Waste Connections Inc (WCN) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, February 14, 2019.

I would now like to turn the conference over to Worthing Jackman, President of Waste Connections.

Please, go ahead, sir.

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our fourth quarter 2018 results and provide a detailed outlook for both the first quarter and full year 2019.

I'm joined this morning by Mary Anne Whitney, our CFO, and several other members of our senior management team.

Unfortunately, Ron Mittelstaedt, our CEO and Chairman of the Board, is unable to participate on this morning's call due to an immediate family member's medical matter. Ron appreciates everyone's concerns and sends his best.

As noted in our earnings release, 2018 finished on a high note as financial results for the fourth quarter exceeded expectations on better than expected solid waste organic growth, E&P waste activity and acquisition contribution.

We're also extremely pleased with our results for the full year as adjusted EBITDA as a percentage of revenue expanded 30 basis points and adjusted free cash flow increased 15.2%.

Increases in both solid waste pricing growth, which was up 130 basis points year-over-year, to 4.5%, and E&P waste activity enabled us to overcome the precipitous decline in recycled commodity values and certain cost pressures during the year. The strength of these results continues to reflect the benefits of our purposeful culture, differentiated strategy and disciplined execution.

2018 was also noteworthy for the continuing elevated pace of acquisition activity. Our acquisition of American Disposal in the fourth quarter brought total annualized acquired revenue to more than $360 million for the year, with rollover revenue contribution of approximately $200 million in 2019.

Along with continued strong pricing growth, this already positions us for high single-digit revenue growth and another 30 basis points adjusted EBITDA margin expansion in 2019, with any growth in solid waste volumes, E&P waste activity or additional acquisitions providing further upside.

We have increased adjusted free cash flow per share at a compounded rate of more than 15% per year over the past several years, and expect continuing double-digit adjusted free cash flow per share growth in the upcoming year .

Our strong financial profile continues to afford the flexibility to fund outsized acquisition activity, an increasing cash dividends and opportunistic share repurchases.

Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

Thank you, Worthing, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement on Page 3 of our February 13th earnings release and in greater detail in Waste Connections' filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements and information as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements and information in order to reflect events or circumstances that may change after today's date.

On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently.

I will now turn the call back over to Worthing.

Thank you, Mary Anne. In the fourth quarter, solid waste price plus volume growth was 4.9%, exceeding the high end of our outlook for the period by almost 100 basis points, and volumes turned positive for the first time in 2018.

In the fourth quarter, solid waste pricing growth was our highest reported price in a decade at 4.8%, up 30 basis points sequentially and up 120 basis points year-over-year.

As noted in prior quarters, our pricing strength reflects the differentiation of our market model and intense focus on execution as we implemented and, more importantly, retained additional price increases during 2018 to address recycling headwinds and certain cost pressures, including third-party logistics and fuel.

Once again, in Q4, our pricing ranged from approximately 3% in our more exclusive markets in the Western region to an average of about 5.5% in our more competitive regions.

Reported volume growth in Q4 turned positive for the first time since we began intentional shedding of lower-quality revenue and unsafe-to-service accounts acquired in the Progressive Waste transaction. Volumes were up 10 basis points and well above the high end of our expected range for the period.

We continue to believe we are prudent to be cautious on volume growth in this environment, with anything positive being upside. Looking across our regions, volumes were driven most notably by our Western region, which was up over 3% in the quarter, while Canada and our Southern region, though showing some improvement sequentially, were both down year-over-year between 0.5% and 1.5% as we continued to anniversary the mostly completed intentional shedding in those regions.

Looking at 2019, we expect pricing growth to continue to average about 4.5%, likely starting higher than that on a reported basis early in the year, and we expect reported volumes to be down about 50 basis points due to the remaining purposeful shedding of poor-quality revenue, with underlying volumes about flat year-over-year.

We believe that our 2018 results are indicative of the effectiveness of a price-led organic growth strategy. And as noted earlier, we will continue to view any increases in underlying volumes as upside.

Looking at year-over-year results in the fourth quarter by line of business on a same-store basis, commercial collection revenue increased approximately 6.5%, mostly due to price increases. Roll-off revenue increased approximately 3.5% on higher revenue per pull. In the U.S, pull per days -- pulls per day decreased about 1% and revenue per pull was up 3%. In Canada, pulls per day decreased about 1.5% and revenue per pull increased about 7.5%.

Solid waste landfill tonnage increased about 1% on increases in MSW tons, up about 3%, led by increases in the Northeast and California, and C&D tons, up about 4% on increases across several markets, led by the Northeast and Texas.

Special waste tons were down about 4% in Q4, a smaller year-over-year decrease than in prior quarters as tough comps began to ease a bit.

Recycling revenue excluding acquisitions was about $20 million in the fourth quarter, down $8 million or almost 30%, the smallest year-over-year decrease in 2018 due to easier comparisons on prices for OCC, or old corrugated containers, and a slight increase sequentially.

OCC prices in Q4 averaged about $93 per ton, which was down 23% from the year-ago period and up 6% sequentially from Q3. Mixed paper revenue, ex-acquisitions, declined approximately 45% year-over-year as values remained between 0 and $5 per ton.

We believe that the flow-through from changes in recycling revenue was similar to prior quarters, with decremental margins of approximately 95% due to the combination of lower fiber values and higher recycling processing costs, resulting in an impact of about $7.5 million in EBITDA and about $0.02 per share of EPS in Q4.

OCC prices currently average about $85 per ton, reflecting some recent weakness. This is down about 10% from Q4 and down about 15% from last year's average of $102 in the first quarter. We expect recycled commodity values to remain around these levels for the full year.

Looking at E&P waste activity. We reported $64 million of E&P waste revenue in the fourth quarter, up 20% year-over-year and down slightly sequentially from Q3, reflecting a lower seasonal decline than typically seen. We have not experienced a notable impact in activity levels resulting from weakening crude prices in late 2018. That said, we remain cautious in our outlook for E&P waste activity, and we'll let any increases in activity or ramping of newly constructed locations be upside in the year.

Looking at acquisition activity, as noted earlier, we closed the previously announced acquisition of American Disposal in December, which, along with other acquisitions completed earlier in 2018, provides rollover acquisition contribution of about $200 million in 2019.

Coming off of 2 years of outsized activity, during which we essentially completed 4 years’ worth of acquisitions, we continue to believe that the factors that were viewed favorably by sellers are still relevant, that is, sellers continue to note the strength of their underlying businesses, the clarity around taxes as a result of Tax Reform, and higher reinvestment rates as drivers for transactions. Dialogue remains active and the pipeline continues to be robust. In short, we believe 2019 could be another year of outsized acquisition activity.

In 2018, we deployed over $1 billion in acquisitions and returned over $210 million to shareholders, including opportunistically buying back stock during December's sell-off. And we remain well positioned for potential continued outsized capital deployment in the upcoming year.

Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and the full year 2019.

I'll then wrap up before heading into Q&A.

Thank you, Worthing. In the fourth quarter, revenue was $1.26 billion, up $104.6 million over the prior year period and about $37 million above our outlook, due to higher organic growth and solid waste and E&P waste, as well as contribution from closing the American Disposal acquisition in December. In total, acquisitions completed since the year-ago period contributed about $66.5 million of revenue in the quarter or about $61.4 million net of divestitures.

Adjusted EBITDA for Q4, as reconciled in our earnings release, was $397.2 million, about $11.2 million above our outlook for the period on higher-than-expected revenue. And up over $36 million year-over-year, despite an estimated hit to EBITDA from recycled commodities of approximately $7.5 million.

Adjusted EBITDA as a percentage of revenue was 31.5% in Q4, in line with our outlook and up 30 basis points year-over-year. Excluding the margin dilutive impact of acquisitions contributing in the period, adjusted EBITDA margins were up about 80 basis points in Q4, despite the impact of lower recycle commodity values.

Looking at the full year, EBITDA margins were up 30 basis points on the strength of price-led organic growth and E&P waste activity in spite of the 70 basis points impact from recycling.

Fuel expense in Q4 was about 3.7% of revenue, up 10 basis points year-over-year. We averaged approximately $2.65 per gallon for diesel in the quarter, which was up about $0.04 from the year-ago period and down about $0.07 sequentially from Q3.

Depreciation and amortization expense for the fourth quarter was 14% of revenue, up 10 basis points year-over-year due to increased depreciation and amortization expense from acquisitions closed since the year-ago period.

Interest expense in the quarter increased by $2.7 million over the prior year period to $35.2 million, due primarily to higher total borrowings as compared to the prior year period. However, this increase was partially offset by $1.5 million in higher interest earnings from invested cash balances. Net of interest earnings, interest expense in the period was $31.7 million, up $1.2 million year-over-year.

Debt outstanding at quarter-end was about $4.2 billion, approximately 23% of which was floating rates. And our leverage ratio, as defined in our credit agreement, ended the year at 2.45x debt-to-EBITDA, with cash balances of almost $320 million.

Our effective tax rate for the fourth quarter was 20.3%, slightly lower than expected. GAAP and adjusted net income per diluted share in Q4 were $0.50 and $0.63, respectively.

Adjusted net income in Q4 primarily excludes the impact of intangibles' amortization and other acquisition-related items and impairments. As noted earlier, the impact to our adjusted net income per diluted share from recycling was a drag of about $0.02 in Q4.

Adjusted free cash flow in 2018 was $879.9 million or 17.9% of revenue and approximately $20 million higher than expected and than anticipated due to better-than-expected collection activity on the final day of the year, essentially pulling some 2019 cash flow into 2018.

I will now review our outlook for the first quarter and full year 2019. Before I do, we'd like to remind everyone, once again, that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statements and filings we've made with the SEC and the securities commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully.

Our outlook assumes no change in the current economic and operating environment. It also excludes any impact from additional acquisitions or divestitures that may close during the remainder of the year and expensing of transaction-related items during the period.

Looking first at the full year 2019. Revenue in 2019 is estimated to be approximately $5.310 billion. For solid waste, we expect organic growth of approximately 4.0%. This includes price of about 4.5%, with volumes down about 50 basis points, due to the remaining shedding of poor-quality revenue, primarily the impact of the New York City Department of Sanitation Marine Terminals operations contract with a third party. Underlying volumes are expected to be essentially flat.

Adjusted EBITDA in 2019, as reconciled in our earnings release, is expected to be approximately $1.705 billion or about 32.1% of revenue, up about 30 basis points year-over-year in spite of over 30 basis points of dilutive margin impact from approximately $200 million in rollover acquisition contribution already in place for the year.

Regarding tax rates. We noted in our earnings release that late in December 2018, the IRS released proposed regulations associated with the Tax Act that we believe, if finalized, could impact our current effective tax rate of 21.5%. Depending on the final form of any proposed regulations, we estimate that our resulting effective tax rate for 2019 could range between 21.5% and 26.5%.

The proposed regs are not anticipated to be finalized until June or thereabouts, if they do indeed get approved as final, and that timing will impact our effective tax rate from quarter to quarter during the year. For example, our first quarter tax rate in 2019 is not expected to be impacted from these proposed regs and should be about 20% in the period. Excluding these proposed regs, our effective rates for Q2 through Q4 would average about 22%, for a full year effective rate of 21.5%. However, for the full year, our outlook assumes that some form of the proposed regs is enacted and reflects the midpoint of our expected range, or a 24% effective tax rate.

Adjusted free cash flow in 2019, as reconciled in our earnings release, is expected to be approximately $950 million or about 17.9% of revenue. To be clear, the potential tax rate impact from proposed regulations, as noted earlier, has already been considered in our guidance for adjusted free cash flow.

Turning now to our outlook for Q1 2019. Revenue in Q1 is estimated to be approximately $1.24 billion. We expect price growth for solid waste to be in the range of 4.5% to 5% in Q1, with volume of approximately negative 1%, about half of which is due to the purposeful shedding, including the impact of the New York City Department of Sanitations' Marine Terminals operations contract, and additional impact from severe winter weather conditions. Adjusted EBITDA in Q1 is estimated to be approximately 30.9% of revenue or about $383 million, down 40 basis points year-over-year, but up 25 basis points when adjusted for the 65 basis point margin-dilutive impact of acquisitions. This impact is most pronounced in Q1 due to the timing of deals in 2018.

Depreciation and amortization expense for the first quarter is estimated to be about 14.1% of revenue. Of that amount, amortization of intangibles in the quarter is estimated to be about $30.6 million or $0.08 per diluted share net of tax. Interest expense net of interest income in Q1 is estimated to be approximately $35 million. Our effective tax rate in Q1, as noted earlier, is estimated to be about 20%, subject to some variability. The effective rate for the period includes about a $4 million benefit to the provision related to excess tax benefits associated with equity-based compensation.

And finally, noncontrolling interest is expected to reduce net income by about $200,000 in the first quarter.

And now, let me turn the call back over to Worthing for some final remarks before Q&A.

Okay. Thank you, Mary Anne. 2018 was truly a remarkable year, considering the challenges that we overcame and the results we delivered to drive our 15th consecutive year of positive shareholder returns. Completing another sized -- another outsized year of acquisitions, overcoming the headwinds of recycling, certain cost pressures and lower margin acquisitions to drive reported margin expansion and further reducing the frequency of safety-related incidents would be noteworthy in any environment but even more so when facing the constraints of low unemployment in many markets.

These accomplishments would not have been possible without the tireless efforts of our over 16,000 dedicated employees. At Waste Connections, we believe that accountability is integral to everything we accomplish and is ultimately what sets us apart.

Given the headwinds that we were able to overcome in 2018, we appreciate the greater visibility we have coming into 2019, with high single-digit revenue growth already in place, continuing adjusted EBITDA margin expansion and another year of targeted double-digit adjusted free cash flow per share growth. And, again, any increases in solid waste volumes, E&P waste activity or additional acquisitions would provide further upside.

Appreciate your time today, and we'll now turn this call to the operator to open up the line to your questions. Daisy?

(Operator Instructions) Our first question comes from the line of Brian Maguire with Goldman Sachs.

Ron, if you're listening, hope all is well. Hope to hear some good news. Guys, just a -- trying to put aside the quarter and the outlook, just kind of a bigger-picture question for you to start off. It seems like consumer sentiment and mood around single-use plastics, single-use consumable items has been shifting a lot in the last year or so. In Europe, it's certainly -- has moved a lot of our packaging companies. We are seeing the impact of that. And you guys seem to be sort of part of the solution potentially with your recycling operations. There has been sort of a push to increase recyclability of single-use items. But obviously, the economics of that aren't really great, especially these days. But potentially, this could morph into more than just the war on plastics could become more war on waste. And just thinking about how do you guys really think about that impacting your business over the longer term. Obviously, it's not something that probably is going to impact 2019 or maybe even 2020. But just -- do you expect that we'll see tighter regulation on landfill expansions? Or could states and municipalities sort of view expansion of landfills as encouraging more waste? Any efforts you guys can do to increase the recyclability of items? Or is it -- are we really just dependent on getting some government help for things like that?

Well, Brian, you stopped your year count at 2020, and I suggest you probably have to go well beyond 2020 before you'd see any impact notable within our business. I mean, clearly, bifurcation and separation of the waste stream at the source is a growing trend. Obviously, we applaud that because it helps the purity of what's going through our facilities. And obviously, what folks are also realizing when you try to do increased source separation to improve recycling and recovery, that costs more money. And so you do have this intersection of desires to recycle, maybe reuse, intersecting with the likely increase in cost to do so. But I'd say in the near term, which easily is looking at over the next decade or more, I don't think you'd see a notable impact in anything within our business. Now are we always looking at new technologies to improve our processing capabilities in our facilities? Absolutely, but that's evolutionary; it's not revolutionary.

Okay. Appreciate the color. And just switching gears and, Worthing, your comments on the M&A environment certainly encouraging. I guess, you obviously mentioned you've done a lot of deals in the last 2 years. Just wondering how you would balance the need to integrate those deals effectively and the risk involved with that versus the opportunities that you've got in front of them? And do you think 2019 is going to be more of a year of just integrating what you've already done and digesting it? Or could this be another front-forward year where we see something similar to what we saw in 2018?

Well, obviously, it's hard to predict the ultimate amount we do in 2019. But I'd back up to your first question around integrations. We -- these are some gold-plated companies that were acquired in 2018, with fantastic management teams. In fact, if you start with the biggest transactions and work your way down from the bigger transactions, the existing teams that were running the businesses have stayed with the businesses. And so it's if -- it's required very few heads on our side to relocate into these operations. And so it's not stressed our bench at all. What I'd say on how are they doing, I'd look no further than the initial company we purchased in 2018, Bay Disposal. And you looked at the integration of Bay Disposal and the adoption of our culture, bay Disposal led our company last year in incident reduction down almost 70% and exiting the year with a single I-rate moving forward. And again, so I think we don't wait, sit around and hope the integration happens. I think the team hops on at early on. I think the support that we give acquired companies is second to none. It's not like we buy a business and all of a sudden start believing that we can jam them with e-mails and jam them with requests. What we do is we flood them with people to support and grow and develop the business and integrate the business immediately, not the other way around. So I'd say the success in '18 and the amount of activity done in the past 2 years is no way precluding us from what we could do in '19. And again, we remain well positioned should '19 become another outsized year.

Our next question comes from the line of Hamzah Mazari with Macquarie Capital.

My question is on M&A as well. Could you maybe talk about how you're managing to keep returns on capital on these deals similar to what you've done historically, just given valuations have stepped up in the private market? So any thoughts on returns on deals?

Sure. And as we've said before in prior calls, clearly, multiples have gone up a 0.5 turns to 1 turn or so over the past couple of years, but that's a combination of things. I mean, initially, was -- it was a combination of very high-quality companies we're buying with high-quality assets, meaning companies that had overinvested in -- prior years up to sale. And obviously, that means if you're looking at returns on a cash-on-cash basis, those returns benefit from lower CapEx required early on in -- after acquiring the business. By the way, the inverse happens too when we take out in evaluations if someone's underinvested and we think we have to overinvest post-closing. So that's what initially drove it a couple of years ago. Obviously, the change in tax law with regards to lower tax rates in the U.S. and immediate expensing of acquired capital based on how the deals are structured, that also accelerates, obviously, cash flow and lower tax rate, puts more cash flow in our pocket, too. And so we haven't seen a major change in target IRRs. I mean, it's just the fact that the other changes that affect how we deduct our purchase price, how we can accelerate cash flow delivery, as well as the quality of the assets, also drives those returns.

Great. And just a follow-up question. On the volume side, is your commentary just incrementally more cautious? Or is it just conservatism? I guess underlying volumes are flat, but it feels like the U.S. consumer is still pretty strong. The job market is strong. GDP is up. So just how do you disconnect in sort of your volume commentary? Is it a comp issue? Or just any thoughts there?

No, I wouldn't say any disconnect or change in what we're seeing. I would start by reminding that we always come into every year pretty cautious after coming off -- we had 5 years in a row of very volumes. Last year, not on a reported basis because of the shedding, but continued strong underlying volumes, as we've discussed, in the places like the West Coast, which we highlighted in Q4. The other thing I would note, Hamzah, is in the last 2 quarters, we've guided to volumes being down 50 to 100 basis points, and we've beaten by -- on that by almost 100 basis points in both cases. So as we come into this year, and we saw the weather in January, and of course we have already described the purposeful shedding that we already know about that's hitting '19, we think it's prudent to guide to volumes being flat and letting volume be upside. But to be clear, no change in what we're seeing out there.

Yes, Hamzah, as we've been saying all along, we think the U.S. economy generally is in that 1% to 2% range. And the Canadian economy is somewhere in that 0 to 1% change, the growth from an underlying basis. And I'd also point out, I mean, you can slice and dice stuff as much as you want, you can say tongue-in-cheek, if you excluded all the negatives, volume is nicely positive. So I mean, you got to be careful about what you want to exclude and try to lead a message. But we think it's always better to be cautious and let volumes be upside.

Yes. Got you. Just last question and I'll turn it over. The proposed regs that are impacting taxes for you, is that specific to you because of a tax inversion that you guys did? Or is this sort of common for most companies?

So, Hamzah, to answer to your question about proposed regs, they do include some potential limits on the deductibility of interest in the United States, which could impact us if they get promulgated as proposed. And so that's why we mentioned them, and I think it's prudent in our guidance to include that midpoint of the range of where they could end up. But, again, to be clear, nothing's happened yet and they won't impact Q1.

Yes, the thing with all the companies with cross-border intercompany finances, I would say is the capital is flowing across countries, this could get caught in. So it's any company with multinational operations.

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

Our thoughts go out to Ron. But, Mary Anne, I appreciate the Q1 guide. But could you guys put a finer point on the progression of the change in EBITDA margins as the year progresses? It sounds like you're going to be most burdened with the rollover of M&A early in the year, and then that abates as the year progresses, is that the right way to think about it?

That is, Tyler, yes. As I said, it's over 30 basis points for the full year, and the cadence would be as follows: It's about a 65 basis point margin dilutive impact in Q1. And that increase -- decreases to about 40 basis points in Q2, steps down to about 20 in Q3 and mostly down by Q4, but about 10 basis points in Q4. So that overall, that works out to be between 30 and 35 basis points for the year.

Okay, very helpful. And then, Mary Anne, I know this is very fluid. But what is your expectation for cash taxes as a percent of that 24% book accrual?

Yes. So the expectation for cash taxes as a percentage of book is about -- between 60% and 65%.

Okay. And does that change as time goes on? Will that go higher?

As we've said, to be clear, our $950 million in free cash flow guidance are -- already incorporates the consideration for our expectations around taxes.

It obviously does. If you go all the way out to 2023, when bonus depreciation expires, obviously, you start at 60%, 65%. It starts migrating above 85%, 90%, especially when you intersect it at 2023, when most of your CapEx outlays over the prior 5 years have been fully expensed.

Okay. And then, Worthing, this is a conceptual question. But you guys are guiding to, say, 60 basis points of core solid waste margins on a very healthy 4.5% price. Your larger competitors are guiding to, give or take, say, 30 basis points of margin expansion, with 2% to high-2% pricing. So where do think the disconnect is? Is it that you are being conservative? Or do you have some sort of differing unit cost inflation set up? Am I reading too much into this? Or just any thoughts broadly there?

Look, I don't know what's driving the outlook of other companies in the space. All we can address is how we look at things. Look, if you just look at our experience quarter-to-quarter, quarter in and quarter out, our year-in and year-out, we try to put numbers out there in February that provide enough push and as we look at the entire year for the proverbial unknowns that can hit you. And, obviously, if we we're able to dodge more of those unknowns, you'll see nice upside to our outlook. Putting numbers out there and then re-crafting the truth as you move through the year to try to reinterpret people's perceptions, it's not what we try to do during the year. We just lay it out all there and let our numbers speak for themselves.

Okay, that's helpful. And then just one last one. Mary, I think you mentioned 2.45 debt-to-EBITDA today. Curious, can you talk about what you view as your optimal capital structure? Where do you kind of want that leverage ratio long term?

Sure. We're certainly very comfortable being higher than that in, sort of in the 2.75 range we think is a good place to be. Because what we know is that we could then -- with the ability to take leverage up to 3.5x or even higher for an outsized deal to the extent that opportunity were to present itself. But what we know is we'll delever dynamically about 0.5 turns within a year, and we like staying in that to 2.75 to 3x range.

Our next question comes from the line of Derek Spronck with RBC.

Just on the proposed changes, tax changes, should we assume that the cash flow impact would be the differential of the effective tax rate of 24% from 21.5%?

Well, as I said, Derek, we think of it more that this impacts GAAP and really is less a matter of cash and that's why we tried to give you free cash flow guidance that says, "Look, don't worry about that; we've already factored that in." It's really a GAAP issue.

So technically, there wouldn't be much of a -- if the regulation didn't come through, there wouldn't be much of a free cash flow tailwind? Is that correct?

Yes. As you know, we try to come into the year with some visibility on what we think we can deliver, and that's how we factored in the $950 million. And so at this point, we'd leave it at that. And I think what's helpful is that we'll know more in April when we're on this call. And so we'll be able to give clearer guidance.

Remember, we apologized for overdelivering in 2018. So let's -- don't start raising $950 million on us right now.

Okay. It's the opposite of what I usually do is over promise, under deliver. But just moving on to some of the items in the 10-K. You have 14 landfills that you're seeking expansion and it also indicated around 10% of your core forces is going through a -- or will be a going through a collective bargaining agreement in 2019. Is this just a standard business for Waste Connections? Or is there any risk that could be tied with those 2 developments?

I'd say pull out all the prior Ks and you'll see similar ratios. This is just standard fare in solid waste business. When you have a large portfolio of landfills, every company is going through episodic expansions. That's common. Obviously, when you have a large workforce and multiple underlying contracts with unions, we're negotiating those all the time. We just got a couple finished earlier this year already. And so that's just part of the day-to-day blocking and tackling.

And I would just add that -- I would just add, Derek, that a number of the landfills with the shorter lives are very small. And probably one of the largest is one that's been on there literally for years where we have another landfill right in the same market, which -- so we've been anticipating this closure.

Okay. Got it. That's great. And then just one more for myself. Free cash flow as a percent of revenue, originally it was around 15% that was a sustainable run rate. 2017 was 16.5%. 2018, 18%. And it looks like 2019, it's shaping up to be in and around 18%. Is that largely from the changes in the cash tax regime? Or is it partly due to the -- you leveraging the economies of scale? Or how should we think about that ratio on a sustainable basis here?

sWell, we've always said, don't own us for our 55% EBITDA-to-free-cash-flow conversion. That will be coming down over time. It'll probably go into the low 50s, not the mid-50s. And so we fully expect that to come down over time. Obviously, as we talked before, as cash taxes go up, as bonus depreciation expires in 2022. And so that will always move down over the course of time. But as we sit here today, we don't see anything lowering that -- bringing that below 50% anywhere, anytime soon. But again, as you know, as we've always said, as you look at EBITDA- to-free-cash-flow conversion, and we always say that not only [does that] create the amount of cash flow, it's a combination of, obviously, a -- the financial profile and the performance we have on our collection side of the business, which, again, is 60-plus percent of revenue. It's a combination of -- and that's lower asset-intensive business. It's a combination of how we structure the acquisitions and looking for our bases in transactions and that impacts cash taxes. So there are a host of things that drive comparisons against other companies. But again, for us, 55%, don't model that long term. We've been consistently saying that for some time now. We'll enjoy 55%, we can do it, but that's not a long-term number.

You have pretty good visibility, though, up to 2020, though, that should be in and around that level, is that correct?

Yes. We try to have visibility on that.

Our next question comes from the line of Noah Kaye with Oppenheimer.

First, just a quick math question on the recycling. So assuming the basket's down 15% year-over-year and that sort of decrementals continue, this is a about a $10 million to $15 million EBITDA headwind for '19? Is that right?

No. I mean, that's mostly a Q1 thing we're talking about here, because Q1 was the toughest comp year-over-year. Once you get past Q1, it's nominal.

Okay. So the full year headwind, we're talking mid-single digits?

Couple million bucks.

Yes.

Okay. And then, just to piggyback off of earlier tax cash question. So essentially, you had a very low accrual in '18. You go into '19 and basically you're looking at cash taxes at about a $70 million or so headwind year-over-year. So, essentially, what I read into this is that underlying free cash flow growth is in the double digits. Is that a fair statement?

Again, we did point out that we essentially overdelivered in '18. And so I do think if you back that out, you do see a nice underling growth beyond what we're showing here. So, yes, you're right. We had the big over-accrual coming into '18. And so on a reported basis, our cash taxes will be up about $75 million year-over-year, and we'll continue to deliver free cash flow. So that is there.

Okay. Great. And then maybe one last one. I walked past a Waste Connections' hauling truck this morning in New York City. And after reading a lot of press around plans for New York City to move towards commercial zone franchising and the experience that L.A. has had so far, I guess, generally, do you see this as a medium-term trend in more of your urban markets? And if so, how positive or negative do you think it is for Waste Connections?

No. We don't see this as a trend. I mean, L.A. was late to party relative to most markets on the West Coast. New York City, it's just something that makes sense in that tight operating environment. Dozens of trucks shouldn't be crisscrossing each other on crowded streets at all times of the day. And the risk profile is just too high for many operators. The quality of equipment that they can take on the street is very low because of the connection positions they're in. And so it makes sense for New York to follow on the heels of L.A. Now how New York structures it in the end, it still remains to be seen, but we don't see this as a trend in other markets.

Our next question comes from the line of Michael Hoffman with Stifel.

If you do no deals in '19, can we continue to think about the structural organic growth of solid waste is in between 4% and 5%?

Yes. We've been consistently saying it's between a 4% and 6% number, especially with this CPI and this pricing environment being 4.5-plus percent.

Okay. And then, again, no deals in '19. How long does it long to recover that 30, 35 basis points of '19's dilution from deals?

Recover? Again, what you have is the acquisitions within the embedded in the base calculation. And so then you're looking at a jumping off point, again, up 30 basis points year-over-year coming out of '19. Then, obviously, if you don't have the rollover of getting dilutive transactions in the year, again, you're looking at that typical 30- to 40-basis-point-type margin expansion in 2020, albeit let's wait and see how the economy is. But, no, again, what -- when you've got the -- got such a large denominator right now, it's rather acquisitions move the needle on a notable basis. But when you have a deal as large as American, at 3.5% of revenue coming in at comparative margins down 600 basis points because it's collection oriented, that's about a 20 basis point impact to consolidated margins. But, again, if it's -- it depends on the size of the year of acquisitions. Obviously, if you do no deals, which we've never done, then you don't have that influence on the reported margins going forward. As Mary Anne said, as you begin to anniversary the deals, as we did last year, you see less and less of a drag in the reported numbers. And, therefore, the printed margin expansion will be a lot higher as you move through the year relative to how we start the year.

Right. I was just trying to draw that out. And then, to be clear, you see no line of business of weakness, no regional weakness, prospects are probably flat housing, consumer remains engaged?

As I said earlier, there's nothing that's changed that would influence our volume outlook. We think it's pretty consistent with the way we've been communicating volumes for the last 2 quarters. And again, guiding down and then delivering better than that. And we'd prefer to start the year the same way.

As you know, Michael, this is just a fixed-bill system business, that if you have a high market share model, generally is the tone of the underlying economy that's going to drive volume growth and reported numbers. Our business is not about market share grabbing. It's about servicing the underlying markets that we operate in.

Yes. And my question wasn't specific about volume. It was about a macro view. You're not seeing line of business weakness. You're not seeing regional weakness. Housing, I'm assuming you're saying you think it's going to be flattish. And you still see the consumer engaged. That's what I was asking.

That's correct. That's all a fair statement. And we saw that in January to confirm at least 1 month of 2019.

Okay. And then, just 2 more questions, just to clarify something. If you're doing double-digit per share growth and free cash flow, obviously, you're going to be pretty active in the buybacks, because you've got to average at least 2%, this the right way to think about that, right?

Yes. I mean, as we've already said, if you look back the past several years, the numerator has been what's -- then a key driver to high teens CAGR on free cash flow per share growth so there's large, large numbers proceed, you've got the combination of higher numerator and lower denominator and that actually comes into play because we're just spitting out more cash flow than we need to deploy in acquisitions because, again, we're cash funding all acquisitions, we're delevering the balance sheet. We've got more than enough to pass the flexibility to affected numerator and the denominator going forward.

Right. And then last for me, just to be clear about an earlier question. Waste Connections is completely indifferent about what they would do with the trash once they collect it, as long as you generate a reasonable return, you deploy it. So whatever changes may come slowly, you'll be able to react to, because you'll control it at the curve in the loading dock?

No one’s -- no one around here is changing their stripes, Michael, that's right.

(Operator Instructions) Our next question comes from the line of Chris Murray with AltaCorp Capital.

Just following on, maybe, on Michael's question a little bit around the free cash flow guidance. So the number year-over-year looks to start at around 8%. And so, I guess, a couple of pieces of this. First of all, we're expecting kind of high single-digit revenue growth. You would've expected it would have been higher. What's the drag embedded in that number from the tax change? I guess, the first piece of that. And then, second, if I think about -- if you think about your target leverage, you're sitting, call it, $300 million in cash, you're going to have the free cash flow generation, should we start thinking about maybe a change in how you approach either the buyback or something like that? I mean, historically 2% to 4% of shares is bought back, but is there any opportunity to maybe step up that number as that free cash flow number expands?

As you know, everything's possible. And, again, that's a flexibility that we have. Again, if you look at the free cash flow, we look at it as, actually, a double-digit growth because, again, last year, we were talking about $860 million. And looking at a 2019 of $950 million that's a little over 10% growth in free cash on a dollar basis. We've already apologized for giving $20 million more in 2018 and delivered $880 million instead of $860 million. But, again, it's too early to change the target of $950 million. And, frankly, what that means is, we probably could have done $970 million or more if that $20 million cleared the bank on January 2 instead of December 31. And so what's the difference of a day make? That's the difference that a day makes. So we're less focused on that. That's just the timing issue of when some checks cleared.

And, I guess, the other piece of it, regarding leverage and the ability to do more in terms of buybacks. As Worthing said, there are number of things that are possible, and we have so much flexibility, we continue to believe we're in a period of outsized M&A activity, as Worthing had said. And so that will continue to be our highest and best use of cash. But, again, we exited the year at sub-25 with over $300 million in cash on the balance sheet and guided to $950 million in free cash flow. So that's $800 million after the dividend. So we had ample firepower to do what we did last year.

Yes, as you know also, Chris, we are the ultimate owner of our stock so we have to be very patient when we pick the time to go to the market and buy. We bought in February's dip last year. We bought in December's dip last year. And so I think our average repurchase price was around $71. And so it's that in addition to deploying over $1 billion in acquisition. Again, we spent over $1.2 billion on M&A and we returned the capital to shareholders and our leverage declined. So, again, we just feel fortunate to be in this position to, first and foremost, deploy our capital on strategically consistent and appropriately priced M&A opportunities. And then, that as long as the runway is still long for us on that opportunity, then dabble in the stock market optimistically. Now we have reason to sell our expectations overinflate, and deal activity slows down a little bit, and cash is building up -- obviously, we don't sit on cash -- we'll pick our spots in the market and step in, in a larger way.

Okay, fair enough. And sorry, just the -- what was your expectation, the tax change on the $950 million guide?

Again, what we've tried to say is that, we think this is a GAAP matter. And that on the free cash flow guide, we've already factored in the changes to taxes. So it's not a free cash flow impact.

All right. Great. Just going back to, sort of, the timing as we think about the purposeful shedding, particularly in Canada, I mean, a 6.2% price number, you got to be thinking that that's got to step down a little bit as you anniversary the shedding and maybe flatten out the volume number, even if you're going to go to a 0 number. How should we think about the cadence as we move through '19 in terms of, call it, the normalization of that price growth?

Yes. You're right, Chris. And certainly, what you saw in Q4 on that continued high price in Canada, a lot of that is because of price increases that were put in, in late '17 and into '18. And when, as you know, that was very purposeful. And as we said really, all of last year, that price stuck better than we expected and volumes took longer to go away than we would have expected when we really started that in earnest in '17. What you should expect to see during 2019 is that price will start stepping down. As Worthing said, even a reported basis, when we guide just 4.5% for the full year, it will start higher than that. And we exited Q4 2018 already higher than that, you should expect it to be higher than that in Q1 and step down over the course of the year. And I would expect Canada, in particular, to follow that same pattern over the course of '19.

Okay, fair enough. All right. And just one last one for me. Just kind of following up. You'd mentioned, you're spending some CapEx on some E&P landfills, and I think they're supposed to be operational towards the middle of this year. I guess, first of all, I just want to confirm or update where we are with those projects.

And then, anything we should think about and I know you previously talked about some EBITDA margins, but anything that's going to be odd in the startup of those? Or should be just assume that as they start taking volumes that we should see, call it, normalized margin profiles on the way in? Or will there be some sort of dilution that we should expect in the back half of the year?

Obviously, depends. But the initial cost ramp, you won't noticed in our overall consolidated business because it's not normally compared to the size of our business. But obviously, the first revenue that comes in dollar-for-dollar we'll cover cost, right? And once we start exceeding that cost, because of the fixed-cost nature of that business. Then you start seeing the incremental flow-through become a lot higher. So it all depends on the speed of the ramp, as regards to the timing. One of our will landfills likely start doing its trial start during Q2. And so we're ahead of schedule on that one. Another project that we -- is still under construction right now that will probably start ramping early in the third quarter. And so that is on schedule with our original schedule, because we're somewhat cautious on that. So, no, it's, again, -- and what we've tried to say is that, look, the ramping of that, for -- of either of the new projects and the other ones we're working on, we view that as being just potential upside to the way we've guided for the full year.

Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets.

I was hoping to get an update on the labor capacity and wage inflation challenges. Perhaps relative to when you guys reported in the fall, I was just hoping to get some context on things like turnover, safety incidents and whether those things have stayed in check or worsened or maybe improved a little bit? And perhaps just what their main sort of goal and focus area is in terms of addressing these challenges in '19?

Sure. So I can start. Certainly, first of all, with respect to safety, as Worthing noted, safety did continue to come down in 2018. And you saw a high single-digit decrease on our incident rate in 2018. We're in the dead of winter and had a January with severe weather. That certainly impacts safety and we're certainly mindful on paying close attention to it in Q1.

In terms of turnover, really the remained in that -- we've been in that kind of 25% to 26% or 27% range on turnover. Haven't seen a market change there. What we really said all of last year is that we were pleased that it just wasn't getting much worse, given the constraints on labor. And what we saw with real wage increase in Q4, it was about where it was, it was a little higher than in Q3, high 4s, between 4.5% and 5% would be the same employee wage increases. Of course, that is mitigated or muted in the P&L by the turnover. But that's what the wage increases are. And as we think about '19, as I think we've communicated, we've taken a look at things like our benefits that increased our 401k match. And then, done some things to make sure that we remain the employer of choice and have the benefits that we think are appropriate for our employees. And those costs are factored in to our guidance for 2019.

Yes, Sean, the -- to Mary Anne's point about higher 401k contributions and the matching that we're doing, we've just faced that and include in our outlook, that's about a 30 basis point headwind year-over-year. So we while guided a 30 basis point improvement in margins, obviously, if I adjust for the anticipated increase of 401k contributions, that would have been a 60-basis-point margin expansion for the full year. But we're anticipating, again, increased participation and folks to be deferring more of their eligible compensation for that.

Really helpful. And my next question is just going back to the M&A. I was hoping to -- you guys are indicating an elevated environment continuing this year. I assume there is a pipeline of targets that are sort of in negotiations getting close. And out of those targets that are at -- in advanced stages, I was hoping to get a sense for the mix of kind of collections-only versus integrated or maybe nonsolid waste, to get a sense for what could be added this year.

Again, like most years, we've got a couple of integrated, meaning collection and landfill, but then there's a large number that are collection only, that either tuck into our existing operations that could be internalized in our facilities, or new market entries as well. So it's just -- it's a standard mix as we sit here right now. And it's all solid waste-oriented right now.

Okay, got it. And just lastly for me. I'm just trying to get a -- get an idea for what the risk to this acquisition environment is. Is there a potential for more private equity to swoop in? What could choke off some of this elevated deal activity?

Well, obviously, as we talked about on our last call, I mean, episodically, you've got -- whether it'd be PE or PE-backed companies that come in and take a different look at the value of things on EBITDA and our cash flow. Sometimes that -- that's an interruption. Sometimes we don't get all the deals we think we might get. That's fine. I mean, our view has always been, you can never recover from overpaying. So that's, obviously, a potential of interruption, and we're fine with that. I mean, again, we're taking the long view here as we know companies that pursue growth for growth's sake don't end well. The debt could get paid off, the banks are safe, but the equity is always at risk. And so we've got to play the long game here, and not be tempted into doing foolish things. And, again, I think the track record you've seen over 21-plus years validates that.

(Operator Instructions) Mr. Jackman, there are no further phone questions at this time.

Well, great. Thank you. If there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and I are available today to answer any direct questions that we did not cover, that we're allowed to answer under Reg FD, Reg G and the applicable securities laws in Canada. Thank you, again. And we look forward to speaking with you at upcoming investor conferences or on our next earnings call. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.