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Advanced Disposal Services South, Inc.  (NYSE:ADSW)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Advanced Disposal Q4 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Matthew Nelson, Vice President of Finance and Investor Relations, you may begin your conference.

Matthew Nelson -- Vice President, Finance and Investor Relations

Good morning, everyone. We would like to welcome you to the Advanced Disposal Q4 2018 earnings call. With me today is Richard Burke, our CEO; Steve Carn, our CFO; and other members of senior management. We issued our press release yesterday with our results and trust that you've had the chance to review it. If you need a copy of the release, you may find it on our website or at www.sec.gov.

In today's earnings release and during the conference call, we are providing adjusted financial formation, including adjusted EBITDA, adjusted free cash flow, and adjusted net income, all of which are defined in our press release and exclude certain items that management believes are not indicative of our results of operations. This information is provided to enable you to make meaningful comparisons of the company's operating performance between years and to view the company's business from the same perspective as management. The earnings release contains exhibits that reconcile the differences between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.

Before we begin, I would like to make certain cautionary remarks about forward-looking information. The matters discussed in the teleconference may contain certain forward-looking information intended to qualify for the Safe Harbors from liability established within the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of certain future events. Any such statements are based upon current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in those forward-looking statements.

In this regard, we direct listeners to the cautionary statements contained in our financial filings with the Securities and Exchange Commission. This call is being recorded and will be available two hours after the conclusion of the call for 30 days. Time-sensitive information provided during today's call may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Advanced Disposal is prohibited.

I would now like to turn the call over to our CEO, Richard Burke.

Richard Burke -- Chief Executive Officer

Thanks, Matt. Good morning and I want to thank everyone for joining us today. The fourth quarter capped off a solid 2018, where we executed on a number of key financial targets, including organically growing the business by nearly 4%, led by our best pricing year of 3.4%; completing $30 million of acquisition spend including a fourth quarter purchase of a company with hauling operations and an MSW landfill with 50 years of remaining airspace in a growing Eastern Alabama market near Metro Atlanta; improving EBITDA by $9 million versus the prior year and meeting our overall EBITDA guidance that we set out at the beginning of the year; generating $308 million of cash from operations, resulting in adjusted free cash flow of $145.6 million, which exceeded the top end of our range; and reducing leverage by 30 basis points year-over-year.

We did all this in an environment that saw commodity prices fall 42% on average in 2018 and diesel fuel cost per gallon increased 21%, which had a net drag on a stand-alone basis of $14 million to adjusted EBITDA and adjusted free cash flow. In short, our core business remains positive, anchored by price-led growth, a favorable acquisition market and strong cash flow generation.

Moving to fourth quarter results. Revenue grew 2.7% or 4.8%, excluding the impact of the adoption of the revenue recognition standard. Average yield of 4% for the quarter was the main driver of the revenue gains, as we continue to match our pricing strategy with overall macroeconomic conditions and waste industry fundamentals that are supportive of strong pricing. We expect pricing well in excess of CPI to continue for 2019.

Volume was down slightly in the quarter, led by the expected cycling of difficult special waste comps, consistent with prior quarter messaging and a contingent prioritization of disciplined pricing. That said, service increases continue to outpace service decreases and we are seeing positive momentum on our residential line of business. This includes our recently awarded 70,000-home disposal-neutral contract near our existing Orlando operations commencing October 1, 2019 in Osceola County, Florida. This contract further strengthens our eye for our quarter footprint as we work to profitably expand in this growing market.

Acquisitions drove 40 basis points of growth in the fourth quarter as we completed 12 acquisitions during 2018. 11 of these deals tucked into and strengthened our existing operating footprint. The 12th acquisition was a new platform deal in Alabama that includes both hauling operations and a well-positioned MSW landfill, which will give us momentum around inorganic growth heading into 2019. And finally, our revenue from sale of commodities declined 30 basis points due to well-publicized declines in fiber prices.

For us, this included the price we receive for OCC, falling from an average of $84 per ton in Q4 2017 to $63 per ton in Q4 2018. We have continued our previous discussed efforts in the fourth quarter to educate our customers around the impacts of contamination and the cost of recycling along with securing price increases related to the collection of recyclables. We've now had initial conversations with almost all of our municipal customers and received some form of pricing concessions from nearly 20% of that group.

Moving to bottom line results. Adjusted EBITDA was flat year-over-year at $108.7 million, as we overcame headwinds from 9% higher diesel fuel prices, a 25% decline in OCC, lower special waste and an extra workday. We also continued to invest money in Q4 toward our digital transformation. This is a multifaceted effort that will improve our customer experience by providing customers with the tools to interact with us, how and when they want to. Along with improving the resources, our sales team have to quickly make a customized quote by April. This will include piloting a new customer portal that will enable our commercial roll-off and subscription residential customers to use their smartphones or computer to review their account or request several services such as replacing a container or scheduling an extra pickup. We are excited about the progress that is being made and we'll update you on our upcoming quarterly calls in 2019 around our progress in this area.

Wrapping up 2018. Free cash flow remains our most important financial measure of success. And we are pleased that for the full-year, we improved adjusted free cash flow by 10% versus 2017 to $145.6 million. This allowed us to reduce leverage by 30 basis points during the year as we remain committed to reducing leverage over time.

Over the past five years, Advanced Disposal has now more than doubled its adjusted free cash flow. As we look forward to 2019, we continue to see a favorable backdrop for our core solid waste business. The pricing environment remains favorable and while volume growth is important, we will not sacrifice price to achieve near-term volume gains.

Our acquisition pipeline remains strong. And for 2019 we expect to spend $50 million to $75 million over the course of the year versus our typical $30 million to $50 million target. These deals will fit our market selection, which prioritizes profitable existing markets where we can internalize waste and improve density, new vertically integrated markets where we can expand our operating footprint and disposal-neutral markets.

And operationally, our top priority will remain winning in the recruitment area for drivers and mechanics, because it is at the heart of every key metric we have, whether it be safety, service, productivity, customer satisfaction or bottom line financial results. We recognize we will need to continue to price above inflation to be able to invest in programs that enhance our recruiting and retention efforts while at the same time improving margins. We are committed to executing on all these fronts.

For 2019, we expect revenue of $1.603 billion to $1.629 billion including strong pricing of 3% to 3.6%, volume of negative 40 to positive 30 basis points and adjusted EBITDA of $440 million to $452 million. Additionally, adjusted free cash flow is expected to be between $140 million and $152 million. Those funds will be used to close accretive acquisitions or repay debt.

With that, I will now turn the call over to Steve.

Steven Carn -- Chief Financial Officer

Thanks, Richard, and good morning. Revenue for the fourth quarter of 2018 was $394.8 million, up $10.4 million or 2.7% over the prior year period. Adjusted free cash flow for the fourth quarter was $25.9 million, increasing $5.7 million over the prior year period. Adjusted net income for the fourth quarter was $11.4 million or $0.13 per diluted share.

Adjusted EBITDA for the fourth quarter of 2018 was $108.7 million resulting in margins of 27.5% for the fourth quarter of 2018. Leverage as defined in our credit agreement was 4.4 times at Q4 2018, which is a decrease of 30 basis points versus Q4 2017. A reconciliation of non-GAAP measures to the comparable GAAP measures can be found in our earnings release.

We achieved strong revenue growth for the quarter of 2.7% led by higher average price yield of 4%, which is our second highest pricing quarter since 2012, which contributed to offsetting the negative impact from lower recycling revenue, higher fuel cost and other inflationary pressures. We also had 40 basis points of acquisition related revenue growth.

However, these revenue gains were partially offset by reduction in organic volume of 30 basis points impacted by lower special waste and 2.1% revenue decline due to the adoption of the revenue recognition standard.

Looking at our pricing in more detail, we achieved strong average price yield of 4% for the quarter, up 2.9% from the prior year period with average yield benefiting from disciplined pricing and higher CPI.

Our open-market pricing drove our strong average price yield with roll-off collection, up 8.5%, commercial collection up 6.7% and disposal up 2.7%. Residential price yield, which is more contractual and tied to CPI index was up 1.3%.

Organic volume declined 30 basis points and was expected due in part by cycling difficult prior year special waste comps and the continued prioritization of disciplined pricing. We also made an intentional decision to more aggressively price on fine-moisture, content volumes and sludges in an effort to mitigate and reduce downstream odor and leachate control cost.

Looking at our expenses. Our core cost of operations, excluding accretion and before landfill remediation cost as a percentage of revenue was 61.7% compared to 61.8% in the prior year quarter. We have provided detailed schedules of our cost of operations and SG&A expenses in our 8-K filing.

SG&A expenses as a percentage of revenue was 11.7% compared to 11% in the prior year quarter. Normalizing for the rev rec standard, SG&A expenses as a percentage of revenue are up 50 basis points, driven primarily by higher technology cost as we continue to invest into ways to make it easier for our customers to do business with us whether it's scheduling a service, providing a price quote, or enhancing mobile capabilities, so we can interact with our customers where it is most convenient for them. We expect our higher technology spending to continue into 2019 and is contemplated in our forward-looking guidance.

Depreciation, depletion and amortization for the quarter was 17.1% of revenue. As a reminder, our D&A is approximately 6% higher due to the legacy acquisition and the related impact of GAAP purchase accounting. However, it has no impact on free cash flow generation.

Turning to our bottom line results for the quarter. Adjusted EBITDA for the fourth quarter of 2018 remained flat at $108.7 million, compared to the prior year period. Adjusted EBITDA margin for the quarter was 27.5%, compared to 28.3% in the prior year, reflecting 80 basis point decrease in margin year-over-year. The 80 basis point margin headwind for the quarter was driven by recycling, workday and fuel. Those three items for the full year translated into 100 basis points margin headwind. So absent those pressures margins for the full year would have been 28.4%.

In 2018, we generated cash flows from operations of $308.3 million or 19.8% of revenue compared to the prior year of $306.5 million or 20.3% of revenue. Adjusted free cash flow in 2018 was $145.6 million, which increased from $131.8 million in the prior year period. The increase in adjusted free cash flow benefited primarily from increased EBITDA along with approximately $8 million of one-time benefits related to net working capital improvements and higher than normal PP&E sales.

The company had CapEx spend of $188.6 million in 2018, or 12.1% as a percentage of revenue. Replacement maintenance CapEx was $140.5 million, or 9% of revenue. Growth in acquisition CapEx spend was $17.2 million, or 1.1% of revenue, and infrastructure CapEx spend was $30.9 million, or 2% of revenue.

Total funded debt net of cash at December 31, 2018 was $1.92 billion with approximately $230.7 million of revolver availability. Fourth quarter interest expense was $25 million compared to $23.3 million in the prior year quarter. Cash paid interest for the quarter was $29.2 million.

Covenant leverage defined as total funded debt net of cash to pro forma adjusted EBITDA at December 31, 2018 was 4.4 times down from leverage of 4.7 times at December 31, 2017. Adjusted TTM December 2018 pro forma adjusted EBITDA was $434.3 million, including $7.2 million of pro forma credit for full year impact of acquisitions and municipal contracts net of the divestitures.

I will now review our outlook for the full year of 2019. Before I do, I would like to remind everyone once again that actual results may vary significantly based on risks and uncertainties as outlined in our safe harbor statement and our various SEC filings. We encourage investors to review these factors carefully.

Our outlook assumes no changes in the current economic and operating environment. The outlook for 2019 includes the rollover impact from recent acquisitions and new municipal residential contracts, but excludes any additional acquisitions or significant municipal contract awards that may occur during the year along with acquisition-related integration and contract start-up cost.

Looking first at full year 2019. Revenue is estimated to be between $1.603 billion and $1.629 billion with average yield estimated at 3% to 3.6% and volume at negative 40 basis to positive 30 basis points. Adjusted EBITDA in 2019 is estimated between $440 million and $452 million with EBITDA margin of 27.6% at the midpoint of the range. Adjusted EBITDA margins are estimated to span 20 basis points to 30 basis points over 2018.

Cash flow from operations is estimated to be between $325 million and $350 million with adjusted free cash flow estimated to be between $140 million and $152 million. These expected 2019 results position us well to further reduce our leverage in 2019 as we look toward our target leverage of three in a quarter to four in the quarter. This specific amount of deleveraging would be somewhat dependent on the amount of acquisition spend and EBIT multiples paid for those acquisitions. But we want to emphasize that we will remain committed to reducing leverage over time.

We are providing additional components that have an impact on cash flow from operations and adjusted free cash flow. Capital expenditures are estimated to be between $191 million to $201 million and expenditures for closure and post-closure between $21 million and $26 million. Net interest expense in 2019 is estimated between $99 million and $106 million with cash paid interest in the range of $96 million to $103 million.

Our effective tax rate for the year is estimated to be about 27% with cash taxes between $3 million to $6 million as the company continues to utilize gross net operating loss carry-forwards to offset taxable income. As of year-end, we have $349 million of available gross net operating loss carry-forwards, which we anticipate will shield us from federal taxes through the end of 2021. Total shares outstanding are estimated to be 90 million.

We will now open the lines for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Hamzah Mazari from Macquarie Capital. Your line is open.

Hamzah Mazari -- Macquarie Capital -- Analyst

Hey, good morning. Thank you. My first question is. If you could just talk about the internal control weakness you cited. Is that a surprise? Do you still expect to file your 10-K on time? Any thoughts as to whether this is the issue of concern or not really?

Steven Carn -- Chief Financial Officer

No, it's not an issue of concern. It really is raising of the bar to the precision. And the weakness was related to certain revenue initiation controls really around our temporary roll-off disposal and subscription residential customers where we don't have service agreements. And those customers primarily pay deposit in advance of the services pay for the service at the time of service or we bill them quarterly in advance. We just need to enhance our initiation controls. The regulators and auditors are really focused on that upfront initiation control. We have about 30 revenue controls. It's just the focus on that individual upfront initiation.

So we'll remediate those controls in 2019. And we have some technology that will help us with those controls and make us more efficient. And at the end of the day there was no restatement to the financial statements. There were no adjustments material or immaterial related to this material weakness. For us, we consider it just kind of a compliance issue that we'll remediate in 2019. But we have effective control structure around our financials. And a decade doing this I really don't lose any sleep over having to enhance these controls. And we will follow on time sometime next week which is consistent to what we do every quarter and on an annual basis.

Hamzah Mazari -- Macquarie Capital -- Analyst

Okay, great. That's good to hear. And then just on the M&A side, it looks like -- and you guided to 2019 as a better setup than 2018. So, maybe if you could just touch on is this more just timing related because valuations haven't really gone down? And so is it just leverage has gone down or it's a function of timing? Any thoughts as to sort of updated -- maybe the tones are little more positive on M&A this year versus last year?

Richard Burke -- Chief Executive Officer

Yes, Hamzah, most -- there's no strategic change. I mean we're still pursuing tuck-in acquisitions in the existing platforms or new platforms that fit one of our three market approaches. It's really about timing. The deal pipeline is very full for us right now. So, we feel comfortable raising that guidance saying that we're going to do more. But strategically it's no different than we did last year. It's just more deals on the board and the deals are a little bit bigger than last year.

Hamzah Mazari -- Macquarie Capital -- Analyst

Got it. And then just lastly, I'll turn it over. On the volume side, how much volume are you losing just because of higher price discipline? Or is that just low margin business that you're purposefully getting rid of as well as you look to sort of your volume guide for 2019? I realize there's a comp issue in special waste, but just any thoughts there? Thank you.

Steven Carn -- Chief Financial Officer

So, there's a few -- Hamzah there's a few factors in that. One there's some tough comps around special waste. The other impacting kind of the volume range that we provided is around some high-moisture content volumes that we've elected to price very high. So, they're outside the system now, which we think long-term is good for the company for us odor order and leachate control costs.

We are focused on pricing. So, we are losing some low margin customers and that's not unexpected. Our churn is in that 10% to 11%, so that's kind of normal course and we'll continue to do that.

So, we feel good about the combination. Again, pricing is what's really going to drive margin expansion. We'll be laser-focused on volume that is profitable and retaining that volume as we look at our customer base.

Hamzah Mazari -- Macquarie Capital -- Analyst

Okay. Thank you.

Richard Burke -- Chief Executive Officer

Thanks Hamzah.

Operator

Your next question comes from Michael Hoffman from Stifel. Your line is open.

Michael Hoffman -- Stifel -- Analyst

Hi everybody. I'm going to revisit the material weakness just because I think there's too many people don't possibly understand the non-contracted piece. So, I'm kind of laying a scenario and tell me if I'm wrong.

So, a builder calls you and wants a roll-off box. You agree on a price for size of the box. You ask for a down payment or the full payment. You send the box that goes through your inventory system inside control-wise. There's an invoice that goes out with the price on it less whatever down payment or full payment. All of that flows through billing and then becomes receivable and a collectible.

And the thing you're getting you on is upfront. You agreed on a price, but there's no documentation because it was verbal and therefore, they're challenging on you. How do you know you charged the right price? Is -- do I have that right?

Steven Carn -- Chief Financial Officer

That's exactly right. It's the purest form of what they like to see with every customer, the service agreement that is documented and signed-off. But you know the temporary roll-off disposal and subscription residential business; it's very fluid it's very quick. And it's not always a tradition to have that process upfront, particularly, on the temporary roll-off because it's very demand-driven. I need it today and it's a very specified level of service.

And we have people in place that are managing that inventory of containers. And that's what gives us some flexibility on the business side. We like it, because we can adjust our pricing based on that demand. And we like that being fluid. But it's...

Michael Hoffman -- Stifel -- Analyst

Okay.

Steven Carn -- Chief Financial Officer

We'll get to the precision level that we need to. We understand it and we'll remediate and in 2019, it will be a non-issue.

Michael Hoffman -- Stifel -- Analyst

So last piece of this and then I'm going to stop asking about it. You've been doing it the same way for a long time, right?

Steven Carn -- Chief Financial Officer

We've been doing it consistent. And we've communicated that it doesn't make sense for our business to have a service agreement for every temporary roll-off customer or subscription residential. We bill on...

Michael Hoffman -- Stifel -- Analyst

Okay.

Steven Carn -- Chief Financial Officer

Our residential customers in advance and often times they pay us before the performance of that service.

Michael Hoffman -- Stifel -- Analyst

Yeah. Okay. So this is just the auditing world, finding another thing to sort of grind down on. All right. Let's move on to more positive things. So can we talk about OpEx and price leverage and sort of your own internal inflation? And how we could view -- how do we get to the 3.6% instead of the 3% in 2019? That's -- I'm trying to understand sort of the mix of your business and the puts and takes that will end us up at 3.6% versus the 3%?

Steven Carn -- Chief Financial Officer

I think, Michael, we did a lot of pricing in 2018. There's a fair amount of that pricing that will roll over. So we'll continue to see pretty good pricing in the front half of the year. As we anniversary those tougher comps in the back half of the year, it kind of depends on some macro things and demand, whether that will continue as -- and we can push additional price increases on tough comps. So that's kind of one factor that you kind of weigh out when we're looking at overall pricing.

The other thing is, around some of the volume line, some special waste, so those jobs are robust, helps with that pricing potential. But it's kind of a balance. We feel comfortable with the range that we got. With expectations that we'd like to land kind of in that midpoint. And we'll continue to control the cost by managing brought-in efficiencies, headcounts, SG&A expenses. So we'll try to drive as much margin to the top line pricing, but continue to look at the cost structure also.

Richard Burke -- Chief Executive Officer

In addition to that, Michael, I'd say that the difference between the -- other than the macro issues, the difference between the 3% and 3.6%, assuming macro stays where it is, a big chunk of that's likely going to be around the landfill side right?

The internal landfill pricings that we're pushing and the initiatives that we have across our 41 landfills now and 73 transfer stations, of how we're driving that disposal price, both to ourselves internally as well as to third parties that use our sites.

So as you saw in fourth quarter -- you don't usually see in fourth quarter pricing on disposal of 2.7%, you usually start to see it deteriorate a little bit in the fourth quarter. So I was encouraged by disposal being up 2.7%. So I think that sets us up nicely as we go into 2019, to continue to push disposal pricing, which will lift the entire market.

Michael Hoffman -- Stifel -- Analyst

Got it. On the deal pipeline, just to be clear, you've always had an active pipeline, but sellers have to say, yes. And you're being disciplined about valuations.

Richard Burke -- Chief Executive Officer

Yeah, exactly. Sellers have to say yes. And we closed 12 deals last year, albeit, not very big deals, right? But accretive deals that build route density in existing markets, 11 of them. And then the one new one in Alabama where we picked up landfill with $50 million -- with 50 years of life. So the only difference between 2018 and 2019 is really no strategy divert. It's just the pipeline has more deals that we think we'll close this year. And the deals are a bit larger.

Michael Hoffman -- Stifel -- Analyst

Okay. And then you pointed out through the year that you've been dealing with landfill leachate cost particularly but just -- there was overall headwind about costs around the landfill side. Was that -- is that an item that is behind you and then it settles into a lower but -- lower level of activity or is this something that, that's just the change that's happened in the business? And so I'm looking for an incremental point of OpEx leverage because this landfill cost issue becomes more manageable in 2019 potentially?

Richard Burke -- Chief Executive Officer

Look I think we're stabilized around it in 2019. But I struggle to say that the cost side of leachate management and gas management is going to track at a CPI level. I think it's going to be north of CPI. And I think that's another reason, we've got price above CPI. So it's challenging on leachate treatment and on gas management. Both those parts of our business have seen above CPI pricing. And I don't really see that subsiding. I think at the end of the day, we just have to charge more for what's coming across the scale.

Michael Hoffman -- Stifel -- Analyst

And then last one from me. You have had hedges on your fuel in the past, what's your plans for fuel in 2019?

Richard Burke -- Chief Executive Officer

So we're up to about 66% of our customer base, pays a fuel surcharge. And then if you think about 23%, 24% municipal contracts that reset once a year those are natural hedges in place. We don't see hedges over and above that.

Michael Hoffman -- Stifel -- Analyst

Okay, that's great. Thank you.

Operator

Our next question comes from Noah Kaye from Oppenheimer. Your line is open.

Noah Kaye -- Oppenheimer -- Analyst

Thanks, good morning. Maybe just a follow-up on Michael's question on leverage. Steve I think you said in the prepared remarks, you called out about 100 bps margin impact for this year on the recycling fuel and the workday. Obviously recycling should certainly abate in terms of the dimension of the tailwind in 2019 just looking at current prices, already tough comp you need a little bit of abatement on the fuel.

And then you're getting really strong price with some of an assumption of pretty much no organic growth. So I guess the question is, what are the headwinds that you would call out for this year that kind of keep that margin expansion to 20 to 30 bps? Because if I back out, the headwind you called out you're essentially saying that, margins would've otherwise expanded 70 bps year-over-year in 2018. So what are the headwinds that we should be thinking about?

Steven Carn -- Chief Financial Officer

Yes. So the headwinds that we have from 2018 and 2019 around margins, so we have continued IT expense that we'll continue as we continue to implement build-out our customer technology and that's about 20 basis points. And then we do have the CNG credits that were in 2018 that are repeating in 2019 and that's about 10 basis points. And then we have some of that high-moisture content waste that we chose to get drive out of the system. So that's a little bit. So given those headwinds kind of moderated what we thought that margin expansion from 2018 to 2019 were about 20 basis to 30 basis points.

Noah Kaye -- Oppenheimer -- Analyst

Okay. So underlying, except for those you're really looking at something closer to call it 50?

Steven Carn -- Chief Financial Officer

Yeah. If we get the CNG credit back that's 10, and if we didn't spend on the IT technology that's another 20.

Noah Kaye -- Oppenheimer -- Analyst

Okay. And then maybe -- already couple of questions around plans for the elevated M&A spend, but it does look like if you keep to this plan and come in relatively close to the guide, you will be in the upper bound of your leverage target maybe to -- 2019. And so at that point, do you start to think about a higher level of M&A spend on a run rate basis? Or does the priority remain paying down the debt?

Richard Burke -- Chief Executive Officer

Look, I think we're trying to serve two masters here, right? So at the end of the day, we look at both. We're looking at both M&A as well as leverage. I mean, our stated goal is to be in that 3.5 to 4.25 range. So that's top of mind as we think through it.

If we have deals that are accretive that help us get there then that's the best use of our free cash flow. So we'll look at it. I don't feel the need to race out and do hundreds of millions of dollars of deals. Deals will be there. This industry is -- I've been at it 31 years, we've been consolidating 31 years. There'll be deals, right?

So I think this year we'll do the $50 million to $75 million spend that we talked about and the rest of the money we'll use to pay down debt. And as you said, we'll get down closer to the high end of our range. But just because we get in that range, I don't think that's going to be the trigger for another couple of hundred million of deals. If they're there and they are accretive then look we'll go raise equity and do the deal.

Steven Carn -- Chief Financial Officer

And I think naturally between the balance of paying down debt and doing deals, particularly deals that are accretive from operation and disposal synergies that add that additional free cash flow, I think we could -- 30 to 40 basis points naturally deleveraging on an annual basis.

Noah Kaye -- Oppenheimer -- Analyst

Yeah. Make sense. And if I can just sneak one more in here. There was a question from Hamzah around volumes. I just want to understand what's your view of underlying industry volume growth as we've heard the peers talk about may be kind of a 1%-ish type range for the year. Are you seeing anything different in your indicators or in your lines of business?

Steven Carn -- Chief Financial Officer

No, we continue to see good core solid waste, volume fundamentals around temporary roll off commercial and MSW volumes. The thing that's always lumpy for us are the special waste and the timing of those special waste projects.

Noah Kaye -- Oppenheimer -- Analyst

Make sense. Thanks so much.

Steven Carn -- Chief Financial Officer

Thanks, Noah.

Operator

Your next question comes from Toni Kaplan from Morgan Stanley. Your line is open.

Toni Kaplan -- Morgan Stanley -- Analyst

Thank you. It looks like your guidance implies a modest improvement in free cash flow conversion. So I was hoping you could talk through some of the initiatives that drive that improvement and how high you'd expect that free cash flow conversion goes over the long-term?

Steven Carn -- Chief Financial Officer

Yeah, so a good question. So we had $145.5 million free cash flow for 2018. If you back out the one-time benefit between about half of that $8 million net working capital and about half of it from the sale of proceeds of PP&E normalized 2018 $137.6 million. And again that's still a 4.4% growth rate over 2017. So if you look at that $137.6 million normalized we gave a range of $140 million to $152 million with the midpoint of $146 million. So growth of about 6.1% free cash flow margin of about 9%. So we continue to pull all the levers making sure we increase EBITDA, we're expanding margins. We continue to see if we can squeeze additional amount of net working capital and then just prudent spending around our CapEx.

Richard Burke -- Chief Executive Officer

And in the past we've repriced our debt two or three times. So should that market present itself, we would look to that as well.

Toni Kaplan -- Morgan Stanley -- Analyst

Okay. And then guidance also implies another year of CapEx spend about 10% -- sorry, 12% of sales. Understanding you have the younger landfills that require more investment. Is there a timeframe we should be expecting that to maybe tick down a bit?

Richard Burke -- Chief Executive Officer

Yeah. I think in the past we've messaged that we're going to be in that 11% to 12% range really foreseeable through 2021. That looks like our run as we're continuing to invest in infrastructure. I mean, if you look at our maintenance replacement about 8.5% or 9% that's in line with the sector. Where we're maybe 100 bps higher than the sector is around landfill construction transfer stations. And it's really about building out our infrastructure because our landfills by and large are younger than others. So we're still doing leachate treatment and gas treatment as opposed to some others.

Steven Carn -- Chief Financial Officer

And just to give you some specific numbers, we spent $30.9 million in 2018 on those infrastructure related, $11.3 million gas projects, $5.5 million on on-site leachate treatment. So that $16.8 million of that $30 million on leachate and gas. Downstream will get the benefit of lower odor control and leachate control. And we've seen the stabilization of that from 2018 and have factored that in into 2019. But we think these are good investments long-term for the business. And because where we are in the life cycle of developing our landfills, there's where we were an outlier a little bit comparative to our peers.

Toni Kaplan -- Morgan Stanley -- Analyst

Thanks so much for the color.

Richard Burke -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Kyle White from Deutsche Bank. Your line is open.

Kyle White -- Deutsche Bank -- Analyst

Hey, good morning. Thanks for taking my question. On recycling, I'm just curious what your expectations are for 2019. I know 2018 was a pretty big year in terms of headwind. But just as we saw OCC go down a little bit more this past month curious what your thoughts are there? And then also you mentioned the 20% of customers in recycling that you received pricing concessions. Do you expect this number to go up? Or is that kind of where it's supposed to be?

Richard Burke -- Chief Executive Officer

Thanks for the question, Kyle. So on recycling, look, I'd like to think we found bottom. I really thought we had until we saw February numbers, which fell off another $8 to $10 a ton. So that could just be a seasonal thing. So let's hope it rebounds.

Certainly, our comps year-over-year will be better. I don't -- I am not so good at predicting commodities, but I don't see any macro indicators that say that recycling prices are going to improve in 2019 over 2018. So I think it'll be easier comps. But I think we're still kind of at the bottom of the trough there.

As for as our municipal customers look -- just because you go in one-time, doesn't mean you're not going back in. I mean when we analyze the 20% that gave us some sort of rate adjustment or a change, a lot of those contracts were in the last year or last two years of a long-term contract of a five or seven-year contract. So, they're coming up for renewal. So, they realize reality is coming and that prices going to change.

So, that was helpful to get them to give us some better price now or some better terms now. So, there'll be another wave with those contracts again this year that will be coming. And we'll be back in with them asking for some help there around recycling. So, as they get closer to their expiration date, they get a lot more reasonable at the negotiating table.

Steven Carn -- Chief Financial Officer

And the sale of the commodities is down to about 1.2% of revenue.

Kyle White -- Deutsche Bank -- Analyst

Thanks for the color. Separately, I am -- most of my questions have been asked. But I'm curious you had the CPI to pass through and pricing comps saw some inflation. You also have a fuel surcharge. I'm curious if you're working to possibly do something similar to have more direct index to pass through other inflationary costs such as labor? If you think something like that would be possible?

Steven Carn -- Chief Financial Officer

We really focus that through our base pricing to make sure that we're pricing sufficiently to cover those costs that are above that inflationary. So, again, that's why you see the headline kind of 4% on an easier comp certainly in Q4. But that's why we're viewing pricing in that 3% to 3.6% for 2019.

Kyle White -- Deutsche Bank -- Analyst

Thanks a lot. I'll turn it over. Good luck in the year.

Richard Burke -- Chief Executive Officer

Thanks Kyle.

Operator

Your next question comes from Sean Eastman from KeyBanc Capital Markets. Your line is open.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Hi gentlemen, thanks for taking my questions. I just wanted to clarify the 30 to 40 basis points of deleveraging. That's sort of a normalized annual target. I'm wondering if you guys are still expecting to achieve that even with the $50 million to $75 million of acquisition activity being sort of above the normalized range.

Steven Carn -- Chief Financial Officer

I think it's always our target to get there. There are several levers to pull. Oftentimes a larger acquisition will give us a little bit more on the synergy side and then just be able to harvest those synergies. Again we're going to be prioritizing to continue to delever the business we'll be opportunistic around all the levers we can pull to do that.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Okay. And then just given that the deal target is above the normalized number for 2019. I'm just wondering how to think about the margin dilution from that as those deals get folded in? Is there any color you can provide around what we should expect there?

Richard Burke -- Chief Executive Officer

Yes. If I use last year's my guide and I look at the deals we did and the margin, the margin for those deals is usually in that low to mid-20s. I mean you really don't pay six times and buy something that's got 30% margins, right?

And you really don't want to. You don't want to buy when they're fully baked. I mean the idea is buying when they're 20%. And then over the course of time what we roll out the back-off and centralize that. We integrate the routes and we internalize the disposal.

And then once you've done all that then you start to price them in line with your prices in that market when you've got it secure and on your contract. So, it does take some time. Depending on the size of the acquisition, it can be as short as three to six months. And on a bigger deal, it could be a year where you just want to hold their prices and you don't want to lose what you bought, right? So it's a good question. I think in that low- to mid-20s is sort of where we would expect acquisitions to come in margin-wise. And then depending on the size over the course of six months to a year, we get them more in line with our run rate.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Okay. That's helpful. And then lastly from me is it's interesting to have this potential special waste swing factor at any time. So I was wondering if you could maybe indicate whether there is sort of a pipeline of projects that you guys are looking at? And what the probability is of maybe seeing something come through like is there any advanced discussions under way on some potential big jobs any big bids out there? That kind of thing will be helpful.

Richard Burke -- Chief Executive Officer

Yes, it's a good question Sean. Special waste is one of the less predictable parts of our industry's revenue stream. But we do manage our pipeline close and tight because many of these projects start six months to a year in advance before they actually start digging anything. So our pipeline looks good. It doesn't look 2017 good, but it looks more like 2018 right now. So there's quite a few projects in the mix and volumes look to be very similar to 2018 at this point.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Okay. Thanks very much. Very helpful. Appreciate it.

Richard Burke -- Chief Executive Officer

Thanks.

Operator

(Operator Instructions) Our next question comes from Michael Feniger from Bank of America Merrill Lynch. Your line is open.

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

Hey, guys thanks for taking my questions. Just with the 20 30 basis points of margin expansion for this year. Can you just help us with kind of the cadence of 2019? I mean, should we be thinking as the first quarter may be off to a softer start with the CNG tax credit recycling? Anything weather-wise, we should think about just trying a handle, how the cadence we should think about for the year?

Steven Carn -- Chief Financial Officer

Yes. In that you hit the major points right there. You're exactly right. You have the CNG credits came in, in Q1. You also have -- around the cold-weather states we're in. Our margins are always lowest in Q1. And then it's always the balance of when do you get that seasonal ramp when weather does break between April, June as construction starts to come back much stronger in those cold-weather states. And then your strongest margin quarters are going to be Q2, Q3. So lowest is Q1, high Q2 Q3 and then Q4 is kind of in between.

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

Great. And Rich big -- just big picture. I understand what the volumes at, but this special waste some of your peers also guiding kind of a flattish volume outlook. I'm just thinking -- I'm just curious like with the U.S. economy humming consumers strong, any reason why just across the board we're not seeing stronger underlying volume growth. I guess, if you could just help us out what the underlying volume growth was in 2018?

Richard Burke -- Chief Executive Officer

What was the -- I don't have the 2018. I can tell you that -- I mean, you think about consumers being strong sure. We're seeing it on residential. We're seeing it on small container. But special waste is more about corporate cleanups, corporate jobs, government work. I'm not sure that ties in as much. It's more about this -- the infamous shovel-ready work is where you get -- is where you get your special waste. Nobody is digging up their backyard for special waste.

It's more about a business-to-business relationship or more about a business-to-government. So while humming economy certainly helps, it's not going to be the driving factor as much as maybe allocation of government funds to clean up some of these sites.

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

That's great. And just lastly, I know this is asked before. Did you guys -- what is the internal cost inflation kind of embedded into 2019?

Steven Carn -- Chief Financial Officer

Around 2.8%.

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

Okay.

Steven Carn -- Chief Financial Officer

I mean there's some below that, there's some at. But we would think kind of overall average 2.8 percentage.

Richard Burke -- Chief Executive Officer

And a lot of that's driven by labor right? I mean we're in a 4% employment market. So drivers and mechanics are both tight. So in many markets we're seeing where we're having to go 3%, 4% in order to attract and retain drivers. So that's the biggest part of that increase.

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

Thank you.

Operator

There are no further questions at this time. I will turn the call back over to Richard Burke, CEO, for closing remarks.

Richard Burke -- Chief Executive Officer

In closing, we're excited about what the future holds for Advanced Disposal. We will continue to focus operationally first and foremost on our goal of every employee coming home safely every day, along with our continued commitment to being the employer of choice in our industry.

Strategically, we'll continue to execute on our price-led organic growth strategy, with a goal of continuing to improve our free cash flow over time that will be used to either enhance our operations through acquisitions or repay debt.

I'd like to thank the Advanced Disposal team for their hard work and dedication, as we all strive to live out our mission of every day, driven to deliver service, first safety, always. Thank you for your time this morning and be safe.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 55 minutes

Call participants:

Matthew Nelson -- Vice President, Finance and Investor Relations

Richard Burke -- Chief Executive Officer

Steven Carn -- Chief Financial Officer

Hamzah Mazari -- Macquarie Capital -- Analyst

Michael Hoffman -- Stifel -- Analyst

Noah Kaye -- Oppenheimer -- Analyst

Toni Kaplan -- Morgan Stanley -- Analyst

Kyle White -- Deutsche Bank -- Analyst

Sean Eastman -- KeyBanc Capital Markets -- Analyst

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

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