Waste Connections, Inc. (WCN) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections Fourth Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [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 are 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 dividend, and opportunistic share repurchases. Before we get into much more detail, let me turn the call over to Mary Anne, for a 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 commitments 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 range from approximately 3% in our more exclusive markets in the western region to an average of about 5.5% in our more competitive region. 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, yet 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 continue 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 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. 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 of about 3% led by increases in the Northeast and California, and C&D tons of 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 tougher 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 remain between zero 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 averaged 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 we typically seen. We've 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 will have 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 two years of outsized activity during which we essentially completed four years worth of acquisitions, we continue to believe that the factors that that review 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 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 full-year 2019. I will 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 in 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 recycled 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 point 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 rate, and our leverage ratio as defined in our credit agreement ended the year at 2.45 times 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 intangible 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 -- has been 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 Commission 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 at 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 rate 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 impacts 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 Sanitation marine terminal operation contract, and additional impacts 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 taxes. 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, non-controlling 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 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 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. I appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions. Stacey?

Thank you. [Operator Instructions]. Our first question comes from line of Brian Maguire with Goldman Sachs. Please proceed with your question.

Hey, good morning, Worthing, and Mary Anne, and Ron, if you're listening, I hope all is well. Hope to hear some good news. Guys just like -- 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 and certainly has moved a lot of our packaging company and the impact of that. And you guys seem to be sort of part of the solution potentially with your recycling operations 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, more than just a war on plastics could become more of a war on waste. And just thinking about how do you guys really think about that impacting your business over the longer-term. Obviously not something that probably going to impact 2019 or maybe into 2020 but do you expect that we'll see a tighter regulation on landfill expansions or could states and municipalities sort of do expansion of landfills as encouraging more waste, any efforts you guys can do to increase the recyclability of items or are we really just dependent on you getting some government help on things like that?

Well, Brian, you start your year count at 2020 and I suggest you probably have to go well beyond 2020 before you see any impact at notables 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. But obviously what folks are also realizing when you try to do to increased source separation and 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 looking out 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, I appreciate the color. Just switching gears and Worthing your comments on the M&A environment certainly encouraging. I guess you've actually mentioned, you've done a lot of deals over the last two 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 got 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 back up to your first question around integration. These are some gold plated companies that were acquired in 2018 with fantastic management teams. In fact, if you start with the biggest transactions that work your way down from the bigger transactions, the existing teams that we're running the businesses have stayed with the businesses. And so, as you said, this required very few heads on our side to relocate entities operations. And so it's not stretched our bench at all. What I'd say on how are they doing. I'd look no further than initial company we purchased in 2018 Bay Disposal and you look at the integration of Bay Disposal and the adoption of our culture, Bay Disposal led our company last year in an incident reduction down almost 70% in exiting the year with a single irate moving forward. Again, so I think we don't -- we don't wait, sit around and hope integration happens. I think the team hops on that 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 request. 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 2018 and the amount of activity done in the past two years is no way precluding us from what we could do in 2019. And again we remain well-positioned should 2019 become another outsized year.

Okay, great to hear. I'll turn it over now. Thanks.

Thank you. Our next question comes from the line of Hamzah Mazari with Macquarie Capital. Please proceed with your question.

Good morning, thank you. 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 half a turn to a turn or so over the past couple of years. But that's a combination of things. I mean initially it was combination of very high quality companies we're buying with high quality assets meaning companies that had overinvested in the 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 after acquiring the business. But with the inverse happens too and we take that out in valuations if someone's under invested 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 required 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. It's just a 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 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 any disconnect in sort of your volume commentary, is it a comp issue or just any thoughts there?

No, I wouldn't say any -- 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 and we had five years in a row very strong volumes. Last year not on a reported basis because of the shedding but continued strong underlying volumes as we've discussed in places like the West Coast which we highlighted in Q4. The other thing I would note, Hamzah, in the last two 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 2019. We think it's prudent to guide to volumes being flat and letting volumes 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 somewhere in that 0% to 1% change growth from on 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 it's tongue and cheek. If you exclude all the negatives, volume is nicely positive. So I mean you got to be careful about what you want to exclude and trying to lead a message. But we think it's always better to be cautious and let volumes be upside.

Got it. Just last question, 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? Thank you.

So Hamzah to answer 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 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.

It affects all companies with cross-border intercompany financing. I'd say capital flowing across countries this could get caught in, so if any company with multinational operations.

Thank you. Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey our thoughts on Ron. But hey, Mary Anne, I appreciate the Q1 guide. Sorry excuse me 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 decreases to about 40 basis points in Q2, steps down to about 20 basis points in Q3, and mostly down by Q4 but about 10 basis points in Q4. So 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 said to be clear our $950,000 in free cash flow guidance are already incorporates a consideration for our expectations around taxes.

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

Okay. And then more than 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 two to high two pricing. So where do you think the disconnect is, is it that you're being conservative or do you have some sort of differing unit cost inflation setup. Am I reading too much into this or just any thoughts broadly there?

Well, I don't know what's driving the outlook of other companies in the space. All we can addresses is how we look at things. Look just look at our experience quarter in and quarter out or year in and year out, we try to put numbers out there in February that provide enough cushion as we look at the entire year for the proverbial. Unknowns that can hit you and obviously if 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 is not what we try to do during the year. We just lay it all out there and let our numbers speak for themselves.

Okay, that's helpful. And then just one last one. Mary, I think you mentioned two spot four or five 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? Thanks.

Sure. We're certainly very comfortable being higher than that and 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 3.5 times or even higher for an outsized deal to the extent that opportunity were to present itself. But what we know is we'll de-lever dynamically about half a turn within a year and we like staying in that 2.75 to 3 times range.

Thank you. Our next question comes from the line of Derek Spronck with RBC. Please proceed with your question.

Hi, good morning Worthing and Mary Anne. Thank you for taking my questions. 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 a bit 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 it, 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 $950,000. So at this point, we'd leave it at that. And I think what's helpful is we'll know more in April, when we're on this call and so we'll be able to give clearer guidance.

Okay great.

Remember we apologize for over-delivering in 2018. So let's -- don't start raising that just to be honest right now.

Okay. It's the opposite of what I usually do is overpromise 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 workforce is going through or will be going through a collective bargaining agreement in 2019. Is this just the standard business for Waste Connections or is there any risk that that could be tied with those two development though?

I'd say pull out all of the prior case and you'll see similar ratios. This is just standard fare of solid waste business when you have a large portfolio of landfills; every company is going through or 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 of finished earlier this year already and such as part of the day-to-day blocking and tackling.

And regarding that, I would just add, Derek, that a number of the landfills with a 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 we've been anticipating the 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% but it was a sustainable run rate. 2017 was 16.5%, 2018 18%, and it looks like 2019 is 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 leveraging economies of scale or how should we think about that that ratio on a sustainable basis here?

Well, we've always said don't own us for 55% EBITDA to free cash flow conversions. That will be coming down over time; it will probably go into the low 50s not the mid 50s. And so we fully expect that to come down over time obviously as we talk before as cash taxes go up, as loans 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, the free cash flow conversion that we always say that not only EBITDA creates same amount of free cash flow, that's a combination of obviously 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 net lower asset intensive business. It's a combination of how we structure acquisitions and looking for our basis and transactions. And that impacts cash taxes. So there are a host of things that 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 looked at 2020 though that should be in and around that level; is that correct?

Yes, we try to have visibility on that.

Okay. Thank you very much. I'll leave it there.

Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Hi, good morning. First just a quick math question on the recycling so assuming the basket is down 15% year-over-year and that sort of decrementals continue, this is about $10 million to $15 million EBITDA headwind for 2019; 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 --

Couple of million rise, couple of million rise.

Couple of million, okay. Okay. And then just to piggyback off of a earlier cash tax question so essentially you had a very low accrual in 2018. You go into 2019 and basically you're looking at cash taxes that's 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 over-delivered in 2018. So I do think if you back that out, you do see a nice underlying growth beyond what we're showing here, so yes, that you're right. We have the big over accrual coming into 2018 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 fair.

Okay great. And then maybe one last one. Walk past Waste Connections hauling truck this morning in New York City and after you've been in a lot of press around plans for New York City to move towards commercial its own franchising and the experience that LA 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 LA was late to the party relative to most markets in the West Coast. New York City, it's just something that makes sense in that tight operating environment, dozens of trucks will be criss-crossing 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 the equipment that they can pick on the street is very low because of the financial positions they're in. And so it makes sense for New York to follow on the heels of LA, and 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.

Thank you. Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.

Hi, Worthing and Mary Anne. Thanks for taking my questions. If you do no deals in 2019, can we continue to think about the structural organic growth in solid waste is in between 4% and 5%?

Yes, we've been consistently saying its tune of 4% and 6% number; especially with this CPI in this pricing environment being 4.5-plus-percent.

Okay. And then again no deals in 2019. How long does it take to recover that 30, 35 basis points of 2019 dilution from deals?

Recover. Again what you have is the acquisitions would then be embedded in the base calculation and so then you're looking at jumping half point again up 30 basis points year-over-year coming out of 2019 then obviously if you don't have the rollover of any dilutive transactions in the year, again you’re looking at that typical 30 to 40 basis points margin expansion in 2020 albeit let’s wait and see how the economy is. But, no, again look when you've got the -- such a large denominator right now it's rare that 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 depends on the size of the year for 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 deals did last year, you see less and less of a drag in 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.

Great. I was just trying to draw that out. And then to be clear, you see no line of business 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 two quarters. And again guiding down and then delivering better than that and we'd prefer to start the year the same way.

But if you know, Michael, well this is such a fixed bill system business that if you have a high market share model, generally 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 all a fair statement. We saw all that in January to confirm at least one month of 2019.

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

Yes, I mean as we've always said, if you look back for past several years the numerator has been what had been the key driver to high-teens CAGR on free cash flow per share growth. But as the large numbers proceed, you've got a combination of higher numerator and lower denominator that eventually 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, de-levering the balance sheet, we've got more than enough capacity and flexibility to affect the numerator and the denominator going forward.

Great. 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 on the capital you deploy it. So whatever changes may come slowly you'll be out to react to because you'll control it at the curve in a loading dock?

No one around here is changing that drive, Michael. That's right.

Thank you. [Operator Instructions]. Our next question comes from the line of Chris Murray with AltaCorp Capital. Please proceed with your question.

Thanks, good morning folks. Just follow 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 to this. First of all, expecting kind of high-single-digit revenue growth you would have expected it would've been higher. What's the drag embedded in that number from the tax change? I guess is the first piece of that. And then second I think about -- you think about your target leverage or 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 it as a buyback or something like that? I mean historically 2% to 4% of shares bought back, but is there any opportunity to maybe step up that number as that free cash flow number expense?

As you know, everything's possible. Again that's the flexibility 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're talking about $860,000 and looking at in 2019 of $950,000. That's little over 10% growth in free cash flow 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 $950,000 exactly what that means is probably could be $970,000 or more of that $20 million clear the bank on January 2nd instead of December 31st. And so what the difference of a day makes that's a difference of a day makes. So we're less focused on that. That's just a 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 a 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 $950,000 in free cash flow, so that's $800 million after the dividend. So we have ample firepower to do what we did last year.

Yes, as you know, also, Chris, look we are the ultimate owner of our stock, so we can be very patient when we pick the time to go to the market and buy. We bought in February 5th last year, we bought in December 5th last year and so I think our average repurchase price was around $71. And so that in addition to deploying overbuilding and acquisitions again we spent over $1.02 billion on M&A and we've returned 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 because the runway is so long for us on that opportunity. And then dabble in the stock market opportunistically, now for whatever reason the seller expectations over inflate 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 it in a larger way.

Okay, fair enough. I'm sorry. Just the -- what was your expectation to tax change on the $950,000 guide?

Again what we 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 thanks. Just going back to some of the timing as we think about the purposeful shedding particularly in Canada, I mean 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 -- flatten out the volume number even if you're going to go to a zero number, how should we think about the cadence as we move through 2019 in terms of call a 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 late 2017 and into 2018 and when as you note 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 2017. But you should expect to see during 2019 is that price will start stepping down. As Worthing said even on a reported basis when we guide the 4.5% for the full-year, it will start higher than that and then we exited Q4 2018 already higher than that, you should expect it to be higher than that in Q1 and stepped down over the course of the year. And I would expect Canada in particular to follow that same pattern over the course of 2019.

Okay, fair enough. All right. And just one last one for me, just to kind of following-up you had mentioned you're spending some CapEx on some E&P landfills and I think they are 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 had previously talked about some EBITDA margins but anything that's going to be odd in the start-up of those or should we just assume that as they start taking volumes that we should see fairly 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 costs ramp you won't notice in our overall consolidated business because it's nominal compared to the size of our business. But obviously the first revenue that comes in dollar for dollar will cover cost, right. And once we start exceeding that cost because the fixed cost nature of that business, then you start seeing the incremental flow through become a lot higher. It all depends on the speed of the ramp as regards to timing, one of our landfills will likely start doing its crawl start during Q2 and so we're ahead of schedule on that one. Another project that we -- it's still on 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, again and what we've tried to say is that look the ramping of that of either of the new projects and the other ones we're working on we'll look at that as being just potential upside to the way we guide for the full-year.

Thank you. Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Hi guys. Thanks for taking my questions. 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 the main sort of goal and focus area is in terms of addressing these challenges in 2019?

Sure. So I can start, certainly first of all with respect to safety, as Worthing noted, safety did continue to come down in 2018. You saw high-single-digit decrease on our incident rate in 2018. We're in the dead of winter and had January with severe weather that certainly impact safety and was certainly mindful and paying close attention to it in Q1. In terms of turnover, really remained in that and 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 are pleased that it wasn't getting much worse given that constraints on labor. And what we saw with real wage increase in Q4, it was about where it was maybe a little higher than in Q3, high 4s between 4.5% and 5% would be the same employee wage increases of course that's -- that's mitigated or muted in the P&L by the turnover. But that's what the wage increases are. And as we think about 2019, as I think we've communicated, we've taken a look at things like our benefits and increased our 401(K) match and done some things to make sure that we remain the employer of choice and have the benefits that that we think are appropriate for our employees. And those costs are factored into our guidance for 2019.

Yes, Sean, to Mary Anne's point about higher 401(K) contributions and the matching that we're doing, we anticipate that and included in our outlook that's about 30 basis points headwind year-over-year. So while we guided a 30 basis point improvement in margins obviously if I adjust just for the anticipated increase from 401(K) 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 to 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's a pipeline of targets that are sort of in negotiations getting close and out of those targets that are added in advance stages, I was hoping to get a sense for the mix of kind of collections only versus integrated or are maybe non-solid waste to get a sense for what could be added this year?

Again like most few 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 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 an idea for what the risk to this acquisition environment is, is there potential from where private equity to swoop in. What could choke off some of this elevated deal activity?

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

Thank you. [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'll 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 lines.