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Waste Connections, Inc. (NYSE:WCN)
Q2 2018 Earnings Conference Call
July 25, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please standby. Your conference call will begin shortly. Once again, please standby. And thank you for your patience.

Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections second quarter 2018 earnings conference call. During the participation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference, you need to reach an operator, please press * 0. As a reminder, this call is being recorded Wednesday, July 25, 2018. I would now like to turn the call over to Mr. Ron Mittelstaedt, Chairman, and CEO of Waste Connections. Please go ahead, sir.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Okay. Thank you, operator. And good morning. I'd like to welcome everyone to this conference call to discuss our second quarter 2018 results and updated outlook for the full year as well as provide a detailed outlook for the third quarter. I'm joined this morning by Worthing Jackman, our president, Mary Anne Whitney, our CFO, and several other members of our senior management team. As noted in our earnings release, continue strength in solid waste pricing growth, E&P waste activity, and acquisition contribution enabled us to exceed our outlook for the second quarter, overcoming increased headwinds from recycling and a weather-delayed ramp in special waste activity across many markets. We are especially pleased with our year-to-date adjusted EBITDA margin expansion and adjusted free cash flow generation in spite of these headwinds as well as our upwardly revised revenue, adjusted EBITDA, and adjusted free cash flow outlook for the full year.

As we look ahead to 2019, we believe we should be well positioned for above-average revenue growth and margin expansion as current favorable trends for solid waste pricing, E&P waste activity, and acquisition contribution should remain in place, and the current negative impact from recycling headwinds and reported negative volume growth primarily associated with our purposeful shedding of lower quality solid waste revenue should abate. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

Thank you, Ron. And good morning. The discussion during today's call includes forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ material from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement on page three of our July 24th earnings release and in greater detail in Waste Connection's filings for the US Securities and Exchange Commission and the securities commissions 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 events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operation. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Okay. Thank you, Mary Anne. In the second quarter, solid waste pricing growth was 4.2%, in line with our expectations and up 110 basis points year-over-year. This increase reflects not only our disciplined execution to overcome recycling headwinds and certain cost pressures but also the strength of the underlying economy. Pricing range between 3% in the mostly exclusive markets of our western region to upwards of 4.5 and 5% in our more competitive regions. Reported volume growth in Q2 was negative 1.5% due primarily to our purposeful shedding of less attractive revenue across the former Progressive Waste footprint, particularly in Canada and the Northeast which accounted for an estimated 85 basis points of reported negative volume growth in the period, most of which should abate by the end of Q3.

An additional estimated 35 basis points impact to volume growth can be attributed to the permitted volume limitations imposed by the new conditional use permit at our southern California and Chiquita Canyon landfill in Q3 of last year. And finally, a decrease in volumes at our New York City transfer stations reduced reported volumes by almost 25 basis points as a result of the ramp-up of the Department of Sanitation's marine terminal operations contract with a third party. Net of these items, overall volumes in Q2 were about flat, largely as a result of what we view as weather-related impacts across many markets which delayed the more typical seasonal uptick in higher margin landfill volumes, most notably, special waste. As will be noted later in our Q3 outlook, we expect volume growth to improve sequentially by between 50 and 100 basis points Q2 to Q3. On the same store basis in the second quarter, commercial collection revenue and roll-off revenue, each increased approximately 5% from the prior year period.

In the US, roll-off polls per day increased 2.9%, and revenue per poll rose about 3.1%. In Canada, polls per day decreased by 7.9% which was primarily related to the purposeful shedding of lower quality revenue and lingering winter weather conditions but was largely offset by a 4.9% increase in revenue per poll. Solid waste landfill tonnage in Q2 on a same-store basis decreased 4% over the prior year period but was essentially flat year-over-year excluding the impact of limitations imposed by the new conditional use permit at our Chiquita Canyon landfill in Southern California. MSW tons were flat. C&D tons increased 6%. And special waste tons decreased 18% or about 5% net of Chiquita Canyon's new limitations which, as we have noted on earlier calls, anniversary at the end of this month. The remaining reduction in special waste volumes is attributable to both difficult prior year comparisons and, we believe, weather-related delays that might shift the timing of projects into the second half of the year.

As expected, we're already seeing a ramp in such activity at certain sites as this quarter begins. Recycling revenue, excluding acquisitions, was about $21 million in the second quarter, down $19 million or almost 48% year-over-year due to the continued declines in both the value of and the demand for recycled fiber, especially recovered mix paper. Prices for OCC or old corrugated containers in Q2 averaged about $95.00 per ton which was down 45% from the year-ago period and down 8% sequentially from Q1. Mix paper revenue declined almost 18% year-over-year. We believe the decrementals related to the reduction in recycling revenue increased from about 85% in Q1 to 95% in Q2 due to higher year-over-year declines in fiber values in the period and increased recycling processing costs. As such, we estimate the [inaudible] reduction to have impacted EBITDA by approximately $18 million and earnings per share by $0.05 in Q2 compared to the year-ago period.

Looking at E&P waste activity, we reported $60.2 million of E&P waste revenue in the second quarter, up 28% year-over-year and 8% sequentially from Q1. We expect our current revenue run rate to continue at this approximate level unless we see a significant shift in crude oil prices, an increase in drilling activity in other basins, or until new, additional facilities come online. We've commenced construction on three new projects, two of which further expand our asset positioning within the West Texas Permian and one of which expands capacity at an existing facility. In addition, we expect to commence construction on another new project later this quarter. These four projects should provide additional growth opportunities beginning in the second half 2019. Looking at our acquisition activity, we've already closed on what we would consider an above average amount of acquisitions for the year. And the pipeline for potential additional transactions remains at an elevated level.

Year-to-date, we have acquired approximately $175 million of annualized revenue, including three $45 to $60 million revenue new market entries in Arizona, Rhode Island, and Virginia and tuck-ins in Arizona, Florida, Idaho, Nebraska, North Carolina, New York, South Carolina, Texas, and Alberta. As additional transactions in our pipeline may begin to close later this year or early next, 2019 is setting up to be another year of above-average M&A contribution. Our strong financial profile and great cash flow generation provide us a flexibility to not only invest in new growth projects and fund expected continuing above-average acquisition activity but to also increase our return of capital to shareholders through double-digit percentage increases in our quarterly dividend each October and opportunistic share repurchases.

Now I'd like to pass the call to Worthing to review more in-depth the financial highlights of the second quarter. Mary Anne will then provide a detailed outlook for Q3 and discuss our increased outlook for 2018. I will then wrap up before heading into Q&A.

Worthing Jackman --President

Thank you, Ron. Good morning. In the second quarter, revenue was $1.24 billion, up $64.4 million over the prior year period. Acquisitions completed since a year-ago period contributed about $55.8 million of revenue in the quarter or about $33.3 million net of divestitures. Adjusted EBITDA for Q2 as reconciled in our earnings release was $395.5 million or slightly above our outlook for the period due to higher than expected revenue. In spite of the high margin data flow through impact from increased recycling headwinds and difficult year-over-year special waste comparisons, adjusted EBITDA in the period increased almost $22 million year-over-year or about a 34% flow through on the change in revenue. Adjusted EBITDA as a percentage of revenue was 31.9% in Q2, up ten basis points year-over-year but 30 basis points below our margin outlook.

Put simply, it took more revenue in the period to overcome higher than expected headwinds from recycling and the weather-related delay and the seasonal ramp in high margin special waste activity. Fuel expense in Q2 was about 4% of revenue, up 35 basis points year-over-year. W3 averaged approximately $2.75 per gallon for diesel in the quarter which was up about $0.31 and $0.07 per gallon respectively from the year-ago period and sequentially from Q1. Depreciation and amortization expense for the second quarter was 13.6% of revenue, up 20 basis points year-over-year due to increased appreciation expense from capital expenditure outlay since the year-ago period. Interest expense in the quarter increased $1.3 million over the prior year period to $32.4 million due to higher interest rates as compared to the prior year period. Net of interest income from invested cash balances, interest expense in the period was $31.4 million.

Debt outstanding at quarter end was about $3.8 billion, approximately 27% of which was floating rate. In our leverage ratio, as defined in our credit agreement, the clients at below 2.4 times debt to EBITDA as we continue the cash flow into acquisitions. Our effective tax rate for the second quarter was 23.5% or 22% net of certain items in the period primarily related to both internal finance and restructuring and a reduction in our deferred tax liabilities resulting from changes in state legislation and acquisition impacts. Looking at the remainder of 2018, we now expect our effective tax rate to be approximately 22.5%, subject to some variability quarter to quarter. Gap and adjusted net income for diluted share were $0.52 and $0.65 respectively in the second quarter.

Adjusted net income in Q2 primarily excludes the impact of intangible amortization and other acquisition-related items as well as impairments associated with the termination of certain contracts assumed in the Progressive Waste acquisition, primarily in conjunction with purposeful shedding. Adjusted free cash flow in the first half of the year was $472.7 million or 19.9% of revenue and up 20% year-over-year. Now let me pass the call to Mary Anne.

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

Thank you, Worthing. I will now review our outlook for the third quarter 2018 and updated outlook for the full year. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statements and filings we've made with the SEC and the Securities Commission or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment. It also excludes any impact from additional acquisitions or divestitures that may close during the remainder of the year and expensing of transaction-related items during the period. Looking first at Q3, revenue in Q3 is estimated to be approximately $1.27 billion. We expect price growth for solid waste to be between 4% and 4.5% in Q3 with volume losses improving sequentially to between negative .5% and negative 1% reflecting up to a 100 basis points improvement over Q2.

We expect continuing sequential quarterly improvements in volume growth as we anniversary the much-discussed purposeful shedding of lower quality revenue and the volume limitations imposed at Chiquita Canyon that commenced last August. Adjusted EBITDA in Q3 is estimated to be approximately 32.5% of revenue or about $413 million. Q3 is likely our most difficult year-over-year margin comparison due to both recycling, where value peaked during the prior year period and E&P waste activity where we begin to anniversary more difficult comparisons given the quarter to quarter sequential ramp in that activity last year. Margins should expand again beginning in Q4 as recycling headwinds begin to ease somewhat. To provide context for everyone, this guidance for Q3 of 32.5% would equate to approximately 33.5% adjusted EBITDA margin at last year's commodity values. Depreciation and amortization expense for the third quarter is estimated to be about 13.6% of revenue.

Of that amount, amortization of intangibles in the quarter is estimated to be about $26.6 million or about $0.07 per diluted share net of taxes. Interest expense net of interest income in Q3 is estimated to be approximately $32 million. Finally, our effective tax rate in Q3, as noted earlier, is estimated to be about 22.5% subject to some variability. Turning now to our updated outlook for the full year as provided and reconciled in our earnings release. Revenue for 2018 is now estimated to be approximately $4.88 billion or $55 million above our initial outlook, due primarily to higher than expected contributions from acquisitions, E&P waste activity, and solid waste pricing being somewhat offset by greater than anticipated declines in recycling revenue, the weather delays, seasonal ramp, and special waste activity, and, to a lesser extent, current weakness in the Canadian dollar. Adjusted EBITDA for the full year is now estimated to be approximately $1.555 billion or about 31.9% of revenue.

And that's about $5 million over our initial outlook. We believe this conservatively reflects current high decrementals associated with year-over-year headwinds in both recycling and special waste activity. Adjusted free cash flow in 2018 is now expected to be approximately $860 million or more than 55% of EBITDA and up $10 million from our initial outlook. This outlook assumes an estimated $30 million increase in growth-related CapEx primarily associated with the four new E&P waste projects discussed earlier, raising our total estimated CapEx for the year to approximately $530 million. And now, let me turn the call back over to Ron for some final remarks before Q&A.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Great. Thank you, Mary Anne. Again, the underlying fundamentals of our business remain strong, and we are extremely pleased with our year-to-date performance. We'd especially like to recognize and thank our folks for the development and implementation of action plan to address the increased headwinds previously discussed. Although the quarter to quarter margin comparisons this year are somewhat atypical given the magnitude and timing of these headwinds, we are pleased to have raised our outlook for 2018 with continuing expectations for a full year margin expansion. Pricing growth of 4% plus has driven margin expansion for us in 2018, as we do not have the beneficial margin expansion optics others may have from either a change in accounting or significant revenue declines in the very low margin recycled brokering business.

More importantly, as noted earlier, we believe we should be well positioned for above-average revenue growth and margin expansion in 2019, as current favorable trends for solid waste pricing, E&P waste activity, and acquisition contributions should continue. And the current recycling headwind reported negative volume growth primarily associated with purposeful shedding of lower quality solid waste revenues should abate. This should result next year in price led organic growth of between 4% and 6%, and additional 3% to 4% revenue growth from acquisitions, and at least a 50 to 75 basis point adjusted EBITDA margin expansion, excluding the impact of such additional acquisitions, and another double-digit annual increase in free cash flow per share. We appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. Once again, to register a question, press 1 4 on your telephone keypad. And our first question comes from the line of Brian Maguire of Goldman Sachs. Please proceed with your question.

Brian Maguire -- Goldman Sachs -- Analyst

Hey. Good morning, guys.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Good morning.

Brian Maguire -- Goldman Sachs -- Analyst

Ron, I think you slipped in some comments on the 2019 outlook bridged there at the end. Just wondering if you could repeat those quickly. And tied in with that, around the volumes, maybe a little bit weak around the quarter due to some of the special waste timing. I think you provided a nice bridge for the rest of the year. Just wondering when we could get back to that historical 1% to 2% growth range that you've been in in prior years.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Sure. Sure. Okay. Several questions there, Brian. So, what we said on 2019 is that we expect price and volume to be in the 4% to 6% range with pricing being the majority of that, so pricing probably in that 3.5% to 4%, maybe even just a little north of that 4% potentially next year. So, obviously, volume being the differential bridge between 4% and 6%. We said that based on deals done already, deals that we expect to do over the balance of the year, that that rollover impact could be up to 3% to 4%. So, it gives you between 7% and up to 9% to 10% top-line growth before contribution from any deals maybe done in '19. And we said from that with recycling, anniversarying, as well as purposeful shedding anniversarying at the end of the third quarter, that we see margin expansion of 50 to 75 basis points going into for '19 as we sit here today. So, I think that was what we said on '19. What we said was that volume growth will improve Q2 to Q3 this year by 50 to 100 basis points.

And most of that is just the anniversarying of shedding that we began well over a year ago that is now finally in the period ending from a report standpoint. Again, I think it's important to note that this is not volume loss that's occurring on a real-time basis. This is volume loss that occurred as we shed that volume a year ago, three to four quarters ago, now coming into the fourth quarter in this third quarter. And it's just in the reported number which is why we give that number and said what the underlying volumes are doing. We do think that it was probably -- we're gonna round -- 30 to 40 basis points of lighter than expected volume in Q2 that was due to special waste projects that were delayed. I know it seems a while ago sitting here in July, but we were having severe snow events throughout many parts of the US all the way up into May and certainly, in Canada, into late May.

So, we did not really begin -- we only really got about one-month contribution of special waste that we would typically see more like a full two months beginning in May. And so, we said that that should improve in Q3. And we are seeing that already in July. And that's part of why we said 50 to 100 basis points of volume improvement as we move from Q2 into Q3. So, I would expect -- the last part of your question was a more typical 1% to 2% volume growth, Brian. I would expect that in this GDP environment and as you look at a full year that we should return to that as we go into '19 and certainly, as we get into the second half of '19. There are still some nominal, lingering effects of some of the contracts that we have opted to walk away from. But the underlying should be in that 1% to 2% range, even at a 4% type price. Obviously, as you push price and you start to get up into that range, there is some offset to volume. So, that mutes it a little bit. But I think that's where we would expect to be.

Brian Maguire -- Goldman Sachs -- Analyst

That's a very detailed answer. And thanks for that. The end of that tied into my follow-on question which was just the price assumptions in the 2019 bridge seemed a little bit higher than I would have thought, staying closer to that 4% level than historically. Just wondering if you had indicated of you seeing more opportunities to push price over volume in some areas. Or are you just expecting some of the CPI flow-throughs and inflationary elements of the contracts to kick in there?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. It's a little bit of both, Brian. As we just said on this call, we reported approximately 3% price in our mostly exclusive markets of the western US. And so, recall that we do those rate increases really in the first half of the year. Those are being priced off of the CPI that ended in July of '17 and January of '18. So, now as we move forward and we look at '19, we will be using the July of '18 CPI for the '19 rate increase. And that has moved up between 25 and 100 basis points in certain markets. So, that's gonna lift that exclusive piece for next year. So, that's already locked in. And so, even if we stayed at the same competitive market rates, it would lift our average price. If the economic environment stays as it is, we would expect our competitive price to continue to move up. So, I think it's pretty comfortable to say we feel comfortable at the upper end of that 3.5% to 4% and likely north of that 4% type price as we sit here today looking at next year.

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

And the one thing I would add to that is if you look at our reported numbers for Q2, 4.2% price, you -- just to remind folks that we do the majority of our price increases in Q1. And over the course of a year on a reported basis, the math works out that we typically report slightly declining price, slightly lower each quarter because of the math, the denominator getting larger. And what you'll see this year is it's pretty flat given the strength of our pricing. So, that sets us up nicely for next year to stay in that 4% range.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. Thanks very much.

Operator

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

Tyler Brown -- Raymond James -- Analyst

Hey. Good morning, everyone.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Good morning, Tyler.

Tyler Brown -- Raymond James -- Analyst

Hey, Ron. So, thanks for the '19 comments. I don't want to split hairs here, but just based on the deals that have been done and announced today, how much would that rollover benefit be expected next year? I think that 3% to 4% you talked about, including some stuff that maybe hasn't been done yet. Is that right?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. I think that when I said the 3% to 4%, Tyler -- obviously, you can do that math. That implies $150 to $200 million of rollover revenue into next year. Obviously, we've done $175 going into the fifth month. So, not even half of that would roll over. So, that's implying that we expect to do other things over the balance of this year that could approximate what we've done or a little less. And that would get you to that number.

Tyler Brown -- Raymond James -- Analyst

Okay. Okay. Perfect. And then I know this a bit of a detailed question, but have you guys seen or heard any --

[Crosstalk]

Female Recording

-- for anyone who wants to travel in luxurious style. We'll be happy to provide you with more details on --

[Crosstalk]

Tyler Brown -- Raymond James -- Analyst

Hello?

Female Recording

-- when your call is answered in a moment.

Operator

We do apologize for the inconvenience. Ladies and gentlemen, please standby.

Okay. Please resume. And Mr. Brown, your line is still open.

Tyler Brown -- Raymond James -- Analyst

Okay. Can you guys hear me?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Tyler, sorry. We don't know what happened here. I apologize to everyone on the call. Go ahead, Tyler.

Tyler Brown -- Raymond James -- Analyst

Yeah. No problem. No problem. Okay. So, this is a bit of a detailed question on the E&P side, but have you guys seen or heard any potential slowdown in the Permian drilling activity just as a result of the lack of pipe takeaway capacity? I think you've seen a blowout midland differentials.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. We have not seen a slowdown, Tyler. And we've spent quite a bit of time looking at this with our guys. We have not seen a slowdown. We would tell you that we think that the Permian's at the level it's gonna be at. I don't wanna say it's capped, but it's probably at the level that we've seen in Q2. That's what we're expecting in Q3 and going forward until there is incremental capacity. And that was why we said we think E&P waste activity stays at the current level unless there's a substantial bump in crude prices or other basins begin to come online. And again, until some of the projects that we've got under development come online that attack alternate parts of that basin over '19.

Tyler Brown -- Raymond James -- Analyst

Okay. And then just my last one here. So, the $30 million increase in CapEx, that is all attributable to those three or four E&P projects. Is that correct?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

That is correct.

Tyler Brown -- Raymond James -- Analyst

Okay. And they do increase addressable market, and you expect them to be done in the second half of '19. Is that correct?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. We expect them to be contributing in the second half of '19. We will finish them probably in the -- I'm rounding -- March through June timeframe and therefore, be contributing in the second half of '19.

Tyler Brown -- Raymond James -- Analyst

Okay. And then just maybe lastly, any thought about once completed and fully ramped, how much EBITDA that $30 million of deployment could produce?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

I think it's in probably the $10 million or plus EBIDTA range. That's generally what we would expect for that deployment on a total development project. That's what we receive on others. So, that implies a $20 to $25 million revenue range because we're gonna run that ultimately at almost a 50% or even north of a 50% EBITDA margin.

Tyler Brown -- Raymond James -- Analyst

Okay. Perfect. Thanks, guys.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Thank you.

Operator

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

Hamzah Mazari -- Macquarie Capital -- Analyst

Hey. Good morning. The first question is just on the volume side. Any thoughts as to what customer churn is running today? I know you're shutting progressive waste business. So, however, you wanna look at that, what the underlying customer churn is and whether that's maxed out or you think we can go lower here as well.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Customer churn is really -- when you exclude the purposeful shedding that's been done -- and again, that was done a year ago. But customer churn is quite low which is why price is sticking so well in the competitive markets I think not only by ourselves but mot industry participants, public and private. And that also implies everybody is also very full from a deployment of their existing routes and capital as well. But customer churn is running very low. I would tell you it's probably in the high-single-digits in competitive markets. There are some that it is higher than that. But overall, it's a single-digit number now. Can it go lower? It certainly could go somewhat lower, Hamzah. But it's probably the lowest we've seen in maybe ever but certainly in more than a decade.

Hamzah Mazari -- Macquarie Capital -- Analyst

Great. And then just on pricing, Ron, you touched on 4% to 5% competitive pricing. And you think that that can go higher. Maybe could you frame for us can it go higher? Is that just cyclical? And maybe just compare the past cycles what you've seen. Or is there anything structural that's helping you in these competitive markets versus history? I know your business was a lot more franchised when you look in the past. So, maybe that's not as relevant. And the portfolio's different with Progressive. But just a confidence level on pushing that price. Is it all just a cyclical play? Or is there anything structural going on in these markets that we should be aware of?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Well, I think it's a combination of everything, Hamzah. First off, I think if you're not getting 3.5% to 4% price, you are not gonna get margin expansion unless you have accounting changes in this type of economic environment. The reality is the cost pressures that are out there are probably in that 4% to 5% range. So, you need a solid 3.5% to 4% price. We reported a 10 basis point margin expansion with overcoming 100 basis point recycling headwind. So, said another way, 110 basis point had we not had the recycling. You're gonna need that type of pricing in this cost environment. So, part of it is we are pushing it hard because of the current environment. The current environment being a strong GDP environment, low unemployment environment, strong growth environment also allows that. It also allows it because your competitors, both public and private, are under the same pressures. So, they're having to do the same thing. So, you do have a pricing umbrella that's lifting for everyone in those competitive markets.

But I would also tell you that I think structurally -- again, whether it is -- yes, we inherited a somewhat different footprint of business in the Progressive transaction. We have culled a lot of that. We have slopped markets. We have sold markets. And we have shedded revenue. So, we've made the Progressive footprint 80% plus in Canada in the US look more like the traditional Waste Connections footprint. And that is we tend to still be a larger player in a smaller pond, often have the only or one of the only landfills for our market. And that asset positioning does provide incremental barriers for and protection for pricing. So, it is somewhat -- it is always asset positioning. We believe very strongly that that's what drives your sustained pricing growth. But there is also cyclical things at play here as well.

Worthing Jackman --President

And I would also add from a structural standpoint, any collection oriented and recycling company that was subsidized in collection pricing based on recycling, that paradigm has changed. And so, if you were trying to subsidize your collection business, and now recycling's rolled over, as you've seen, those companies have to go back to the pricing well to help make up for that recycling.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. And I think that's an excellent point, Worthing. Look, Hamzah, we all know that private company independent operators are able to live very well on lower EBITDA margins than public companies and still have very solid companies. But many of them have built a lot of their EBITDA margin on commodity values. So, right now, they are just crushed. So, the independent companies more so than the public companies are having to substantially raise price in this environment, in many cases, for their survival, to be quite honest. So, that's another driver in this situation.

Hamzah Mazari -- Macquarie Capital -- Analyst

That's very helpful. Just last question. I'll turn it over. Recycling's a small part of your business, but obviously, the decrementals are very high. So, any views or thoughts on China banning all recovered paper imports? I know there's a feedback expected in August. Just any thoughts as to you see OCC going lower off of that. And then just anything on what you're hearing specifically? Because you have that west coast presence. Thanks.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Hamzah, we are hearing just what you're hearing, that that decision will be made in the latter part of the third, beginning of the fourth quarter of this year and that that is certainly one thing China's considering. Again, we won't beat this because we spoke about it recently quite publicly. Look, selfishly, I would prefer that China does ban this permanently and that that puts a final stake in the ground that forces us as an industry, public and private and municipal to relook at this whole recycling model and create a model that is sustainable on its own, indefinitely. That is how recycling will become a successful business for everybody involved with it. Right now, it is a completely broken model. That is the industry's fault because nobody else set it up this way and priced it this way. We as an industry did. And it took 30 years to get there. It's gonna take a while to undo it. Not 30 years, but it's gonna take two to three years to get it to where we all want it.

If China comes back and says, "Game's back on," everybody will just go back to doing what they were doing, and we'll kick this can down the road. That's just human nature and certainly Americans' nature. So, them banning it, there's not enough international depth of market to absorb the commodities out there from the US, let alone anywhere else in the world. So, you're gonna see the development of more mills and markets domestically. That's good. That's good for the business. It's good for the cost structure of the business. And you're gonna see a repricing and a restructuring of how contracts are serviced by the providers on a go forward basis which shifts more of the commodity value to the user, be it commercial or be it a municipal customer or individual customer. It's their commodity, and the industry I think will move to where we're not taking all of or the majority of the risk of what that commodity does and get paid more for the collection and processing and a return on that.

So, it's a longwinded way around the barn, Hamzah, to say I actually think -- I hope they stand their guns and they ban it. That will cause pain for the industry, but it will fix the problem once and for all.

Hamzah Mazari -- Macquarie Capital -- Analyst

Great. That's very helpful color. Thank you.

Operator

Our next question comes from the line of Corey Greendale of First Analysis. Please proceed.

Corey Greendale -- First Analysis -- Analyst

Hi. Good morning. Thanks for taking my question. Ron, you were mentioning the underlying inflationary cost environment. You said 4% to 5% increase. Can you just dig into that a little bit? Are you seeing 4% to 5% increase in labor cost? What kind of pressure are you seeing in terms of the availability to just turning drivers up? Just give us a sense of that environment.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Corey, I think the labor environment I think for all service related industries, not just ours but anybody's that has a heavy labor component is obviously extremely tight. There are niches where it is incredibly tight. And there are markets where it's not quite as much. But it's a very tight labor market, certainly the tightest I've ever seen in 30 plus years through varying cycles. I know there's reported unemployment of 3.6 or 7%. Tell you, we're probably at 0% in reality. And so, that creates wage pressure. That wage pressure's probably in that 4% to 5% arena. And if you look at someone like us, if you got 0% wage pressure or 5% but we've got a turnover rate in the low 20s, and that comes on at maybe 90% to 95% of your normalized rate, that still yields you a labor cost increase overall, year-over-year of about three. And so, we're doing fine with it.

But certainly, most inputs into business today, whether it is labor at any level, but more particularly frontline labor, whether it is third party trucking and brokerage costs who are trying to get labor, whether it is medical, whether it is input costs for things like steel in containers and trucks, all of that is going up at something that is north of the reported inflationary index in the country. And so, that's why we believe that you've got to be getting in that -- again, I'm gonna say around 3.5% plus price, or you're gonna take margin compression, again, unless you have some sort of one-time accounting change that affected things. And I think you'll see that [inaudible] in other's numbers that without that, there would be margin degradation in this environment.

Corey Greendale -- First Analysis -- Analyst

Thanks. Really helpful. And then one other. And I apologize if you addressed this already and I missed it. But it looked like you didn't repurchase any shares in the quarter. Obviously, your leverage is at a very comfortable level. Could you give us a little bit more on how you're thinking about that? And are you just preserving dry powder for larger M&A at this point?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. The first part of your assumption was correct on the share repurchase. We are opportunistic in the share repurchase. Obviously, our prioritization of capital deployment has not changed. We still believe that the first and best use of capital is appropriately priced, strategic transactions. We remain in what I would argue is the best environment for that in perhaps 20 plus years. We're approaching that. We are incredibly busy at all sides of potential transactions. And we believe that that deployment will be, as it has already been in the first five months of this year, it will be elevated over the balance this year and into '19.

And so, that's what we're preserving incremental capital for and excess cash capital for. From that, we then would look at obviously the commitment to our dividend which, as we've said on this call, we've increased double-digits. We'll revisit that again in this October. And that should increase double-digits again in October. And then, of course, share repurchases opportunistically. I think on any rolling 12-month basis, our shareholders should expect between 2% and 4% of our shares to be repurchased. And we remain committed to that. And you will see that as well.

Corey Greendale -- First Analysis -- Analyst

Great. I'll turn it over. Thank you.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Thanks, Corey.

Operator

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

Michael Hoffman -- Stifel Nicolaus -- Analyst

Thank you very much for taking the questions. Bear with me. This has a little bit of a windup, the first one. But I think it's important to show the power of the solid waste. So, your original guidance said 4.825 revs implied I think about $4.7 billion was solid waste, and the rest was recycling. What I'm not as absolutely certain about is the $1.55 billion on EBIDTA, how much was solid waste versus recycling and then comparing that. So, what I think has happened is you're going to go to 4.88. But that's $100 million uptick in solid waste revenues between organic growth and deals. And my guess is that that $5 million increase in the EBIDTA is overshadowing that there's a heck of a lot of solid waste upside in that EBIDTA and there's a negative swing in recycling.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. First off, your first assumptions, Michael, on the approximate breakdown were about right. Again, I'm gonna round for you. If you look at 2017, recycling represented about 3.5% of reported revenues. And coming into this year, knowing what we knew in February, we thought it would be down about a percent, about $40 to $50 million in revenue at about a 75% to 80% decremental.

And that was what was in our guidance. It has now moved to it's only about 2% or less of revenue. So, it dropped another 35% from what we thought in February. So, it's now on the first three quarters of this year, it will be on a run rate of being down about $60 million in revenue and by as much as up to $50 million in EBITDA in that. And then, of course, that amount drops down in the fourth quarter because commodities started dropping in the fourth quarter of last year. So, yeah. Your numbers are pretty accurate. And that's why the guide up on EBITDA, there was so much to overcome from relative to February that recycling dropped down again.

Michael Hoffman -- Stifel Nicolaus -- Analyst

And how do I think about that $100 million incremental rev on solid waste? It's coming in in 30-something percent kind of margin?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Well, you gotta look at the split, Michael. I think it's fair to think of the organic piece of coming in at north of our average margin because it's price led. But then the acquisition contribution could come in at below our corporate margin, probably more in that mid- to high-20% level between the blend of new markets and tuck-ins.

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

And that's about two-thirds of the incremental revenue. It's the $65 million in acquisition contribution.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. $65 million deals. $35 million organic. Okay. So, some housekeeping, just so I understand everything correctly. In the new guide, in the 4% to 4.5% on price, how much are you assuming for help from fuel in that?

Worthing Jackman --President

Well, the surcharge component is a combination of fuel as well as recycling fees in some markets as well. So, it's a combination. And surcharges collectively were what? 30 basis points in Q2.

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

  1. And they'll pick up a little -- since fuel's been up, they'll pick up a little --

[Crosstalk]

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. So, they were 30 basis points incrementally in the second quarter, Michael. And we would expect that to be -- I'm gonna round -- 40 to 50 basis points in the Q3, Q4 timeframe.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. So, the pure price part's 3.5% on the collection disposal business, 3.5% to 4%. And then fuel and other's another half, roughly.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

That's a fair estimate.

[Crosstalk]

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

-- think that.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. And then in your guide, the months of missed special waste because of the weather, are you picking it up? Or you're not assuming you pick up in the guide? So, that's upside?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Well, we're assuming it's obviously there in the third quarter because we're seeing that, as July is virtually three quarters done, and we're seeing that. Now, we are not assuming that the incremental whatever was delayed occurred. If that does, that is upside. There's always a balance when these projects get delayed. There's some you get and some that just doesn't occur or gets pushed to the --

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. Okay. But it's work that theoretically would happen eventually. So, if it happens in the context of '18, that's upside to the guidance is the way to interpret it.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

That's a correct statement.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. On price, are you seeing better retention of a price at a certain level? Or are you absolutely raising the level which is helping drive this? Or is it a combination of both?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

It's a combination of both.

Michael Hoffman -- Stifel Nicolaus -- Analyst

And is the retention issue being helped by just how good garbage is? There's so much volume. I did a recent tour through the northeast and was stopping in and seeing transfer stations. And the C&D ones were overflowing. There were no way they were gonna clear all that volume in a day. And the MSW ones were struggling. That's how much volume there was.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Again, I think to my comments earlier, Michael, the economic strength that is underlying is benefiting everybody. And everybody's system's full. So, whether you're public or private, you don't have a lot of excess capital lying around in terms of trucks and boxes to go put to work. You can get it. And in some cases, you can't get it because trucks are pushed out so far right now from a lead time standpoint. So, you got a very full system. And everybody is facing the same cost pressures and laborer supply pressures. And the privates who tend to not be as price-focused historically, they typically built their model with more commodity risk in it. And so, they are really cost pressured right now. So, they too have to push. So, you've got a cyclical issue, and you've got some uniquenesses around our sector that are causing that to even need price more.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. And then shifting gears around this labor issue, do you think there's any likelihood of successively either at a state or federal level getting relief on hours of service or the e-log limits that are putting incremental pressure around the model?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. I don't know about the likelihood of getting relief on that. As you know, I think some of the larger players in our sector are pursuing that very heavily right now, have made a very good argument as to our drivers not being over the road drivers, being routed drivers that come home each night, that the logs and these rules were really more intended for unsupervised over the road drivers who are self-policing, if you will over the course of a week and are not getting home each night. So, the arguments are very good.

And so, I would hope so. But we're not banking any reliance on that. It would certainly be beneficial to the sector. And certainly, as a participant in that sector, we would benefit as well because whether it is the singular day or the cumulative total hour restriction, there are many days, especially during the very heavy summer months, both heavy from a volume and heavy from a vacation standpoint where that is a challenge, where you would typically run routes between 52 and 56 weeks. When you start getting to 10% to 15% of your people on vacation, just mathematically, you push to 60- to 70-hour weeks in some cases or 60- to 65- hour weeks. And that's where this becomes a struggle that I think we and other participants are facing, particularly in light of such a tight labor market right now.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. Last two for me. Total dollar value of offer letters out to sellers. You talked about four in a quarter in the first --

[Crosstalk]

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

-- provide that as you know. But nice try. 20 years, we still haven't provided that. But what we will tell you is that the amount of revenue that dollars of offers are out on is north of what we closed to date.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. Perfect. And then last one. New York City has just done two things around their waste business. The transfer station ruling, that is that equilibrium principle and then the issue of franchising. How does that change your view about staying in the five boroughs?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. No change. This is the conti -- No. 1, both of those were known and have been known for the better part of a year and half now. As you know, it affected our decision to stay in New York City. We believe that in a city like New York City and the way waste service works in New York City, how complex that city is and large and the difficulty with traffic and service, etc., that the franchise system or some model thereof does make a lot of sense relative to the existing system today for a host of reasons.

And we believe that those with the best asset positioning based on other cities of the size that have looked at this like Los Angeles tend to have a very good opportunity if the city goes to franchising. So, whether they do or not, we don't know. We're neutral. We plan to be there either way. But if they do go to it, we believe we certainly have a strong asset positioning to be very competitive however they go at it. But it certainly does make sense, and we understand why they would look to do so.

Operator

And our next question comes from the line of Noah Kaye of Oppenheimer. Please proceed.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Hey. Thanks for squeezing me in. Thanks for offering the early thoughts on 2019. You talked a lot about lapping the recycling headwinds here. But just want to be clear that that 50 to 75, that that assumes flattish recycling price environment. I guess a follow-up question on that is if we get another leg down here off of a potential ban -- and I'm interested in your thoughts on that -- how significant is that for you? Are we still gonna see these 90% type decrementals? Or at a certain point, are the decrementals gonna get better just because you're not gonna be spending as much on trying to meet practicably infeasible contamination standards?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Okay. Good questions, Noah. First off, we're not guiding but just giving early thoughts on '19, as you said. It does assume that we stay in a flat recycling environment from where we are right now. So, that was No. 1. No. 2, if there is another leg down, will we experience that leg down? Yes. Like everyone else, we will. This is just price for a commodity. Of course, if it goes up, we would experience that as well. We're not really expecting another leg down because I don't believe anyone is expecting China to come back anytime soon. We are making operating, marketing, structural decisions as a company and as a sector as if they're not. So, that is an upside if they were to. But no one is expecting that. So, I don't really believe that that on its own leads to another significant leg down.

And as far as the decrementals, I would expect those to, as we go forward, to begin decreasing as a percentage. And the reason I say that is we and others in the sector are rapidly working to change the economics one customer at a time as we have the opportunity to where we're being paid a processing fee for handling someone's commodities. Of course, a collection fee for collecting them. And we're transferring more of the commodity risk over time to the customer. So, as the sector and as we, as a company do that, the decremental, while it comes, it comes more on the customer than it does us. So, it should continue to be less as commodities drop more in the future. I don't mean necessarily over the next 90 days but as we get into '19 and beyond.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Yeah. That makes total sense. And then just implied by your comments, just so I'm clear, are you exporting a significant amount of your recycling? What percentage of recycling revenue now is actually going to China?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

0% or very, very nominal. As you're aware, there's just not any loads really going into there. So, I say 0% tongue in cheek. It might be a couple, under 5%. And we're exporting approximately another 25% of our commodities to various countries up to and including Europe, most recently, for the first time ever in the second quarter. And then the balance again about 70% to 75% being domestic now which is completely [inaudible] from 12 months ago.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Yeah. And just on your free cash flow guidance and the use of CapEx, you would have been at $890 million had you not made the investment decision to spend that $30 million on the E&P. Can you just remind us how much we should think about that as a revenue run rate and how much it might contribute to the 2019 early thoughts in terms of total growth? You're only gonna get part of that obviously next year. But just so we have it right in our models for '19's impact.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. Well, what we were saying is that that CapEx was dedicated to those E&P facilities. We said that once fully running, they would generate approximately $10 million of EBITDA on approximately $20 to $25 million of revenue. You're not gonna get all of that in the second half of next year. But certainly, as you come out of the end of the third, beginning of the fourth quarter, it's reasonable to expect that. So, if you picked a number -- I'm using this -- of $5 to $10 million of EBITDA contribution and reported 2019, and let's use $15 to $20 million of reported revenue, those are probably fair numbers. So, that gives you, on a revenue basis about 30 to 40 basis points of reported growth.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Perfect. Thanks so much.

Operator

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

Chris Murray -- AltaCorp Capital -- Analyst

Yeah. Thanks, guys. Good morning. Just a couple quick questions and one clarification. The first one, and I'm not sure who wants to take this, but when I think about leverage levels, as you guys continue to acquire -- part of the discussion's always been that your leverage ratios are based on I think total debt, not net debt. But as that cash gets deployed for M&A, should we be expecting your leverage levels to continue to fall down, especially if, as you alluded to, your pace of acquisitions looks in the second half somewhat like what the first half looks like?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

No. Chris, remember the following. We came into the year with -- I'm gonna round -- $4 to $500 million of cash balances. First off, you are correct that we do not get a net debt credit. It is the total debt credit that we have in a leverage calculation. So, cash sitting on the balance sheet earning a nominal interest rate really isn't helping you. So, remember, as we put that first half billion to $600 million of cash to work, we're getting EBITDA which is dropping the leverage because of the EBITDA you acquired. When we get to where we're now utilizing our credit facility, then your leverage will start to climb. Knowing the transactions that we've had out in front of us and do have out in front of us over the balance of '18 and as we look into '19, I think you will see leverage levels go up which implies that we will be moving into our credit facility because we will have outspent the cash that we either have on the balance sheet or that we generate in that period of time. So, you'll see leverage start to move back up.

Chris Murray -- AltaCorp Capital -- Analyst

All right. And you're still comfortable around that three times normalized leverage rate? That's a fair thought?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. We're comfortable at above that. We've always said that somewhere in that 2.5 to 2.75 is optimal from a pricing grid standpoint on our bank debt. But we're comfortable living up to that or north of that.

Chris Murray -- AltaCorp Capital -- Analyst

Okay. Great. And then just one quick question on 2019 on CapEx. Just so I'm clear on this, you talked about free cash flow increasing double-digits on a per share basis. You've got $30 million call it growth capital allocated for the E&P business right now. Is there any rollover like additional growth capital we should be thinking about? And is it still fair to think that 10% to 11% of revenue as your run rate for CapEx next year?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. I think right now we would tell you that 10% to 10.5% on a run rate basis is a fair number used for our CapEx for next year. If there are incremental growth projects that come at the end of next year like these are, we would, of course, talk about them and adjust the CapEx cuts midyear through. But as we sit here right now, we are not aware of incremental projects that we would spend money on in '19. Again, if crude sits at $100.00 a barrel and we see the Bakken open up, that could change things. But again, that's not baked into guidance. That's not what we're expecting. So, I think using 10% to 10.5% is a very fair number, Chris.

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

Yeah. Just to add onto that, we [audio cuts out] our maintenance CapEx as being in that 9.5% range. And as Ron said earlier, assume volumes are positive next year, and therefore, you get up to that 10%, 10.5%.

Chris Murray -- AltaCorp Capital -- Analyst

All right. Thanks, guys.

Operator

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

Derek Spronck -- RBC Dominion Securities -- Analyst

Hey. Great. Thanks. I know it's been a long call, so I'll try to be quick. Just to clarify on the 3% to 4% acquisition revenue for 2019, it seems that you need to close about $75 million in acquisition revenue in the back half of '18 to get you there. And you currently have over $175 million currently out there that you're potentially could close. Is that correct?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

I think both numbers are correct.

Derek Spronck -- RBC Dominion Securities -- Analyst

Okay. So, potentially, that 3% to 4% could be higher depending on how the back half of the year closes out. Has there been any change in terms of -- it seemed like more opportunities were in the tuck-in following the acquisitions you made into new markets. Are you seeing larger acquisition opportunities of size flow through and maybe a little bit more so than you had originally expected in the first part of the year?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. I think, as we tried to outline on the call today, Derek, we've closed three new market entries between $40 and $60 million each, two of those three which were fully integrated markets for us. Again, let's go back, make sure everybody understands. In our model, a large transaction is $20, $30, $40 million. So, we start getting to $40 to $60 million, that's a very large stand-alone transaction in our model. Very large. And so, to have done three already this year, that is more than we expected going into this year. And yet, there remains similar type transactions in that pipeline on a go forward basis which is what gives us some confidence in this. So, yes. I think where there is more activity, there is more deals of size. And again, of size being $20 to $60 million in our model. And for all the reasons we've talked about on prior calls.

You have a first tax rate change in 30 plus years and the belief that that could be a window of opportunity. We have an election cycle in a year and a half. And who knows what happens there? But that could change things in two years, and we could be in a different environment. You got moving interest rates. That helps us over in the redeployment of proceeds in fixed income type products earn more of the standard of living they were used to. So, that's helpful. You've got a very full economy. They're now well above where they were coming out of the great recession of '09 to '12. And you've got a capital deployment cycle coming for many. So, they gotta make a decision. Do I bite that next capital bullet? And does that take me two to three years to get back in value what I put into it?" So, you've got all these things that are affecting.

So, I think if you're looking at selling your company potentially over the next two, three, four years, you're probably truncating into this window of now till the end of '19. That was what we believed would occur, and that's what we're seeing happen.

Derek Spronck -- RBC Dominion Securities -- Analyst

Okay. That's great color. Thanks, Ron. And just last one for myself. Generally, we've been thinking about your cash tax rate around I believe 80% of your effective tax rate or 80% to 90%. Does the asset enhanced spending, does that change that at all? Or how should we think about your cash tax rate in 2018 and into 2019?

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

Yeah. We think it stays in this range. There is a benefit from being able to expense the equipment we buy in these acquisitions. And you see that in our guide as CFFO being up from our original guidance. So, there's some benefit. But you have to look at what percentage of the purchase price is actually allocated to equipment to see how much of an impact that is.

Derek Spronck -- RBC Dominion Securities -- Analyst

Okay. And then a little bit more elevated M&A than anticipated might be a net benefit to the cash tax --

[Crosstalk]

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

I think some incremental benefit. Yes. That's the right way to see that.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

That's correct.

Worthing Jackman --President

That's why you're seeing the raised the free cash flow guidance by the $30 million increase in CapEx.

Derek Spronck -- RBC Dominion Securities -- Analyst

Yup. Okay. Thanks very much.

Operator

Our next question comes from the line of Michael Feniger of Bank of America. Please proceed.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Just on the M&A discussion, does the recycling pressure that you're seeing in the issue, especially if China goes through with the ban, is that also starting to have an impact on M&A conversations bringing more people to the table, changing evaluation discussion? I'm just curious if that's starting to have an impact.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

It is, Michael. And this is an arena you gotta be very careful in because there's three types of companies. There's those that it's brought to the table because they're at their knees and they're become virtually worthless because their entire EBITDA was built on commodities. We're not too interested in any of those unless we can materially change the model. But we're seeing a lot of those companies that again, have built their whole business on commodity values and taken a lot of municipal contracts from a lot of public companies based on undercutting them at the table and taking on commodities.

And now those companies are really hemorrhaging. There are companies who have -- I'm using this -- 5% to 10% of their EBITDA hinged in commodities. They're well aware of it, and they are attacking it the same manner that we and others are, through price and model changes. And as long as we can get comfort with what they're doing in that model, we're gonna give them the full value for that change in the model. We're very interested in those companies and are having many discussions with those. And then, of course, there's companies that just have no commodity exposure because of the niche business that they're in. And so, again, we're -- so, I would put the companies into three buckets. And two of those three buckets, we're very interested in. And one, you gotta be very, very careful with.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Great. And then just my last question. I know there was a lot of color you guys provided on 2019 with pricing. You guys also discussed cost and what you're seeing there. I guess just if I could ask it a different way, the price cost dynamic, is it fair to say that it's incrementally improving in 2019? Or is it just staying in lockstep as we move to next year?

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Yeah. I think we're seeing it's really -- as we see things right now, Michael, we're saying it's staying in lockstep. Again, we don't see the cost pressures abating. If anything, if the economy continues to stay at the strength it is and there's not immigration reform, meaning improved immigration, you're gonna continue to see the labor markets tighten. So, if anything, cost pressures should maybe go up some. So, that's why, again, we think you have to have next year approaching more close to that 4% type price to have strong margin expansion. So, we're just really saying it stays in lockstep as we see it right now.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Perfect. Thanks, guys.

Operator

And we have no further questions at this time.

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

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

Operator

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask you to please disconnect your lines.

Duration: 78 minutes

Call participants:

Ronald Mittelstaedt -- Chairman & Chief Executive Officer

Mary Anne Whitney -- Senior Vice President & Chief Financial Officer

Worthing Jackman --President

Brian Maguire -- Goldman Sachs -- Analyst

Tyler Brown -- Raymond James -- Analyst

Hamzah Mazari -- Macquarie Capital -- Analyst

Corey Greendale -- First Analysis -- Analyst

Michael Hoffman -- Stifel Nicolaus -- Analyst

Noah Kaye -- Oppenheimer & Co. -- Analyst

Chris Murray -- AltaCorp Capital -- Analyst

Derek Spronck -- RBC Dominion Securities -- Analyst

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

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