Republic Services, Inc.

Good afternoon and welcome to the Republic Services fourth quarter 2018 investor conference call. Republic Services is traded on the New York Stock Exchange under the symbol RSG. All participants in today's call will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Nicole Giandonotto, Senior Vice President of Investor Relations and Treasurer.

Good afternoon, and thank you for joining us. I would like to welcome everyone to Republic Services' fourth quarter 2018 conference call. Don Slager, our President and CEO, and Chuck Sirianni, our CFO, are joining me as we discuss our performance. I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our FDC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive, If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 7, 2019. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings, Our earnings press release, which includes gap reconciliation tables and a discussion of business activities, along with a recording of this call, are all available on Republic's website at republicservices.com. Also, included in our press release are unaudited supplemental schedules that include a pro forma view of fourth quarter 2017 revenue and costs had we adopted the new revenue recognition standards as of January 1st, 2017. During today's call, all references to changes versus the prior year are based on the 2017 pro forma figures, which are comparable to 2018 results. Finally, I want to remind you that Republic's management team routinely participates in investor conferences. When events are scheduled, the dates, times, and presentations are posted on our website. With that, I would like to turn the call over to Don.

Thanks, Nicole. Good afternoon, everyone, and thank you for joining us. We are very pleased with our strong finish to 2018. Full year 2018 EPS was $3.09 and in line with our guidance range. Free cash flow was $1.2 billion and exceeded the upper end of our guidance range. Total acquisition investment was over $200 million. Total cash return to shareholders was $1.2 billion, and total shareholder return was 9%, compared to the S&P 500's negative return of 4%. The team delivered these results despite a $145 million headwind from the recycling business. We accomplished this by capitalizing on strong solid waste trends to drive both price and volume growth, strengthening our market position and improving route density through acquisitions, executing our plans to mitigate recycling headwinds in the short term while advancing our long-term strategy to transform the business, and efficiently returning cash to our shareholders. During the fourth quarter highlights, we delivered double digit growth in earnings per share, invested $87 million in value enhancing acquisitions, and divested $79 million of non-strategic assets. We also returned $284 million to shareholders through dividends and share repurchases. Throughout the fourth quarter, the pricing environment continued to be favorable. We achieved core price of 4.3% and average yield of 2.7%, our highest pricing level in nearly a decade. We also achieved an all-time low customer defection rate of sub-7%. We attribute these accomplishments to our laser focus on enhancing the customer experience and delivering superior service. Additionally, we successfully converted 27% of our CPI-based contracts representing $660 million to a waste-related index or fixed rate increase of 3% or greater. These waste indices are more closely aligned with our cost structure and continue to run higher than CPI. During the quarter, we also continue to see underlying volume growth in our collection and disposal businesses. Excluding the impact of non-regrettable losses and a difficult special waste comp, total volume increased 90 basis points over the prior year. Our recycling business also improved in the fourth quarter. The team continued to tightly manage operating costs and increase recycling collection and processing fees. As expected, the current market conditions continue to serve us as a catalyst to transform recycling into a more durable, and economically sustainable business. Additionally, we opened our first next-gen recycling processing center in Plano, Texas. We call it next-gen because unlike a traditional processing center where we primarily sort and remove items that are not recyclable, here we are leveraging state-of-the-art technology to extract items that are recyclable. This positive sort configuration allows us to produce a higher quality product with less labor. The facility also includes a 5,000 square foot learning resource center for the community, so residents can learn the proper way to recycle and reduce their environmental impact. Our partnership with the City of Plano is an example of our new recycling business model. We are paid an appropriate fee to process the material, and the majority of the commodity value is rebated back to the community. This contract structure enables us to invest in new technology while earning an appropriate return on our investment. Lastly, given we operate one of the largest vocational fleets in the US, we are continuously evaluating innovative approaches and technologies to improve the performance, economics, and environmental impact of our trucks. Earlier this week, Mack Trucks announced our partnership to design and test electrification in a fully integrated garbage truck with zero diesel propulsion components. We are proud to be partnering with MAC and optimistic that this will result in a significant step towards an even cleaner, more efficient fleet. With that, I'll now turn the call over to Chuck to discuss our fourth quarter financial results in greater detail.

Thanks, Don. Fourth quarter revenue was approximately $2.5 billion, an increase of $65 million or 2.6% over the prior year. This increase includes internal growth of 2.3% and acquisitions of 30 basis points. The components of internal growth are as follows. First, average yield increased 2.7% and was the highest level we've seen since 2009. Average yield in the collection business was 3.4%, which included small container of 3.2%, large container of 4.5%, and residential of 2.6%. In our post-collection business, average yield was 1.5%, which included landfill MSW of 2.1%. The majority of our third-party landfill MSW business is with municipal customers that have contracts containing pricing restrictions. Total core price, which measures price increases, less rollbacks, was 4.3%. Core price in the open market was 5.1%, and in the restricted portion of our business was 2.9%. The second component of internal growth is total volume. As expected, total volume decreased 70 basis points over the prior year. Excluding the impact of non-regrettable losses in a difficult special waste comp, volume growth would have been 90 basis points. Volume in our small container business decreased 80 basis points as anticipated. This includes 130 basis point headwind from intentionally shedding certain work performed on behalf of brokers, which we view as non-regrettable. Excluding these losses, small container volume would have increased 50 basis points. Volume in our large container business increased 80 basis points. And volume in our residential business decreased 1.9% due to our strategic decision not to renew certain contracts that fell below our return criteria. Next, turning to landfill volume. Landfill MSW volume increased 7.2% while special waste decreased 11.6% and C&D decreased 10.7%. The decrease in special waste and C&D volume was due to a difficult comp in the prior year. In 2017, both special waste and C&D volume grew over 30%. The third component of internal growth is fuel recovery fees, which increased 70 basis points due to the rise in the cost of fuel. The average price per gallon of diesel fuel increased to $3.26 in the fourth quarter from $2.87 in the prior year, an increase of 14%. The current average diesel price is $2.97 per gallon. The next component, energy services revenue, was flat versus the prior year, which was in line with our expectations. In the Permian Basin, where we are well positioned, drilling activity remains steady. The final component of internal growth is recycling processing and commodity revenue, which decreased 40 basis points. The change in revenue primarily relates to a decrease in the number of tons sold and lower recycled commodity prices. This decrease was partially offset by the new recycling processing fee rolled out to our open market recycling collection customers. This fee contributed 35 basis points of pricing. It's important to note that our average yield of 2.7% does not include this benefit. Excluding glass and organics, average commodity prices decreased 15% to $106 per ton in the fourth quarter, down from $125 per ton in the prior year. Next, I will discuss changes in margin. In the fourth quarter, adjusted EBITDA margin decreased 80 basis points to 27.4%, from 28.2 percent in the prior year. This included 10 basis points of margin expansion from the solid waste business, which was offset by a 40 basis point headwind from recycling and a 50 basis point headwind from one additional workday. Fourth quarter 2018 interest expense was $96 million, which included $10 million of non-cash amortization. Our all-in tax rate for the fourth quarter was 20%. This includes an adjusted effective tax rate of 12% and a non-cash charge of approximately $30 million related to solar energy investments that qualify for tax credits. Fourth quarter adjusted EPS was 80 cents and increased 19 cents or 31% versus the prior year. EPS included a 12-cent benefit from tax reform. Excluding this benefit, EPS would have increased 11%. Adjusted free cash flow for the full year was $1.2 billion, and cash conversion was 42%. Free cash flow exceeded our expectations primarily due to better-than-anticipated improvements in working capital. During the year, we improved both DSO and DPO, by approximately two days. This improvement provided a one-time benefit to free cash flow. Looking ahead, I'd like to review the highlights of our 2019 financial guidance, which is consistent with the preliminary outlook we provided in October. For the year, we expect adjusted earnings per share to be in the range of $3.23 to $3.28. After normalizing for taxes, our guidance represents double-digit growth in earnings per share. Next, we expect adjusted free cash flow of approximately $1.125 to $1.175 billion. Included in our free cash flow guidance is a working capital headwind of approximately $45 million and $50 million of incremental capital We are investing for the benefit of our frontline employees as a result of tax reform. Excluding these two items, our guidance represents high single-digit growth in free cash flow per share. Total annual revenue growth is expected to be 4.25 to 4.75 percent. We expect adjusted EBITDA margin to expand by 30 to 50 basis points over 2018. demonstrating the operating leverage in our business. Furthermore, given the strength of our current pipeline, we anticipate investing approximately $200 million in tuck-in acquisitions. 2019 net capital expenditures are expected to be $1.2 billion. And finally, we expect to return $1.4 billion of total cash to shareholders through $500 million of dividends and $875 million of share repurchases. I'll now turn the call back over to Don to make a few closing comments before going to Q&A.

Thanks, Chuck. Our strong finish to the year positions us well for continued growth in 2019. We'll achieve this growth by securing price increases in excess of our cost inflation, growing volume for the seventh straight year, continuing to transform the recycling business by transitioning our municipal recycling customers to a more durable, fee-based pricing model and educating customers on what and how to recycle through our recycling simplified campaign. We'll be executing our strategy of profitable growth through differentiation to attract and retain the best people, enhance the customer experience, and drive additional operating leverage through the use of technology. And finally, effectively deploying capital to fund profitable organic growth, invest in value-enhancing acquisitions, and consistently and efficiently, as always, returning cash to our shareholders through dividends and share repurchases. At this time, operator, I'd like to open the call to questions.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. In the interest of time, we ask that you limit yourself to one question and one follow-up question today. If your question has been answered and you would like to withdraw your request, you may do so by pressing star, then two. If you are using a speakerphone, please pick up your handset before pressing the keys. And your first question will be from Tyler Brown of Raymond James. Please go ahead.

Hey, good afternoon. Hey, Tyler. Hey, so I see in the guide that you're expecting 25 to 50 positive basis points on processing fees, commodity sales in the guide. So I think that the RISD data that came out yesterday showed a dip in fiber prices. Can you just give us some clarity? I guess on the one hand, I surmise you've got continuing a push on processing fees, but it's a little unclear whether Specifically, what are you kind of assuming recycling prices in the guide?

So the guide is about $505. I know it's a little bit lower than that right now, but, you know, if you think about sort of how this thing normally works through the cycle of the year, you know, we feel that it'll bounce back through the middle of the year and over time, you know, we'll average it at the right rate.

So $105 is in the number. Okay. And, you know, Don, I know you probably dislike getting that question as much as I dislike asking it. So in that vein, do you think that over time, Republic will really, for all intents and purposes, eventually inoculate itself from commodity price changes, really pushing the risk down to the waste generator? And if so, how long do you think that process might take?

Well, I like your term, inoculate. So we're all about that. So if you think about my comments, and we used our new contract with the city of Plano, that's an example of what we're doing. We believe the right way to do this is to get paid appropriately for the collection, to get paid appropriately for the processing. And when I say appropriately, that means with a return that we can live with. that there is a function in the contract for contamination, that the cities and communities have to bear that burden, and in the end, that they get the benefit of what's left over, which is the commodity value, less contamination. That's fair. Again, we've made it increasingly easy for customers to recycle. We're committed to be a good environmental partner for those customers that want to do their part. But where customers don't want to be responsible, that's got to be on them. And so we're only making investments in recycling going forward that have a true sustainability from a profitability perspective. And that has to work just like I described. So we're having success. And to be frank, there's all kinds of customers, right? So we've had conversations with all of our 1,100 contracts. Some have immediately already agreed to new terms that work. Some have told us kind of at this point, no way. And some have said, you know, let me think about it. We're in the second and third round of talks. We are going to continue to push this. I think, frankly, any operator would have to be, you know, I'm trying to think of a nice word. an idiot, to sign up for recycling the old way when we've got this big global macro thing in front of us. So we did a great job. The team did a great job isolating the problem in 2018. We've done a ton of great work in 2018 that's going to anniversary and carry forward into 2019. And the work continues. We're going to have more success in 19 than 18, and that's one of the reasons we've got the confidence. But we're going to change the model. And people tell us they want to recycle, and I'm kind of a broken record around here. You're going to have to give us – every homeowner is going to have to pay us about a buck more a week, and they're going to have to give us about two minutes more a day of their good, responsible time. And if they don't want to do that, we'll be glad to provide trash service instead of recycling service because we're really good at that.

All right. Yeah, that's really good. And then one last one just on the volume guide of zero to 25 bps. So can you talk about some of the puts and takes there? I mean, I thought you were largely through the broker culling. I don't think special waste has any real big comps. And frankly, it just doesn't really feel like a zero volume environment. So can you just talk about what's driving that outlook? Is that just conservatism or is there something more idiosyncratic? Thanks.

Yeah, there is a headwind associated with special waste. that we have going from 18 back into 19. So that's part of the reason why that volume growth is a little muted. And, you know, at the end of this year, we're going to be, you know, about halfway done with shedding the brokers. But if you extract that out of the equation, if you remove broker volumes and those event volumes, then the volume growth is closer to 1 to 1.25%.

Okay, perfect. Thank you.

Yeah, and let me add to that a topic. We've got some strong price here, too, right? So we're being very intentional about where we can get pricing, and we understand the tradeoff of price and volume. So, for instance, in our temp roll-off business and so forth, you know how that works, Tyler. So if we can get an extra point of price because demand is there, we might let a little volume go for that purpose.

Right, right. Okay, thank you. Great.

The next question will be from Brian McGuire of Goldman Sachs. Please go ahead.

Hi, good afternoon, Don, Chuck, and Nicole.

Hey, Brian. How are you?

Hey, just a question on just the interrelationship between CapEx and volumes, because it seems like the CapEx will be up again. And I thought of, in the past, the model being a little bit more like 10% of sales. It looks like we're going to be in that 11% to 12% range, you know, 10% of sales if we're getting roughly 1% volume growth. And totally appreciate, you know, walking away from some broker business and some residential business that doesn't meet your return hurdles. But I I would have thought with that would have come, you know, actually maybe some reductions in CapEx or, you know, shifting of trucks from less productive routes to more productive routes. So can you help me maybe understand where this CapEx is being spent and where, you know, that number could be heading over time and, you know, in kind of a flat volume environment, you know, why it should be so high?

Yeah, so keep in mind that including that CapEx guide, there's $75 million of what we're calling... spend associated with tax reform, and that's money, as I said, that we're going to put back into the business benefiting the frontline employees. So if you're trying to pull that out of the equation, then what you end up with is CapEx has closer to 10.5% of revenue, which is right in line with what we've told the street that we would be at, kind of post-rev recognition, which is on a historical basis, it's closer to 10%. So That's right in line with what we believe our long-term average should be.

And this will be the last year with that sort of outsized spend on employee stuff?

Yeah, we've got one more year, that being 2020, where we have about $100 million that we're going to spend doing the same thing. But keep in mind that we talked about this back when tax reform was first enacted going into Q4 2017.

Got it. And then just one more from me just on tax rate in general in 4K was a little lower than your guidance. Just wondering if you could help us with that. And then just thinking about the 19 guidance, I appreciate the EPS is kind of in line with what you outlined earlier, but it looks like the tax rates may be a little lower. I was a little confused on that. Maybe I'm reading that wrong, but it seemed like it was 24% versus I think 27% before. So just trying to understand the puts and takes there.

Yeah, so both in 2018 and again in 2019, we're going to benefit from solar projects. These investments that we're making that come with tax credits that we're able to utilize in order to reduce our effective tax rate, but also to reduce our cash taxes. So just to put that in context for you, for 2018, our effective tax rate was 20.7%. And then we had certain non-cash charges associated with those solar projects that are included below operating income, right? So if you think about those two items together, then the net tax rate, including both of those items, is closer to 22.8%. As we go into 2019, our effective tax rate is 24.2%. And then we have about 3.1% in non-cash charges related to those solar projects. So once again, if you put those two together, you end up with a tax rate of about 27.3%. Got it.

So those non-cash charges, you're going to include that in that EPS?

That's included in our EPS guide, yes.

Okay, so they net out to 27. Okay, just checking on that. Thank you.

You're welcome.

The next question will be from Hamza Mazzari of Macquarie. Please go ahead.

Good evening. Thank you. My question is just around the cost side, specifically how you guys are managing labor cost inflation, labor shortage. What's baked into your guidance there? I realize employee turnover is lower for you because every driver wants to work for Don Slager, but just any thoughts in terms of cost inflation?

Yeah, so our overall inflation, you know, we think for 19 is, you know, kind of in that two and a half range. You know, labor will be a little higher than that. We do have pockets where we've got some labor shortage just because, you know, maybe there's, you know, local economic issues. Our turnover is, you know, essentially flat year over year. It's up a little bit with the growing economy. That's to be expected. We're not sitting on our hands. We're still working hard to improve the work environment. Jeff mentioned some of the investments we're making in facilities, specifically around employee facilities, locker rooms and training rooms, et cetera. So, you know, there is some labor pressure with long-haul trucking, which will impact our costs in and around, you know, transporting waste from our transportation to our landfills. We're dealing with that. But we're also doing a great job in and around with our procurement team. You know, they've got goals this year. There are some spend categories that we historically haven't looked at. So we'll dig into those, and we'll find some savings there as well. But the driver shortage, so to speak, isn't keeping us up at night. We're working hard to retain and attract, you know, the best people, and I think we're on a good track. Lampelops, you know, is going to be another part of the story, you know, The leachate expense is going to be about flat year over year to what it's been this year, and that really is related to... to leachate because of just, you know, changes in POTWs or public treatment works that are changing their technology and starting to raise prices on leachate disposal. You know, that's something we can manage, Drew, and it's something we can price for. But I think that's going to be something, again, that affects all people in our business. And so I think more than likely you'll see, you know, more companies, you know, turn into some kind of price action to recover some of those costs.

Great. And just my follow-up question, on pricing, you know, you guided 2.75%. It feels like that's the highest price since 2009 or just prior to, you know, waste or downturn because you guys are late cycle. Anything different in this pricing environment that you see versus, you know, prior to the downturn? Clearly, there's a lot of changes in this space over the last, you know, I don't know, 10 years. So any thoughts on, you know, how this pricing environment is different, Don? Thank you.

Well, I'll say this. Look, when organic growth is, you know, decent to good, that sets up the industry for a better pricing environment. I've always said that. So when there's decent organic growth, pricing tends to be better. The The overall increase in capital cost, capital intensity, complexity of business, I think gives people a reason to price that maybe they didn't have before, so that lifts us up a little bit. Certainly, CPI has moved in our favor. And we're de-risking our CPI portfolio by moving to alternative indices that work for us. So that's going to benefit us going forward. Moving to alternative index, you know, we've said, you know, $660 million now of that book has been converted. The hard work we're doing in and around recycling, with the question that Tyler asked, we're doing a lot of contract renegotiations and new pricing. That's going to help. We've got a recycling processing fee that we've implemented. That's going to add some lift. And, you know, some of these things aren't fully implemented yet. So we've still got some time to run under them and have them build through 19 and, frankly, anniversary into 20. So we think there's a fair amount of upside there. As it relates to just us pricing customers, we've got a lot better at it. We're smarter about it. Our overall defection is down sub-7%, which would tell you that, again, that's the lowest in the history of the company. We're spending a lot of time on customer experience. And so I don't believe you can just raise a customer's price. I think you've got to raise a customer's willingness to pay. And so we're working on further improving our service levels meeting our service commitments, improving our products, improving our fleet, certainly, you know, having the best people on the front lines of our business. All those things, I think, give us pricing power in the end, and those things we're going to continue to work on. So, again, as you said, Hamza, best pricing in 10 years, basically. It's been building through the last few quarters. You know, we're pretty confident we can achieve these levels in 19. Great.

Thank you.

The next question will be from Noah Kay of Oppenheimer. Please go ahead.

Noah Kay Good afternoon. Thanks for taking the questions. Great to hear about solar projects and electric trucks. Always nice. I want to ask you about the outlooks. You're reiterating the components of the preliminary outlook you provided in November. And I think you should be surprised by that, because investors have come to expect that consistency from you, the final numbers looking the same. But has anything changed in the last three months within your assumptions, whether it's on volume, price, M&A, or the cost side? And I ask, you know, in light of what is still a very sort of dynamic macro situation.

Well, you know, what's changing in the macro is – You know, last year we spent a lot of time bringing our hands over this China thing. You know, we're no longer dependent on China. Our team's done a lot of work moving material to new ports, opening new lanes. All of our material that we collect is handled and recycled ethically. So we've overcome the operational hurdle of that, and now we're settling into sort of a new cost model. So working through that, I've already described what we're doing there. from a growth perspective, right, we've always said we grow with population growth that drives household formation, business formation. So when there's population growth and there's job growth and there's wage growth, that's good for waste generation, right? So as long as we see this same kind of housing start number and, you know, consumer sentiment spending is good, we think that's enough for us to continue to grow into the future. So we feel good about that. Chuck described some of the capital spending. Our CapEx is very, very consistent. Other than when we got the gifts from the government with tax reform, we decided to spend $100 million or so to improve our customer or our employee facilities. And these are not Offices for general managers and staff. This is for frontline, hardworking men and women who show up at 2 in the morning and drive garbage trucks and fix garbage trucks and work at landfills. So those are the people we're most concerned about improving their work environment. So we're spending real money for a really good cause. But that's not a surprise because we told you about that. So, again, as you said, the business is very – On one hand, slow moving, which is maybe a bad thing for you, but it's slow moving, which is a good thing for you because it makes it predictable. So it shouldn't be a surprise to anybody that our guidance is right on top to preliminary outlook because we've got a pretty good handle on our business. And then, you know, what will change in 19 going forward? You know, how fast can we move on restructuring the recycling business? That's going to depend on customer sentiment. It's going to depend on... how well the market adjusts and it'll be depend on what other competitors do, frankly. But, uh, our resolve is, is, uh, greater than it's ever been. And we're making some really great headway and we're having great examples of where customers are taking a good common sense approach. Uh, and again, I gave an example in my, in my written remarks. So, um, uh, we feel good about the business. We've got a really solid team here and, uh, you know, we're, uh, you know, we're off to a great start.

Thank you for that. And just to come back to the labor question, you know, I was really struck by the labor and benefits line. Expenses were up, you know, just 3% year over year. Obviously, that's a significant improvement in your cost containment. Anything you would point to in terms of kind of an improved success containing those labor costs? Anything we could think about, you know, going forward? Because obviously we've We saw a lot of growth over the first three quarters of the year, and what you are sort of suggesting for 2019 is just kind of a deceleration of labor cost inflation.

Well, look, I'll hand that off, you know, kudos to our operating leadership. They're really labor-focused on productivity, on efficiency, on safety. Employee engagement is a big deal around here, as I said. I think we're probably the only solid waste company that does a nationwide employee engagement survey every year. You know, 85% of our employees respond, which is double that of a world-class company. Our employee engagement scores are high. Our people trust that if they give us their opinions, we'll listen and we'll respond. We really are genuinely in earnest trying to make this the best place to work or the best people come to work. And I think that helps us a great deal. And it's not a slogan. It's what we really think. And, again, our operating leaders echo that throughout the organization. So I think that's part of it. Again, every year we get a little benefit from the things we do last year. So, you know, we can continue to automate the residential fleet. You know, we continue to make improvements in other areas. One fleet continues to pay off. You know, that investment, you know, we don't talk about one fleet anymore, but it's part of what we do now all the time, and it makes us more reliable. You know, reliable trucks mean more efficient trucks. They mean more happier drivers. So, you know, we're just going to keep building on the Republic way. And year on year on year, we get better at the things we launched two and three years ago. We launched new things. And while maybe not one of them by itself is a game changer, it's the combination and sort of the sum of the parts that really, you know, make a difference for us. So we're just going to continue to build on that. So appreciate the compliment, I think. That's right. Thank you.

And the next question will be from Sean Eastman of KeyBank Capital Markets. Please go ahead.

Hi, guys. Thanks a lot for taking my questions. Really excited to be joining the group here. I just wanted to touch on the M&A front. The 200 million planned investment seems to indicate, you know, an above normalized year again in 2019 that's expected. So just hoping to get an idea of the profile of M&A you know, the discussions underway with your targets? Is it the usual singles and doubles or is there a good probability we might see something towards the upper end of that range in terms of target size?

Well, it all depends, right? So, look, we wouldn't tell you 200 million unless we felt pretty strongly that we could deliver it, right? So, we've got a great pipeline. Again, we've got a great development team. We've got a lot of good people in place now who've been in place for a while with all the business. Again, we don't go around incenting sellers because these are good companies we buy. And if you've got a really great company, you're not likely to sell it unless someone pays you an arm and a leg for it. So, When it comes time for you to be in that moment where you reach your business life cycle or your personal plan comes to fruition and it's time to monetize your life's work or something else happens, some kind of a life event, that's when we buy good companies. And we've been able to keep our multiple really consistent over the year. We're not overpaying for deals. And, you know, there are a lot of really nice companies out there, some companies of all sizes that we'd love to, you know, someday have an opportunity to be part of our network. And, you know, our job is to know the owners, to know where they're at in the life cycle. and to be able to write the check. And we've consistently done that. We've sort of built our momentum up over the last few years. And we've got the appetite to do very big deals. It's just a matter of whether or not it's their time. So it's kind of like, you know, when the seller's ready, we're ready. And we're very good at integrating businesses. And so, you know, we're first and foremost, you know, focused on tuck-ins because, you know, those are, again, lowest risk, quickest return, best returns. It doesn't mean we won't look at a brand new market. If we could go into a new market and have scale and vertical integration or at least the opportunity to over time, we would look at that. But you'll see us kind of staying in our lane and with most of the acquisition activity. We've done some good work in and around the E&P space and there might be an opportunity or two there that we'd look at. But we're very diligent about the ROI on these deals. We always compare and contrast the better use of cash to buy more cash flow, to write multiple, or buying on our own stock. We're very comfortable with the value of our company and what value we're going to create over the next three years. We always look at that intrinsic trade-off. So this is kind of our formula. It's been kind of a balanced approach of cash allocation, dividend, buyback, keeping a strong capital structure, keeping our debt where we think it needs to be, and having plenty of powder to do more acquisitions.

Got it. I appreciate that. And the next one I have is just on the differentiation strategy. You guys were speaking to the customer experience, customer willingness to pay. I was just hoping maybe you could talk anecdotally about where you guys have been finding you're getting some additional pricing power through that strategy. I just want to understand that a bit better.

Well, we've had... A lot of effort, our marketing groups put a lot of effort into gaining customer insight. Again, we probably spend more money on customer insights than any of our competitors, really getting to know what they think, what they want, and for us to prioritize those things. Some of them seem pretty obvious on the surface, and some of them don't, so there's a lot of learning there. We are... We're looking at digital opportunities. We're looking at ways to make it easier to do business with the company. We do have a digital channel for subscription and residential business that actually has worked quite well, and new business coming into that channel comes in at a higher price than if we were going door-to-door. So people are willing to pay for convenience and reliability. And, you know, so you'll hear us talk more and more about digital as we go through time, not only digital in the trucks, digital in the operations to make us safer and more efficient, but digital as we connect more and more to customers. And we think customers want to pay for that and are willing to because it makes their life easier. So, we'll continue to do that. And then, you know, job one, though, is get the garbage off the ground every day on the right day and the right hour, do it safely, and be a good environmental partner, and we're pretty good at that, too.

Okay, great. I really appreciate the time and insights. Thanks very much.

And the next question will be from Michael Hoffman of Stiefel. Please go ahead.

Thank you for taking the questions. John, can Can you share with us where in the business model we're going to see the effect of the operating leverage? Is this going to be mostly OpEx or be a mixture of OpEx and SG&A as we work through that 30 to 50 basis points of operating leverage?

Yeah, it's mostly going to be OpEx, right? You know, I mean, just to say, we still have some SG&A savings on the horizon. But I will say, look, You always hear me say this, Michael. I mean, we've got two constraints. You know, one is cash. We're only going to put so much cash to work on initiatives every year. And the reason for that is, you know, we can only take on so much change at a time. You know, we've got 35,000 employees. We're trying to lead them in a direction, and we've got to get all 35,000 people to buy into that plan. And so we can't overload them with too many new things. But, you know, there is, you know, there's benefit. And then, you know, pricing. We're going to price to beat inflation. We had years and years where we couldn't do that, and now we've got momentum on our side to do that as well. But those things go hand in hand. Better operations mean happier customers mean better pricing.

And then on free cash flow, I appreciate the approximately about $200 and a quarter, $225 million spending over three years is sort of the $50, $75, and $100 million. to reinvest into the employee base. If I get to strip that away in working capital timing things, how do I think about, one, what's the baseline free cash flow I'm starting with, and what's the sustainable growth rate, your thoughts about that sustainable growth rate of that cash flow?

Okay, let me explain it this way, Michael. If you take our reported free cash flow for 2018, So $1.178 billion. And then I would back out about $45 million from working capital, which we believe one time, one time in nature. And then tax reform capital investment that you mentioned of $50 million, you end up with $1.083 billion. And that I would consider to be a baseline. So then if you look at that relative to the guide that we gave for 2019, that's about a 6% growth in free cash flow year over year.

Okay, that's what I was trying to get at is that's probably a good sustainable number. If I'm talking about a four at the top, getting a six at the cash is kind of a good relationship. Yeah, that's right. Okay, and then just one more thing from a – maybe there's two I was keeping. What's your share count in your EPS guidance? Go ahead. Sorry.

Yeah, so the share count for the end of the year is 323 million shares. And then we'd expect that to decrease by about 2.5% during 2019 because we are executing on the share repurchase program. Okay.

And then in the $4.25 to $4.75 for total growth, the 1% is acquisition. Is that all rollover?

Michael, it's both in-year and rollover. So we do have a little bit of the $200 million. Okay. that we're investing this year is going to benefit us this year.

Right. So if those get done earlier, that's the upside of that number is what I was kind of getting at.

Sure.

A little bit. Okay. Thank you. Yep. Thank you. Thanks, Michael.

The next question will be from Jeff Silber of BMO Capital Markets. Please go ahead.

Hey, good evening. It's Henry Chen calling for Jeff. Just wanted to follow up on a similar question prior on your cost structure and how you're thinking about beyond natural operating leverage, are there any areas in the business where, you know, I was just thinking of the technology that you mentioned earlier in your remarks that are, you know, opportunities that you could maybe make the sort of long-term margin structure higher?

What's your definition of long-term?

The next few years. So beyond that.

Okay.

There's a lot of upside left in the business, right? You know, I mentioned, you know, I mentioned, you know, just something like OneFleet where we don't talk about it much anymore. Internally, we do quite a bit. Obviously, we measure everybody against the standards. But, you know, there'll be a moment when, you know, all new trucks come in. Every truck we have will have been sort of brought into life under the One Fleet banner, and we'll even have a better fleet situation than we have today, right? So, you know, that day is out there, but that is long-term. You know, some of this technology, you know, we're excited about this thing we've got going on with Mac on the EV, but, you know, too early to tell, right? But that's why we're spending, you know, time and effort, you know, on this, because, you know, technology has a real place in the future. We talked a little bit about technology in our new Plano next-gen recycling facility. There's sort of some technology yet beyond that, you know, sort of robotics and things like that that we're testing. So I will tell you this, I think there's a lot of opportunity yet, you know, with our digital operations initiative and when we, you know, digital platform is kind of our fifth pillar of our strategy. But what I wouldn't want you to do is sort of run away with that too soon because, you know, we're involved in the conversations. We're involved in pilots and tests. We're involved in involving technology where we can. And as we get sort of the magic formula, we'll be talking more about it. And then at that point, we'll be layering it into future guidance. But it's more right now for you to know that there's upside here. And we're working on it, and there'll be a moment when it comes to realization, and then we're going to love talking more about it.

Okay, great. Sounds great. Thanks so much.

The next question will be from Steve Schwartz of First Analysis. Please go ahead.

Good afternoon, everyone. Hi there, Steve. If I could just continue on that question with respect to fuel recovery fees. You know, it looks like you in your prepared remarks noted a pretty significant sequential decline in fuel costs here in the first quarter. And I know that typically there's a lag between your recovery of increasing costs, which is certainly something that I think you've faced over the past several quarters. So as we look for, you know, 2019 and your costs versus those fees, can you give us some color there?

Well, let me start. You know, fuel recovery fee isn't, I don't think, frankly, much of a story by itself because the purpose of our fuel recovery fee is to create a fair and equitable vehicle to sort of de-risk the fuel that at some times in our history has been pretty volatile. So, you know, it's somewhat of a built-in hedge against fuel prices. So while it does go up and down and at times can play a little havoc with our margin and because of the lag, net, net, and net over the long term, it doesn't really do much for us. It doesn't help us, doesn't hurt us. It just sort of negates and offsets, you know, the volatility. That's the mindset.

Yeah. And then, you know, the other way I would add to that is that we anticipate fuel being up in 2019. And that's really due to a couple of things. One is the CNG tax credit. So if you think about the that had providing for us in 2018 a three cent benefit in OPEX and then a one cent benefit of tax. So that goes away. And then also we had some hedges in place during 2018 that ended up rolling off. So because of that, we're expecting fuel to be a little bit higher in 19 than it was in 18.

Okay. So in other words, at cost, you wouldn't expect any significant difference from the 25 basis points that you have built into your revenue guidance for fuel.

Yeah, that's correct. I mean, if you think about it, the 25 basis points that the revenue goes up, you'd have a corresponding cost increase, maybe a little bit more because the CNG tax credit isn't tied to the fuel recovery fee, and that's the only disconnect you might have in there.

Okay. And then my second question, my follow-up is just, once again, an extension, I think, off the discussion that you had with Tyler on volume. You know, through 2018, essentially, your volume declined. So from a comp standpoint, going through 2019, do you expect your volume to kind of play out through the quarters, I guess, in opposite or in mirror to what happened in 2018?

Yeah, I would say that it would be, you know, relatively close to what happens in 18. The only thing I would say that we would need to be cognizant of are some of the quarters where we had especially heavy special waste volumes and C&D volumes coming into our landfills. That could skew the numbers a little bit. Got it. Yeah, that's the first quarter of 18.

Yeah. Yeah.

Okay. Well, thank you. I'll just add some color to that. We have a good outlook for growth this year, and we've got a good handle on, again, our sales efforts with our good sales tools and a great sales team. We think we're winning our fair share of new business, and at the same time, we're going to maintain the discipline to walk away from some business. We do have some municipal contracts out there that frankly don't perform very well for us, and You know, we're the incumbents, so we know all the costs and we know all the pressures. And, you know, when we're the incumbent and we know that there's no profit or not a reasonable return in these things, you know, we're going to probably walk away from some contracts. That's baked into that number, right? So that's going to continue. That's no different than it was in 2018. You've got to make sure you understand that that's going on behind the scenes, net of net. So we're looking for our teams to either bring these contracts back around to profitability or move the equipment and the assets into utilization in other parts of the business. So that's going to continue to happen.

Yeah. Okay. Thank you for the color.

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

Hey guys, thanks for just taking my question. Just can you help me with the 30 to 50 basis points margin expansion 2019? You know, is this back end loaded? Is there, you know, how should we think about the quarterly cadence with still pretty tough recycling comps in the first quarter?

Yeah, I would say that it's pretty well distributed throughout throughout the entire year. You're right, we have a little bit of a headwind associated with the recycling in Q1. So we need to keep that in mind. But other than that, I would say it's pretty well evenly spread.

Yeah, Michael, just to put a finer point on that. So you're exactly right. As Chuck mentioned, our most difficult commodity comp, we still have a little bit of a headwind in Q1, just because that was the highest price quarter of last year. And then when you look forward, as Don talked about pricing, the pricing momentum will build As we go in and we renegotiate and we get more and more of our recycling municipal customers to agree to price increases, that will build. So you do see a little bit, think about Q3 as kind of our strongest quarter, and that's kind of where you build up an expansion in Q3. And that's kind of how you can think about the distribution.

Okay, that's helpful. And then, did you say earlier in your comments that you had 10 basis points of margin expansion off solid waste in the quarter? That's right. That's right. I'm just curious. I mean, if you're talking about shedding non-regrettable contracts, walking away from some of these resi contracts, which we know can be low margin, seeing the best pricing in 10 years, you know, with the mix of the business, would we expect that number to be higher at this point of the cycle?

Keep a couple things in mind. One is that we had a headwind associated with special waste. And the other one is that we had, as we had talked about, a little bit higher cost from landfill operating. So that's masking or diminishing that growth that we called out.

Okay, and just lastly, if that makes sense, on the average yield, the 275, how much of that is just automatic from 18? It's just automatic from the CPI uplift, and how much of that is pushing on the open side?

Yeah, about 10 to 15 basis points is coming off of CPI. Okay, thanks, guys. You're welcome. Thank you.

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

Thank you, Denise. In closing, I would like to thank all Republic employees for their hard work, commitment, and dedication to operational excellence and, of course, creating the Republic way. Additionally, I'd encourage everyone listening to this call to take a few minutes and visit recyclingsimplified.com. It would be good for everyone to learn how and what to recycle this very day. We all have an opportunity to do our part to create a cleaner and healthier environment. Thanks, everybody, for spending time with us today, and be safe out there. Have a good evening.

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