Good morning. My name is Sia and I will be the conference operator today. At this time, I would like to welcome everyone to the Waste Management Fourth Quarter and Full-Year 2018 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period.

[Operator Instructions] Thank you. At this time, I would like to turn the call over to Ed Egl, Director of Investor Relations. Please go ahead, sir..

Thank you, Sia. Good morning, everyone, and thank you for joining us for our fourth quarter 2018 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris; Executive Vice President and Chief Operating Officer; and Devina Rankin, Senior Vice President and Chief Financial Officer.

You'll hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover an operating overview. And Devina will cover details of the financials including guidance for 2019.

Before we get started, please note that we have filed the Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. Form 8-K, the press release and the schedule to the press release include important information.

During the call, you will hear forward-looking statements, which are based on current expectations, projections or opinions about future periods. Such statements are subject to the risks and uncertainties that could cause actual results to differ materially.

Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. Jim and Devina will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specifically references to internal revenue growth or IRG from yield or volume.

All fourth quarter volume results discussed are on a workday-adjusted basis. During the call, Jim, and Devina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and then also address operating EBITDA, which is income from operations before depreciation and amortization, and operating EBITDA margin.

Any comparisons unless otherwise stated will be with the fourth quarter of 2017.

Net income, effective tax rate, EPS, income from operations, and operating EBITDA for both the fourth quarter and full-year of 2018 and 2017 have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations.

These adjusted measures in addition to free cash flow are non-GAAP measures. Please refer to the earnings press release notes and schedules, which can be found on the Company's website, at www.wm.com, for reconciliations to the most comparable GAAP measures and additional information about the use of our non-GAAP measures.

This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern Time today until 5 p.m. Eastern Time on February 28. To hear a replay of the call over the internet, access the Waste Management website, at www.wm.com. To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 6496795.

Time-sensitive information provided during today's call, which is occurring on February 14, 2019, will no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited.

Now, I'll turn the call over to Waste Management's President and CEO, Jim Fish..

Thanks, Ed. And thank you all for joining us this morning. At this time last year, I was telling you that 2017 was arguably the best year we've seen. I'm pleased to report that 2018 results were even better. Through our continued focus on customer experience, our cost management and our price discipline, to name a few, we had a great year.

For the year, the business produced a record high in operating EBITDA, which is the best reflection of the health of our business. We grew operating EBITDA by more than 5%, in spite of the strongest recycling headwinds we've seen in over a decade. Overall, in 2018, we produced $4.20 of EPS, another year of double-digit improvement.

Devina will cover our 2019 guidance in more detail, but we are forecasting another record year in operating EBITDA this year with our growth rate expected to be about 5%.

Included in our 2019 forecast is our expectation that the strong recycling headwinds from last year will turn into a tailwind, thanks to our focused efforts on reducing operating costs in our plants and charging fees for contamination. To the extent the Waste Management is a good proxy for the overall U.S.

economy, our 2019 guidance of another record year in operating EBITDA clearly demonstrates the strength of our own business and of the economy as a whole.

As we mentioned, our operating EBITDA is the best reflection of the health of our business and our strong growth translated into the strongest free cash flow we've seen ever with the exception of 2014 when we sold our waste energy business.

We allocated close to 90% of that free cash flow to shareholder returns, growing our dividend for the 15th consecutive year and spending $1 billion on share repurchases. We also spent $466 million on acquisitions, an indicator of the active M&A environment we’re in and our ability to complete transactions at our targeted returns.

In 2018, we continue to focus on our people, disposal optimization, technology and profitable growth, all about delivering exceptional customer service.

Our strong 2018 results validate that our execution on our focused differentiation and continuous cost improvement strategies drive strong growth in our business, and we expect further progress in 2019.

Our strategic direction in 2019, will look very much like 2018, as we move forward with a cultural transformation that places Waste Management employees at the head of the class in terms of focus and importance. In December, we announced the hiring of our Chief Human Resources Officer, Tamla Oates-Forney who was formerly an HR executive at GE.

Tamla's moving forward quickly in putting world-class processes in place, upgrading talents and helping to direct this valuable cultural shift at Waste Management.

Similarly, after only 15 months under the leadership of Nikolaj Sjoqvist, our new digital team is beginning to show how our investment in operating, customer facing and back office technologies, as we migrate towards more agile cloud-based systems, can serve to differentiate Waste Management going forward, and propel profitable growth.

Lastly, on the strategic front, our 2019 sustainability forum which was held two weeks ago, in conjunction with the Waste Management, Phoenix Open, broke all previous forum attendance records and built on our message of sustainability, that is collectively good for the environment, good for our customers, and good for our investors.

That's best demonstrated by the shift in our fleet from higher cost, higher emission diesel trucks to quieter, much cleaner burning, lower cost CNG trucks.

To complement and aid shift towards sustainability and benefit from the geographic breadth of our landfill assets, Waste Management is investing in higher return energy plants at our landfills in 2019 and beyond.

This investment provides an avenue to close the loop between our renewable energy plants and CNG fleet, creating favorable returns for the Company. Our strategic focus on people, technology and growth to a superior customer experience is moving Waste Management from a leader in the waste business to being a leader in the Fortune 250.

That was no better acknowledged than with our recent recognition by Fortune as one of the world's most admired companies. Finally, as part of our strategic growth plan, we will continue to invest in acquisitions that surpass our return criteria and create value for our shareholders.

Our pipeline looks robust and there are plenty of opportunities to invest in acquisitions at a rate similar to what we achieved in 2018. So, in 2019, we expect another year of above average M&A activity.

To that point, you may have seen that we recently received Hart-Scott-Rodino antitrust clearance to proceed with the acquisition of landfill assets in West Texas. We will be buying these assets at an operating EBITDA multiple well below our trading multiple and we’re excited [technical difficulty] core Waste Management service offering.

We hope to close in March and we will provide additional details once the deal is closed. In summary, our hardworking employees made 2018, a very successful year, and we expect to see strong growth again in 2019.

We will continue to make investments in our employees and technology and in capital equipment this year to further grow our business, improve customer service and generate strong returns. We are confident that these investments will position us well for 2019 and into the future.

And with that, I'll turn the call over to John and Devina to discuss our results, and our 2019 guidance in more detail..

Thanks, Jim, and good morning. We're very pleased with our fourth quarter results, as we executed extremely well on our core price disciplined growth strategies. Our industry-leading organic revenue growth continued to drive strong income from operations and operating EBITDA growth, both ground 7% in the fourth quarter.

Throughout 2018, and particularly in the second half of the year, we've been very focused on our pricing programs to overcome inflationary cost pressures and grow margins.

As we continue to experience cost pressures in 2019, particularly labor, transportation and landfill operating cost, we will ensure that these increases are being passed along to our customers so that we can continue to generate appropriate returns and grow margins. This strategy is best demonstrated by our collection line of business.

We generated strong growth in 2018 and expect that trend to continue into 2019. As we think about the year ahead in our collection line of business, we expect to see the benefit from our investments in people, fleet and technology. First, as Jim mentioned, focusing on our people is the most important priority in 2019.

Last year, we invested a portion of our tax savings in our employees, and this year in addition to upgrading and automating our fleet, we will continue to invest in our employees through a proactive wage increases, facility improvements and additional training at our driver and technician training facility, which will open in the first half of this year.

In regard to fleet investments, 2018 truck purchases and further fleet investments planned in 2019 are beginning to drive meaningful improvement in our maintenance costs.

By the end of 2019, we expect to have over 60% of our routed vehicles running on natural gas, and we know there is a significant maintenance savings with natural gas, as compared to diesel trucks as they age.

2018 proved to be another solid year with respect to our efforts around continuous improvement and modernizing the work environment for our employees. We believe the steps we’re taking to move towards an automated fleet will continue to drive not only safety performance, which is paramount, but also the meaningful efficiency and employee retention.

This was again validated with several recent contracts that we were able to convert from the traditional rear-load model to an automated sizeable service offering. We recognized almost immediate improvement in all of those critical elements of our performance.

We are also advancing our fleet strategy through partnerships with the truck manufacturers to implement the same safety technology we have in many of our cars today.

We are looking to implement features like lane departure warnings, brake assist and collision detection that are worthwhile for enhanced safety alone, and they have the added benefit of making our operations more efficient as we avoid lost time and costs associated with incidents.

Finally, the use of technology is important to the continued growth of our collection business. We've been collecting and using data from the technology on our vehicles to anticipate and respond to our customers’ growth and needs. This is translating into lower customer churn, volume growth above U.S.

economic levels, and it's creating value for our customers and shareholders. Looking at our disposal network, as we have discussed, we have the best positioned assets in North America but we are seeing cost pressures from our third-party haulers at our transfer stations and higher landfill operating costs.

We’re focused on disposal pricing opportunities that will continue to create healthy margin in a rising cost environment. In addition, we look to continue to make technology investments, like our pilot with Caterpillar for remote operated equipments that will continue to increase the returns in these valuable assets.

Turning to recycling, we performed well in the fourth quarter as a direct result of our continued focus on improving operating costs, restructuring our municipal contracts and successfully battling contamination.

In 2019, we will look to continue to improve in recycling by investing in the MRF of the future to further improve operating costs and optimizing our plans by being thoughtful about meeting our customers' requirements.

In addition, we will continue making progress on reducing contamination, assessing fees to cover our cost of service and reduce cost of managing materials. Last week, we closed on above average amount of acquisitions in 2018, and as Jim mentioned, the pipeline looks strong for 2019.

Integrating these acquisitions is a key priority for our operating teams to ensure we manage cost, extract the value of these transactions and deliver superior service to our customers.

I'm excited about the future opportunity for Waste Management, as we believe that focusing on our people, optimizing our disposal network, better using technology and growing our business will provide strong returns for many years to come. I'll now turn the call over Devina to further discuss our financial results and 2019 outlook..

Thanks, John, and good morning, everyone. Our fourth quarter results were in many ways the strongest we saw all year, allowing us to close our 2018 on a strong note as we either met or exceeded all expectations. I'm going to start by reviewing those results in detail and then turn to our outlook for 2019.

Our top two financial priorities are growing operating EBITDA and leveraging that growth to convert more earnings to free cash flow. In 2018, we delivered on each of those priorities. Operating EBITDA in the fourth quarter grew on a year-over-year basis by more than 7%.

For the full-year, operating EBITDA was $4,216 million, over a 5% increase from the prior year and in line with our original guidance, in spite of a recycling headwind that was far greater than we could have predicted.

We converted every dollar of operating EBITDA growth into incremental free cash flow in 2018, growing free cash flow to $2,084 million, that's an increase of over $300 million or almost 18%.

This is higher than expected as the strong performance in the traditional solid waste business was supplemented by the sale of over $200 million of non-strategic businesses and assets over the course of the year. While these proceeds are always a part of our free cash flow measure, in 2018, the amount was over $100 million more than we expected.

And so, as we normalize for this difference, the result is free cash flow of about $1,975 million, right in the middle of the guidance range that we gave at the end of the third quarter. These results highlight the value of our balanced execution of disciplined pricing and targeted volume growth.

In the fourth quarter, organic revenue growth in our collection and disposal business was 5.8%. Achieving this result in the fourth quarter of 2018 is particularly impressive on the volume front, when you consider the year-over-year comparisons we were facing given 2017 hurricanes volumes.

Our notable volume performance has been driven by our commercial collection business, and our focus on customer progress has reduced our churn to 8.6%, which is over a 100 basis-point improvement from the prior year.

We have also seen service increases continue to outpace service decreases, making this the sixth consecutive year for us to achieve that result. And we are happy to see momentum on that front build. In the landfill business, volume growth has been driven by strong C&D and special waste volume, both of which grew by double digits in the fourth quarter.

As we have discussed on prior calls, the California wildfire volume contributed to the increase in our C&D volumes, which we expect to continue into 2019.

We never like to see events like this occur, but we have positioned ourselves particularly well as a strong community partner for those devastated by the fires, and as a result, expect that we will continue to see a significant fire volumes into 2019.

However, given the magnitude and uncertainty inherent in this effort, we have not specifically considered these volumes in our 2019 outlook. Turning now to cost and margins. In 2018, our operating expenses as a percentage of revenue were about 62% for both the fourth quarter and the full-year.

There were a number of variables that impacted the comparability of operating margins in 2018, but when we isolate the impact of the revenue accounting change, the special benefits we paid to our frontline employees and recycling, we are pleased with our operating expense margin improved for the year in spite of higher third-party transportation and labor costs.

These results tell us that we are growing in the right ways, executing our pricing programs to cover cost increases and create incremental margin, and continuing to operate more efficiently. In 2018, our SG&A costs as a percentage of revenue were 9.6% for the fourth quarter and 9.7% for the full-year.

This is the first time since 2005 that full-year SG&A as a percentage of revenue has been below 10%. In fact, when you compare our 2018 SG&A cost to 2012, you'll see that dollars spent on SG&A had actually come down; that's a testament to the hard work our team has done to manage our spending, even in a strong growth environment.

Together, these results drove more than 50 basis points of operating EBITDA margin expansion in the fourth quarter of 2018, and 50 basis points of operating margin expansion for the full-year. As we think about guidance and outlook for 2019, we see the strong performance from 2018 as a foundation for continued earnings and cash flow growth.

We project that our operating EBITDA will increase to $4.4 billion to $4.45 billion in 2019, growing again at about 5%, with this growth fueled by our focus on delivering industry-leading organic revenue growth. We expect core price of greater than 4%, yields of greater than 2% in collection and disposal, and total Company volume growth of around 2%.

We expect our strong operating EBITDA growth to drive free cash flow of between $2,025 million and 2,075 million, an increase of approximately 7% after adjusting for the above average asset sales in 2018 and normalizing for tax planning benefit that won't repeat.

We project capital expenditures required to support our business to be between $1.65 billion and $1.75 billion in the year ahead.

We will continue our long-standing commitment to our shareholders of using excess free cash flow to pay dividends, prioritize well-priced acquisitions and investments that will bolster our long-term organic growth, and repurchase shares. Adjusted EPS for the year is expected to be between $4.28 and $4.38.

Our 2019 guidance is based on an effective tax rate of 24%, which is almost 2 percentage points higher than what we saw in 2018. Normalizing for that as well as 2018 benefit from fuel tax credit that we are not counting on in setting our 2019 guidance, this represents EPS growth of about 7% for 2019.

We are all very pleased with the strong financial performance we accomplished in 2018 and are particularly proud of the commitments we made and will continue to make in the years ahead in building the best team in the industry. Jim, John, and I can't thank the Waste Management team enough for the fantastic year they delivered.

With that, Sia, let's open the line for questions..

[Operator Instructions] And the first will come from Michael Feniger with Bank of America..

Hey, guys. Good morning. Thanks for taking my questions. Can we just talk about on the SG&A, obviously it's a great year in 2018.

So, I was wondering how we're thinking about SG&A as a percentage of sales and going into ‘19?.

Sure. So, you're right. 2018’s SG&A performance was fantastic and definitely a result of very-focused and dedicated attention to controllable costs When we think about the baseline, what you'll see is that we’re ensuring that we manage our baseline cost of it, we can invest in the future.

And so, thinking about 2019 you'll see an increase in SG&A as a percentage of revenue to about that 10% level that we think is the right level for us long-term. And that increased SG&A is going to be dedicated towards the two strategic priorities that Jim discussed, and that's continued investment in technology and people..

The only thing I would say in adding to what Devina said is that this is not a one-year trend, this has been a continuing trend since 2012. And it's something that I talked about when I was CFO way back in 2012 and Devina has really taken the ball and continued to run with it.

So, this is something that -- it’s ongoing, but it's not something that just started to happen in ‘18..

And on the pricing, guys, I mean, core pricing was strong in the fourth quarter, 5.6%; you're guiding it to be up 4%; I think ‘18 was up over 5% for the full year, even 2017 was up close to 5%.

I'm just curious, how you're seeing that pricing playing out, at least the momentum there, and how we should think about that as we go to the second half of the year?.

Look, I think, you are right to talk about core price, Michael, because yield -- it's a bit more complicated, includes some mix component, but the core price is probably the best representation of what we’re actually passing to our customers in terms of price increase.

You mentioned a couple numbers there in ‘18 and core price was 5.3%, 5.6% in the fourth quarter, which is outstanding. And honestly when I look at early indications in January for the month, I mean January was excellent in terms of core price, in terms of yield and in terms of volumes. So, we’re encouraged to see that it is continuing.

We think we’re really in a sweet spot right now in terms of driving both strong price and accretive volumes and really no reason to see a trade-off between the two..

Understood. And just lastly, you might have mentioned this, but I think we were talking about 40 to 50 bps -- $40 million to $50 million EBITDA kind of uplift just if prices remained flat. I mean, that was -- this was a few months ago. Obviously we saw prices take it down.

Could you guys clarify what’s actually baked into the ‘19 guide with recycling?.

Yes. I mean, look, we -- it's a little bit of a hard to predict number, because there is a couple components to it. There's what we're doing on operating cost that John mentioned and what we're doing with contamination fees, and then of course there is the number which is commodity prices.

And so, we’re sticking with our prior comments that the recycling is going to be a tailwind for ‘19. The extent of the tailwind honestly is difficult to quantify right now because of this continued softening in commodity prices.

But, really, for the year, the reason we’re sticking with our prior comments about the tailwind is because of our efforts that were solely driven by contamination fees. The confirmation fees really didn't start until second quarter and they continued to ramp throughout the year.

So, first quarter, should be certainly a tailwind from those and this reduced operating cost. And then, that lessens as we get through 2019..

If you think -- Michael, just to add a little bit of color there, because there is so much variability that can happen in the recycling line of business.

The key point there is that Waste Management’s done a really good job of ensuring that commodity price volatility is no longer going to be the driver of how we think about the earnings profile of that business, moving to a model that prioritizes fee for service and getting a return on the assets that we deploy and then using technology to reduce cost over time.

Those are going to be our priorities. I think that the one data point that I would additional, if you look at our estimate for average commodity prices, we ended 2018 in the $65 to $70 range for the full-year on average. We predicted that we would be at about $70 in 2019.

And you guys know as well as I do that early in 2019, we are seeing levels that are softer than that. So, that's why we're hesitant to specifically give you a number that confirms what we had told you at the end of Q3..

I think, Devina, what I would add is the beginning of the year was certainly volatile and it’s reflected in our OpEx through Q2 but we've seen steady improvement in the last couple of quarters in our OpEx. And if you look at our results for Q4 in recycling despite kind of flattish commodity prices Q3 to Q4, we showed improvement.

So, I think it validates what Jim and Devina were talking about, Michael..

The next question is from Brian Maguire with Goldman Sachs. .

Hi, Jim. It’s good seeing you golf [indiscernible] in Phoenix. I didn’t get to see how your game was though, but was obviously very topical talking about those real waste initiatives you've got there and that's been -- seems like picking up a lot of steam and momentum, both with consumers and in the industry.

Obviously, you guys are making a lot of investments there MRF of the future and some of the -- a lot on the recycling side, a lot on the CNG vehicles. Just wondering, how you view these investments in general.

Are they -- do you sort of view them as almost defensive to sort of sustain current profitability in the industry and protect some of the turf that waste guys have or can these be offensive sort of investments that lead to new lines of business down the road that don’t really exist today?.

Actually my golf game was a little better this year than last year. So, I’m happy. But, regarding your question, we really are looking at this as being an offensive move.

When I said all along about sustainability and I said it at our forum this year, and as I spoke with Kevin Johnson of Starbucks this week about it, and my point is sustainability has to be both environmentally and economically sustainable for it to really work. And so, that's our kind of upfront goal going in.

When we think about the investments themselves, our venture group is run by Chuck Boettcher and Chuck's looking at what -- is there something we can invest in that improves the backend of these recycle plants? For example, we have a lot of waste plastics that go out of the backend.

And so, we’re charging fees on the frontend as we've said earlier for contamination. But, is there something we can invest in that produces really good returns but also is able to handle some of these waste plastics out of the backend of the plant. From a sustainability standpoint, both economically and environmentally, that would be ideal.

So, that's what Chuck and his team are looking for really around the world. And I think, we’ll find it.

I think we’ll find something that helps us improve the sustainability of our model, our recycling model, but doesn't concede, somebody is still going to contaminate their trash and we’re still going to charge them fees and we’re still going to work on to our new recycle plant of the future, reducing operating costs..

And sort of tying with that a little bit, I can't -- some of your comments from the prepared remarks, I think, you said you were maybe spending a little bit more CapEx.

And I think it maybe was methane recovery at the landfills in 2019, can you give a little bit more color on that? And just in general, the step-up in CapEx doesn’t seem like a huge amount, but it is a little bit higher from already elevated 2018 levels, just wondering is that continued fleet modernization or some of these new initiatives that you're just talking about on sustainability and environmental things?.

Right. So, you’re right. I mean, it’s -- well last year, actually on a percent of revenue, which is kind of how we look at CapEx on a percent of revenue, 11.4% of ‘18 and middle of the range is 11 percentage, maybe 10.9 this year. But keep in mind that doesn't include -- our guidance does not include capital or EBITDA for these renewable energy plants.

The renewal energy plants are a way for us to close the loop. We've made a big investment in natural gas trucks. It’ll be over 60% of our fleet at the end of the year, will be CNG; they are cheaper from a maintenance standpoint; there is all bunch of reasons why natural gas trucks are good for us.

But, what this allows us to do because now we have such a big natural gas fleet is really close the loop through the modernization of these credits that are available to us by building these plants. The reason I say that it's not in either the CapEx guidance or the EBITDA guidance is because there's a timing difference.

It takes 12 to 14 months to build these plants. So, when we go through our capital committee process, if we decide that we're going to build out a renewable energy plant, the paybacks on those are excellent in three to four years. So, they’re kind of no-brainers in terms of investments.

But we also have to -- investors have to recognize that there is a timing difference. And we don’t attempt to match them on a calendar year with the returns, simply because you're looking at a 12 to 14-month construction period for the plants. And so, the CapEx obviously takes place upfront..

And I would add on the normal capital number to your point that it being elevated from kind of those historical norms of the 10%, really has to do with the growth that we’re seeing in the solid waste business. We've invested in the fleet and we're also investing in additional airspace at the landfills.

I mentioned CNG and special waste volumes, both being up double digits. And so, constructing airspace to keep up with that growth is something that we’re committed to. And so, those are the main drivers of the elevated spend that in a growth economy and a growth environment for our business we’re certainly seeing that as a worthwhile investment..

Okay. Last one for me. Jim, I think you mentioned you get some regulatory clearance in March; you're closing some landfill assets in West Texas. I recognize that was kind of a hole in the portfolio out in the Permian for you guys.

But, I'm just wondering with the decline in oil prices, why now is the right time to be investing in there? And do you feel like you got the appropriate multiple on those businesses, given where oil prices are now?.

Yes. We feel really good. As I mentioned in my script, we feel really good about the multiple that we’re buying this at. And we really didn't have a presence in the Permian basin, which if you are going to be in that energy services space in the United States, that's the big void. That's the one you have to be in.

And so, this is something we've been looking at for a while, and this one, we really felt like was the right fit for us. So, we will give more details on the financial side of it, once we close this, but we’re excited about the strategic value of this and we’re certainly excited about the multiple that we're getting it at..

The next question will come from Hamzah Mazari with Macquarie Capital. .

My question is around capital allocation. I realize you have a $1.5 billion authorization.

But, just any thoughts as to how to think about the pace of buybacks in ‘19 and as well as any kind of updated as how you're thinking about large M&A, either in solid waste or outside solid waste?.

Sure. So, I'll start, Hamzah, good morning, and then, turn it over to Jim to talk a little bit more about the M&A landscape. But, as he mentioned during his prepared remarks, if you look at 2018, we spent over $450 million on acquisitions, and at the same time bought back $1 billion of our stock.

In 2019, we expect that M&A spending could be in the $200 million to $400 million on that core solid waste tuck-in spend where you are more accustomed to seeing that being more in the $100 million to $200 million range for us. So, when we think about that level, we're planning share repurchases of about $800 million for 2019.

And should we see a different outcome on the M&A side, we will flex that as appropriate to maintain a strong balance sheet. .

Yes. And Hamzah on the M&A front, really as Devina said, I mean, we tend to do a handful -- probably several handfuls of these smaller tuck-in type acquisitions where the benefits are really exciting synergies. And those are right out of the middle of the fairway.

And then, we’re looking at -- as is the case with this -- with Petro Waste, looking at something that's core to us because it is landfill assets, but it’s also in place that we wouldn’t normally be otherwise, if we wanted an energy space. We're not going to be out in the middle of West Texas if we weren't doing this for energy purposes.

So, I think with respect to the latter, that's why we really had to buy that at well below our trading multiple because it doesn’t come with the synergies that a tuck-in comes with. But, we feel good about that multiple.

And then with respect to those tuck-ins, we always feel good about the fact that we buy those at multiples, and then wheel them down to the tune of 2, 3, even 4 turns through synergy monetization..

And then, just in terms of -- are you thinking about cyclicality of this business differently, if things were to slow? I know 2009 volumes were down 10%, nobody expected that. That was obviously a great recession.

But, how do you think about cyclicality of your business and defensive qualities, if things do slow down?.

Yes. I mean, look, here is what I would say. We do think about it. We’ve talked a lot about what happens if the economy turns down, there has been a lot of chatter about that a bit earlier. It feels like that's tapered off a bit.

We’ve said this I think many times and that is that 2009 -- I mean, we all know there's a recession coming at some point, we just don’t know when. And 2009 was a bit different than the normal recession because it was so driven by housing. And so, our business really on the housing side has not returned to where it was in 2009.

But, when we look at the indicators that might lead us to believe that a recession is on the horizon, the best indicators for us are our volume numbers in our commercial collection business, our special waste business, which is a good indicator of the industrial economy and our C&D volumes at our landfill.

And really, all of those look strong right now. We tend to be more of a lagging indicator than a leading indicator. But, those tend to be somewhat leading. And all of those look strong right now and that carries over into January when we looked at our volume numbers in January and they were very strong on those three measures as well.

So, we do focus on it and we want to make sure we're not caught off guard by a downturn in the economy. Hence, the real attention that we pay to efficiencies and cost control. But the good news is right now we're not seeing that softening that's been talked about over the last few months..

And from a defensive nature, Hamzah, I mean, it's a very good point anytime it's made about our industry and our business, there's a great deal of discipline in the industry today. But, I think last time around, maybe we weren't always good at. So, we can certainly flex down our capital expenditures. You've seen us flex our SG&A costs.

And we would be well-positioned to do those things that we saw from softness in the volume environment going forward..

Great, just a follow-up question and I'll turn it over. On customer churn, could you remind us how you're calculating churn? Is it on a dollar basis, is it something different? And then, is there any more room to improve that further? Thanks..

I think there is -- John go ahead..

Yes. I was going to say, we're doing on a customer -- we look at both ways [indiscernible] and the customer count.

And yes, we’ve talked about how much of that is structural, but as you're seeing year-over-year, even in a growth environment, one of the ways we're getting that growth and that growth is that we've improved service, and you're seeing in our churn rate, which has come down year-over-year and quarter-over-quarter. .

And I'd say, your last point there, Hamzah, I still think we have some opportunity. You asked a question and rightly so, over the last few quarters. And I still think we have some opportunity. We were really happy with the improvement and we finished at 8.6%. But, look, I think we can get down below 8%.

And then where we go from there is more aspirational. But, I think structural, I think, the business can certainly be below 8%..

The next question is from Tyler Brown with Raymond James..

Hey, Devina, couple of modeling questions. But, what are your expectations for total revenue growth in ‘19? So, basically, what I'm driving at is, what is your assumption for the net benefit from M&A in ‘19. It looks like you had quite a bit of action at the end of the year including maybe some divestitures..

Right. So, both acquisition activity and divestiture activity were a little elevated for us in 2018. The net impact to revenue in the year was about $65 million to revenue rollover, we expect to be about the same, and then with incremental acquisitions I would say that it's about a 1% increase in revenue.

And if you add that to the 2% yield plus guide and about 2% volume, it'd be around the 5% mark..

Okay.

And to be clear, is Petro Waste in that guidance?.

No. It's not specifically included in the guide..

Okay. That's helpful..

Acquisition growth in the $200 million to $400 million range was included in the guide. So, you can think about the Petro being a piece of that puzzle potentially. But, we're going to wait until after the first quarter to revisit the total M&A guide for the year, beyond the $200 million to $400 million..

And then, I just want to make sure we all have it.

But, how big of a headwind in Q1 specifically will the CNG tax credit and recycling be in terms of EBITDA or EPS?.

So, the CNG tax credit was $28 million in operating expense benefit in Q1 of last year; it didn’t show up in cash flow until the second quarter. From a recycling business perspective, we actually expect some upside from recycling, though with the softness in commodity prices we've discussed, it's hard to predict how much that will be..

And then, Jim, just a bigger picture question, but it seems like the solid waste market is really a affording maybe 4% to 5% organic growth. You're looking at call it 2 plus 2 in ‘19, which is obviously very healthy.

But, conceptually, is 2 plus 2 a function of your to go-to-market strategy, or is it a function of what the market is affording? I mean, obviously, volumes require capital, the airspace et cetera.

Maybe why not turn up the pricing dial and turn down the volume dial, particularly in an inflationary environment?.

So, look, Tyler, here is what I would tell you about the kind of the 2 and 2 for a total of 4 here is that it's very similar to what we gave last year; in fact, I think it was 2 and 2 and 4% on -- also 4% on core price. And it's not that different from what we gave in ‘17, although it's higher on volume.

I think in ‘17 we kind of gave 4% core price 2% yield and 1% volume. So, it's pretty consistent with what we've been giving over the last couple of years. Obviously, when you look at our 2018 performance on those metrics, you might say well there is some upside, and we wouldn’t disagree with you on that.

But, we don't want to get out of -- over our skis too much. There has been, as I mentioned earlier, there has been some conversation in kind of the -- with respect to the macroeconomic climate that things might be softer. Again, we're not seeing that, but for guidance purposes, we wanted to be a bit cautious when we gave our guidance on top line.

But, we do recognize that that could be a bit of upside. .

I think, the one area that we've talked about and we're going to continue to talk about and focus is post collection pricing, both landfill and transfer station. You heard us all talk about some of the pressures we’re seeing from our third-party transporters and all the pressure on the network to be able to move volumes.

I think, if you look at the results you're going to see that our focus on the core price side and the transfer and landfill piece has improved. But, as Jim mentioned, I think, that's the one opportunity there, particularly as we see the volumes improvement, and we’re trying to mitigate some of these cost pressures that we’re facing..

And Tyler, I would add that I really don’t think for us in this environment we view price and volume at all as a trade off. We see the incremental volumes that we’re achieving in the marketplace providing better flow through than our existing business, and that's important.

And so as long as we continue to see EBITDA margin on incremental volume exceed our existing margins, and we can control the capital at a reasonable level and see return on invested capital grow at the same time, we’re going to continue to see volume growth as a good addition to the price discipline that we bring to the market..

And maybe lastly, Devina, if I walk down the EBITDA to free cash flow waterfall, so I start with EBITDA add in stock comp, maybe take out closure, post closure, cash interest, cash taxes, all the CapEx, it still feels like you need a little bit of a working capital benefit to get to the free cash flow guidance.

Am I right there?.

We're expecting about a little bit of a repeat of the working capital benefit that we saw in 2018 and the in the year ahead. But other than that, yes, I think, you have it exactly right. The one thing that I would say is we have a $75 million -- I think, I mentioned in my prepared remarks that we had a tax planning benefit in 2018 that won't repeat.

So, that does provide a little bit of a headwind, if you look at the interest and tax piece of the equation in 2019. But that is included in our guidance. So that emphasizes your point on working capital. We expect to see some value there..

The next question is from Noah Kaye with Oppenheimer..

So, you know that the volume guidance of 2%, as you said that that doesn't contemplate or include the fires, and obviously you're coming off a tough comp year-over-year including some large new contracts that you talked about.

Any large new contracts or items that you would call out as drivers for the volume growth this year?.

I think, the one that we spoke about which we just about anniversaried is the city of Los Angeles, obviously that was a big implementation for us and drove a lot of the puts and takes in our volume last year. But outside of that, there's not one that I would call out..

John, we may see a little bit of impact positively in ‘19 with respect to the city of Los Angeles was the start up cost side. So, while the top line may not show much due to the anniversering, we did see some start up costs that really persisted through a big part of last year, and that should start to mitigate..

We should start to lap that..

Yes..

Understood, thanks. And then, I guess, I wanted to follow up on Devina’s previous comment that you're seeing the EBITDA margin on new volumes exceeding additional volume. I guess, if we look at the revenue guide and EBITDA guide, if we’re doing our math right, it kind of assumes flattish EBITDA margins year-over-year.

So, I guess, the question is, should we be seeing higher operating leverage at this point? Is there anything you can do to get margin expansion in ‘19 considering that we don't have the recycling headwind, and it is a very healthy environment for growth?.

Yes. I think, it’s a great point, Noah. And when we look at the guidance for 2019, what I think is important to point out is that we do expect solid waste margins to improve by about 50 basis points.

And in 2018, we saw the same results; they were just muddied up a little by the impact of hourly bonus as well as the recycling line of business that you mentioned. And so, when we strip away all of that, we generated 50 basis points of solid waste margin expansion in 2018. We expect to do the same in 2019.

Where you're going to have an offset on the EBITDA line is the incremental SG&A dollars that we expect to invest in technology and people. And so, the solid waste business is performing exceptionally well and we're getting the right leverage also with that incremental volume..

Noah, it's John.

I would probably revisit or add to that, one area we're clearly focused on has a lot to do with the cost pressures and transportation pressures that I mentioned earlier is on landfill and post collection pricing and making sure that we're recognizing that all the pressures that we're seeing through the transfer and landfill networks to make sure that we're overcoming those cost pressures..

And perhaps a finer point as well that’s worth mentioning is we actually are seeing increases in our recycling volumes. A lot of those increased recycling volumes are in our brokerage business. And so that does mute the margin expansion of the overall business a little as well..

Right. So, that shift to brokerage is as you said in the past, it's about 5% EBITDA margin business, so that will have an impact as well. All right. This is very helpful color. Thank you..

The next question is from Sean Eastman with KeyBanc Capital Markets. .

I know, it's tough on the recycling to give a number on the anticipated tailwind for ‘19. But perhaps just assuming a stable underlying commodity price environment, I'm trying to get a sense for what portion of the benefit is coming from the contamination fees relative to the operating costs.

And maybe if you can provide some context on how far through the portfolio you guys have worked through on the contamination fees, and perhaps on a percentage basis, how much those operating costs have come down over the last year or so?.

Let me start with kind of kind of -- we’ve kind of broken out this -- the contamination fees in a couple of different buckets. One is municipal contracts, obviously, which I mentioned. And I would tell you, we’re mid innings on there. As you might imagine, the contract cycle is longer there. So, we’re working our way through that.

So, that's where we expect to see the upside going into ‘19 and beyond. The first two phases were a little bit easier, if you will, to execute on, although the buckets weren’t quite as big, which is making sure that our own internal customers -- commercial customers are giving us the material that we expect.

And then, lastly, it is making sure that when material hits the floor that the contamination levels are not above what we can otherwise process. So, there is three buckets around that.

I mentioned earlier, our OpEx from a MRF standpoint kind of peaked in Q2, which probably shouldn’t come as a surprise to anyone because there is a obviously lot of volatility in the market at that point. And off the top of my head, we've probably come down about 4% to 5% in our operating cost per ton since then.

But, if you look at Q3 and Q4, we kind of stabilized revenues, and we've continued to make improvements and the overall MRF performance at those cycling plants suggests that what we're doing around contamination is that -- it is driving a big piece of that improvement..

And Sean, I think the original number we gave in terms of tailwind was $40 million to $50 millionish, something like that. And that was -- we always qualified it by saying that assumes flat commodity prices from where they were. They have come down a bit. So, they’ve softened a bit more, and that's why we’re a bit hesitant to give a number.

But, I think, suffice it to say, it's going to be somewhere of between -- it's going to be a tailwind, we just don’t know exactly what it's going to be. If it flattens from here, I would say, we're going to stay where we are now.

We haven't -- I don’t know that we know the number, but I think it's probably in the 20 to $30 million range would be my guess. But, then, again, I'm not sure it flattens here. It may return back up to where it was a couple months ago. So, that's why we’re a little uncertain about it.

But, the number that we gave originally, assuming flat commodity pricing back at the end of the third quarter was 40 to $50 million.

And if it does return to that, I think you will see us kind of in that range with the things that John mentioned, as well, continuing to work on kind of that phase 3 of contamination fees with the municipalities and then also an added focus on operating costs..

Sean, this is probably the toughest quarter to call just because this is generally a volatile market from a commodity standpoint with what’s generally going on overseas. .

And the second question I have is, you guys are talking a lot about technology, it's -- those investments are having a visible impact on the SG&A line this year. You guys did mention a few initiatives.

But, I just want to make sure I understand exactly what the big technology goals are in terms of implementation for this year relative to those investments flowing through SG&A.

Whether there's some core sort of KPIs you guys are targeting or some sort of payback period on those investments, just want to understand those dynamics?.

So, certainly, Nikolaj and his team are looking at -- once we came an investment in a -- whether it's a customer-facing technology, whether it is really a use of data and analytics, they do have a very prescriptive scoreboard, if you will, and they're looking to see what kind of returns we get for those.

So, we’ve recently rolled out a tool for our open market residential customers, and it's showing really, really promising results. And so, the payback on it is we think is very short. But it’s -- open market residential was not a huge business for us.

The big question will be what happens when we roll out a customer-facing technology for one of our bigger lines of business, like commercial. We wanted to walk before we ran. And so that's why we chose to go with OMR [ph] first. It is very promising in terms of the results that it's generating.

Once we move to some of our bigger lines of business such as commercial or roll-off, we expect that those will also have short paybacks on them. But, we're in the process of kind of building those out right now.

And then, the use of data and analytics, largely for John's purposes right now, I mean as you think about, he's talked about maintenance cost and how we use data and analytics to really help us with things like predictive maintenance, we're doing some pilots on that.

And those we think will definitely bear some fruit and we do have a metric that we're using to gauge that..

The next question is from Michael Hoffman with Stifel..

Hey. Thank you. Jim, you sound like you have a cold too.

Devina, am I correct -- we're talking about $100 million is what the SG&A swing is for investing in Nikolaj’s projects?.

That's about right. Yes..

And just to follow up on the last one.

So, typical three-year paybacks, way to think about that and mid-teens unlevered IRR, and that's the way to think about the sort of leverage on that?.

Yes. That's a great way to think about it..

Okay. And then, on free cash flow, I get you sell things periodically. That's the swing in the numbers. If I strip that out over the last three years, and I look at the sustainable growth between them, like ‘17 to ‘18 you are up 12%, but ‘18 to ‘19 you're up sort of mid 5s.

Is it appropriate for me to sort of smooth those two numbers and say that we can talk about a 6% to 8% sustainable free cash flow growth rate under the current business climate?.

That's where we are. Yes. We definitely are happy that if you normalize ‘17 to ‘18 for taxes and interests and the proceeds from divestitures and do the same for ‘18 to ‘19, we're in about a 7% annual growth environment..

I think, Michael, one of the questions that you’ve all had of us is how is this -- you're EBITDA, which is really the long pole in the tent, right? I mean, how is that converting to cash, how is it converting to free cash flow? And if we look at ‘17, ‘18, ‘19, ‘19 of course is our guide, so if we look at that we're pleased, very pleased with that.

I mean ‘17 was 42.2; ‘18, if you strip out some of those one-time tax planning and normalize the divestiture, I mean we're always going to have some divestitures in there. So, I'm not saying take it out completely but more of a $100 million in divestitures than the big year that we had this year.

If you normalize ‘18, 45.1 and then when you look at our guidance for ’19, 46.3. So, somewhere between 90 basis points to 120 basis points of the annual growth in that conversion ratio. And by the way, remember, it was too long ago that we’re -- that number started with a 3 and it was really the mid-3s.

So, we’re now on a path to something that starts with the 5; we’re really pleased with that conversion from EBITDA to which is 5% last year, 5%ish this year to cash. .

And then, to do this waterfall bridge differently on your EBITDA $4,216 million, midpoint 4,425, that's 209. But, I got to factor in there, there is a $100 million of the SG&A.

So, the solid waste and recycling is really up 300 something is that the way to think about that?.

That's exactly right..

That's why, Michael we -- it's pretty easy to kind of say, hey, -- and nobody has actually this morning, but it's easy to say, what about your bonus, why not add that or why not add your recycling benefit. And there -- as we all know, there's a lot of puts and takes on the EBITDA number.

And the -- what we’re really focused on is the big number itself, which is -- grew 5% last year and will grow another 5% this year that was 2 times the economy last year, 2 times GDP last year and it could be as much as 2.5 times.

So, so we're very pleased with the EBITDA growth, which in our mind is that is the best indicator of the health of the business..

And to that last bit, Devina, what's the number for 2018 when you talk about the solid waste business? So, that when you make that statement, the solid waste business, what is that revenue number?.

The revenue number? We’ll have to get back to you, Michael. And we've got good information in the tables, but we’ll clarify how we’re thinking about that.

So, when we look at the solid waste business in the 2018 relative to 2017, we saw over $300 million of EBITDA growth in that business, which makes sense because the $210 million of EBITDA growth that we talked about had that $90 million of headwind from the recycling line of business. It was really a stellar performance. .

Okay. That's part of what I was trying to get at, but I also -- it's hard for people to see the margin expansion in that business, given the way that that is provided but maybe a little clarity on that would help..

Okay. We’ll take that into consideration..

And then, one last thing for you, Jim.

I'm assuming these renewable energy projects, as you experience in CNG credits, come and they go, so they are good return on capital, not counting on the RINs are there forever?.

Yes. That's right. And look, the RINs are -- there is some volatility to those RINs. But, we feel like they're really good investments for us and so -- our interest in them. And they made available to us because of the not only our landfill gas but also this CNG conversion that we’re making over a period of years..

The final question is from Jeff Silber with BMO..

Hey guys. Good morning. It’s Henry Chien calling for Jeff. I wanted to ask about the volume guidance for 2019 just in relation to some of the comments, that sounds like there's a little bit more skew to commercial and C&D.

I am just curious how you're thinking about the sort of sensitivity of that number and volume growth to different parts of the economy. So, just thinking if housing starts continue to get weaker or stronger or any other -- or the industrial economy and so forth.

Is there any kind of changes in the sensitivity of that volume, as you look forward to this year?.

Yes. Henry, I think Devina mentioned it earlier. I think, when you look at our special waste pipelines and our C&D pipelines. We obviously had a strong 2018 and we still see health in those pipelines. I think, Jim and Devina both commented on the commercial line of business.

And we -- service increases versus decreases is certainly a good barometer along with our other sales activity. And while we're kind of looking out at the horizon to make sure we're not missing something, the short-term outlook is still strong. In fact, as Devina mentioned, the service increase and decrease ratios actually improve as the year goes on.

So, we have not seen softening in those buckets as of yet..

And we certainly take into consideration a lot of attention in our business is paid to housing starts and new business formation. And so, those two data points are important to us. We're a lot less directly tied to housing than we were with the last downturn.

And that's valuable for us in thinking about the confidence we have in achieving that 2% margin growth in the year..

I would also add, Henry, when you look at the tables in the back on MSW line, if you net out some of the one-time things, we really look at that as being about a 3.5% to 3.7% increase in volume when you kind of normalize it for some one-time issues. So, all our volume fronts look pretty consistent and strong as we sit here..

There are no further questions. At this time, I would like to turn the conference back over to management for any closing comments..

Great. Thank you. So, to conclude, first, I do understand Ron Mittelstaedt was not on his call this morning due to a family emergency. And Ron is a friend of mine. And I just want to say to Ron that we're thinking about him. He's definitely in our thoughts and prayers this morning.

Regarding the business, the last few years and we've talked about it this morning, but the last few years and our expectations for this year really demonstrate our consistency in managing our business.

And we're producing what we consider to be excellent growth in all of our financial and operational metrics and very solid returns to shareholders, and I could not be more proud of this team for doing that. Thank you all for joining us this morning. And we will talk to you next quarter..

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect..