Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections 4th Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Wednesday, February 22, 2017.
I would now like to turn the conference over to Mr. Ron Mittelstaedt, Chairman of the Board and CEO. Please go ahead, sir.
Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our Q4 2016 results and provide our financial outlook for both the Q1 and the full year 2017. I'm joined this morning by Worthing Jackman, our CFO, as well as several other members of our senior management team. As noted in our earnings release, our acquisition of Progressive Waste made 2016 a transformational year for Waste Connections.
More importantly, our culture and operating playbook enabled us to drive significant improvements in safety, quality of revenue and operating performance within the acquired operations, all pacing 12 to 18 months ahead of our original expectations. This was evident in Q4 as revenue, adjusted EBITDA and margins once again exceeded expectations. This underlying strength together with continuing improvements in recycled commodity value and E and P waste activity, should position us well for 2017. In addition, having already announced the acquisition of Gerrit Industries, we are on track for another above average year in M and A. We believe free cash flow generation is synonymous with our name.
Waste Connections' industry leading 50 plus percent conversion of EBITDA to free cash flow should drive a more than 15% year over year increase in free cash flow per share in 2017. And our strong financial profile provides us the flexibility to fund a continuing above average amount of expected acquisition activity while increasing the return of capital to shareholders. Before we get into much more detail, let me turn the call over to Worthing for our forward looking disclaimer and other housekeeping items.
Thank you, Ron, and good morning. The discussions earned today's call include forward looking statements made pursuant to the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995 and applicable securities laws in Canada. Actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties.
Factors that could cause actual results to differ are discussed both in the cautionary statement on Page 3 of our February 21 earnings release and in greater detail the filings that have been made by Waste Connections, formerly named Progressive Waste Solutions Limited and Progressive Waste U. S, Inc. With the Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward looking statements in order to reflect events or circumstances that may change after today's date.
On the call, we will discuss non GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings release for a reconciliation of such non GAAP measures to the most comparable GAAP measure. Management uses certain non GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non GAAP measures differently. Finally, reported results reflect the impact of our merger with Progressive Waste on June 1, 2016.
Contribution from this combination will be treated as acquired revenue and will not be incorporated into organic growth statistics until 12 months from the closing date. I'll now turn the call back over to Ron.
Okay. Thank you, Worthing. In the Q4, solid waste core price plus volume growth was 3.7%. Core price increases in the period were 2.7% year over year with total pricing net of surcharge reductions of 2.6%, up 30 basis points sequentially from Q3. Volume growth of 1% in the 4th quarter was primarily driven by high single digit increases in disposal volumes, commercial collection revenue and roll off activity, and most notable in our Western and Eastern regions.
Solid waste landfill tonnages overall on a same store basis increased 8% year over year in Q4 with all lines up year over year in the period. MSW tons rose 13%, special waste increased 2% and C and D was up slightly. On a same store basis, commercial collection and roll off revenue in Q4 increased about 7% and 8% respectively from the prior year period. Roll off calls per day increased a little more than 3% with all regions reporting high roll off activity compared to the year ago period, primarily due to milder weather in many markets during the 1st 2 months of the quarter. Looking at the full year, core price was 2.8% and volume growth was 1.9% or 10 20 basis points respectively above the expectations we had communicated on our last call.
As Worthing noted earlier, price and volume growth from acquired operations are not reflected in our reported organic growth calculations until the anniversary date of the related transaction, which for the Progressive Waste acquisition will not be until June 1st. However, we're extremely pleased to report that these recently acquired operations delivered over 3% pricing growth in Q4 and volumes in the period were slightly negative as expected since we're well underway in our efforts to shed low quality and unsafe to service revenue. Recycling revenue, excluding acquisitions, was $13,200,000 in the 4th quarter, up almost $1,800,000 or about 16% year over year due primarily to higher commodity values for fiber. Prices for OCC or old corrugated containers averaged about $125 per ton during Q4, up 18% from the year ago period and up 2% sequentially from Q3. OCC prices currently exceed $150 per ton, up over 50% from the level we averaged in last year's Q1.
Regarding E and P waste activity, we reported $32,200,000 of E and P waste revenue in the 4th quarter, up 7% sequentially from Q3 and slightly above our outlook for the period with segment EBITDA margins well off their lows and now exceeding our corporate average. The rig count is now twice the level of last year's trough and drilling activity is picking up in additional basins beyond just the Permian. As a result, we continue to see month to month revenue growth at high incremental flow through in our E and P Waste operations. With year over year declines in 2015 2016 now behind us and macro industry trends in our favor, we believe 2017 2018 are setting up for strong double digit increases in E and P waste activity. Now moving on to the Progressive Waste acquisition.
As noted earlier and in our press release, we believe the integration of our culture and execution on our operating playbook have enabled us to drive significant improvements in safety, quality of revenue and operating performance, all of which are pacing 12 to 18 months ahead of our initial expectations within these acquired operations. This success is a direct result of our employees embracing our safety focused, servant leadership driven culture, honoring commitments and accepting accountability at the local level. Progressive legacy operations exited 2016 with almost a 50% reduction in safety related incident frequency as compared to pre acquisition levels of the earlier months in 2016. This is a run rate reduction of almost 3,000 fewer accidents and injuries in their platform alone in the year. Employee turnover at these operations is down from 42% in Q2 of 2016 to 26% in Q4 of 2016, a nearly 39% reduction in employee turnover plus box.
Quality of revenue also continues to improve with pricing growth, as noted earlier, now above 3%. In addition, the shedding of about $50,000,000 of low margin revenue across numerous markets is well underway and we are seeing continuing momentum within our divestiture program. Just last week, we exited the Washington DC market, which had an annual revenue run rate of about $50,000,000 at a negative operating margin in 2016. As a reminder, our playbook focuses on improving the quality of revenue within Progressive's operations to drive higher EBITDA from less revenue, reduce the CapEx intensity necessary to generate the EBITDA and therefore convert a higher percentage of EBITDA to free cash flow. This playbook will reduce 2017 revenue generated by operations acquired in the Progressive acquisition by about 10% when compared to 2015, but increased EBITDA by 25% and free cash flow by 100% over the same period.
We've already been able to more than double Progressive's free cash flow margin from less than 8% in 2015 to our 16% plus corporate average and drive a company wide 50% plus conversion of EBITDA to free cash flow. Looking at other acquisition activity, we're extremely pleased to have already announced our acquisition of Groot Industries earlier this year. Founded over a century ago, Groot was the largest privately owned solid waste services company in Illinois with total annual revenue of approximately 200,000,000 dollars Group serves approximately 300,000 customers primarily in Northern and Western Illinois from a network of 6 collection operations, 6 transfer stations and 2 recycling facilities. With the majority of its operations contiguous to the Rock River assets we acquired in November 2015 and already bringing a substantial portion of its tonnage to our landfills, Group solidifies our leading position in these markets, increases potential internalization benefits of additional disposal volumes into our landfills and further expands our platform for additional growth opportunities. We are very honored that Groot shareholders chose Waste Connections purposely when deciding who would be the best steward of their 4th generation 100 plus year old company.
Groot is arguably one of the top 5 solid waste companies in the U. S. When viewed in terms of asset quality, market positioning, management debt, and community involvement. We congratulate Larry Groot and Lee Brandsma on all of their accomplishments over the past nearly 40 years and we welcome John Group and Ryan Brandsma along with all of the leaders and employees of Group to Waste Connections. As a reminder, Groot was an outsized deal.
In fact, it was the 3rd largest in the company's history. Acquisition dialogue remains quite active, but with our more traditional smaller sized opportunities. For example, we've also signed an agreement requiring approximately $15,000,000 revenue franchise operation on the West Coast that due to a lengthy regulatory review process should close in late Q2 or early Q3. Some potential sellers who may have been sidelined over the past several years due to high tax rates and low reinvestment rates are now testing the waters given current expectations for lower taxes and higher interest rates. With our strong free cash flow generation and recently committed $400,000,000 note offering, we are well positioned to fund a continuing above average amount of acquisition activity while also increasing the return of capital to shareholders.
And now I'd like to pass the call to Worthing to review more in-depth the financial highlights of the Q4 and to provide a detailed outlook for Q1 and the full year 2017. I will then wrap up before heading into Q and A.
Thank you, Ron. In the Q4, revenue was $1,040,000,000 or almost $30,000,000 above our outlook for the period. Acquisitions completed since the year ago period contributed about $507,000,000 of revenue in the quarter with Progressive Waste accounting for $498,000,000 of that amount. Adjusted EBITDA, as reconciled in our earnings release, was $325,400,000 or 31 percent of revenue and slightly above our margin outlook for Q4. Year over year, our adjusted EBITDA margin reported for the 4th quarter declined by 200 basis points primarily due to the comparative lower margin profile of the Progressive leased operations acquired since the year ago period and to a lesser extent the impact of lower E and P waste activity.
Fuel expense in Q4 was about 3.85 percent of revenue and we averaged approximately $2.42 per gallon for diesel, which was down about $0.14 per gallon from the year ago period and up about $0.09 per gallon sequentially from Q3. Depreciation and amortization expenses for the Q4 were 13.8% of revenue, up 70 basis points year over year primarily due to acquisitions completed since the year ago period. For the quarter, this was 60 basis points below our outlook due to $5,500,000 lower than expected amortization of intangibles expense as we finalized the fair value of intangible assets during Q4 for the Progressive Waste acquisition. This lower than expected expense has no impact to adjusted EPS as we exclude this item in the calculation. Interest expense in the quarter increased $10,600,000 over the prior year period to 27,400,000 dollars due to the additional debt outstanding resulting from acquisitions completed since the year ago period and higher interest rates compared to the prior year period.
Debt outstanding at quarter end was about $3,600,000,000 and our leverage ratio, as defined in our credit facility, decreased to less than 2.7x debt to EBITDA. Our effective tax rate for the Q4 was 24.2%, which included an approximate $4,100,000 benefit to the tax provision related to our review of the deductibility of certain items from earlier in the year related to the Progressive Waste acquisition. Excluding these items, our effective tax rate was closer to 28% in the period. For full year 2016, our effective rate was 31.6%, which included a 2.3 percentage point impact from certain nondeductible items related to the Progressive Waste acquisition. As that point as that 2.3% impact was unique to 2016, As we look ahead, we expect our effective tax rate to be about 29%, subject to some variability depending on the percentage of total profitability contributed by operations in the U.
S. Versus Canada and discrete items in certain periods. GAAP and adjusted net income per diluted share in the 4th quarter were $0.49 $0.68 respectively. Adjusted net income in Q4 excludes the impact of 3 items, dollars 24,500,000 after tax of acquisition related items such as amortization of intangibles and certain items related to the Rest of Waste acquisition, including severance related costs, accrued synergy bonus and professional fees $14,300,000 after tax for impairments and other operating losses primarily associated with a write down of certain assets held for sale in connection with our previously discussed divestiture program. And finally, the previously mentioned $4,100,000 benefit to our tax provision.
Adjusted free cash flow in 2016 was $550,000,000 $550,900,000 or 16.3 percent of revenue. As a percentage of adjusted EBITDA, this represents a conversion rate of over 51% in a year. I will now review our outlook for the Q1 and full year 2017. Before I do that, I would like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and filings we've made and Waste Connections U. S.
Inc. Has made with the SEC the Securities Commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment. It also excludes any remaining severance, integration costs or other items resulting from the Progressive Waste acquisition and any additional acquisitions or potential divestitures that may close during the respective periods.
Looking first at the full year 2017. Revenue in 2017 is estimated to be approximately 4,450,000,000 dollars We expect price plus underlying volume growth for solid waste to be between 4% 4.5% in the U. S, less about 1% for the previously discussed low quality and unsafe to service revenue we are shedding in the U. S. In Canada, we expect price plus underlying volume growth for solid waste of about 4% on a constant currency basis, less about 2% for the previously discussed low quality and unsafe to service revenue we are shedding in Canada.
Recycling and E and P waste related revenue should each increase double digits on higher commodity values and drilling activity respectively. As a reminder, Progressive's operations will be included in our organic growth statistics beginning June 1. Adjusted EBITDA in 2017 as reconciled in our earnings release is estimated to be approximately 1,410,000,000 dollars or about 31.7 percent of revenue. Margins for the year were trending above 32% before the impact of the comparably lower margin group transaction. I'd like to note that the timing of divestitures and the shedding of low quality revenue could impact revenue and reported margins, but is not expected to impact EBITDA on a dollar basis.
Adjusted free cash flow in 2017, as reconciled in our earnings release, is expected to be approximately $725,000,000 or about 16.3 percent of revenue and more than 50 percent of EBITDA. We're off to a good start towards our target, having already generated more than $100,000,000 of free cash flow in the month of January alone. Turning now to our outlook for Q1 2017. Revenue in Q1 is estimated to be approximately 1,075,000,000 dollars We expect core price plus line growth for solid waste to be between 3% and 3.5%. As a reminder, we have a tough comp against the prior year period in which we reported volume growth of 3.2% due partially to the benefits of an extra leap year day, ramping of a recently opened landfill and comparably milder weather.
Adjusted EBITDA in Q1 is estimated to be approximately $322,500,000 or about 30% of revenue. Depreciation and amortization expense for the Q1 is estimated to be about 14.1 percent of revenue. Amortization of intangibles in the quarter is estimated to be about $26,500,000 or about $0.10 per diluted share net of taxes. Operating income for the Q1 is estimated to be about 15.8 percent of revenue. Interest expense in Q1 is estimated to be approximately 29 $1,000,000 Our effective tax rate in Q1 is estimated to be about 25%, subject to some variability.
The effective rate for the period includes about a $6,000,000 benefit to the provision due to a new accounting pronouncement that reclassifies excess tax benefits associated with equity based compensation arrangements from the cash flow statement to the income tax provision. Finally, non controlling interest is expected to reduce net income by about $225,000 in the Q1. And now let me turn the call back over to Ron for some final remarks before Q and A.
Okay. Thank you, Worthing. Again, 2016 was a transformational year for Waste Connections and our 13th consecutive year of positive returns for shareholders. We are quite pleased that our financial results continue to track above expectations. Moreover, 2017 is already setting up to be another exceptional year given the strong momentum with which we exited 2016, the recently announced GRUIT acquisition and increasing recycled commodity values and E and P waste activity, all driving a more than 15% expected growth in adjusted free cash flow per share.
Sustainability of current commodity values or any additional acquisitions could provide further upside. Culture is a major contributor to our success and safety is a key component of our culture. At Waste Connections, we believe that safety is the responsibility of each and every employee. It is ingrained in everything we do and it is the best indicator of organizational health. We're especially proud to report that the accident at the incident rate at 4 progressive operations has already fallen by about 50% since our combination.
I'd like to recognize the tremendous efforts of all our employees in their tireless pursuit of 0 incidents. We appreciate your time today. And I will now turn this call over to the operator to open up the lines for your questions. Operator?
Thank you. And our first question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.
Thank you so much. Ron Worthing, can we dig a little bit into the full year guidance and just frame a little more narrowly what your underlying assumptions are for recycling and R360. How much of the upside of versus the average in 2016, for instance, in recycling has baked into the outlook? And therefore, what do we have left if the prices stay where they are?
Yes, Michael, we've only baked the current prices into the current quarter's outlook. We have not baked it in beyond Q1. And so to the extent that those prices remain, that's likely about between another $5,000,000 $7,000,000 of revenue per quarter in Qs 2, 3 and 4 with about a 70% flow through to pre tax. With regards to E and P activity, we've seen continuing ramping month to month as we've kind of moved away from March April of last year. As we noted already, Q4 was the 2nd quarter in a row where sequential activity quarter over quarter increased about 7%.
We're trending about that same percentage higher Q1 versus Q4 this year. And so to the extent that that trend continues throughout the year, that could be another 10,000,000 or 15,000,000 dollars of top line growth within E and P above current expectations. But again, it's we're not going to put out guidance for a full year, including items we don't control and have to come back and take things down rather those kind of things all be upside
to Yes, fair enough.
Michael Ford, just for the record for Q2 last year, commodity values were 104, Q3 they were 123 and Q4 they were 125.
Okay.
So those are the numbers you have to compare against whatever your assumptions are.
Great. That's very helpful. And then in June when you closed Progressive, you talked about an opportunity for maybe about $50,000,000 of op savings. There was $25,000,000 of risk and the other $25,000,000 for productivity and price. How would you frame where you are in that cycle now?
And is it bigger and faster? And how much of that's in 2017?
Well, yes, I mean, I think generally you explained it accurately, Michael. I mean, look, we expected originally about $50,000,000 of what I'll call SG and A savings, but we achieved a little bit more than that, about $54,000,000 to be exact by year end. We expected $20,000,000 to $25,000,000 of initial safety improvements or risk improvements. And I would tell you, we're ahead of that track without question. We have already reduced incidents more than we thought we would reduce by the end of 'seventeen.
So we're north of that $25,000,000 in savings. And then on price and operating, look, if you take an approximate $1,900,000,000 in revenue and you assume almost a 2% to 2.5% improvement in price, let's just take 2%, that's $38,000,000 Of course, we've also added costs and other things against that, but you're clearly ahead of the $25,000,000 So I mean that's how I would frame each of those buckets right now. So it's a long way and obviously if you go back to when we announced the transaction, we started by saying $1,250,000 to $1,300,000 of EBITDA. Now we just endorsed $1,401,000 take out group and you get to $50,000,000 to $100,000,000 above the initial guidance. So obviously, a lot of those improvements and then some are in
there. Got it. Okay, that helps. And then
I noticed in your volumes, the MSW, there's an beginning not beginning, but there's a continued acceleration of MSW, which is clearly higher margin. How do you frame where you think you are in the cycle of that MSW mix shift?
Well, every time we think you got to be closer to the end, another quarter or a year comes around. I mean, I'm sitting here looking at really since 2011, so we're entering our 7th year of double digit increases now in MSW and I would have thought that that would have lasted 5 years, maybe 6 years. But obviously, there's no mystery that we had a slower recovery for a variety of reasons. But I think that recovery has been strong and it's going to last longer because it took longer to come out of. And that's what we're seeing pretty much across all geographies now.
Okay. And then where are the cash flow from ops for 2017 framed at 26% is a pretty healthy upside to the previous year, your 23%, 24%. Is that a permanent shift? Or is that working capital moving between 2016 2017?
No, it's not a shift at all. Actually, if you adjust the 16 numbers for all the deal costs, you get about 26.3 percent, 26.4 percent for 'sixteen on an adjusted basis. So it's really no change relative to 2016 adjusted for transaction items.
Okay. So this we can model 26 kind of going forward then?
We can model it in 2017. That's right, Michael.
Just trying to reach a
little bit. All right.
Thanks for taking my questions. I appreciate it.
Thanks, Michael. Take care.
You too.
Our next question comes from the line of Hamzah Mazari with Macquarie Capital. Please proceed with your question.
Good morning. Thank you.
Hey, Alvaro.
Hey. I just had a question on how much of your business right now is truly franchised markets? And how should we think about the adjustment of higher inflation, specifically within those franchise markets. Just trying to get a sense of how the company is different versus prior cycles when we saw inflation and what the impact could be?
Sure. Well, Hamzah, post as you know, prior to the merger with Progressive, we ran about 51%, 52%, what we call exclusive markets, which are obviously more index to a CPI or other metric that's similar. Post combination, we're about 43%, 44%, what we call exclusive markets, So still very high, comfortably the highest in the sector by over 2x. And as you know, there are it depends on the state, it depends on the indices. These are local indices that we operate off of.
They trail 6 to 12 months. So if we get into a higher CPA environment over the course of 'seventeen into 'eighteen, that just would bode for higher pricing in 'eighteen, 'nineteen and beyond for that segment of the business. And it's pretty much correlated exactly. I mean, if you use the CPI and assume a little buffer north of the CPI, that's a good estimate. So whatever your assumption is on that, you could apply it to that 43%, 44% of revenue.
Okay, great. And then just a follow-up question maybe for Worthing. Do you guys have a sense of what pro form a cash taxes are for the business after Progressive? I know you did the inversion. Some of your peers have been pretty vocal on quantifying a cash tax savings number off of potential tax reform in the U.
S. So anything you could maybe provide for us a frame relative to obviously there's some noise with the pro form a and then the inversion? Thank you.
Yes. With regards to the reverse merger, we look at our cash tax to our GAAP provision for 2017 to be about 70% or so. If you think about potential tax law changes that bring the corporate tax rate down, likely doesn't change our it depends on the final outcome. We'll get some cash tax savings to the extent that they obviously look to do 100% bonus depreciation that will flow through some benefit. Our debt sits outside of Canada sits outside of the U.
S, so sits in Canada. So the extent they remove interest rate deductibility, we retain the deductibility up in Canada. And obviously any shift with regards to potential phasing out of interest deductibility in the U. S. Is more than offset by the reduction in the effective tax rate.
And so while the 70% you see us paying cash tax against the GAAP accrual in 2017, once tax law changes come through, if they do, you'll see the reduction in the dollar of cash taxes. But because the provision will come down dramatically, you'll see an increase in the cash tax as a percentage of the provision. But on a total dollar basis, we should be set up to save some money.
Yes. And Hamzah, I mean, if you think about it, I think there's a way I think about it. Look, in the U. S, we are approximately a 39.4 percent GAAP taxpayer still, okay? That hasn't changed due to the structure.
That we pay the maximum 35% corporate rate in the So there's been discussions that that could go to 20% or 25% or whatever it goes through. Everybody makes their own assumptions. For every 1,000 basis point change in that rate, there's approximately an incremental $50,000,000 of tax savings. So make your own assumption from what you assume the tax rate would move to in the U. S.
And again, depending upon the final makeup with regard to interest, subsidy, etcetera. But anyway you cut it, again our cash tax on a dollar basis should decline if it comes out the way we think it comes out. But our percentage of the cash taxes of the GAAP accrual will go up because the GAAP accrual will come down a good size.
Got you. Thank you. Appreciate it.
Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning guys.
Good morning Tyler.
Hey, very nice quarter. Worthing, just a quick one here. But should we see a working capital outflow of cash here in Q1 from the payment of the incentive plan? Is that in the guidance?
Well, the $10,000,000 to $11,000,000 of synergy bonus will be adjusted back into the free cash flow for the year, just like it was adjusted back into EBITDA for the year last year. But again, that's a small number relative to the $725,000,000 Again, in January alone, we already did as much cash flows as we did in all of Q4 of last year.
Okay. Okay, good. And then I'm just interested in the 8 ks regarding the masternode agreement. So I think Ron you even mentioned that you're looking to maybe sell $400,000,000 of pretty nicely priced fixed rate notes I think in April. But should we think about that as incremental debt to pay for Groot or is that just to fix some of the floating debt?
And then Worthing, can you give us kind of thoughts on full year interest expense?
Sure. That's baked into our numbers already, Tyler, because we find that commitment already. We're just delaying the funding of that and taking down that money in April. And that's purely just a fixed versus floating look at the world. Our we priced 10 year money at treasuries plus 100.
We priced 7 year money at treasuries plus 95. And so we thought it was a good environment to lock in some long term money and take some floating rate debt to fix. Again, the outflows associated with those notes are baked into all of our outlooks for interest expense.
Okay. Okay. And then just maybe lastly, just Ron, I'm curious, but you guys are running 12 to 18 months ahead of schedule with Progressive and you've only owned it for, let's just call it, 6 months or so. But I'm just curious, I mean, why do you think you're getting such quick buy in, if you will, from everybody? What is it about this acquisition that's really, again, allowing you to get that buy in?
Well, I think the reality is that we had assumed Progressive was a better run company than they ended up being. There was a lot more opportunity in basic blocking and tackling that we had just assumed was there and it just wasn't. And so while there was a lot more work to do initially and still, the opportunity was much greater. When you have a 42% to 44% employee turnover, something unhealthy is going on. And we had to stop that.
And you see and we've seen it in our own company because at one time we had that kind of turnover 9, 10 years ago. There is an exponential benefit in risk and other things by the reduction of turnover. Said another way, if you reduce turnover 15%, you'll see a multiple of that in risk, productivity, variable and other things come through over time. And that's what we're seeing. We have over a 50% reduction in risk on a 35% to 40% improvement in turnover already.
So that is we knew that Progressive had very good assets with good asset positioning in markets that predominantly 85% were similar to ours. What we didn't really know fully is how they ran the business relative to how we do. And it's a very, very different approach.
Okay. That's great color and good job guys. Thanks.
Our next question comes from the line of Derek Spronck with RBC Capital Markets. Please proceed with your question.
Good morning. Thanks for taking my questions.
Sure.
There's been discussions in the waste industry around changing towards a franchise type model in Los Angeles, New York City and some areas in Illinois. Ron, I'd be interested to get your thoughts on these potential developments. And does it change the way you're looking at the progressive assets in the U. S. Northeast?
Well, and Derek, very good question. I mean, yes, in a way it does. I mean, look, some municipalities, as you've mentioned, 2 large ones or 3 large ones there, Los Angeles and New York City, certainly, Los Angeles being the first one, for varying recycling and diversion requirements and legislation in those municipalities have moved to or are moving to a franchise model. We were a participant in the Los Angeles process. We did not have collection or transfer assets in Southern California, but we had a landfill asset.
And what that process showed us is those with assets, very difficult to replicate assets, transfer stations, recyclaries, hauling companies, at the end of the day, they won the franchises. We did not have those assets and we didn't win a franchise in Los Angeles. Those were won by Waste Management and Republic and 5 very strong independents, all of them had great assets. Now we did get we are going to get some substantial disposal volumes through the franchises into our Southern California Chiquita Canyon landfill. So as we look at New York, who is looking at a similar process, they haven't decided that, the former Progressive and now us comfortably has the best assets in 2 of the 5 boroughs in New York City, between transfer stations and collection operations.
So we have made a decision on New York for a couple of reasons. One is that we've seen a change in performance from low single digit EBITDA margins when we closed the transaction to high double digit EBITDA margin. To be honest, almost a 300% improvement in operating performance in 7 months. So that was one reason, and that we found that the market wasn't broken the way we assumed it was. And then the second thing is what you've pointed out.
I mean, the potential of the franchising as a business, what we learned in the LA process is may or may not play out in New York. But if it does, we think we're positioned in some of the boroughs certainly better than anyone else at this point. And I'm not exactly sure where you're speaking about in Illinois. It depends where that would be. But obviously, if it's anywhere north or west of the city, we now have the number one position there as well.
And many of the western and northern markets in Illinois are already exclusive in some nature or another. But so that would be the answer on those, Derek.
Yes. No, that's great color. Thanks, Ron. Appreciate that. Just quickly to with guidance now for 2017 coming in at $725,000,000 for free cash flow.
Last quarter, you were indicating that it was trending towards $700,000,000 in 2017 and towards, I believe, dollars 800,000,000 in 2018. Is that the incremental I guess it's from Groot, part of it is from Groot and some other tailwinds that you're seeing with the Progressive integration. Should we assume that 2018 now is trending towards 825,000,000 dollars in free cash?
Yes, let's be very clear about this. When we talk in terms of $700,000,000 for calendar 2017 that was before the Groot transaction. We mentioned Groot was about 3% accretive to that. So $21,000,000 or so. So we round that to $725,000,000 for calendar 2017.
With regards to 2018, we've been consistent all along pre group to say that our target for 2017 were between $4.50 a share and $4.75 a share. And so to the extent that Groot at 3% or so to that number, that's a kind of a revised target for the Groot transaction. We've shied away from putting a dollar number out in 2018 because it's too far out in the distance. But again, on a per share basis, our guidance has been consistent at $4.50 to $4.75 a share for 2018 prior to the group uptake.
Okay, great. Thanks. Thanks very much for taking my questions.
Thank you.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Good morning. Thanks very much for taking the question. First, just wanted to clarify some of the cost reduction benefits from the significant lowering in incident rates at Progressive. Understanding that I believe you're likely seeing the cash benefits of that now. How do we think about that from a modeling perspective becoming more evident in the P and L?
What's sort of the cadence of that? And how do you think about kind of a margin expansion benefit from that in 2017 as you can kind of recognize the effects of these improvements?
That's again, that margin benefits baked in our outlook for 2017. You'll start seeing that come in second half of the year as we anniversary Progressive because that way the actuary has more data points to see a trend being established versus kind of the success has been anomaly. And so again, you've seen the cash benefits already trickling through the cash flow. You'll see the P and L benefits trickling in the second half of this year. But again, that's baked into our outlook.
Yes. No, I would also tell you that the P and L benefits toil the cash benefit because the reality is, is that we're working off a historical severity level and it takes the actuaries time for those severity levels to run out. I remind you that in the prior 4 years, Progressive had 31 fatalities. And in 2016, in the 1st 5 months, they had 6. So we've had 0 since the close, thankfully.
So we're running out on 31 fatalities in the severity by the actuaries in a that is baked into our P and L for some time. So you're really going to see a tail on this for some period of time if we continue the improvement as severity declines and the tail is able to run out on historical performance.
First, I wanted to clarify First, wanted to clarify whether that potential $15,000,000 franchise collection revenue acquisition is in the guidance already? And then I guess just generally for you Ron, as you pointed out, as it regards M and A, I mean, we don't really know what tax reform is going to look like, pick your own assumptions. But you did mention that it is certainly part of the driving factor in the conversation. So I guess I'd just like to get a better sense of how it's impacted the conversations, how we think about the puts and takes of what we still have some uncertainty on the tax reform picture, but clearly there seems to be a prospect for lower tax rates and for sellers to keep more of their profits?
With regards to the first question on the $15,000,000 signed transaction, that is not in our outlook because again, we don't bake anything into our outlook until the transaction closes. And so once that closes, we'll update the numbers to reflect that. I'll start and I'll let Ron finish on your second part. We always think about an average year being about $125,000,000 plus or minus of acquired revenue. So to the extent we've already done $200,000,000 it's my guess that we'll beat the $125,000,000
Yes. We better or we got an issue. To your second part of your question, Noah, I mean, look, we have said over time that low interest rates for reinvestment and high tax rates have been an inhibition to deals and they certainly slow things. Well, the prospects for each of those looking different in the future, potentially lower tax rates and higher interest rates, those help deals, pure and simple. And we have seen an increase in activity since November 9th and certainly inquiries of potential activity.
We're busier now than we've been in quite some time in years. And obviously, some people want to see what the clarity is on that tax law change, but I don't think there's anyone that assumes it would be any worse. The assumption is universal that it will be better. And we've had some tightening, although pretty nominal, but there is if the economy continues to improve, we will see further tightening. So those are good for transactions overall.
I mean, sellers keep more of their after tax proceeds and they can earn more in the fixed income market on reinvestment. That helps sellers who have a single asset for their family think about whether it's the right time or not to do something. And we have said, we believe there is going to be a period here and I believe it's very strongly that for certainly 2018 2019 and properly once tax law is clarified in 2017, there will be a flurry of acquisition and M and A activity. I don't just believe in our industry, I believe in most because there will be a fear that come the next election, those tax laws could be reversed. So people will view this as a window after sitting on the sidelines for up to 8 years because of what's been going on the other direction for 8 years.
That is great color. Thank you very much and congrats on the quarter and the outlook.
Thank you.
Our next question comes from the line of Corey Greendale with First Analysis. Please proceed with your question.
Hey, good morning.
Good morning, Troy.
Congratulations on the good year. So Worthy, just a housekeeping question. You're saying that $200,000,000 is a bigger number than 125,000,000
dollars Let me follow my calculator. Yes, in U. S. Dollars it is. That's right.
So I just had a couple of actually real housekeeping questions. Could you use your help on how to model internal growth after Progressive anniversaries. So, is did you start this cycle of kind of raising price and pushing away undesirable volumes immediately? So in other words, once that's in the organic growth comp, do you still have this kind of 3% plus price and drag on volume or what is the timing around that?
Yes. I mean, first off, of course, to answer your question, we did start it immediate. But I would say certainly by the end of last year's Q3 and in the Q4, we were heavily into it.
So the volumes turned negative slightly in Q4.
That's right. So I would but I would tell you that, that will continue through 'seventeen, Corey. Do I believe we'll get most of it done in the 1st two quarters? Yes. But a lot of this takes time.
You have contracts you need to honor until exploration or whatever the case. We're not going to walk away from commitments to customers. So the way to think about the growth, we just told you, we said earlier what our price was running. We told you that Progressive is running north of 3%. So as that comes into the growth calculation, you would expect price to elevate somewhat, just adding those two numbers together and dividing.
And then you would expect volumes on a reported basis to come down somewhat because, again, we've given you guidance for West Connection. We've told you that Progressive is growing slightly negative. I think most of that will the negative will come out by about the beginning of Q3. So you would probably see that volume to it could be flat to slightly positive. It could be normally negative.
We will break out for people a reported growth number and then what was in that underlying growth, meaning how much did we consciously shed to drive negative volume in the progressive footprint. Therefore, what was the underlying volume? So we plan to do that for 'seventeen. And then I would expect the culling to be done through by the end of 'seventeen.
Okay. And so once the culling is done, Ron, at that point, do you think those operations are kind of a 3% price going forward? Or does that come down once you're past the schedule?
Well, look, what we said is that we it depends on what the macroeconomic environment is, the GDP environment is, Corin. But what we said is that we don't see a reason that price in the competitive piece of the progressive footprint should look materially different than the life connections over time.
And because you have a higher percentage in that competitive piece versus exclusive on a combined basis, its pricing relative to legacy Waste Connections should be slightly higher.
Yes.
And so no, the 3% is not a one time correction in price. No, it's a new shift in the overall strategy in pursuit of quality of revenue.
Yes, great. That helps. And then on DC, the language was that you exited that market. Was that a divestiture or a swap?
That was a divestiture, but it I mean it had some components of that. We took back a long term disposal agreement for the market through transfer stations and landfills we have in the area. And so effectively, we divested the collection and transfer operation and we took back a long term disposal agreement as part of the consideration to keep us what I would call EBITDA neutral without the $50,000,000 of revenue associated to do so.
Okay. And is the target still about $225,000,000 in acquired revenue that you think you're going to shed?
I think it's come down a little, Corey. You've been
saying 2 100,000,000. Yes.
I mean, we've been saying I think we said 200,000,000 on the last call and I think that number is 175,000,000 to 200,000,000 dollars And so when you say, well, why has it come down? We have been able to make improvements or identify other assets in some markets that we thought we would divest that make those markets attractive. And that has been somewhat of a surprise to us. And so I'm going to round, but we started with sort of 6 market areas that we weren't sure fit us strategically and asset positioning. And we've already taken 2 of those off the table and said, no, we can make them fit through asset positioning improvements and performance improvements and those are happening.
So I would tell you that number is $175,000,000 to $200,000,000 and we've just done $50,000,000 of it. And you should expect that you'll see more done in the Q1 announced as we complete that. And I would expect that the balance of what we do will be signed and or closed by the end of the second quarter.
Great. Thanks. I will turn it over.
Our next question comes from the line of Chris Murray with AltaCorp Capital. Please proceed with your question.
Yes, thanks guys. Good morning. Just very quickly, just on the E and P way. So kind of running the 7% sequential number. So I guess that kind of gives us at least a runway into the double digit.
But one of the things just curious about, any changes at the federal level in terms of environmental regulation? How do you think that would play into maybe slowing down that growth rate?
Well, number 1, we so let's back up, Chris. First off, on E and P waste. E and P waste is the one waste stream in the United States that there is not federal regulations on. And so each state has its own regulations with regard to E and P and those vary from very stringent, like in New Mexico or Louisiana, to less stringent, like a Texas, as an example, or in Oklahoma. So there is a federal regulation.
So in the current administration where the belief by some is that there'll be less stringent regulation, there already isn't federal regulation in E and P. So I don't think there would be any slowing of that growth rate due to regulation change as it regards to E and P. Now conversely, the if you want to call it reduced regulation, accelerates the development of things like pipelines and others, which are positive drivers in the E and P space, as well as other types of permits for new development of facilities. So I believe with regard to certainly E and P that the environment is an improving one, at least regulatorily.
Yes. We've even seen a tightening of some regulations in Louisiana with regards to folks that bring waste in from offshore.
And that
is a that's again a further driver of activity in that area. But again, this is all at the state level within the U. S. Versus the federal level. Yes.
In Canada, there is federal regulation in Canada, but we do not do a lot of E and P waste in Canada.
That's fine. Great, guys. Thanks. I'll leave it there.
Thank you.
Our next question comes from the line of Brian Maguire with Goldman Sachs. Please proceed with your question.
Hey, good morning. It's Derek Leighton on for Brian. How are you all?
Good, Derek. Good morning, Derek.
Hey, just a quick one for me, kind of higher level. So you'd mentioned, obviously, obviously, getting over $200,000,000 in CapEx or sorry, M and A so far in Q1. Could you maybe just give us your thoughts higher level on how the M and A market is looking? And then how that's kind of trending versus your expectations as you'd expect to see a pipeline increase from M and A opportunities from the larger progressive footprint?
Sure. Well, for those that have followed us on a historical basis prior to the Progressive transaction, we always sort of said that $60,000,000 to $80,000,000 was of acquired revenue was sort of a normalized year. If you look at that, that was 3% to 4% organic or external growth.
And in the footprint we had then, that was targeting about a $2,000,000,000 to $2,500,000,000 of identified opportunities.
That's right. And now what we're saying is that we've increased that to sort of $125,000,000 plus annualized. Again, that gets you to 3 plus percent external growth. And we've now identified about $3,500,000,000 of potentially available acquisition candidates that fit our profile in both the U. S.
And Canada. So we as Worthing said, we've done $200,000,000 in the group transaction. We've already signed we just told you about another $15,000,000 franchise. We've signed other transactions beyond that. I mean, obviously, we would hope and expect that this is going to end up being a strong year.
We should do another I would hope to do another $125,000,000 plus on top of the group transaction this year. But obviously, time will tell on that.
Great. That's really helpful. I'll go ahead and
turn it over.
Mr. Mittelstaedt, there are no further questions at this time. I will now turn the call back to you.
Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in our call today. Both Worthing and Mary Anne Wiette are available to answer any direct questions that we did not cover that we are allowed to answer under Regulation FD and Regulation G. Thank you again and we look forward to speaking with you at upcoming investor conferences or on our next earnings call.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.