody else in their market so they're willing to pay a little bit more than we were just because it fits their system better or maybe they needed something more than we did. As I would say, there tends to be a natural buyer in these deals. And when we're the natural buyer and we've got relationships and it fits our business, we think we can get good deals at the right multiples. So we're very focused on returns.

And our next questioner today will be Corey Greendale with First Analysis.

Just a couple quick ones. I realize your practice is to update guidance midway through the year, but just obviously, did a nice job offsetting the impact of recycling in the quarter. Just could you give us some view? Can you continue doing that? So in other words, are you still at least comfortable with the guidance you have put out there?

Yes. So I'm going to give you some color and then I'll let Chuck give you some -- a little more on the number side. We've been saying, and I think a lot of people have been writing, that April really was expected to be sort of the floor, the bottom this year. That's proving out to be true. As I said in my comments, over this last couple of weeks, we've seen prices start to bounce. The reality is, the inventories in China are very low. We actually mentioned this last week when we spoke at WasteExpo. Our team went over to China a few weeks back and met with our mills there. Normally, they have about 30 or 60 days of material inventory. They were sitting at about 10 days of inventory. Normally, they have a fair amount of inventory in transit. In oceangoing vessels, from port to port, there's very little, if any in transit. So this is very sort of what I would call sort of simple Econ 101, supply and demand economics. At some point, they need to make paper. And they're buying a lot of raw pulp. They're paying 8x what they used to pay. So we think that's the reason that price is starting to come up. Chuck can give you kind of a color of where we were at the beginning of the year, where we were in April and where we think the year ends up for us.

Yes, sure. For the quarter, average price was $112 a ton. What we saw in April was closer to $105. And as we go forward, we think that the average would be closer to $115. So Corey, to your point, we're able to offset -- more than offset the headwind associated with commodities in Q1. And right now, we're estimating that we're going to be able to do the same thing in -- for the rest of the year with commodities at $115 a ton, that being a little bit of a headwind for us based upon our original guide, but being able to offset that through continued outperformance in the solid waste business.

Okay. And then the second question I had is on the volume side where you are intentionally shedding some broker volumes. I think I'm hearing that the underlying kind of small container business is strong. So can you give us a sense like when do you start to enter -- is there a part where you anniversary shedding those volumes? Or is that kind of a continual thing? And as you anniversary that, do you think you can get to even higher volume growth levels than you're at now?

Yes, so if we take out the -- what we call non-regrettable losses, right, our volume would have been...

110.

110 basis points, so kind of in line with our expectations. As it relates specifically to broker, we -- by the end of the year, we'll have maybe only $100 million or so left of broker business to shed. That's a little lumpy as it happens, but we're cutting through it. And again, by the end of the year we'll be, I would say, near the end. But that will probably happen -- that last bit will probably happen over 2 or 3 years.

And the next questioner today will be Michael Hoffman with Stifel.

If I could follow up just a little bit to clarify. So from this point forward, we should go -- if we had $135 as our assumption for recycling, take that down to $115 for 2Q through the remainder of the year, which is about $0.08 of incremental headwind. And you feel that given the power of the first quarter, and it was great quarter in garbage, that you can make that up. Is that the way...

Yes, that's right, Michael. So yes, on average, $115 for the remainder of the year. Your math is right. It's about $0.08. And we feel like we can make that up through the outperformance in the solid waste business.

And so to that end, you exceeded your own budget -- I mean, your own guidance on volume. So are we to look for -- we should walk volume up as part of the -- as we think about modeling? You had a -- 2.25 was your reported price for the year. But your volume assumptions are going to be 0 to [0.25]. So how do I think about volume in the guidance at this point? Is that...

Yes. Yes, so first quarter volume -- yes, Michael, first quarter volume was very strong because of special waste. And obviously, we'll take that into consideration when we do a broader update of guidance as we always do in Q2.

But where you're going with that, right, volume's good. I would say it's strong. We're seeing strong volume in C&D landfill, we're seeing strong volume in large container, we're seeing strong volume in [temp], good housing market. I mentioned we were seeing lower customer defection, right? Our customer defection actually fell below 7% for the first time in our history, okay? So all of those things factor into volume, Michael, as you know. So as Chuck said, as we get through May and June and understand our sort of normal seasonality and how things are coming back, we're going to come back to you in the second quarter call and have a clear picture for you.

Fair enough. But I'm interpreting it correctly? I get that you're not changing guidance till it...

Directionally, you are correct.

Okay. And the price seems to have a little bit better momentum as well. That's -- so that's the other part of it. If the volume trend's that good, that gives you that much more room to push on the levers on price.

Well, look, I've always said when volume -- when organic volume growth is good, pricing goes along with that. When organic volume growth dips and goes negative, that's when pricing gets a little squirrely, right? So if volume's growing, organic's growing, housing's growing, all those things that we're seeing in the broader macro are good, we think volume holds up. And it's a pretty good story for this year, and pricing comes right alongside of it.

So on the recycling issue and your following comment, which I hope the industry is able to take advantage of this and fix this. From a fundamental standpoint, I look at this, what's going on is we clear the deck in '18 and '19, whatever the lower number is. It's a lower number and we just plow on with good garbage in the E&P business. And this is the debt-clearing year. How long do you think, though, it will take to get the customer to agree this has to change? Because it's been really slow historically.

Well, let me help you. Okay, so I'm going to burn a little time on this answer, okay? So this is really important for everybody to try to understand, everyone listening on the call. We make 2 assumptions and we would posit them as facts. So first fact is customers want to recycle, okay? Part B of that first fact is customers are showing us that they're willing to pay for recycling. I'll come back to that. The second important fact that we posit is that paper packaging demand is not decreasing. In fact, most people would argue it's on the increase. So recycling, there's a business here, right? People want to do it and there's a demand for paper packaging. Most of what we recycle is fiber. So I mean, the lion's share of it is fiber. So we have -- we receive recycling through 3 channels or 3 lanes. The first inbound lane comes from -- in our open market collection business. So these are front-load, reload commercial customers, where we put out 3 yards, 4 yards, 8 yards, right? In that business, we've reported quarter after quarter that we've been increasing the price we charge for commercial recycling in our small container business. Started out $0.28, $0.30 -- or 30% of trash rates. Now it's 90%-plus of trash rates, okay? So customers are saying, I'm willing to pay for that and I want to do it. So that -- we've corrected that space. Customers are voting with their wallets and we haven't lost any volume. And we're making money in that business. We're making an appropriate return so we can continue to offer that important service to our customers. Second lane that we bring material into our company is through recycling facilities, right? This is where third parties who don't own their own manufacturing or processing capacity, but they have their collection trucks. These are primarily cities, so cities collecting wastes from the curb and some other competitors or smaller haulers bringing us material to our facilities. In those cases, in that lane, the lion's share, 85% of those contracts of that volume now is coming in at what we would call kind of a fee-based structure or a fair share arrangement. We're no longer holding all the risks. Now we're giving away some of the upside, but we're getting a certainty of a return on that revenue. So those are the first 2 lanes. Now the third lane is the biggest and it's more -- it's most difficult, and that is municipalities where we go out and collect with our trucks and either bring them to our own facilities or to third-party facilities. And this is the same group of people who were trying to move away from a CPI index to an alternative index. So you see the results we're having there. We've moved now well over 20% of that business to a fair share arrangement or an alternative index. So now we're going to have -- we're having that same conversation with those customers, which is going to take some time. But in my comments, in my prepared remarks, this chaos, if you will, this crisis, if you will, in China, is the catalyst to fix this business. And if I look at the first 2 lanes of those first 2 customer groups, they've already demonstrated customers understand the economics and they're willing to pay for it because they want sustainability, they want recycling. So we just have to do the work. And then frankly, we're built for that. We get up every day, we pick up the garbage. We get up every day, and pardon the football analogy, but we run the ground game. And customers are going to have to understand if you want to recycle, it's not free. This stuff is not worth gold, okay? We've got residual issues, too much trash in the garbage. We've got glass, which is a contaminant at some point. We've got materials that don't have value that we have to deal with, okay? The fiber has value and has a market. So these are the discussions we're having with customers and it's going to take some time, but we're very determined. And as I've said a few times now, it's kind of a perverse statement but frankly, in one way, I kind of welcome this China chaos because it gives us the platform that we need to go ahead with the conversations that we frankly probably should have been having 10 years ago, okay? So it's going to be a good business. It is a good business in some markets, and some markets are lagging. So again, as we talk about return on invested capital, it can be a better business on that basis than the landfill business, than the solid waste business. And it is a growing segment. It's a growing waste stream. So we want to get in front of the growth, but we're not going to do it for practice. So you'll see the returns improving in this business. You'll see this story change over time, and that's all I've got to say today. But that's the reality we're living in, and our team is poised to go out there and make it happen. We've got a strong team here. They're getting good results in other ways. And I would say lastly that we've seen these issues before in solid waste. When fuel became the volatile in 2004, we implemented a fuel recovery fee, which is a very fair way to deal with fuel costs with customers. It goes up and down based on fuel markets so customers are treated fairly. We see CPI, which has become an unfair index. We're going to a fair index and customers are coming along with us. And now we have to deal with this last sort of issue, this sort of last frontier of volatility in our business, and we're going to be through that. And it may take a few years to do, but we're going to see progress. And how did I do, Michael, did I -- are you still there?

Yes. No, I'm here. And well -- and so somehow I'm supposed to work in some corny analogy about football games are won by passing. So on the passing side, if you're -- I don't know how I'm drawing this all together this way, so I'll scratch that and just go, your $570 million out of $2.5 billion, you did in about 30 months. Is that about the way we should think about the pace of being able to fix the 80% of the recycling...

Yes, I don't know. Well, let's just -- let's get going on it and we'll see in a couple of quarters. But we're determined. We're really good at picking up trash and recycling. We don't need practice doing it for free, right? And then my final word on it, and I'm sort of the master of the obvious here, right? But my team's heard it a thousand times. Sustainability, my customers, is not possible without profitability. Organizations like ours cannot invest in sustainable practices in recycling unless there is a return that we can count on, and that's the nature of the beast. That's what we believe and that's what you'll see happen in our business. And anybody who doesn't believe that, well, it's kind of a fool's errand.

Right. And the only thing we care about is we don't want to see the price recover too fast so the customer won't come to the table. So that $115, that still leaves you room to argue, "Hey, you got to fix this."

Even if it goes to $200, we've got to fix it because here's what we know: It will go down again. So again, this is just -- we've been doing a lot of other great work in the company over the last 7 or 8 years. We been busy doing a lot of good things like Fleet -- One Fleet, and all the other good stuff, and Capture and PBS. And so we've been doing a lot of great things to make the company better. This is the great thing we're going to be doing over the next couple of years.

And the next questioner today will be Michael Feniger with Bank of America.

Just first off, I mean, EBITDA margins up 30 basis points year-over-year despite the headwind on recycling. I know you guys aren't updating your guidance right now and the components. But is there anything we should be aware of, the cadence of the margins throughout the year? Is there anything that should stick out? And with that, I mean, the landfill operating costs I think fell like 5% year-over-year. This was clearly an issue last year. Can you just provide us an update there? Is that something that's like sustainable and should be kind of the run rate going forward for the year?

Yes. So think about some of the major components, right? We told you last year that SG&A was going to -- some of the SG&A investments we made were going to anniversary. We're seeing that, right? So we're very much in control of our SG&A spend, right? So we've got a pretty good handle on that. So made those investments last year, the year before. Now they're coming down just as we said. We told you last year we were doing some additional work at some of the landfills related to some various permit issues and some leachate issues. We're coming through that. That's going to start working its way down. We've already seen that in the first quarter. So we got a good handle on that. I mentioned One Fleet earlier. Our fleet costs are solid. Our labor costs are in line. The core solid waste business is running well. The operating team is doing a fantastic job. And again, growth, right, we're seeing pretty consistent growth, positive sort of economic factors across the portfolio. So yes, we think it's sustainable. And over the long term, we still aren't backing away from 30% EBITDA margins because we're going to see CPI improve. We're going our conversion to a better index continue. We're going to see improvement in this recycling business. We've got the courage and stamina to do what we need to do there. And again, we've got customer willingness to pay on our side, and we're improving the products. We're Improving the quality. We're improving service. We're improving fleet reliability. As I said, our defection has come down. All those kind of things, a lot of really good stuff going on here. And someday, we won't have to talk about recycling so much. Well, let's not. What else do you got, Michael?

I guess, I just wanted to follow up on that. I mean, you mentioned, obviously, organic growth helps drive the pricing dynamic. But we're also seeing it driving investment back into the fleet, your CapEx is up. Some of your suppliers in the industry have pretty big backlogs. So I guess just -- I guess, big-picture question here. You guys are clearly adding some routes. Are you seeing anything in the open market of the small mom and pops adding trucks, or maybe too many trucks for the supply-demand balance of that with the open market?

I would answer it this way. I think we're getting our fair share of the organic growth. And again, we target our sales force for customers that we think use some kind of value equation in their thinking, people that like the idea of great service and solutions and recycling services and a broader suite of services. We don't expect to chase every account or have every new yard of growth. But we're getting our fair share. And as long as we're getting our fair share and maybe a little more because our products are strong, then we're okay with that. Meanwhile, we're getting pricing to offset inflation, and that's an important factor of the overall story. So nothing bad to report there.

That's great. And just my last question. We saw an industrial company last week kind of make a comment about peak or near peak. Clearly, it's a different type of industrial company in the business. It sounds like from what you're seeing on the volume side and with your different aspects of what you guys touch in the economy, there's nothing that suggests to you that were -- any areas of the business that feels frothy to you or peakish in any way? Does it still feel like you have a runway ahead on a multiyear basis?

Yes. So simple answer is we think there's still room to run and we back that up with some statistics. I'm going to let Chuck back it up with statistics because I've been doing all the talking. How's that?

So what we talk about is that there'll be a 90% correlation to our volume growth overall, the entire company, and single-family housing starts, when you lag single-family housing starts by 1 year since we're late cycle, obviously. So as -- we've looked at single-family housing starts and the print for March was 1.3 million units on an annual basis, so it's been increasing slowly over time. Based on the experts that we talk to, we think there's nothing that will prevent us from getting back to a longer-term average of close to 1.4 million, 1.5 million units. There's also been a number of articles written recently that say that there is actually a lack of supply of single-family housing throughout the United States. And they estimated that to be an additional 7.3 million units. So all of that in combination, we would say that, back to Don's point, that there's still plenty of room to run here in this economy.

No, that's great. And then just lastly, I mean, the special waste was really strong this quarter. You mentioned a big project. I'm just wondering, do you guys quantify that big project that you completed this quarter? And how does the pipeline look in special waste since I think that's one of the reasons why your volume outlook for the year was flat to up 25 bps?

Yes. So we've had a tremendous growth in special waste over the course of last several quarters, close to a year now. To grow on top of a 30% type of growth year-over-year is really hard for us to do. Like you had mentioned, we had a really strong special waste job that occurred during the quarter. That's ended now. Looking forward, we still see some growth there, but I can't -- to grow 30% on top of 30% is difficult to do. But what it does speak to, though, right, this event work, it's a precursor to single-family housing starts and to development in general. So that's another indication that we think that the economy still has room to run.

And the next questioner today will be Noah Kaye with Oppenheimer & Company.

I think free cash flow conversion this quarter really stood out. Historically, I think it had tracked around 8% to 9% of revenue. Prior guidance probably implied something like 11% this year. But for 1Q, it was almost 15% of revenue. And I'm not sure if that's a high water mark, but it looks very impressive. So can you comment on a couple of things here? First, you mentioned the working capital benefit. How do you think about that maybe reversing over the course of the year? And second, again, one particular line item. It looks like the capping closure and post-closure expenditures were down pretty markedly to about $7 million, which is a much lower run rate than it had been in past quarters. Is that sort of $7 million the right run rate for the balance of 2018?

Yes. So a couple of questions there. The first one being the working capital. We think that, that is timing and that will end up reversing kind of evenly throughout the rest of the year. Not really a permanent benefit, but more of a timing benefit. To your point on the capping, the closure, post-closure, that tends to be lumpy. Obviously, we don't cap until we need to, right? And so that will depend upon when we need to do the capping and also the weather to a certain extent. So it does tend to be a little lumpy, but we don't expect there to be a significant change in that expenditure, that cash expenditure year-over-year.

Okay, that's very helpful. And you mentioned weather. Obviously, a strong quarter on a number of metrics. But I think most folks have been expecting a little bit of a weather-related headwind this year. So can you comment on (inaudible) might have held back that might have impacted (inaudible) for the business?

Yes. So the weather ended up being a little bit of an offset. We had a lot of rain on the West Coast last year. And this year, we had a little bit of weather, as you're aware, on the East Coast, so it tended to offset. So we didn't see a real significant impact in the business overall this quarter because of weather.

Okay, that's helpful. And then maybe one more. Really appreciate the adjustments on pro forma so we can compare like-for-like. But a point I'm getting a bit confused on, if we look at the recycle from (inaudible) line, (inaudible) year-over-year, I guess, down 3% to 4%, when the commodity basket is obviously down a lot more. I'm sure part of this has to do with rev rec and the changes. But could you just help us explain why the line didn't drop that much?

Yes. Hi, Noah, this is Nicole. So when you look at the supplemental schedules -- and you kind of cut out a little bit. So hopefully I'm answering your question. When you look at the revenue dollars, there wasn't a significant decrease, and that's because, if you recall, this time last year, we didn't have ReCommunity. So that's kind of offsetting some of the decline in RSG legacy recycling commodity revenue. When you go to the kind of the components of internal growth in there, you referred to the 1.3% decline. Again, that is more of a same-store legacy Republic Services. The impact of ReCommunity is down in the acquisition line.

And the next questioner today will be Jeff Silber with BMO Capital Markets.

It's Henry Chien calling for Jeff. Just wanted to follow up on some of the volume trends in -- on the residential side and the small collection side. You mentioned some of the rationalizations or, I guess, the shedding of the broker business and some of the changes in contracts on the residential side. Just curious, does that change the margin structure of those 2 businesses? And how should we think about that going forward?

Yes. The business that we're shedding both on the small container side and on the residential side, that's business that's regrettable -- I mean, it's not regrettable that we're shedding that business. That's because it's at lower margins. So part of the reason why we're doing that is because we didn't feel like we were getting an appropriate return on our investment. And what we've always said is that we're very much focused in on ROIC. So obviously, shedding that work and then deploying those assets in other pieces of business that provide us with a better return obviously will help us enhance our margins.

Yes, keep in mind that those are small moves, right, but they're directionally going to improve the margins over time. Keep in mind that when we're the incumbent in a residential contract, we know all the costs right down to the nth degree, right? So we're very aware when the contract is sort of not meeting our threshold returns and when a customer doesn't really value what we're doing. And if we can't get the extensions at the right price or the right kind of built-in indexes, or as we relate to recycling, we just got to -- we got to move away from them. And revenue, good success rate in converting and increasing and extending contracts as well. Every now and then, we run across one where we just can't get it done. And the good news is the team has the courage to walk away from that business and go find another customer who wants to value great service.

Got it, okay. Great. That's good to hear. And just on the cost side. I mean, some companies seem to have some difficulties in transportation costs and labor costs. So I'm just wondering how you're thinking about that. Is that potentially an issue going forward or is it something that you're [keeping] and aware of?

Well, certainly, it's something we think about. We spend a lot of time and effort, energy, talking about, thinking about working on employee engagement at Republic. So our employee engagement rates are at all-time highs. Our turnover has been flattish year-over-year. We think our employee turnover is best-in-class. And even in light of a good or even an improving economy, where you might lose more people, we're actually holding our own quite nicely. So we're spending more and more effort in just making Republic Services a great place to work. We think as it relates to our frontline people, truck drivers appreciate our One Fleet initiative of having reliable, safe trucks. Our techs enjoy working in a shop where we take fleet seriously. Our professional salespeople like the tools that we've created for them. Again, we're working on the work environment at the facilities. As I said last quarter, we're going to spend about $100 million over the next few years improving frontline facilities, locker rooms, training rooms, break rooms, so those kind of things. So we put a lot of effort into just creating the best work environment. And we've got a number of external agencies and experts that have given us some acknowledgment and some accolades around that. So it's something we take really seriously. So it doesn't mean that we will be affected by things to come, but I think we're ahead of the curve.

And our next questioner today will be Hamzah Mazari with Macquarie.

I just had a quick follow-up for Chuck. Chuck, do you know what your updated tax rate is in your guidance given Q1 was lower? Is it sort of 27% or has that changed?

Yes, it is, Hamzah. It's still 27%.

Hamzah, just to clarify, 27% for the remainder of the year. So the full year average would be closer to 26%, just to clarify.

And our next questioner today will be Tyler Brown with Raymond James.

Chuck, just real quick. It's a little unclear, but was the $0.04 CNG tax credit contemplated in the guidance from last quarter?

No, it wasn't. If you remember, that actually -- that was part of the budget reconciliation package that came out a couple of days after our conference call or earnings call.

So do we tack on $0.04 to the guide? Or is it used to absorb some of the recycling?

Yes, it's actually -- that's what absorbed the recycling during the period. And keep in mind, we had about a $0.06 headwind from recycling during the period. So we have about $0.04 of benefit from CNG and then another $0.02 benefit from the tax refunds that I talked about. So that's what offset the recycling.

Okay. Okay, that's helpful. And then I apologize, but can you go back over the margin math? So are you saying that if you exclude the tax credit ReCommunity dilution and recycling prices, basically, solid waste margins were up 140 basis points. Is that right?

Yes, right. So solid waste up 140 basis points. The CNG tax credit, as I have mentioned, was about 50 basis points. And then recycling operations, that was a negative -- a headwind of 160 basis points. So the net of all of that is the 30 basis points that we called out.

Okay, perfect. And then I do want to kind of go back to the transportation question. But one line item we've been watching pretty close is the subcontractor hauling costs, and I think you guys saw a pretty pronounced squeeze this quarter. I think some of your peers have as well. I know it's a pretty granular question, but can you guys talk about what the expectation there is? I mean, transportation costs don't look like they're abating anytime soon, in my humble opinion. But should we expect that, that is a margin headwind for the rest of the year?

Not necessarily. So what we saw in the first quarter was a little bit of a spike in our transportation subcontract costs because the business mix -- so there's a little bit higher national accounts and subcontract work that we -- that was performed that was in the mix and just that mix of the business kind of in general. And we're not necessarily saying that that's a trend that's going to continue.

Also, Tyler, on a large group of those waste moves, if you will, we've got long-term contracts with stable providers and so we're in pretty good shape there.

Right, okay. And then maybe my last one, I don't know if you can parse this out. But how much did the shedding of the broker business help margins, solid waste, specifically?

Yes, Tyler. I don't have that at my fingertips. As Don mentioned before, it's small relative to the rest of the business. But incrementally, as we continue to do this over time, it is going to improve our margins.

And the next questioner today will be Brian Maguire with Goldman Sachs.

Just following on Tyler's question. Just to make sure I have it clear that the energy credit was about, I would say, about a $14 million benefit to EBITDA and we shouldn't think about that recurring in the future, right?

Yes, it was about $15 million. That's right. That was a onetime benefit that actually pertained to 2017.

Got it. Okay. And it just wasn't included because the tax law clarification didn't come out till after you gave your original guidance, is that right?

That was part of the budget reconciliation package that came out a couple of days after we had already had our earnings call. Correct.

Okay, thanks for the clarification there. And then not to belabor the recycling point too much, but just the contaminant levels that China is trying to get to, I know that's a big obstacle to try and get down to like 50 basis points of contamination. Just wondering, as you've changed your operations and you're incurring these additional costs, how close are you getting to that level? And sort of related to that, are you seeing -- sort of what we've seen is maybe some different markets develop in recycled fiber, where some higher-quality stuff like the OCC #12 or DLK is trading at a little bit of a higher price than some of the more commodity grades. Is that sort of what you're seeing too? And is that what you're sort of referencing when you say you're starting to see some signs of uplift on recycled fiber?

Yes, that's fair. So with OCC, we're doing a pretty good job with the newspapers. Some other grades are a little bit tougher, as you can imagine. But again, we've opened up other outlets, so we're moving our export material to a number of other places now that we didn't previously. So -- but again, ultimately, China has to figure out if they've got to make paper, they have to decide whether they're going to deal with some of this contaminant or they're going to keep buying pulp and chopping up trees. So we're going to just keep working it out. But again, supply and demand, and we're already starting to see the bounce. As Chuck talked about, the rates we experienced in Q1, where the April dip was, and now we're seeing a bounce already the last part of April and here in early May. So now we're pretty confident it's going to come back, as we said, in line with that $115 number. And our team's doing a great job on getting the material moved. And again, we threw in a little extra labor in Q1 to do a little better job of cleaning it up. But I think it's going to come back for us.

Okay. And just one last housekeeping one. Appreciate the restated 2017 numbers. Just was wondering why the -- it looks like the adjusted EBITDA was a little bit lower than what we had in our model as the reported numbers from last year. Any reason why the accounting change would modestly lower the EBITDA in 2017?

Yes. So with the 110 basis point impact from revenue -- from the revenue recognition change, so I'm not really sure why that would be different than what you had in your models.

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

Thank you, William. In closing, we will continue to manage the business to create long-term value and remain focused on executing our strategy of profitable growth through differentiation. I would like to thank all Republic employees for their hard work, their commitment and dedication to operational excellence and creating the Republic Way. Thanks, everybody. Thanks for spending time with us today. Have a good evening, and be safe out there.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.