Ronald J. Mittelstaedt - Chairman & Chief Executive Officer Worthing F. Jackman - Independent Director, Quanta Services, Inc..

Patrick Tyler Brown - Raymond James & Associates, Inc. Derek Spronck - RBC Dominion Securities, Inc. Joe G. Box - KeyBanc Capital Markets, Inc. Misha Levental - Wedbush Securities, Inc. Michael E. Hoffman - Stifel, Nicolaus & Co., Inc. Kevin Chiang - CIBC World Markets, Inc. Chris Murray - AltaCorp Capital, Inc. Noah Kaye - Oppenheimer & Co., Inc.

(Broker) Bert Powell - BMO Capital Markets (Canada) Andrew E. Buscaglia - Credit Suisse Securities (USA) LLC (Broker).

Ladies and gentlemen thank you for standing by. Welcome to the Waste Connections Second Quarter 2016 Earnings Conference Call During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Thursday, August 4, 2016.

I would now like to turn the conference over to Mr. Ronald Mittelstaedt, Chairman of the Board and CEO. Please go ahead..

Okay, thank you, operator, and good morning. I would like to welcome everyone to this conference call to discuss our second quarter 2016 results and provide both an update on our recent combination with Progressive Waste and our Financial Outlook for Q3.

I'm joined this morning by Steve Bouck, our President; Worthing Jackman, our CFO; and several other members of our senior management team.

As noted in our earnings release better than expected solid waste volume growth and contribution from Progressive Waste merger enabled us to once again exceed our outlook for revenue and EBITDA in the second quarter.

The combination of strong increases in both solid waste disposal volumes and collection activity, most notably on the West Coast, as well as low fuel costs drove a 110 basis point margin expansion in solid waste, excluding the impact of the merger.

We believe this performance together with pricing and operational improvement plans we've implemented at prior Progressive Waste operations has already positioned our adjusted EBITDA run rate at or above the upper end of the original $1.25 billion to $1.35 billion year range we communicated when we announced the merger in January.

In addition, acquisition dialogue remains robust and continued strength in free cash flow provides the ability to both fund additional growth and return of capital to shareholders.

To that end, we are pleased to have also announced that our Board of Directors authorized a share repurchase program for up to 5% of our outstanding shares over the next 12 months. Before we get into much more detail, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items..

Thank you, Ron, and good morning. The discussions during the call today include forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, and applicable securities laws in Canada.

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 beginning on page 2 of our August 3 earnings release and in greater detail in filings that have been made by Waste Connections, formerly named Progressive Waste Solutions Limited and Waste Connections U.S. Inc.

with the Securities and Exchange Commission and the Securities Commission or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business.

We make no commitment to revise or update any forward-looking statements in order to reflect these 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, and adjustment net income per diluted share, and adjusted free cash flow.

Please refer to our earnings release for our reconciliations 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.

Finally, reported results reflect the impact of our merger with Progressive Waste effective June 1st. Contribution from this combination will be treated as acquired revenue and will not be incorporated into our organic growth statistics until 12 months from the closing date. I will now turn the call back over to Ron..

Okay, thank you Worthing. In the second quarter, solid waste pricing volume growth was 5% or 100 basis points above our expectations due to continuing strength in volume growth. Core prices increases in the period were 2.9% year-over-year with total pricing growth net of surcharges of 2.6%. Volume growth was 2.4% in Q2.

Net pricing remains comparably higher in our competitive markets, once again averaging about 3.5% in the quarter compared to around 1.5% in our exclusive markets on the West Coast. However, our Western region where we received 100% of all growth within our exclusive markets reported more than 5% volume growth in the period.

As a reminder, incremental margins on volume growth within exclusive markets is more attractive than in competitive markets given the guaranteed pricing on all new business. Higher-than-expected MSW disposal volumes, commercial collection, and roll-off activity drove strong solid waste following growth in the period.

On a same-store basis, commercial revenue increased about 6% year-over-year in Q2. Roll-off pulls per day increased about 5.5% year-over-year in the period on a same-store basis with all regions reporting higher activities.

Roll-off pulls per day increased almost 6.5% in our Western region, 5.5% in our Central region, and over 4.5% in our Eastern region compared to the year-ago period. Solid waste landfill tonnage on a same-store basis increased 6% year-over-year in the second quarter.

MSW tons increased 8% in the period, with about 65% of our landfills reporting higher MSW tons year-over-year in the period. Special waste grew 6%. And C&D tons, due to tough comps at a couple of landfills as well as a weakened economy and Oklahoma, were down 5%.

Recycling revenue excluding acquisitions was $11.5 million in the second quarter, down about $600,000 or 5% year-over-year due primarily to lower commodity values for plastics predominately. Prices for OCC, or old corrugated containers, averaged about $104 per ton during Q2, up 4% from the year-ago period and up 6% sequentially from Q1.

OCC prices currently are around $115 per ton, up slightly compared to what we averaged in last year's third quarter. Headwinds experienced within recycling over the past several quarters have now mostly abated.

Regarding E&P waste activity, we reported $27.5 million of E&P waste revenue in the second quarter, consistent with our $25 million to $30 million revenue guide for the period, with segment EBITDA margins of around 25%.

Same-store E&P waste revenue in Q2 decreased 43.5% year-over-year due almost entirely to lower volumes on about a 52% decline in average rig count in the basins where our E&P waste operations are located.

We estimate our E&P waste business to be running at almost $120 million of annualized revenue or about 3% of total revenue following the Progressive Waste combination. This level of revenue should enable EBITDA margins for E&P to remain at least 25%, with less than $5 million of associated CapEx per year.

Despite recent increases in rig count and related drilling activity, the drop in crude oil back around $40 per barrel keeps us somewhat cautious. As a reminder, EBITDA from our E&P waste business is currently almost $150 million below its peak run rate in late 2014.

High incremental margins for any revenue growth resulting from expected increases in drilling activity over the next year or two should provide a nice tailwind to reported results. Moving on to the Progressive Waste combination.

As noted in our press release, the integration of the legacy Progressive Waste business remains on track, with its contribution to consolidated results running ahead of expectations.

In terms of measuring our progress on the integration, we believe that a good barometer will be an improvement in safety, which reflects the impact of instilling leadership and a culture of accountability throughout our new operations.

As we've noted before, Progressive Waste incident frequency before the merger was running three times to four times higher than that of legacy Waste Connections.

We're pleased to report that legacy Progressive operations reported a 12% reduction in incident frequency in June as compared to their 12-month rolling average, and we saw a further improvement in July to now be down 26% compared to their prior rolling monthly average.

July was the lowest number of incidents these operations have ever achieved over the last few years and this is in our second month of ownership. We're already halfway to our expected 50% improvement in incident count within a year. P&L benefits from safety improvements accrue over time.

However, SG&A synergies, pricing strategies and operating improvements are more immediate.

On this front, we're pleased to report that pricing strategies and operational improvement plans that we developed and implemented at Progressive Waste operations have already positioned our adjusted EBITDA run rate at or above the upper end of the original $1.25 billion to $1.3 billion year-one range that we communicated when we announced the merger in January.

This strong performance provides a solid foundation both for typical budgeted growth and further margin improvement in 2017 and for organizational momentum to drive further synergies and cash flow improvements from the combination.

Regarding potential asset swaps or divestitures of the Progressive Waste operations, our goal remains to sign or complete any such activity by Q1 next year. That said, we've been encouraged to find that some operations we believed would be likely candidates for the potential divestiture because of their low margin profiles were simply undermanaged.

In some cases, we've already seen a several hundred basis point operating margin improvement since last year or we've also identified potential opportunities to fundamentally change our asset positioning. As a result, we intend to review results through Q3 before making any final decisions on potential asset swaps or divestitures.

However, we've had initial discussions with potential swap or divestiture partners and I'd say we have a minimum of three or more options for all of our combinations. And now I'd like to pass the call to Worthing to review more in depth the financial highlights of the second quarter as well as provide you an outlook for Q3..

Thank you, Ron. In the second quarter, revenue was $727.6 million, or almost $13 million above the upper end of our outlook for the period. Acquisitions completed since the year-ago period contributed about $199 million of revenue in the quarter, with Progressive Waste accounting for $174 million of that from the month of June alone.

Adjusted EBITDA as reconciled in our earnings release was $233.6 million or 32.1% of revenue and 40 basis points above our outlook for Q2.

Excluding the impact of the Progressive Waste merger, we estimate that our adjusted EBITDA margin in Q2 expanded approximately 70 basis points sequentially and 30 basis points year-over-year to about 33.7%, consistent with our outlook, as a 110 basis point improvement in solid waste more than offset the impact from slowdown in E&P waste activity.

Progressive Waste's adjusted EBITDA margin in June was almost 27.5%. This comparative lower margin profile of Progressive's operations reduced our adjusted EBITDA margin reported for the second quarter by about 130 basis points year-over-year.

Fuel expense in Q2 was about 3.8% of revenue and we averaged approximately $2.48 per gallon for diesel, which was down about $0.50 per gallon from the year-ago period, but up $0.06 per gallon sequentially from Q1. Depreciation and amortization expenses for the second quarter were 13.5% of revenue.

The 90 basis point year-over-year increase as a percentage of revenue was primarily due to acquisitions completed since the year-ago period. Looking specifically at Progressive Waste, depreciation and amortization are estimated at about 11.4% and 4.2%, respectively, of its contribution to reported revenue.

This means that amortization of intangibles for the combined company will be about $100 million in the initial year following the Progressive Waste transaction or around $70 million after-tax and a $0.40 per share impact to reported full-year EPS.

On a dollar basis, this amortization amount should decline between $6 million and $8 million per year following year one.

As a reminder, acquisition accounting typically increases our D&A as a percentage of revenue following material transaction, due primarily to the expensing of that portion of purchase price allocated to both intangibles and landfills.

But as we noted before, while the higher D&A percentage impacts cap results, it has no impact on cash flow generation.

Therefore, we'll continue to add back amortization of intangibles when calculating adjusted earnings as a way to partially bridge the wide delta between reported EPS and free cash flow per share, which as analysts and investors should already know, is one of our primary metrics.

Interest expense in the quarter increased $5.2 million over the prior year period to $20.5 million due to the additional debt outstanding resulting from acquisitions completed since the year ago period and higher interest rates associated with fixed rate notes issued since the prior year period.

Debt outstanding at quarter end was about $3.78 billion and our leverage ratio as defined in our credit facility was about 2.9 times debt to EBITDA. GAAP and adjusted net income per diluted share in the second quarter were $0.20 and $0.66, respectively.

Adjusted net income in the current year period excludes the impact of over $60 million after tax of acquisition-related items such as amortization of intangibles, transaction costs and severance-related items.

Our effective tax rate for the second quarter was 35.5%, which included a $6 million to $7 million benefit to the provision, or almost $0.05 per share, resulting from the Progressive merger closing in the period.

Looking ahead, we anticipate our effective tax rate to be about 30% or 31%, subject to some variability depending upon the percentage of total profitability contributed by operations in the U.S. versus Canada. Adjusted free cash flow year-to-date through Q2 was $234.2 million or 18.8% of revenue.

CapEx through mid-year was about $112 million and we anticipate an additional $200 million to $225 million to be spent during the year. I will now review the outlook for the third quarter.

Before I do, we would like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and filings we've made and Waste Connections U.S. has made with the SEC and the securities commissions or similar regulatory authorities in Canada.

We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment. It also excludes any remaining severance, integration costs, or other items resulting from the Progressive Waste transaction and any additional acquisitions that may close during the period.

Looking first at revenue, revenue in Q3 is estimated to be approximately $1.075 billion. For legacy Waste Connections we expect core price plus volume growth of solid waste to be over 4%. As mentioned earlier, we do not include a new acquisition in organic growth until after the anniversary of its closing date.

That said, we estimate that price plus volume growth at Progressive was running around 3% when the merger closed, broken down, about 1% price and 2% volume.

We expect our strategic initiatives to improve the quality of revenue within Progressive Waste operations both by increasing pricing growth to at least 2% before the anniversary of the merger's closing, and by continuing to exit low or negative margin business.

We are consciously exiting unsafe and negative margin business as well as brokerage customers throughout the platform. We will gladly trade-off some volume growth for additional price. Adjusted EBITDA in Q3 is estimated to be about $340 million, or about 31.5% of revenue.

Depreciation and amortization expense for third quarter is estimated to be about 14% of revenue. Amortization of intangibles in the quarter is estimated to be about $25.3 million or almost $0.10 per diluted share. Operating income for the third quarter is estimated to be about 17.5% of revenue.

Interest expense in Q3 is estimated to be about $27.5 million. As mentioned earlier, our effective tax rate in Q3 is estimated to be up to 31% subject to some variability. Non-controlling interest is expected to reduce net income by about $300,000 in the third quarter.

Finally, our fully diluted share count in Q3 is estimated to be about 176 million shares. And now let me turn the call back over to Ron for some final remarks before Q&A..

Okay. Thank you, Worthing. Again, we are quite pleased to be already trending at or above the upper end of our original year one EBITDA range, just one month after closing the Progressive Waste merger.

We had underestimated the opportunity for improvement within Progressive Waste operations and are encouraged by the organizational momentum to exceed original expectations as we look ahead.

The integration is mostly going fairly smooth, thanks to the dedication and commitment of the legacy Waste Connections team and the receptiveness of our newest team members from Progressive Waste. Macro trends remain quite favorable for solid waste, and our differentiated strategy continues to deliver differentiated and industry-leading results.

In addition, we are now uniquely positioned within the sector to further accelerate growth in EBITDA, free cash flow per share, and shareholder value creation, as we implement our proven playbook on Progressive's approximate 8000 employees and nearly $2 billion of revenue.

Our playbook starts with market selection, asset and contractual positioning, and has been focused on safety, our people, culture, accountability, and disciplined capital deployment which creates free cash flow per share growth. This will not change, but is a fairly large adjustment for our new team members.

We look forward to closing out Q3 and having a full quarter of combined results following the merger before providing both our outlook for Q4 and early thoughts on 2017 on our next call.

That said, for current modeling purposes, we believe seasonality could result in about a 5% to 6% sequential decline in revenue and a 7% to 8% decline in adjusted EBITDA between Q3 and Q4, a portion of which could be offset by increased synergies.

With the current pace of pricing and operational improvement, we believe adjusted EBITDA for 2017 should be at least 5% higher than our current run rate, excluding the impact of any acquisitions or divestitures. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions.

Operator?.

Thank you. And our first question comes from the line of Tyler Brown with Raymond James. Please proceed..

Hey. Good morning, guys..

Hey. Good morning..

Hi, Tyler..

Hey Ron, can you talk a little bit about the 8-K that you guys followed the other day regarding the Board tweaking the comp plan. So, first off, I'm curious why the $85 million to $125 million bracket was chosen.

I mean, I think, I get the 85 million, which I believe is what's implied in that T plus one guidance but what was the process or the thought process on the $125 million? You guys mentioned you might be underestimating opportunities, could you maybe even indulge us on what might be probability be of achieving the high end by year end?.

Yes. I mean, well, Tyler, the thought process, which was your first question, was very simple. And that is that, the entire officer and Director and management team of the company have been pouring just countless hours into this transaction since dating back to December of 2015. That's when the work on this began.

So it's really taken an extraordinary effort to get to where we are. It's going to continue to take that to get to year-end.

The Board wants to make certain that we have tremendous incentive beyond what we normally do to maximize the synergy and tax opportunities, and to that end has set a reward out there for those that are going to end up having to put the work in to drive it.

So as we communicated, our initial synergy expectation was sort of $50 million at the SG&A level, roughly approximately a $35 million tax benefit. So you add those two together and you get the $85 million. So that's where the $85 million starts.

If you take $40 million on top of that, that's a 50% stretch to that, and not saying we can get to that, but we are hoping to land somewhere certainly north of the $85 million and as close to the upper-end of that as we can, probably with the midpoint being most realistic with the additional improvement being mostly synergies, not tax.

So that was how the bracket came about. The upper-end represents a stretch goal. We certainly think we can get to that over time. It's unlikely that we can get to that by January 1 which is -- or December 31 which is the measurement period for this.

But we wanted to put a strong goal out there to make sure everybody was incentivized to push as hard as they can to give us the best jumping off point for 2017..

And Tyler, It's also important to note what's not in that number. I mean what's not in that number are things like pricing improvements. What's not in the number are things like operational improvement, safety improvements, et cetera. This is just focused on the SG&A and the cash flow line.

I don't think we ought to be rewarded for just executing what should be done on a day-to-day basis..

Yeah, and also not included in that is any net benefit due to divestitures or asset swaps. As you just heard us say, we are targeting closing those in the Q1. So they wouldn't even be achieved by December 31. So we also don't believe that we should be incentivized or benefited from that because we consider that normal course of business..

Okay.

No, that's extremely helpful, and it obviously will give you a lot of momentum going into next year but, -- and I think you mentioned that right at the end of your prepared remarks, but at a very high level is it just simple to think about the high-end of your pro forma EBITDA, give it a solid mid-single-digit growth, and then maybe you have some optionality for any additional M&A or synergies? Is that kind of the idea for 2017?.

Yes, I think that's a fair – I mean again we're talking about expectations as we sit here today, but yeah, we just communicated that we think on a run rate basis, we will be at the upper-end of what we originally guided, so that's $1.275 billion to $1.3 billion, that that's the upper half of that.

So using that range, add the mid-single-digit that you just said, we just communicated that. And then any benefit that we expect from divestitures and/or swaps the net benefit as you go into next year, and I think you get into the bracket that you are talking about..

Okay, and then just lastly, would you still expect that free cash conversion could hover around 50% or would Progressive somewhat dilute that?.

Well, as you look at the original guidance for the, what I call the combined year one, we talked about at least $610 million on $1.25 to $1.3 billion, and so it's not at 50% but it's probably somewhere around the 45% plus area. And I think, I would hope we can do better.

On percentage of revenue again, based on the current run rate of about $4.1 billion, $4.2 billion, you're looking at about a 15% minimum target for cash flow as a percentage of revenue..

All right. Perfect. Thanks and great quarter..

Thanks, Tyler..

Our next question comes from the line of Derek Spronck with RBC Capital Markets. Please proceed..

Yes. Hello, thanks.

Just quickly on the free cash flow assumption prior to the merger of $610 million one year out, or essentially by June 2017, can you go through quickly again, what's included in that number is organic growth accounted for what rate of FX and what sort of operational synergies are part of that?.

Yeah. If you really try to build it up, you get a number north of $610 million. But the simple math to get to the $610 million, if you look at it, Waste Connections was running about $360 million of EBITDA. You look at Progressive, Progressive was running at about $140 million to $150 million last year in EBITDA. That gets you to $500 million.

You put the cash tax savings on top of that, and then you put what should be a normalized amount of CapEx versus the overspending they have as well as the SG&A savings on it, you build up at least $610 million on that.

If you run it through the components starting at EBITDA, and you take out the cash interest, the cash taxes, and CapEx of about 10.5% of revenue on a look forward basis, you will get a number that's again probably closer to $630 million or $640 million. But again, we've owned this thing for two months.

We are sticking with at least $610 million in year one. If you look at the second half of this year and play it out, you would see that we are easily on that run rate..

And there is no organic growth in that number?.

No..

No..

Yeah. To clarify I think Worthing said $360 million on Waste Connections and $170 million, $180 million on Progressive in EBITDA, he meant free cash flow..

Free cash flow..

Yes, got it. And just back on the CapEx, Progressive had been pulling forward vehicle purchases, in particular side arm loaders and CNG trucks.

Are their vehicles compatible with your fleet, and what sort of opportunity do you see in terms of slowing that run rate CapEx at Progressive?.

Yes, there is sort of a twofold answer to that, Derek. Number one, certainly the vehicles that Progressive deployed are all compatible with our fleet. Now some of them have been deployed by Progressive in locations that we think the application is just completely inaccurate.

And we will move those to areas where we think the application is accurate and sort of swap. In other words, they have some front loaders where we would rather run rear loaders. They have some rear loaders where we'd rather fun front loaders. That's not a big deal. We will swap those and rationalize those over time.

We can certainly use everything that they have acquired. So that's umber one. There is no issue there.

Number two, while Progressive has frontloaded some of their CapEx this year and you've done a nice job on truck replacement over the last several years, I'd say the last three years or so, the reality is is they still have in many markets a fairly old fleet, and a fairly beaten up fleet from years of lack of maintenance.

But I -- and so I don't necessarily think there is any "relief" if you want to use that -- if those words from their CapEx program over the last several years.

But as we have said, as we rationalize assets through divestitures and swaps, we will be dropping their CapEx as a percentage of revenue where it was running between 13% and 14% down to probably closer to 10.5% and 11%. And that may not come completely out of the chute in 2017 by certainly by 2018 I expect it be there.

So part of the entire plan of how we change the cash flow trajectory of the legacy Progressive Waste has always been not only incremental EBITDA margin, but a reduction in CapEx as a percentage of revenue by 250 to 300 basis points, and that will come..

Okay. That is great color. Thanks..

Our next question comes from think line of Joe Box with KeyBanc Capital Markets. Please proceed..

Hello?.

Question for you on the pricing side. Clearly there's a disconnect between how legacy been price versus volume, how you guys are thinking about it. I guess I'm curious how you guys are changing the local sales guide, local management compensation at been in order to drive that pricing level to where you wanted to be..

Yeah, first off, we have not yet adjusted the incentive plan for the prior BIN sales personnel. We're leaving their comp plan relatively intact for the balance of 2016 because there were already objectives and other things set that they were well on the way to and we didn't want to pull the rug out on anybody.

But we have immediately at the closing of the merger changed the reporting responsibility. And while this may sound nominal, it's actually a very large shift. On the sales side, legacy Progressive was a silo up to the corporate level and there was not really an interaction between sales and local operations.

They almost operated in a vacuum of each other. We changed the sales reporting function directly through the local management at the closing with a dotted responsibility up through the chain of command in sales.

So the local management team now has authority over sales and has the ability to direct them as they see fit and the ability to change the price that they can sell at to what is driven by their local cost structure, not just something sales had authority to sell at what they would like.

So that's quite a change and we've done that effective immediately. That is going to result in lower volume and it's going to result in a higher net price per unit sold effective immediately, which is what we want.

We are also targeting doubling the budgeted price increases over the balance of 2016 at each of the Progressive sites and we believe they are on track to achieve that. And so that's what we've done now.

We will be changing for 2017 their incentive plan to where there is a much heavier focus on quality of sales and there is a much heavier focus on retained price.

And so what we would hope is that the sales people would make more money by selling less units at a higher quality of sale requiring less CapEx and less personnel to manage an amount of business that we'll make more money on. That's really how we look at the sales component in our business today and we will be instilling that..

Got it, that's helpful. Thanks, Ron. And then I just want to dig into your divesture comment from earlier. It sounds like some of these businesses are maybe fixable.

So I'm curious, what's actually fixable in these businesses? Can you get some of them to maybe Waste Connections-type margins? And can you maybe give us a sense if beforehand you were expecting to dispose of, call it, $150 million of revenues, now is that maybe sub $100 million, or are we talking there will be one or two locations that are actually going to stay within Connections?.

Yeah. Number one, Joe – or I shouldn't say number one but in your questions. But first off, I think that number is still in that $150 million to $200 million range of swap and divesture revenue. Again, some we thought that we would end up doing we probably won't. Some we thought we'd end up keeping, we probably will.

So the number stays probably around the same. What has changed, well, in some markets, we have just seen the ability to change the margin profile by a variety of operating changes. And in others, it's that there is an asset that we can acquire or swap for that changes the asset positioning of what we have.

Illustratively, a 15% standalone collection company where we can acquire or integrate disposal now becomes a 30% EBITDA market. That is a step change. That's an attractive market suddenly for us. So those are the kinds of things that we're talking about. But I do not think the bucket in aggregate has changed.

I think some of the assets, a mix of what we were going to do, has changed..

Great. That's perfect. Thank you..

Our next question comes from the line of Al Kaschalk with Wedbush Securities. Please proceed..

Hi, guys. This is Misha calling in for Al. Thanks for taking my question.

With Waste Connections now a national player in North America, what changes have you seen in the M&A funnel? And specifically what additional opportunities has Progressive provided despite historically M&A being assessed from a local operations perspective?.

Yeah, I would tell you that obviously the transaction with Progressive brought in eight new states in the U.S. and an entire country in Canada with ten provinces. So there's a large geography that we can now look at potential transactions relative to just the core Waste Connections. And we are doing that.

I would also tell you that you've just simply decreased the amount of public players that are in the acquisition arena, because Progressive was an acquisitive company that was aggressive and now suddenly that is out of the mix.

So I think that helps your potential win percentage and potentially the multiples that you'll be paying on transactions as well because they were an aggressive purchaser.

So I think both of those things give us a greater opportunity on an increased footprint and give us confidence in that $100 million to $125 million annual acquisition target that we've been talking about..

Thank you. And one more. Thanks for the detail regarding the price and volume cadence in Canada. And I was wondering if maybe you'd be able to provide us with how you see the price and volume landscape playing out in Canada.

Maybe what's changed since you first started strategically looking at Progressive and how you see price and volume cadence in Canada going forward?.

Yeah, again, let's go back to what made up Progressive of Canada. Progressive of Canada was made up of the legacy BFI Canada, which was the legacy BFI, which had been in Canada since the late 1970s early 1980s. So that's a 35 to 40-year track record of assets in the Canadian market by legacy Progressive.

And so as we looked at pricing between the US and Canada in the legacy Progressive, Canada has historically done a much stronger job on achieving more consistent price and volume that's closer to what Waste Connections would expect.

So put simply, they were achieving price in Canada more closely assimilated to what we expect and they were underachieving price in the United States. And so our focus in the Progressive footprint is much more focused on their pricing improvements in the US than it necessarily is in Canada.

And that's both a function of performance and a function of the asset positioning they have in Canada..

Got it. All right. Well, thank you very much..

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

Hi. Thank you for taking my questions. Back to the risk conversation. If my memory serves, BIN didn't measure risk the same way you did as far as measurement of incidences. So this reduction is on even a tougher standard versus you and them as well.

Is that accurate?.

Yes and no, Michael. Mostly yes is the answer to your question. They measured a couple of different metrics. And part of that is a measurement required in Canada versus the U.S. But they did measure incidents, numbers of incidents in both workman's comp and in third-party accident frequency the exact same as we did.

They translated that into a couple different metrics. So we are able to look back and have the exact same metrics on an apples-to-apples basis and that's why we're able to use the measurements and they are comparable. So they reported it differently, but they captured the same data.

And we have converted it to the way we would do it to make it apples-to-apples. I would tell you that I think the standard that we're using is a more robust standard. It is a tighter calculation, if you will, then what they have done. So in that way, yes, it is more difficult..

So on that vein, as you've made this progress, how quickly does the reinsurance, so because you are self-insured, how quickly does that industry allow you to capture that as a savings? What long of a track record do they need before they will give you the savings?.

Yeah, there are two types of savings here Michael. First off understand that companies -- larger companies in this space have high deductible programs to protect against severity. So basically frequency in number of incidents matter because we're mostly cash flowing these out of our P&L because they are not hitting the stop-loss.

And so reducing frequency is very important.

The second benefit you get, and it's more of a multi-year benefit, is when the actuaries, who we have actuaries reassess the development of existing claims, as the actuaries see this performance improvement, and again we do it on a quarterly basis; they will start to capture this improved data into their outlook for claims closure and the amount of, what's called IBNR that's sitting on the books.

So you start seeing a steady and progressive improvement or reduction in the actuarial analysis of the claims book as you walk through these improvements. And so there is some modest benefit near-term in the P&L.

The bigger dollar benefit, as we said in our script, really comes after year one and maybe into year two when you start seeing that reflected in actuary reports..

And Michael, I would to just comment on this. Because I think this is an issue that is harder to understand maybe from an investor or Analyst standpoint, but I want to put it in some real terms. Because there is a, what I will call is a hangover affect from not acting safely. So let's go back to the beginning of 2015 and go to six months of 2016.

So in 2015 Progressive had six fatalities, employee or third-party fatalities. Waste Connections had zero. And the first six months of 2016, Progressive has seven fatalities. Waste Connections has one.

So in the 18 month period, we are talking about here, there has been 13 fatalities, due to incident frequency compared to one in 18 months, third-party or employee related. That is a monumental difference. And that's why there is such a focus on bringing down severity.

Not just the cost but the impact to our employees and the communities that we operate in. So my point is, when you have that amount of fatalities and severity, there is an impact in what's your IBNR and your rate core incident climbs until you bring that severity or that frequency down dramatically..

As we've pointed out in the past, if you look at just Progressive's U.S. operations relative to Waste Connections' because they both have a lot of workers comp in it, Progressive was running about 3.5% of revenue in the U.S. where Waste Connections was running about 1.3%.

You see there is an improvement in the P&L you'll see, but again this is a march over time..

Okay. Shifting gears to the incentive plan.

I understand everything you explained before, though the timing of the payout would be in 1Q 2017, is that accurate?.

Yeah, the projected would be on or around March 1 of 2017 when our annual incentive cost pays out, generally the third week of February following the announcement of the earnings..

So when you've talked about 15% or better of revs for free cash on $4.1 billion to $4.2 billion, that's not including carrying the burden of an incremental incentive payout, if successful?.

Yeah. Again, we will make sure we highlight in any adjustments, any payments related to the combination and I'd put this one time incentive payout in that same category..

Yeah. I just want to make sure everybody understands, we've got to think about that..

Yeah. That's correct, but I would point out Michael that, let's say, it's at the midpoint of that band, that's an incremental $10 million..

Pre-tax and that's after tax..

Pre-tax, so that's right. So the impact on cash flow, while every dollar is significant, it's going to be approximately 1% on the run rate free cash flow..

Okay. And then you haven't defined operating gains, the leverage very specifically other than the $25 million approximate potential savings in 2018.

Two months into this, do you have a better lens on what that looks like even if you define it more what is the type of operating profit gains you can make --margin gains?.

There are two buckets of what I call operational cost savings we talked about originally and that was -- and by the way the two added up to $50 million -- $25 million was the safety that you talked about and $25 were other operational improvements.

And again the operating improvement plans that have already been in place and that they are executing on, is a number that's higher than the $25 million that is not related to safety. Obviously, we like to handicap these because not everything you model and you expect to outplace that, the way you think.

But they're already underway and striving for a target that's well in excess of that $25 million that's not related safety..

Yeah. Michael, your question was around -- I think also around some specifics. Look, we've got targets for the improvement of labor as a percentage of revenue, truck variables as a percentage of revenue, other operating and supervisory costs as a percentage of revenue. And you achieve those targets by two things.

You achieve those targets by greater efficiencies in those areas, but the greater way you achieve it is by improving the quality of revenue, and that comes through both improvement in price increases and what you sell at higher.

So if you're focusing on quality of revenue when everything stays the same, you are getting a reduction in those cost items as a percentage of revenue..

Fair enough. And we should still think about this as multiyear, it doesn't happen in the first 18 months. This is ratably over a two to three-year period..

Yes. I think we would get the majority of it over a one and a half to two-year period, in fairness. But, clearly, it would be -- people shouldn't expect this all to occur by any means in 2017.

We're going to be a lot better coming out of 2017 that we are coming out of 2016, but there is going to continue to be improvements through the platform for multi-years..

Yeah, that said, there's already over $40 million of the SG&A synergies in already achieved on a run rate basis as we look at just the month of June..

That's right..

Okay. And then lastly, the New York City contract that Progressive walked away from, there is 1,200 tons a day of volume in Seneca related to one of the old three-year rolling contracts. And if the current G2 (49:12) is true, Waste Management is going to win that contract, that volume goes to Pennsylvania and Virginia.

So what you do to replace that 1,200 tons?.

Well, number one Michael, again I'm not sure where the city will decide to direct that volume. Let me just say this, that will take some time. There is still work to be done on the NTS transfer station and the connectivity between them.

This is not something the city can make a decision on tomorrow and affect the volume flow in 2017 even, or certainly early in 2017. So we are talking about something that -- if it is an impact, it's an impact out. It's not an immediate impact. Number one. Number two, let me say this.

Progressive, in its own fleet, prior fleet, our fleet today, has almost 1200 tons that is going to Waste Management, that won't continue to go to Waste Management. OK? Due to the way Progressive was operating its fleet and its transfers. So I'm not overly worried about 1200 tons a day..

You also need to realize Michael, there is some capacity constraints at some landfills in and around the Hudson Valley that is pushing waste further out.

In fact, we had tons also that we sent to third parties because our landfill in Hudson Valley has annual limits on them and as you take that into account and what we recycle, there is still almost 100,000 tons a year of waste that we push out of that market.

And again with some of the municipal landfills in that area also experiencing constraints as they kind of meter out their remaining available capacity. There is enough waste shed up there to find its way in Seneca and I will also tell you Seneca is going to be better landfill with less volume and higher prices..

Yeah, and Michael, in the city as you may or may not know, we currently -- we meaning the legacy Progressive, Waste Connections now, we have two transfer stations that we operate in Brooklyn, and one in the Bronx. And another one mothballed currently, and the city gets first claim of that space on a daily basis.

That is causing us to direct haul at times 500 to1,000 tons a day to closer in third-party landfills that when the city opens its MTS transfer station and whoever operates it, they we will pull some of that volume back to there, which therefore goes on to the recipient of that contract, and we suddenly have 1,000 tons a day that we are direct hauling that we can use our own transfer stations on..

Perfect. And then you made an interesting statement, Progressive ran Seneca at its cap at the detriment of incremental dollar per ton. So you're clearly not operating on that mindset, you would rather have less tons at a better price and not worry about the cap..

That's our mantra throughout the whole platform..

And Michael that's already started..

Yeah. And that started, we implemented price increases at Seneca on June 1..

Perfect. Thank you very much..

Our next question comes from the line of Kevin Chiang with CIBC. Please proceed with your questions..

Hi. Thanks for taking my question and thanks for all the detail on the call here. Just wondering, sounds like the integration is obviously going maybe better than expected.

Any areas of concern though, anything that's coming maybe as a negative surprise that as you've digested over the past couple of months here, that maybe has you scratching your head?.

You know Kevin, look, anytime you do a public-to-public transaction, you do not get nearly the level of due diligence that you are able to do on a private company or a smaller transaction, because of the fact that they're public companies and you are dealing with disclosure and time deadlines.

So with that as a backdrop, there is always things where you don't know fully. And we have experienced those, as we expected to. So some operations aren't performing as well as we had hoped. Others are performing better. Some problems there is greater depth to, and it's going to take a little longer to fix.

But there are things that are in our wheelhouse. Turnover is higher than we even projected. So we knew turnover was running in the mid to high 30%s. It's running in the low 40%s. That's a need for 300 plus employees in that platform per month. And with our safety standards, that's going to get worse before it gets better.

And we know that, we're okay with that. So we've had to gear up our recruiting efforts probably 50% more than we had expected to. That's an illustration of something that is more difficult than we had hoped, but achievable. That's in the numbers, we're not worried about that and we can impact that.

But -- so, yes, it would be misleading to tell you everything is rosy and everything is going better than planned. There's always pushes and pulls and we would say on balance it's going at or above plan. We believe on balance the opportunity is greater than we originally thought, thus we've communicated that. But we are not without our struggles..

That's very helpful and maybe to that point, given it seems as though there is greater opportunities than you had initially expected, you did announce a 5% buyback with yesterday's results.

While tuck-in acquisitions are obviously a part of your growth strategy, does that push it further down the line a little bit? Maybe you focus more on the buyback, focus more on trying to integrate BIN and harvest some of these benefits sooner.

Or does it have no impact on how you look at tuck-in acquisitions?.

I would say the acquisition pipeline is as robust as ever, as we mentioned on the call. But, again, a large deal in our models are $10 million to $20 million revenue type company and the average is probably is $4 million to $5 million. That said, there are a few transactions that are north of that $20 million of revenue number.

So that -- look acquisitions that fit our strategic and market criteria priced right are our best use of capital. We just can't tell you the timing of when these opportunities will close because we don't control the timing of that. And in some cases they are subject to lengthy regulatory approvals to the extent they are a franchise company.

And so obviously the 5% buyback that's a normal course approval up in Canada. With regards to the TFX, that's something you will see once year. We will go in and submit that request to renew that and it will be a perpetual 5% approval that the Board does every year. And we'll opportunistically take advantage of buying stock during the year.

As we've always said, if we just do our normal amount of M&A activity, that consumes about 30% of free cash flow. Our dividend is less than 20% of free cash flow. That still leaves half of our free cash flow available for either outsized M&A opportunities or to buyback on average about 2% to 3% of our stock every year.

If the market gives us better opportunities to buy back, we'll step on it even harder..

Yeah. And Kevin again, for many people that followed us for a long time are well aware of this, I mean, this is consistent with what we've always done.

We bought back between 2% and 4% of our stock per year while executing our growth plan and as Worthing just said, if we didn't do that then over 50% of free cash flow per year would either be used to debt reduction, if we were not doing buybacks in this interest rate environment and debt environment, that is not the next most attractive beyond dividend and M&A, and we would just be delevering.

Thus we've got -- because along with what comes along with M&A is EBITDA. So you would be delevering very quickly. And so we really need to -- it's a great problem to have. We really need to buyback somewhere in that 2% to 5% range a year, or we will just continually delever..

That's helpful and just last one for me. It looks like your E&P business has found some level of stabilization.

Just wondering when you look at the Alberta market, and noting some of the comments you made earlier on the Canadian market, are you seeing that market also stabilizing as you lap some of this lower oil price environment or is there still some weakness in that local economy?.

Yeah, that economy is definitely – well, number one we think it is stabilized and we're near the bottom of it. If you look at Progressive's performance in that market area, they have had an impact of up to 15% in their business this year over the prior two years. So it has been coming down in that specific area. We hope that it's near the bottom there.

But, again, let's put in perspective that Alberta is one area in their entire footprint and within the combined company now would represent less than 1.5% of revenue. So your exposure is only so great there..

And as a reminder, when we talk about Alberta, we're talking of the solid waste business in Alberta. We're not in the E&P business..

That's right..

But you're right. Again then similar struggles we've seen in places like Oklahoma and the U.S. are no different than what we're seeing in Alberta..

That's right..

That's very helpful. That's it for me. Thank you very much..

Our next question comes from the line of Chris Murray with AltaCorp. Please proceed..

Thanks, guys. Good morning. Just turning back to safety performance. I know those were some interesting metrics you guys quoted. I think part of the Progressive safety performance though is concentrated in a number of their regions.

Any commentary on how the, call it, bigger problem areas, have been able to move? And anything that you are seeing in terms of resistance in terms of change there?.

Well, number one, let's go to the last part of that. We have not seen any resistance. In fact, we've seen a tremendous embracing by not only supervision, but most importantly, frontline employees who affect things. Number one, you have to not look at frontline employees as the problem, but rather the solution.

And you've got to give them part of the upside. They react just like management does. So we've seen a tremendous response. By the way, employees know who is unsafe and they don't like them being on the team either. So I will give you some – many people would think of New York City.

Look, New York City is the most congested, difficult market to operate in arguably in the United States. Progressive is the largest player within the boroughs. The largest commercial player within the boroughs. And it was rare, very rare, to go a day without an incident.

Now, when you're running 80 to 100 vehicles a day in a market like that, remember an incident can be a truck opening the door into the side of a car that's parked..

Or someone hitting us..

Or someone hitting us. It was rare to go a day. Progressive had some times when they have gone a day. In the month of July, we had six consecutive days without an incident in New York City. The incidents in New York City are down over 35% within the first 60 days.

So my only point is is that's an area you would get perhaps the most resistance potentially because of the nature and we're seeing great impact. That would be what you would have labeled a historical, or Progressive, a difficult area..

Hey, I just moved to Canada and look at that, there is no change with regard to the region, the assets, et cetera. But if you look at Canada, Canada in the month of July was down over 40% from where they were running on a rolling 12-month average before the transaction closed.

So it's a tremendous rise and that's because the people are embracing it and they understand the benefits of that number one value..

And to give you further – I mean, Canada, July over June came down to, Worthing said over a third. On an exit speed basis of the last two weeks of July, if they stayed that, they would be down over 50% in August to where they were in June..

Okay. That's great. And then, Worthing, one of the things and I guess we've always concerned with Progressive was their ability to, when they would give us guidance, we went a few quarters without not being able to get some clarity to what was going on.

What have you guys done differently to ensure that the legacy Progressive operations, particularly where you are maybe a little more isolated in Canada, that you're going to have that kind of, call it outlook, that you can have the confidence in with your guidance?.

Yeah, number one, Chris, this will take a little time. But let me explain the Grand Canyon of a difference. Progressive did all of its financial reporting looking back. So in August, they could tell you what they did in June and likely what they did in July. Their focus was always backward reviews.

We don't do any backward reviews because it's already happened and you can't change it. We spend very little time looking backwards. All our time is forward. So we have changed all of Progressive looking forward projecting the current month and two months out and managing to those.

So the difference is is we forecast forward and ask our people to proactively manage to forecast. They didn't forecast forward and looked back to reactively try to change the future. That's why there was no clarity. They were clearly driving through the fog with no lights on. We're going to get much tighter.

And if we look at our $2 billion of revenue, I'm using historical Waste Connections, we forecast that very tight because there's a history of forward-looking forecasting built in. We give a lot more latitude right now to the legacy Progressive because they haven't had to do that.

We will get them as tight as we can, but that will take the course of the balance of 2016 and into 2017. They are already getting better into the third month than they were in the month of June.

And that sounds nominal, but it's huge because it changes what your internal processes are and what you are measuring and capturing daily to manage the business..

Okay. And....

It's like looking at how your portfolio did in Q1 without thinking about the right spots to own looking ahead..

Sure.

If you think about their original forecast that you saw for June and July and I guess even what you're seeing run rate, how accurate were those numbers that they were able to provide for you?.

I think on an annual basis, overall very good. Progressive believed they were doing about $490 million, I'm using that approximately, of EBIDTA on a standalone basis coming out of 2015 going into 2016. We think on an annual basis that was a very accurate number. They were within a percent or so. So that's damn good.

But of how that laid out, the reality is is they really had a hard time telling you what the next quarters looked like. They really used annual metrics. And on an annual basis, I think that was very good. The reality is that's a hard way to run a public company and that led to what you're talking about at the beginning of your question..

Okay. Thanks, guys..

Our next question comes from the line of Noah Kaye with Oppenheimer & Company. Please go ahead..

Yeah, thanks for the detail on the call. Just a couple of quick ones from me.

First, given your comments earlier on the Progressive fleet and historical investment levels, what is the right steady-state run rate for CapEx and that legacy business? And what's the cadence of that in your view?.

Well, I think you have to look at it on an integrated basis, combined company. And that's where we have been leading people to a 10.5% assumption. Sometimes you might hit, based on some new facilities you may be able to open up for permit, et cetera, you might see a pop-up for new contract, you'd see a pop-up to 11%.

Some periods you might see a drop to 10%. But I look at it on aggregate between landfills, equipment, fleet, et cetera, at about 10.5%.

Because without a doubt the critical thing to always keep in mind is you need a three-year rolling outlook for your major investments around construction, landfill, air space, et cetera and you always want to be managing everything else around that versus just piling on and waking up and looking in the rearview mirror, as Ron said, and find that you spent 14% or 15% of revenue on CapEx..

Yes, got it. And then just turning to a subject we haven't touched on, recycling.

Nice 40 bps improvement year-over-year in terms of the hit of volume growth, but it would be helpful to understand how much of that was commodity impact versus a kind of contract restructuring that a number of your peers have talked about widely to improve the economics in the face of lower commodities, and how much more benefit you think you could get from restructuring those contracts both for yourselves and for legacy Progressive? Thanks..

Yeah, thank you. Well, first off, zero of it was from restructuring of contracts at this point.

So if you look at on a legacy Waste Connections, 90% of our recycling that we do in the Waste Connections footprint comes off of our West Coast where it is part of our franchise model, and it is amalgamated within our Return on Capital and return on margin profile business there, and so, and it's a profitable business due to the legislative requirements of the West Coast.

So there is really no contract restructuring necessary on legacy Waste Connections. On the legacy Progressive side, there is some contract restructuring necessary in certain parts of their U.S. footprint, not their Canadian footprint but their U.S. footprint, and those negotiations are underway.

And they were underway by Progressive well before the transaction. They take time, but we have not yet seen the benefits of that. We hope to get some of that done over the balance of '16, and others into '17. But that is upside relative to what we've talked about, because none of that has yet been completed..

Right and kind of given the length of some of those many contracts. I mean this could be a multi-year benefit as you are able to go through that. All right. Thank you very much..

Yes, it is. But I would caution everybody, that is not a needle mover for us in this transaction whatsoever. Because it is a small percentage of revenue overall, whether you look at legacy Waste Connections or Progressive..

Right, thank you..

Our next question comes from the line of Bert Powell with BMO. Please proceed..

Thanks. Lot of ground has been tilled here, so I have a couple of quick questions. With respect to acquisition pipeline, I know Canada was kind of atrophied on that front.

Do your comments extent to Canada as well in terms of the opportunity set, or is that some thing that you've kind of, pushed and that's think about Canada a little further down the road..

Well, Bert, I think you know, as we – what we try to say, look just by the size of the opportunity basket Canada isn't as large as the opportunities in our 40 state network in the U.S. But it's still – there are a number of opportunities there.

And there are markets that for varying reasons, Progressive has not yet looked at going into in certain provinces.

We have tasked our Canadian region, which is led by Dan Pio, who knows Canada as well as anyone in that country and what those opportunities are, we have tasked them with going and bringing incremental growth opportunities up there from both acquisitions and new contracts.

And we fully expect that to be occurring throughout the balance of 2016 and into 2017 more heavily..

Okay. Great. Thanks Ron. I just want to go back to the reversal of the Progressive model in terms of price versus volume.

As you start to focus on price on their operations, are you finding that the churn is going up or you're actually finding that, you know what, they weren't getting what they could have got and by increasing price it's actually not creating the churn that you would have expected or do you fully – volume's falling off as you focus on price as expected? Just curious as to how that is going so far..

It's going the way you outlined at the beginning of the question, Bert, and that is that -- so far we are not seeing a trade-off between price and volume, because they just weren't getting what they could get -- to your point. Now, I do expect that that will change over time. Okay? I do expect there will be a trade-off.

We will see more of that in 2017 as we change incentive alignment, we will see more of that. So I don't want to say that there won't be any.

Most of the increased churn and negative -- I am going to use that, impact to volume that we are seeing right now is due to conscious decisions by us and local management of dropping unsafe stops -- brokered stops where -- there was no money being made on collection. There was no internalization, a third-party was just getting the benefit of that.

And we've just given the field the flexibility to just stop doing that. And so -- we're and it takes time to stop doing that. You got to make sure the customer has another option, et cetera. We are not leaving customers in a lurch. So it takes time. But we are starting to see that.

So I would expect in 2017 more than now we will see an impact dampening of volume somewhat as we ramp price and we are fine with that. Again, I want to go through the metrics. Let's say you had five points of volume coming on at their incremental margin of 20% to 25% EBITDA.

That tell us you it takes one point of price to contribute the same amount of all that incremental volume to EBITDA, and the volume comes with capital and people..

Okay, appreciate that. Just lastly, the divestitures, the $150 million to $200 million, as you look to that and no decision till 2017. The absolute dollar amount hasn't changed but the mix has changed.

And maybe it's too early to think about this but, when you think about what the margin upside is that you initially thought from just maybe purely doing swaps or worst-case, divestiture.

How much better can it be working these assets and reconfiguring that mix given how you're thinking about maybe some of the opportunities to go in and change dynamics in the market..

Yeah, well, I mean I think again in fairness, I think it is too early to try and crystallize what that could be, because the answer depends on what percentage is swapped versus divested. It is too early to break that all down because as I said, we haven't defined fully what we will do, and whom we will do it with.

And each of those comes with varying amounts of divestitures versus swaps, so it would be very crystal ballish. But look, I think if you think about it, let's pick $150 million because that was the low point of what you said, and let's assume that – it had 10% EBITDA. That is $15 million on that $150 million.

If you swap that straight across, I would expect that you would improve that to by 50% to 100% on that $150 million. So you would take it to that $10 million of EBITDA to $15 million to $20 million the day you've got it done, if you will.

So then the question become, and then improvements from there, because if we wouldn't just be swapping a 10% EBITDA for $15 million or $20 million. We don't keep markets that are $15 million to $20 million.

That $15 million to $20 million will have to be what we get back and we've got to have an ability to internalize or make that a 25%-plus market or we might as well just divest it. So it depends on the percentage of what we can get from a divestiture versus – I mean the swamp versus divestiture.

And it's too early to say that, but it's a long way of saying, I would hope to improve what we swap 50% to 100% over time..

Perfect. Thank you guys..

Our next question comes from the line of Andrew Buscaglia with Credit Suisse. Please proceed..

Hey, guys. Just one quick one for me, just on your capital allocation. So your – much bigger company now, bigger market cap, -- into much bigger investor base, trading a couple exchanges.

Is there any consideration longer-term on a focus more towards the dividend?.

Well, I think if you, first off, we put our dividend in place in 2010 and you've seen the board increase it double-digits every October and the board will once again review it this coming October.

If you just play the long game here, Andrew, what you see is that the dividend over time double-digit increases will continue to be at or less than 20% of free cash flow.

Obviously, if you look at it on a – on an absolute dollar outflow to the extent we're also retiring 2% to 3% of our stock every year, you are really just looking at about 7% to 8% increase in absolute outlays on a dollar basis.

That's almost keeping up with pace with the growth of the business with regards to our organic improvement in cash flow and you add acquisitions on top of that.

Only thing with a long runway, we've got a tremendous amount of growth opportunities in front of us and what we don't want to do obviously is completely shift our model and start tying up 50%, 60%, or 80% of our free cash flow for dividends at the risk of not being able to fund growth.

The flexibility we have in our balance sheet and our cash flow is almost second to none. And so we are pleased to be able to pursue all growth opportunities as well as return to capital the way we do it..

All right. Makes sense. Thanks, guys..

There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks..

Okay. Thank you, operator. Well, if there no further questions, on behalf of our entire management team, we appreciate you listening to and interest in our call today. Both Worthing and Mary Anne Whitney are available today to answer any direct question that we did not cover, but that we are allowed to answer under Regulation FD and Regulation G.

We thank you again and we look forward to speaking with you at upcoming investor conferences or on our next earnings call..

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..