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Republic Services Inc  (NYSE:RSG)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon and welcome to the Republic Services Fourth Quarter 2018 Investor Conference Call. Republic Services is traded on the New York Stock Exchange under the symbol, RSG. All participants in today's call will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Nicole Giandinoto, Senior Vice President of Investor Relations and Treasurer.

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

Good afternoon, and thank you for joining us. I would like to welcome everyone to Republic Services fourth quarter 2018 conference call. Don Slager, our President and CEO; and Chuck Serianni, our CFO are joining me as we discuss our performance.

I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause the actual results to differ materially from expectations. The material that we discuss today is time-sensitive.

If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is February 7th, 2019. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited.

I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities along with a recording of this call, are all available on Republic's website at republicservices.com. Also, included in our press release are unaudited supplemental schedules that include a pro forma view of fourth quarter 2017 revenue and cost as we adopted the new revenue recognition standard as of January 1st, 2017.

During today's call, all references to changes versus the prior year are based on the 2017 pro forma figures, which are comparable to 2018 results. Finally, I want to remind you that Republic's Management team routinely participates in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website.

With that, I would like to turn the call over to Don.

Donald W. Slager -- President and Chief Executive Officer

Thanks, Nicole. Good afternoon, everyone and thank you for joining us. We are pleased with our strong finish to 2018. Full year 2018 EPS was $3.09 and in line with our guidance range. Free cash flow was $1.2 billion and exceeded the upper end of our guidance range. Total acquisition investment was over $200 million. Total cash returned to shareholders was $1.2 billion and total shareholder return was 9% compared to the S&P 500's negative return of 4%.

The team delivered these results despite a $145 million headwind from the recycling business. We accomplished this by capitalizing on strong solid waste trends to drive both price and volume growth, strengthening our market position and improving route density through acquisitions, executing our plans to mitigate recycling headwinds in the short-term, while advancing our long-term strategy to transform the business and efficiently returning cash to our shareholders.

During the fourth quarter highlights, we delivered double-digit growth in earnings per share. Invested $87 million in value-enhancing acquisitions and divested $79 million of non-strategic assets. We also returned $284 million to shareholders through dividends and share repurchases. Throughout the fourth quarter, the pricing environment continued to be favorable. We achieved core price of 4.3%, an average yield of 2.7%, our highest pricing level in nearly a decade.

We also achieved an all-time low customer defection rate of sub 7%. We attribute these accomplishments to our laser-focused on enhancing customer experience and delivering superior service. Additionally, we successfully converted 27% of our CPI-based contracts, representing $660 million to a waste-related index or a fixed rate increase of 3% or greater. These waste industries are more closely aligned with our cost structure and continue to run higher than CPI.

During the quarter, we also continued to see underlying volume growth in our collection and disposal businesses. Excluding the impact of non-regrettable losses in a difficult special waste comp, total volume increased 90 basis points over the prior year. Our recycling business also improved in the fourth quarter. The team continued to tightly manage our operating costs and increase recycling collection and processing fees. As expected, the current market conditions continue to serve us as a catalyst to transform recycling into a more durable and economically sustainable business.

Additionally, we opened our first next-gen recycling processing center in Plano, Texas. We call it, next-gen, because unlike our traditional processing center, where we primarily sort and remove items that are not recyclable, here, we are leveraging state-of-the-art technology to extract items that are recyclable. This positive sort configuration allows us to produce a higher quality product with less labor. The facility also includes a 5,000 square foot Learning Resource Center for the community. So residents can learn the proper way to recycle and reduce their environmental impact.

Our partnership with the City of Plano was an example of our new recycling business model. We are paying an appropriate fee to process the material and the majority of the commodity value is rebated back to the community. This contract structure enables us to invest in new technology, while earning an appropriate return on our investment.

Lastly, given, we operate one of the largest vocational fleets in the US, we are continuously evaluating innovative approaches in technologies to improve the performance, economics and environmental impact of our trucks. Earlier this week, Mack Trucks announced our partnership to design and test electrification in a fully integrated garbage truck with zero diesel proportion components. We are proud to be partnering with Mack and optimistic that this will result in a significant step toward an even cleaner, more efficient fleet.

With that, I'll now turn the call over to Chuck to discuss our fourth quarter financial results in greater detail.

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Thanks, Don. Fourth quarter revenue was approximately $2.5 billion, an increase of $65 million or 2.6% over the prior year. This increase includes internal growth of 2.3% and acquisitions of 30 basis points. The components of internal growth are as follows: First, average yield increased 2.7% and with the highest level we've seen since 2009. Average yield in the collection business was 3.4%, which included small container of 3.2%, large container of 4.5% and residential of 2.6%.

In our post-collection business, average yield was 1.5%, which included landfill MSW of 2.1%. The majority of our third-party landfill MSW business is with municipal customers that have contracts containing pricing restrictions. Total core price, which measures price increases less rollbacks was 4.3%, core price in the open market was 5.1% and in the restricted portion of our business was 2.9%. The second component of internal growth is total volume. As expected, total volume decreased 70 basis points over the prior year. Excluding the impact of non-regrettable losses in a difficult special waste comp, volume growth would have been 90 basis points.

Volume in our small container business decreased 80 basis points as anticipated. This includes 130 basis point headwind from intentionally shedding certain work performed on behalf of brokers, which we view as non-regrettable. Excluding these losses, small container volume would have increased 50 basis points. Volume in our large container business increased 80 basis points. And volume in our residential business decreased 1.9% due to our strategic decision not to renew certain contracts that fell below our return criteria.

Next, turning to landfill volume. Landfill MSW volume increased 7.2%, while special waste decreased a 11.6% and C&D decreased 10.7%. The decrease in special waste and C&D volume was due to a difficult comp in the prior year. In 2017, those special waste and C&D volume grew over 30%. The third component of internal growth is fuel recovery fees which increased 70 basis points due to the rise in the cost of fuel. The average price per gallon of diesel fuel increased to $3.26 in the fourth quarter from $2.87 in the prior year, an increase of 14%.

The current average diesel price is $2.97 per gallon. The next component energy services revenue was flat versus the prior year, which was in line with our expectations in the Permian Basin, where we are well positioned, drilling activity remains steady. The final component of internal growth is recycling processing and commodity revenue, which decreased 40 basis points. The change in revenue primarily relates to a decrease in the number of tons sold and lower recycle commodity prices.

This decrease was partially offset by the new recycling processing fee rolled out to our open market recycling collection customers. This fee contributed 35 basis points of pricing. It's important to note that our average yield of 2.7% does not include this benefit. Excluding glass and organics, average commodity prices decreased 15% to $106 per ton in the fourth quarter, down from $125 per ton in the prior year.

Next, I will discuss changes in margin. In the fourth quarter, adjusted EBITDA margin decreased 80 basis points to 27.4% from 28.2% in the prior year. This included 10 basis points of margin expansion from the solid waste business, which was offset by a 40 basis point headwind from recycling and a 50 basis point headwind from one additional work day. Fourth quarter 2018 interest expense was $96 million which included $10 million of non-cash amortization.

Our all-in tax rate for the fourth quarter was 20%. This includes an adjusted effective tax rate of 12% and a non-cash charge of approximately $30 million related to solar energy investments that qualify for tax credits. Fourth quarter adjusted EPS was $0.80, an increase of $0.19 or 31% versus the prior year. EPS included a $0.12 benefit from tax reform. Excluding this benefit, EPS would have increased a 11%. Adjusted free cash flow for the full year was $1.2 billion and cash conversion was 42%. Free cash flow exceeded our expectations primarily due to better than anticipated improvements in working capital.

During the year, we improved both DSO and DPO by approximately two days. This improvement provided a one-time benefit to free cash flow. Looking ahead, I'd like to review the highlights of our 2019 financial guidance, which is consistent with the preliminary outlook we provided in October. For the year, we expect adjusted earnings per share to be in the range of $3.23 to $3.28. After normalizing for taxes, our guidance represents double-digit growth in earnings per share.

Next, we expect adjusted free cash flow of approximately $1.125 billion to $1.175 billion. Included in our free cash flow guidance is a working capital headwind of approximately $45 million and $50 million of incremental capital, we are investing for the benefit of our front-line employees as a result of tax reform. Excluding these two items, our guidance represents high single-digit growth in free cash flow per share. Total annual revenue growth is expected to be 4.25% to 4.75%.

We expect adjusted EBITDA margin to expand by 30 basis points to 50 basis points over 2018, demonstrating the operating leverage in our business. Furthermore, given the strength of our current pipeline, we anticipate investing approximately $200 million in tuck-in acquisitions. 2019 net capital expenditures are expected to be $1.2 billion. And finally, we expect to return $1.4 billion of total cash to shareholders through $500 million of dividends and $875 million of share repurchases.

I'll now turn the call back over to Don to make a few closing comments before going to Q&A.

Donald W. Slager -- President and Chief Executive Officer

Thanks, Chuck. Our strong finish to the year positions us well for continued growth in 2019. We'll achieve this growth by securing price increases in excess of our cost inflation, growing volume for the seventh straight year, continuing to transform the recycling business by transitioning our municipal recycling customers to a more durable fee-based pricing model and educating customers on what and how to recycle through our recycling simplified campaign.

We'll be executing our strategy of profitable growth through differentiation, to attract and retain the best people, enhance the customer experience and drive additional operating leverage through the use of technology. And finally, effectively deploying capital to fund profitable organic growth, invest in value-enhancing acquisitions and consistently and efficiently, as always, returning cash to our shareholders through dividends and share repurchases.

At this time, operator, I'd like to open the call to questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. In the interest of time, we ask that you limit yourself to one question and one follow-up question today. (Operator Instruction) And your first question will be from Tyler Brown of Raymond James. Please go ahead.

Tyler Brown -- Raymond James -- Analyst

Hey, good afternoon.

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Hey, Tyler.

Donald W. Slager -- President and Chief Executive Officer

Hi, Tyler.

Tyler Brown -- Raymond James -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

Yeah. So the guide has -- is about $505. I know it's a little bit lower than that right now. But if you think about sort of how this thing normally works through the cycle of the year. We feel that it will bounce back through the middle of the year and over time, we're leveraging and at the right rate. So underpricing in the number.

Tyler Brown -- Raymond James -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

Well, I like your term inoculate. So that's -- we're all about that. So if you think about my comments and we used our new contract with the City of Plano, right that's an example of what we're doing. We believe the right way to do this is to get paid appropriately for the collection, to get paid appropriately for the processing, and then I'd say appropriately, that means, within a return that we can live with. And there is a function in the contract for contamination that the cities and communities had to bear that burden. And in the end, they get the benefit of what's leftover which is the commodity valued less contamination.

That's fair. Again, we made an increasingly easy for customers to recycle. We're committed to be a good environmental partner for those customers that want to do their part, but where customers that want to be responsible, that's got to be on them. And so we're only making investments in recycling going forward that have a true sustainability from a profitability perspective and that has to work just like I described. So we're having success and to be frank, there is all kinds of customers, right. So we've had conversations with all of our 1,100 contracts, some have immediately already agreed to new terms that work. Some have told us kind of at this point, no way, and some of them said, let me think about it, we're in the second and third round of talks.

We are going to continue to push this, I think frankly, any operator would have to be -- I'm trying to think of a nice word, an idiot to sign up for recycling the old way when we got this big global macro thing in front of us. So we did a great job, team did a great job, isolating the problem in '18. We've done a ton of great work in '18 that's going to anniversary and carry forward into '19 and the work continues.

We're going to have more success in '19 than '18. And that's one of the reasons we've got the confidence, but we are going to change the model and people tell us they want to recycle and I'm kind of a broken record around here, you're going to have to give us -- every homeowners going to have to pay us about more week and they're going to have to give us about two minutes more a day of their good responsible time. And if they don't want to do that, we'll be glad to provide trash service instead of recycling service, because we're really good at that.

Tyler Brown -- Raymond James -- Analyst

All right. Yeah, that's really good. And then one last one, just on the volume guide of 0 bps to 25 bps. So can you talk about some of the puts and takes there. I mean, I thought you were largely through the broker Colleen, I don't think special waste has any real big comps. And frankly just doesn't really feel like a zero volume environment. So can you just talk about what's driving that outlook. Is that just conservatism and -- or is there something more idiosyncratic? Thanks.

Chuck Serianni -- Executive Vice President, Chief Financial Officer

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

Tyler Brown -- Raymond James -- Analyst

Okay, perfect. Thank you.

Donald W. Slager -- President and Chief Executive Officer

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

Tyler Brown -- Raymond James -- Analyst

Right, right. Okay, thank you.

Donald W. Slager -- President and Chief Executive Officer

Great.

Operator

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

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good afternoon, Don, Chuck and Nicole.

Donald W. Slager -- President and Chief Executive Officer

Hey, Brain.

Hey, Brian.

How are you?

Brian Maguire -- Goldman Sachs -- Analyst

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

Chuck Serianni -- Executive Vice President, Chief Financial Officer

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

Brian Maguire -- Goldman Sachs -- Analyst

And this will be the last year with that sort of outsize spend on employees?

Donald W. Slager -- President and Chief Executive Officer

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

Brian Maguire -- Goldman Sachs -- Analyst

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

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah, so both in 2018 and again in 2019 we are going to benefit from solar projects, these investments that we're making that come with tax credits that we're able to utilize in order to reduce our effective tax rate, but also to reduce our cash taxes. So just to put that in context for you, for 2018, our effective tax rate was 20.7% and then we had a certain non-cash charges associated with those solar projects that are included, but low operating income,right.

So if you think about those two items together, then, the net tax rate, including both of those items, is closer to 22.8%. As we go into 2019, our effective tax rate is 24.2% and then we have about 3.1% in non-cash charges related to those solar projects. So once again, if you put those two together, you end up with a tax rate about 27.3%.

Brian Maguire -- Goldman Sachs -- Analyst

Got it. You include -- you're in those non-cash charges, you're going to include that in that EPS?

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah, that's included in our EPS guide. Yes.

Brian Maguire -- Goldman Sachs -- Analyst

Got it. Okay, so you might end at 27%. Okay, just checking on that. Thank you.

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Welcome.

Operator

The next question will be from Hamzah Mazari of Macquarie. Please go ahead.

Hamzah Mazari -- Macquarie Research -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

Yeah, so our overall inflation we've seen for '19 is kind of in a 2.5 range. Labor will be a little higher than that. We do have pockets where we've got some labor shortage just because maybe there is local economic issues. Our turnover is essentially flat year-over-year. It's up a little bit with the growing economy, that to be expected. We're not sitting on our hands. We're still working hard to improve the work environment just mentioned some of the investments we're making in facilities in specifically around employee facilities, locker rooms and change rooms, et cetera.

So there is some labor pressure with long haul trucking, which will impact our costs in around transporting waste from our transfer agent to our landfills. We're dealing with that. But we also -- we are also doing a great job in and around with our procurement team, they've got goals this year there are some spend categories that we historically haven't looked at. So we'll dig into those and we'll find some savings there as well. But the driver shortage, so to speak, is in keeping this up at night. We're working hard to retain and attract the best people, and I think we're on a good track.

landfill ops is going to be another part of the story. The leachate expense is going to be about flat year-over-year to what it's been this year. And that really is related to leachate, because of just no changes in PLTWs or public treatment works that are changing their technology and starting to raise prices on leachate disposal. That's something we can manage through and it's something we can price for, but I think that's going to be something again that, that affects all people in our business. And so I think more than likely you'll see more Companies turn into some kind of a price action to recover some of those costs.

Hamzah Mazari -- Macquarie Research -- Analyst

Great and just my follow-up question on pricing, you guided 2.75%. It feels like that's the highest price since '09 or just prior to waste saw a downturn because you guys are late cycle. Anything different in this pricing environment that you see versus prior to the downturn. Clearly there is a lot of changes in this space over the last, I don't know, 10 years. So, any thoughts on how this pricing environment is different, Don? Thank you.

Donald W. Slager -- President and Chief Executive Officer

Well like, I'll say this. Look when organic growth is decent to good, that sets up the industry for better pricing environment and I've always said that so when there's decent organic growth, pricing tends to be better. The overall increase in capital cost, capital intensity, complexity of the business, I think gives people a reason to price that maybe they didn't have it before so that lifts us up a little bit. Certainly CPI has moved in our favor, and we're derisking our CPI portfolio and moving to alternative indices that work for us. So that's going to benefit us going forward.

Moving to alternative index, we've said $660 million now of that book has been converted, the hard work we're doing in and around recycling with the question that Tyler asked, we're doing a lot of contract renegotiations in new pricing that's going to help. We've got a recycling processing fee that we've implemented that's going to add some lift. Some of these things are pulling implemented yet. So where we still got some time to run under them and have them build through '19 and frankly anniversary in the '20. So we think there is a fair amount of upside there.

As it relates to just us pricing customers, we've got a lot better at it. We're smarter about it. Our overall defection is down sub 7% which would tell you that again that's the lowest in the history of the Company. We're spending a lot of time on customer experience. And so I don't believe you can just raise the customers' price. I think you've got to raise the customers' willingness to pay. And so we're working on further improving our service levels, meeting our service commitments, improving our products, improving our fleet.

Surely, having the best people on the front lines of our business, all those things I think give us pricing power in the end. And those things we're going to continue to work on. So again, as you said, Hamzah, best pricing in 10 years basically it's been building through the last few quarters, we're pretty confident we can achieve these levels in '19.

Hamzah Mazari -- Macquarie Research -- Analyst

Great, thank you.

Operator

The next question will be from Noah Kaye as Oppenheimer. Please go ahead.

Noah Kaye -- Oppenheimer & Company -- Analyst

Good afternoon and thanks for taking the questions. Great to hear about solar projects in electric truck, always nice. I want to ask you about the outlook. You're reiterating the components of the preliminary outlook you provided in November. And I think we're seriously surprised by that investors are from this fact they can put something from you. The final number looking the same. But has anything changed in the last three months within your assumptions, whether it's on volume, price, M&A or the cost side and I asked in light of what still a way sort of dynamic macro situation?

Donald W. Slager -- President and Chief Executive Officer

Well, what's changing the macro is last year, we spent a lot of time bringing our hands over this China thing. We're no longer dependent on China. Our team has done a lot of work moving material to imports, opening new lanes, all of our material that we collect is handled and recycled ethically. So we've overcome the operational hurdle of that and now we're settling into sort of a new cost model.

So we're working through that and already described what we're doing there. From a growth perspective, right we've always said we grow with population growth that drives household formation, business formation. So when there's population growth and there is job growth and there is wage growth that's good for waste generation, right. So as long as that we see the same kind of housing start number and consumer sentiment spending is good. We think that's enough for us to continue to grow into the future. So we feel good about that.

Chuck described some of the capital spending. Our CapEx is very, very consistent other than when we got the gift from the Government with tax reform, we decided to spend $100 million or so to improve our -- $200 million I guess, to improve our customer or our employee facilities and these are not offices for general managers and staff. This is for front line hard working men and women who shop at two in the morning and drive garbage trucks and fix garbage trucks and we get landfills.

So those are the people we're most concerned about improving their work environment. So we're spending real money for a really good cause. So, but that's not a surprise as we told you about that. So again, as you said, the business is very -- on one hand, slow moving which is maybe a bad thing for you. But it's slow moving which is a good thing for you, because it makes it predictable. So it shouldn't be a surprise to anybody that our guidance is right on top of the preliminary outlook because we got a pretty good handle on our business.

And then, what will change in '19 going forward. How fast can we move and a restructuring the recycling business, that's going to depend on customer sentiment, it's going to depend on how well the market adjust. It will be -- depend on what other competitors do frankly. But our result is greater than it's ever been and we're making some really great headway and making great examples of where customers are, taking a good common sense approach, and again I gave (inaudible) example in my remarks. So we feel good about the business. We've got a really solid team here and we're off to a great start.

Noah Kaye -- Oppenheimer & Company -- Analyst

Thank you for that. And then just to come back to the labor question. I was really stuck by the labor and benefits line, expenses were up I think just 3% year-over-year. Obviously, that's a significant improvement in your cost containment. Anything you would point to in terms of a kind of an improved success containing those labor costs. Anything we can think about going forward, because obviously we saw a lot of growth over the first three quarters of the year and what you are sort of suggesting for '19, suggest kind of a deceleration of labor cost inflation?

Donald W. Slager -- President and Chief Executive Officer

Well look, I'll hand that to half kudos to our operating leadership, they're really labor focused on a productivity, on efficiency and safety. Employee engagements is a big deal around here as I said, I think we're probably the only salaries Company that does a nationwide employee engagement survey every year, 85% of our employees respond which is double that of a world-class Company. Our employee engagement scores are high, our people trust that they give us their opinions, we'll listen and we'll respond. We really are genuinely in earnest trying to make this the best place to work or the best people come to work and I think that helps us a great deal and this is not a slogan, it's what we really think.

So, and again, our operating leaders echo that throughout the organization. So I think that's part of it. Again, every year we get a little benefit from the things we do last year. So we can -- we have continued to automate the residential fleet. We've continued to make improvements in other areas, one fleet continues to pay off that investment we don't talk about one fleet anymore but it's part of what we do now all the time and it makes us more reliable. Reliable trucks mean, more efficient trucks. They need more happier drivers.

So we're just going to keep building on the Republic way and year-on-year-on-year we get better at the things we launched two and three years ago, we launched new things and well maybe not one of them by itself is a game-changer. It's the combination and sort of the sum of the parts that really make a difference for us. So we're just going to continue to build on that. So, appreciate the compliment, I think.

Noah Kaye -- Oppenheimer & Company -- Analyst

That's right. Thank you.

Operator

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

Sean Eastman -- KeyBanc Capital Markets -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

Well, it all depends, right. So look, we wouldn't tell you $200 million unless we felt pretty strongly that we can deliver it, right. So we've got a great pipeline again we've got a great development team. We've got a lot of good people in place now who have been in place for while of the business. Again we don't go around incenting sellers, because these are good companies, we buy. And you got a really great Company, you're not likely to sell it unless somebody pays you and I'm going a leg for it.

So when it comes time for you to be in that moment where you reach your business life cycle or your personal plan comes to fruition and it's time to monetize your life's work or something else happened some kind of a life event, that's when we buy good Companies. And we've been able to keep our multiple really consistent over the year, we're not overpaying for deals. And there are a lot of really nice companies out there, some really -- some Companies of all sizes that we'd love to, some they have an opportunity to be part of our network and our job is to know the owners to know where they're at in the life cycle and be able to write the check and we'd consistently done that we've sort of built our momentum up over the last few years, and we've got the appetite to do very big deals. It's just a matter of whether or not it's their time.

So it's kind of like when the sellers ready, we're ready. And we're very good at integrating businesses and so we are first and foremost, focused on tuck-ins. Because those are again, lowest risk, quickest return, best returns. It doesn't mean we won't look at a brand new market. If we could go into a new market and have scale and vertical integration or at least the opportunity to over time, we would look at that. But you'll see us kind of stay in our lane and with most of the acquisition activity.

We got some good working around the E&P space and there might be an opportunity here to there, that we look at, but we're very diligent about the ROI and these deals. We always compare and contrast the better use of cash to buy more cash flows the right multiple we're buying in our own stock. We are very comfortable with the value of our Company and what value we're going to create over the next three years. We always, look at intrinsic trade off. So this is kind of our formula, it's been kind of a balanced approach of cash allocation, dividend, buyback, keeping a strong capital structure, keeping our debt where we think it needs to be and having plenty of powder to do more acquisitions.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

While we had -- we've had a lot of effort -- our marketing Groups put a lot of effort into gaining customer insight. I probably -- again we probably spend more money on customer insights than any of our competitors, really getting to know what they think, what they want and for us to prioritize those things, some of them seem pretty obvious in the surface and some of them don't. So there's a lot of learning there. We are -- we're looking at a digital opportunities. We're looking at ways to make it easier to do business with the Company. We do have a digital channel for subscription residential business that actually has worked quite well and new business coming into that channel comes at a higher price. And then if we were going door to door.

So people are willing to pay for convenience and reliability and so you'll hear us talk more and more about digital as we go through time, not only digital in the trucks, digital in the operations to make a safer and more efficient but digital as we connect more and more to customers and we think customers want to pay for that and willing to because it makes our life easier. So we'll continue to do that. And then job one, those get the garbage off the ground every day on the right day, in the right hour, do it safely and good environmental partner and we're pretty good at that too. So.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

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

Operator

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

Michael Hoffman -- Stifel Nicolaus -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

Yeah, it's mostly going to be OpEx, right. No, and I mean just to say, we still have some SG&A savings on the horizon, but I will say, look, you always hear me say this Michael, I mean we've got two constraints. One is cash flow, we're going to put so much cash to work on initiatives every year. And the reason for that is, we can only take on so much change at a time. We got 35,000 employees, we're trying to lead them in a direction and we're getting all 35,000 people to buy into that plan. And so we can't have a load that with too many new things, but there is benefit and then pricing, right. I mean, we're going to price to beat inflation we had years and years where we couldn't do that. And now we got momentum on our side to do that as well. So, but those things go hand in hand, better operations mean, happier customers, mean, better pricing.

Michael Hoffman -- Stifel Nicolaus -- Analyst

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

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Okay, let me explain it this way, Michael. If you take our reported free cash flow for 2018. So $1.178 billion and then I would back out about $45 million from working capital, which we believe one-time, one-time in nature. And then tax reform capital investment that you mentioned of $50 million, you end up with a $1.83 billion and that was, that I would consider to be a baseline. So then if you look at that relative to the guide that we gave for '19, that's about a 6% growth in free cash flow year-over-year.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay, and that's what I was trying to get at is. That's probably a good sustainable number if I'm talking about a four at the top, getting a six at the cash is kind of a good relationship.

Donald W. Slager -- President and Chief Executive Officer

Yeah, that's right.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. And then just one more thing from -- or maybe there's two housekeeping. What's your share count in your EPS guidance and in. Go ahead sorry.

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah. So the share count is for the end of the year is 323 million shares. And then we expect and it decreased by about 2.5% during 2019 because of this our executing on the share repurchase program.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. And then in the 4.25 to 4.75 for total growth, the 1% of its acquisition, is that all roll over?

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

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

Michael Hoffman -- Stifel Nicolaus -- Analyst

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

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

Sure. A little bit.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. Thank you. Yeah, thank you.

Donald W. Slager -- President and Chief Executive Officer

Thanks, Michael.

Operator

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

Henry Chen -- BMO Capital Markets -- Analyst

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

Donald W. Slager -- President and Chief Executive Officer

What's your definition of long-term?

Henry Chen -- BMO Capital Markets -- Analyst

The next few years. So beyond that.

Donald W. Slager -- President and Chief Executive Officer

Okay. Look, there is a -- there lot of upside left in the business, right. I mentioned just something like one fleet where we don't talk about it much anymore. Internally we do quite a bit obviously we measure everybody against the standards. But there will be a moment when all new trucks come in, every truck we have, all have been sort of brought into life under the One Fleet banner and we're going to have a better fleet situation than we have today, right.

So that days is out there, but that is long-term. Some of this technology, we are excited about this things that we've got going on with bank on the EV. But too early to tell, right, but that's why we're spending time and effort on this, because technology has a real place in the future. We talk a little bit about technology in our new Plano next-gen recycling facility. There is certainly some technology beyond that sort of robotics and things like that that we're testing. So I will tell you this, I think there's a lot of opportunity yet with our digital operations initiative and -- digital platform is kind of our fifth pillar of our strategy.

But what I wouldn't want you to do sort of run away with that too soon, because we're involved in the conversations. We're involved in pilots and tests. We're involved in evolving technology where we can and as we get sort of the magic formula, we'll be talking more of audit, and then at that point, we'll be layering it into our future guidance. But it's more right now for you to know that there's upside here and working on it and there'll be a moment when it comes to realization and then we're going to really talk about it.

Henry Chen -- BMO Capital Markets -- Analyst

Okay, great. Sounds great. Thanks so much.

Operator

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

Steven Schwartz -- First Analysis Securities -- Analyst

Good afternoon, everyone.

Donald W. Slager -- President and Chief Executive Officer

Hi there, Steve.

Steven Schwartz -- First Analysis Securities -- Analyst

If I could just continue on that question with respect to fuel recovery fees. It looks like you -- in your prepared remarks noted a pretty significant sequential decline in fuel costs here in the first quarter and I know that typically there was a lag between your recovery of increasing costs which is certainly something that I think you faced over the past several quarters. So as we look for 2019, and your cost versus those fees. Can you give us some color there?

Donald W. Slager -- President and Chief Executive Officer

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

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah. And then the other -- where I would add to that is that, we anticipate fuel being be up in 2019. And that's really due to a couple of things. One is CNG tax credit. So if you think about that they are providing for us in 2018, a $0.03 benefit in OpEx and then a $0.01 benefit of tax. So that goes away. And then also we had some hedges in place during 2018 that ended up rolling off. So, because of that we're expecting fuel to be a little bit higher in '19 than it was '18.

Steven Schwartz -- First Analysis Securities -- Analyst

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

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

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

Steven Schwartz -- First Analysis Securities -- Analyst

Okay. And then my second question. My follow-up is just once again an extension I think of the discussion that you had with Tyler on volume through 2018 essentially your volume declines. So from a comp standpoint going through 2019, do you expect your volume to kind of play out through the quarters I guess in opposite or in near to what happened in '18?

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah, I would say that it will be relatively close to what happened in '18, the only thing I would say that we need to be cognizant of for some of the quarters where we had especially heavy special waste volumes in C&D volumes coming into our landfills they can skew the numbers a little bit.

Steven Schwartz -- First Analysis Securities -- Analyst

Got it. Yeah. First quarter of '18.

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

You can look back. Exactly.

Donald W. Slager -- President and Chief Executive Officer

Yeah, right, yeah.

Steven Schwartz -- First Analysis Securities -- Analyst

Okay, that was helpful. Thank you.

Donald W. Slager -- President and Chief Executive Officer

I'll just add some color to that. We have a good outlook for growth this year and we've got a good handle on again, our sales efforts with our good sales tools and a great sales team. We think we're winning our fair share of new business and at the same time, we're going to maintain the discipline to walk away from some business. We do have some municipal contracts out there, that performed very well for us. And we are incumbents. So in all the costs I mean, all the pressures and we're the incumbent and we know that there is no profit or not a reasonable return in these things, we're going to probably walk away from some contracts that's baked into that number, right.

So that's going to continue. There's no different than it was in '18. So you got to make sure you understand that's going on behind the scenes that of net. So we're looking for our teams to either bring these contracts back around to profitability or move the equipment and the assets into utilization in other parts of the business. So that's going to continue to have.

Steven Schwartz -- First Analysis Securities -- Analyst

Got it. Yeah. Okay. Thank you for the color.

Operator

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

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

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

Chuck Serianni -- Executive Vice President, Chief Financial Officer

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

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

Okay and then did you...

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

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

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

Okay, that's helpful. And then did you say earlier in your comments that you had 10 basis points of margin expansion of Solid Waste in the quarter?

Donald W. Slager -- President and Chief Executive Officer

That's right, that's right.

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

I'm just curious I mean, if you're talking about shedding down non-regrettable contracts, walking away from some these resi contracts, which we know can be low margin. I think the best pricing in 10 years and with the mix of the business. But wouldn't -- we would we expect that number to be higher at this point of the cycle?

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah we keep a couple things in mind, one is that we had a headwind associated with special waste, right. And the other one is that we had -- as we had talked about a little bit higher costs from our landfill operated. So that that's masking or diminishing that growth that we called out.

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

Okay. And just lastly that makes sense. And on the average yield of 2.75% (ph) like how much of that is just automatic from '18 is just automatic from the CPI uplift. And how much of that is pushing on the open side?

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Yeah, about 10 basis points to 15 basis points, is coming off of a CPI.

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

Okay, thanks guys.

Chuck Serianni -- Executive Vice President, Chief Financial Officer

You're welcome.

Donald W. Slager -- President and Chief Executive Officer

Thank you.

Operator

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

Donald W. Slager -- President and Chief Executive Officer

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

Operator

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

Duration: 58 minutes

Call participants:

Nicole Giandinoto -- Senior Vice President, Investor Relations & Treasurer

Donald W. Slager -- President and Chief Executive Officer

Chuck Serianni -- Executive Vice President, Chief Financial Officer

Tyler Brown -- Raymond James -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Hamzah Mazari -- Macquarie Research -- Analyst

Noah Kaye -- Oppenheimer & Company -- Analyst

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Michael Hoffman -- Stifel Nicolaus -- Analyst

Henry Chen -- BMO Capital Markets -- Analyst

Steven Schwartz -- First Analysis Securities -- Analyst

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

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