Ladies and gentlemen, thank you for standing by. Welcome to the Waste Connections Second 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, Thursday, August 4, 2016.
I would now like to turn the conference over to Mr. Ronald Mittelstaedt, Chairman of the Board and CEO. Please go ahead.
Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our Q2 2016 results and provide both an update on our recent combination with Progressive Waste and our financial outlook for Q3. I'm joined this morning by Steve Balck, our President Orson Jackman, our CFO and several other members of our senior management team. As noted in our earnings release, better than expected solid waste volume growth and contribution from Progressive Waste merger enable us to once again exceed our outlook for revenue and EBITDA in the 2nd quarter.
The combination of strong increases in both solid waste disposal volumes and collection activity, most notably on the West Coast, as well as lower fuel costs drove a 110 basis point margin expansion in solid waste, excluding the impact of the merger. We believe this performance together with pricing and operational improvement plans we've implemented at prior Progressive Waste operations has already positioned our adjusted EBITDA run rate at or above the upper end of the original $1,250,000,000 to 1,300,000,000 dollars year range we communicated when we announced the merger in January. In addition, acquisition dialogue remains robust and continued strength in free cash flow provides the ability to both fund additional growth and return of capital to shareholders. To that end, we're pleased to have also announced that our Board of Directors authorized a share repurchase program for up to 5% of our outstanding shares over the next 12 months. 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 discussion during the call today includes 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 beginning on Page 2 of our August 3 earnings release and in greater detail in filings that have been made by Waste Connections, formerly named Progressive Waste Solutions Limited and Waste Connections 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 and adjusted net income 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 effective June 1.
Contribution from this combination will be treated as acquired revenue and will not be incorporated into our organic growth statistics until 12 months from the closing date. I will now turn the call back over to Ron.
Okay. Thank you, Worthing. In the Q2, solid waste price and volume growth was 5% or 100 basis points above our expectations due to continuing strength in volume growth. Core price increases in the period were 2.9% year over year with total pricing growth net of surcharges of 2.6%. Volume growth was 2.4% in Q2.
Net pricing remains comparably higher in our competitive markets, once again averaging about 3.5% in the quarter compared to around 1.5% in our exclusive markets on the West Coast. However, our Western region where we receive 100% of all growth within our exclusive markets reported more than 5% volume growth in the period. As a reminder, incremental margins on volume growth within exclusive markets is more attractive than in competitive markets given guaranteed pricing on all new business. Higher than expected MSW disposal volumes, commercial collection and roll off activity drove strong solid waste volume growth in the period. On a same store basis, commercial revenue increased about 6% year over year in Q2.
Roll off tolls per day increased about 5 point 5% year over year in the period on a same store basis with all regions reporting higher activity. Roll off tolls per day increased almost 6.5% in our Western region, 5.5% in our Central region and over 4.5% in our Eastern region compared to the year ago period. Solid waste landfill tonnage on a same store basis increased 6% year over year in the second quarter. MSW tons increased 8% in the period with about 65% of our landfills reporting higher MSW tons year over year in the period. Special waste grew 6% and C and D tons due to tough comps at a couple of landfills as well as a weakened economy in Oklahoma were down 5%.
Recycling revenue excluding acquisitions was $11,500,000 in the 2nd quarter, down about $600,000 or 5% year over year, due primarily to lower commodity values for plastics predominantly. Prices for OCC or old corrugated containers averaged about $104 per ton during Q2, up 4% from the year ago period and up 6% sequentially from Q1. OCC prices currently are around $115 per ton, up slightly compared to what we averaged in last year's Q3. Headwinds experienced within recycling over the past several quarters have now mostly abated. Regarding E and P waste activity, we reported $27,500,000 of E and P waste revenue in the 2nd quarter, consistent with our $25,000,000 to $30,000,000 revenue guide for the period, with segment EBITDA margins of around 25%.
Same store E and P waste revenue in Q2 decreased 43.5% year over year due almost entirely to lower volumes on about a 52% decline in average rig count in the basins where our E and P waste operations are located. We estimate our E and P Waste business to be running at almost $120,000,000 of annualized revenue or about 3% of total revenue following the progressive waste combination. This level of revenue should enable EBITDA margins for E and P to remain at least 25% with less than $5,000,000 of associated CapEx per year. Despite recent increases in rig count and related drilling activity, the drop in crude oil back around $40 per barrel keeps us somewhat cautious. As a reminder, EBITDA from our E and P Waste business is currently almost $150,000,000 below its peak run rate in late 2014.
High incremental margins for any growth any revenue growth resulting from expected increases in drilling activity over the next year or 2 should provide a nice tailwind to reported results. Moving on to the Progressive Waste combination. As noted in our press release, the integration of the legacy Progressive Waste business remains on track with its contribution to consolidated results running ahead of expectations. In terms of measuring our progress on the integration, we believe that a good barometer will be an improvement in safety, which reflects the impact of instilling leadership and a culture of accountability throughout our new operations. As we've noted before, progressive waste incident frequency before the merger was running 3 to 4 times higher than that of legacy waste connections.
We're pleased to report that legacy Progressive Operations reported a 12% reduction in incident frequency in June as compared to their 12 month rolling average and we saw a further improvement in July to now be down 26% compared to their prior rolling monthly average. July was the lowest number of incidents these operations have ever achieved over the last few years and this is in our 2nd month of ownership. We're already halfway to our expected 50% improvement in incident count within a year. P and L benefits from safety improvements accrue over time. However, SG and A synergies, pricing strategies and operating improvements are more immediate.
On this front, we're pleased to report that pricing strategies and operational improvement plans that we've developed and implemented at Progressive Waste Operations have already positioned our adjusted EBITDA run rate at or above the upper end of the original $1,250,000,000 to $1,300,000,000 year 1 range that we communicated when we announced the merger in January. This strong performance provides a solid foundation both for typical budgeted growth and further margin improvement in 2017 and for organizational momentum to drive further synergies and cash flow improvements from the combination. Regarding potential asset swaps or divestitures of the Progressive Waste operations, our goal remains to sign or complete any such activity by Q1 next year. That said, we've been encouraged to find some operations we believed would be likely candidates for the potential divestiture because of their low margin profiles were simply under managed. In some cases, we've always seen a several 100 basis point operating margin improvement since last year or we've also identified potential opportunities to fundamentally change our asset positioning.
As a result, we intend to review results through Q3 before making any final decisions on potential asset swaps or divestitures. However, we've had initial discussions with potential swap or divestiture partners And I'd say we have a minimum of 3 or more options for all of our combinations. And now I'd like to pass the call to Worthing to review more in-depth financial highlights of the Q2 as well as provide you an outlook for Q3.
Thank you, Ron. In the Q2, revenue was $727,600,000 or almost $13,000,000 above the upper end of our outlook for the period. Acquisitions completed since the year ago period contributed about $199,000,000 of revenue in the quarter with progressive waste accounting for $174,000,000 of that from the month of June alone. Adjusted EBITDA is reconciled in our earnings release was $233,600,000 or 32.1 percent of revenue and 40 basis points above our outlook for Q2. Excluding the impact of the Progressive Waste merger, we estimate that our adjusted EBITDA margin in Q2 expanded approximately 70 basis points sequentially and 30 basis points year over year to about 33.7 percent consistent with our outlook as a 110 basis point improvement in solid waste more than offset the impact from the slowdown in E and P waste activity.
Progressive waste adjusted EBITDA margin in June was almost 27.5%. This comparative lower margin profile of Progressive's operations reduced our adjusted EBITDA margin reported for the 2nd quarter by about 130 basis points year over year. Fuel expense in Q2 was about 3.8% of revenue and we averaged approximately $2.48 per gallon for diesel, which was down about $0.50 per gallon from the year ago period, but up $0.06 per gallon sequentially from Q1. Depreciation and amortization expenses for the Q2 were 13.5 percent of revenue. The 90 basis point year over year increase as a percentage of revenue was primarily due to acquisitions completed since the year ago period.
Looking specifically at Progressive Waste, depreciation and amortization are estimated at about 11.4% and 4.2 percent respectively of its contribution to reported revenue. This means that amortization of intangibles for the combined company will be about $100,000,000 in the initial year following the Progressive Waste transaction or around $70,000,000 after tax and a $0.40 per share impact to reported full year EPS. On a dollar basis, this amortization amount should decline between $6,000,000 $8,000,000 per year following year 1. As a reminder, accounting typically increases our DNA as a percentage of revenue following material transaction due primarily to the expensing of that portion of purchase price allocated to both intangibles and landfills. But as we noted before, while a higher G and A percentage impacts GAAP results, it has no impact on cash flow generation.
Therefore, we'll continue to add back amortization of intangibles when calculating adjusted earnings as a way to partially bridge the wide delta between reported EPS and free cash flow per share, which as Allison investors should already know is one of our primary metrics. Interest expense in the quarter increased $5,200,000 over the prior year period to $20,500,000 due to the additional debt outstanding resulting from acquisitions completed since the year ago period and higher interest rates associated with fixed rate notes issued since the prior year period. Debt outstanding at quarter end was about $3,780,000,000 and our leverage ratio is defined in our credit facility was about 2.9 times debt to EBITDA. GAAP and adjusted net income per diluted share in the 2nd quarter were $0.20 $0.66 respectively. Adjusted net income in the current year period excludes the impact of over $60,000,000 after tax of acquisition related items such as amortization of intangibles, transaction costs and severance related items.
Our effective tax rate for the Q2 was 35.5 percent which included a $6,000,000 to $7,000,000 benefit to the provision or almost $0.05 per share resulting from the Progressive merger closing in the period. Looking ahead, we anticipate our effective tax rate to be about 30% or 31% subject to some variability depending upon the percentage of total profitability contributed by operations in the U. S. Versus Canada. Adjusted free cash flow year to date through Q2 was $234,200,000 or 18.8 percent of revenue.
CapEx through mid year was about $112,000,000 and we anticipate an additional $200,000,000 to 225,000,000 dollars to be spent during the second half of the year. I will now review the outlook for the Q3. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and filings we've made and Waste Connections US has made with the SEC and 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 transaction and any additional acquisitions that may close during the period. Looking first at revenue, revenue in Q3 is estimated to be approximately $1,075,000,000 For legacy Waste Connections, we expect core price plus volume growth for solid waste to be over 4%. As mentioned earlier, we do not include a new acquisition in organic growth until after the anniversary of its closing date. That said, we estimate that price plus volume growth at Progressive was running around 3% when the merger closed, broken down about 1% price and 2% volume. We expect our strategic initiatives to improve the quality of revenue within Progressive Waste Operations, both by increasing pricing growth to at least 2% before the anniversary of the merger's closing and by continuing to exit low or negative margin business.
We are consciously exiting unsafe and negative margin business as well as brokerage customers throughout the platform. We will gladly trade off some volume growth for additional price. Adjusted EBITDA in Q3 is estimated to be about $340,000,000 or about 31.5 percent of revenue. Depreciation and amortization expense for the 3rd quarter is estimated to be about 14% of revenue. Amortization of intangibles in the quarter is estimated to be about $25,300,000 or almost $0.10 per diluted share.
Operating income for the 3rd quarter is estimated to be about 17.5 percent of revenue. Interest expense in Q3 is estimated to be about $27,500,000 As mentioned earlier, our effective tax rate in Q3 is estimated to be up to 31%, subject to some variability. Non controlling interest is expected to reduce net income by about $300,000 in the 3rd quarter. Finally, our fully diluted share count in Q3 is estimated to be about 176,000,000 shares. And now let me turn the call back over to Ron for some final remarks before Q and A.
Okay. Thank you, Worthing. Again, we are quite pleased to be already trending at or above the upper end of our original year 1 EBITDA range just 1 month after closing the Progressive Waste merger. We had underestimated the opportunity for improvement within Progressive Waste operations and are encouraged by the organizational momentum to exceed original expectations as we look ahead. The integration is mostly going fairly smooth, thanks to the dedication and commitment of the legacy Waste Connections team and the receptiveness of our newest team members from Progressive Waste.
Macro trends remain quite favorable for solid waste and our differentiated strategy continues to deliver differentiated and industry leading results. In addition, we're now uniquely positioned within the sector to further accelerate growth in EBITDA, free cash flow per share and shareholder value creation. As we implement our proven playbook on Progressive's approximate 8,000 employees and nearly $2,000,000,000 of revenue. Our playbook starts with market selection, asset and contractual positioning and is in focus on safety, our people, culture, accountability and disciplined capital deployment, which creates free cash flow per share growth. This will not change, but is a fairly large adjustment for our new team members.
We look forward to closing out Q3 and having a full quarter of combined results following the merger before providing both our outlook for Q4 and early thoughts on 2017 on our next call. That said, for current modeling purposes, we believe seasonality could result in about a 5% to 6% sequential decline in revenue and a 7% to 8% decline in adjusted EBITDA between Q3 and Q4, a portion of which could be offset by increased synergies. With the current pace of pricing and operational improvements, we believe adjusted EBITDA for 2017 should be at least 5% higher than our current run rate, excluding the impact of any acquisitions or divestitures. 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 And our first question comes from the line of Tyler Brown with Raymond James. Please proceed.
Hey, good morning, guys.
Good morning, Tyler.
Hey, Ron. Can you just talk a little bit about the 8 ks that you guys filed the other day regarding the Board tweaking the comp plan? So first off, I'm curious why the $85,000,000 to $125,000,000 bracket was chosen. I mean, I think I get the $85,000,000 which I believe is what's implied in that T plus guidance. But what was the process or the thought process on the $125,000,000 You guys mentioned that you might be underestimating opportunities, but could you maybe even indulge us on what might the probability be of achieving that high end by year end?
Yes. Well, I mean, Tyler, the thought process, which was your first question, was very simple. And that is that the entire officer and director and management team of the company has been pouring just countless hours into this transaction since dating back to December of 2015. That's when the work on this began. So this is it's really taken an extraordinary effort to get to where we are.
It's going to continue to take that to get to year end. The Board wants to make certain that we have tremendous incentive beyond what we normally do to maximize the synergy and tax opportunities. And to that end has set a reward out there for those that are going to end up having to put the work in to drive it. So as we communicated, our initial synergy expectation was sort of $50,000,000 at the SG and A level, roughly approximately a $35,000,000 tax benefit. So you add those 2 together and you get sort of a floor of $85,000,000 That's where the 85 starts.
If you take $40,000,000 on top of that, that's a 50% stretch to that. And not saying we can get to that, but we're hoping to land somewhere certainly north of the $85,000,000 and as close to the upper end of that as we can, probably with the midpoint being most realistic with the additional improvement being mostly synergies, not tax. So that was how the bracket came about. The upper end represents a stretch goal. We certainly think we can get to that over time.
It's unlikely that we can get to that by January 1, which is the measure or December 31, which is the measurement period for this. But we wanted to put a strong goal out there to make sure everybody was incentivized to push as hard as they can to give us the best jumping off point for 2017.
And Tyler, it's also important to note what's not in that number. I mean, what's not in that number are things like pricing improvements. Improvements. What's not in that number are things like operational improvements, safety improvements, etcetera. This is just focused on the SG and A and the cash flow line because I don't think we ought to be rewarded for just executing what should be done on a day to day basis.
Yes. And also not included in that is any net benefit due to divestitures or asset swaps. As you just heard us say, we're targeting closing those in the Q1. So they wouldn't even be achieved by December 31. So we also don't believe that we should be incentivized or benefited from that because we consider that normal course of business.
Okay. No, that's extremely helpful. It obviously will give you a lot of momentum going into next year, but and I think you mentioned it right at the end of prepared remarks, but at a very high level, is it just kind of simple to think about the high end of your pro form a EBITDA, give it kind of a solid mid single digit growth and then maybe you have some optionality for any additional M and A or synergies? Is that kind of the idea for 2017?
Yes. Think that's a fair I mean, again, we're talking about expectations as we sit here today. But yes, we've just communicated that we think on a run rate basis, we will be at the upper end of what we originally guided. So that's $1,275,000,000 to $1,300,000,000 is that's the upper half of that. So used in that range, add the mid single digit that you just said, we just communicated that.
And then any benefit that we expect from divestitures and or swaps, the net benefit as we go into next year. And I think you get into that bracket that you're talking about.
Okay. And then just lastly, would you still expect that free cash conversion could hover around 50% or would Progressive somewhat dilute that?
Well, as you look at the original guidance for the kind of what I call the combined year 1, we talked about at least 610,000,000 on 1.25 to 1.3. And so it's not at 50%, but it's probably somewhere around the 45 plus percent area. And I would think I hope we can do better. Our percentage of revenue again based on the current run rate of about $4,100,000,000 you're looking at about a 15% minimum target for cash flow as a percentage of revenue.
All right, perfect. Thanks and great quarter.
Thanks Tyler.
Our next question comes from the line of Derek Spronck with RBC Capital Markets. Please proceed.
Yes, hello, thanks. Good morning. Just quickly on the free cash flow assumption prior to the merger of $610,000,000 1 year out or essentially by June 2017. Can you go through quickly again what's included in that number is organic growth accounted for, what rate of FX and what sort of operational synergies are part of that?
Yes, I think if you really try to build it up, you get a number north of 610, but the simple math to get to the 610, if you look at it, Waste Connections is running about $360,000,000 of EBITDA. You look at Progressive, Progressive was running at about $140,000,000 to $150,000,000 last year in EBITDA that gets you to 500 dollars You put the cash tax savings on top of that and then you put what should be a normalized amount of CapEx versus the overspending they have as well as the SG and A savings on it, you build up through at least 6 10 on that. If you run it through the components starting in EBITDA and you take out the cash interest, the cash taxes and CapEx of about 10.5% of revenue on a look forward basis, you'll get a number that's again probably closer to 630 to 640. But again, we've owned this thing for 2 months. We're sticking with at least 610 in year 1.
If you look at the second half of this year and play it out, you'd see that we're easily on that run rate.
And there's no organic growth in that number?
No. No. Yes. And
I think Eric, just to clarify, I think Worthing said 360 on Waste Connections and 170, 180 on Progressive and EBITDA, you meant free cash flow.
Free cash flow.
Yes. Got it. And just back on the CapEx, Progressive had been pulling forward vehicle purchases, in particular sidearm motors and NC and G trucks. Are there vehicles compatible with your fleet? And what sort of opportunity do you see in terms of slowing that run rate CapEx then at Progressive?
Yes, there's sort of a twofold answer to that, Derek. Number 1, I would tell you that certainly the vehicles that Progressive deployed are compatible with our fleet. Now some of them have been deployed by Progressive in locations that we think the application is just completely inaccurate and we'll move those to areas where we think the application is accurate and sort of swap. In other words, they have some front loaders where we would rather run rear loaders. They have some rear loaders where we rather run front loaders.
That's not a big deal. We'll swap those in and rationalize those over time. We can certainly use everything that they have acquired. So that's number 1, there's no issue there. Number 2, while Progressive has front loaded some of the CapEx this year and you've done a nice job on truck replacement over the last several years, I'd say the last 3 years or so.
The reality is, is they still have in many markets a fairly old fleet and a fairly beaten up fleet from years of lack of maintenance. But I so I don't necessarily think there's any quote relief, if you want to use that math if those were from their CapEx program over the last several years. But as we have said, as we rationalize assets through divestitures and swaps, we will be dropping their CapEx as a percentage of revenue where it was running between 13% 14% down to probably closer to 10.5% to 11%. And that may not come completely out of the chute in 'seventeen, but certainly by 'eighteen, I expect it to be there. So part of the entire plan of how we change the cash flow trajectory of the legacy Progressive Waste has always been not only incremental EBITDA margin, but a reduction in CapEx as a percentage of revenue by 250 to 300 basis points and that will come.
Okay. That's great color. Thanks.
Our next question comes from the line of Joe Box with KeyBanc Capital Markets. Please proceed.
Hello?
Question for you on the pricing side. Clearly, there's a disconnect between how legacy bin valued price versus volume, how you guys are thinking about it. I guess I'm curious how you guys are changing the kind of local sales guy, local management, compensation at BIN in order to drive that pricing lever to where you want it to be?
Yes. Well, first off, we have not yet adjusted the incentive plan for the BIN sales, the prior bin sales personnel. We're leaving their comp plan relatively intact for the balance of 16 because there were already objectives and other things set that they were well on the way to and we didn't want to pull the rug out on anybody. But we have immediately, at the closing of the merger, changed the reporting responsibility. And while this may sound nominal, it's actually a very large shift.
On the sales side, legacy Progressive was a silo up to the corporate level and there was not really an interaction between sales and local operations. They almost operated in a vacuum of each other. We changed the sales reporting function directly through the local management at the closing with a sort of a dotted responsibility up through the chain of command and sales. So the local management team now has authority over sales and has the ability to direct them as they see fit and the ability to change the price that they can sell at to what is driven by their local cost structure, not just something that sales had authority to sell at what they would like. So that's quite a change and we've done that effective immediately.
That is going to result in lower volume and it's going to result in a higher net price per unit sold effective immediately, which is what we want. We are also targeting doubling the budgeted price increases over the balance of 16 at each of the progressive sites, and we believe they are on track to achieve that. And so that's what we've done now. We will be changing for 2017 their incentive plan to where there is a much heavier focus on quality of sales and there is a much heavier focus on retained price. And so what we would hope is that the salespeople would make more money by selling less units at a higher quality of sale, requiring less CapEx and less personnel to manage an amount of business that will make more money on.
That's really how we over that's how we look at the sales component in our business today and we will be instilling that.
Got it. That's helpful. Thanks, Ron. And then I just want to dig into your divestiture comment from earlier. It sounds like some of these businesses are maybe fixable.
So I'm curious what's actually fixable in these businesses?
Can you get some of them to
maybe waste connections type margins? And can you maybe give us a sense if beforehand you were expecting to dispose of call
it $150,000,000 of revenues? Now is that maybe
sub-one Yes. Number 1, Joe, I shouldn't say
Yes. Number 1, Joe, I shouldn't say number 1 in your questions. But first of all, I think that number is still sort of in that 150 to $200,000,000 range of swap and divestiture revenue. Again, some we thought that we would end up doing, we probably won't. Some we thought we'd end up tipping, we probably won't.
So the number stays probably around the same. What has changed? Well, in some markets, we have just seen the ability to change the margin profile by a variety of operating changes. And in others, it's that there is an asset that we can acquire or swap for that changes the asset positioning of what we have. Illustratively, a 15% standalone collection company where we can acquire or integrate disposal now becomes a 30% EBITDA market.
That is a step change that's an attractive market suddenly for us. So those are the kinds of things that we're talking about. But I do not think the bucket in aggregate has changed. I think some of the assets, the mix of what we were going to do has changed.
Great. That's perfect. Thank you.
Our next question comes from the line of Al Kaczak with Wedbush Securities. Please proceed.
Hi, guys. This is Misha calling in for Al. Thanks for taking my question. With the Wish Connections now a national player in North America, what changes have you seen in the M and A funnel? And specifically, what additional opportunities has Progressive provided despite historically M and A being assessed from a local operations perspective?
Yes. I mean, I would tell you that, look, obviously, the transaction with Progressive brought in 8 new states in the U. S. And an entire country in Canada with 10 provinces. So there's a large geography transactions, potential transactions relative to just the core waste connections And we are doing that.
I would also tell you that you've just simply decreased the amount of public players that are in the acquisition arena because Progressive was a acquisitive company that was aggressive. And now suddenly, that is out of the mix. So I think that helps your potential win percentage and potentially the multiples that you'll be paying on transactions as well, because they were an aggressive purchaser. So I think both of those things add give us a greater opportunity on an increased footprint and give us confidence in that sort of $100,000,000 to $125,000,000 annual acquisition target that we've been talking about.
Thank you. And one more, thanks for the detail regarding the price and volume cadence in Canada. And I was wondering if maybe you'd be able to provide us with kind of how you see the price and volume landscape playing out in Canada. Maybe what's changed since you first started strategically looking at Progressive and how you see price and volume cadence in Canada going forward?
Yes. I mean, again, let's go back to what made up Progressive of Canada. Progressive of Canada was made up of the legacy BFI Canada, which was the legacy BFI, which had been in Canada since the since the late '70s, early '80s. So there's a 35 to 40 year track record of assets in the Canadian market by legacy Progressive. And so as we look at pricing between the U.
S. And Canada and the legacy Progressive, Canada has historically done a much stronger job on achieving more consistent price and volume that's closer to what Waste Connections would expect. So put simply, they were sort of achieving price in Canada more closely assimilated to what we expect and they were underachieving price in the United States. And so our focus in the progressive footprint is much more focused on their pricing improvements in the U. S.
Than it necessarily is in Canada. And that's both a function of performance and a function of their the asset positioning they have in Canada.
Got it. All right. Well, thank you very much.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed.
Hi, thank you for taking my questions. Back to the risk conversation, my memory serves VIN didn't measure risk the same way you did as far as measurement of incidences. So this reduction is on even a tougher standard versus UMM as well. Is that accurate?
Yes and no, Michael. Mostly yes is the answer to your question. They measured a couple of different metrics. And part of that is a measurement required in Canada versus the U. S.
But they did measure incidence, numbers of incidence in both workman's comp and in 3rd party accident frequency, the exact same as we did. They translated them into a couple of different metrics. So we are able to look back and have the exact same metrics on an apples to apples basis. And that's why we're able to use the measurements and they are comparable. So they reported it differently, but they captured the same data.
And we have converted it to the way we would do it to make it apples to apples. I would tell you that I think the standard that we're using is a more robust standard. It is a tighter calculation, if you will, than what they have done. So in that way, yes, it is more difficult.
So on that vein, as you've made this progress, how quickly does the reinsurance because you're self insured, how quickly does that industry allow you to capture that as a savings? What long of a track record do they need before they'll give you the savings?
Yes, there are 2 types of savings there, Michael. I mean, first off, understand that companies, larger companies in the space have high deductible programs to protect against severity. So basically frequency and number of incidents matter because we're mostly cash flowing these out of our P and L because they're not hitting the stop loss. And so reducing frequency is very important. The second benefit you get and it's more of a multiyear benefit is when the actuaries, so we have actuaries reassess the kind of the development of existing claims.
As the actuaries see this performance improvement, and again, we do it on a quarterly basis, they will start to capture this improved data into their outlook for claims closure and the amount of what's called IBNR that's sitting on the books. So you start seeing a steady and progressive improvement or reduction in the actuary analysis of the claims book as you walk through these improvements. And so there is some modest benefit near term in the P and L. The bigger dollar benefit as we said in our script really comes after year 1 and maybe into year 2 when you start seeing that reflected in the actuarial reports.
And Michael, I'd like to just comment on this because I think this is an issue that you know, is harder to understand maybe from an investor or an analyst standpoint, but I want to put it in some real terms because there is a what I'll call is a hangover effect from not acting safely. So let's go back to the beginning of 2015 and go to 6 months of 2016. So in 2015 Progressive had 6 fatalities, employee or third party fatality, Waste Connections had 0. In the 1st 6 months of 2016 Progressive has 7 fatalities, Waste Connections has 1. So in the 18 month period we're talking about here, there's been 13 fatalities due to incident frequency compared to 1 in 18 months, 3rd party or employee related.
That is a monumental difference. And that's why there's such a focus on bringing down severity, not just the cost, but the impacts to our employees and the communities that we operate in. So my point is when you have that amount of fatalities and severity, there is an impact in what's your IBNR and your rate per incident climbs until you bring that severity or that frequency down dramatically.
And as we pointed out in the past, if you look at Just Progressive's U. S. Operations relative to Waste Connections because they both have all workers' comp in it, Progressive, old Progressive was running about 3.5% of revenue in the U. S. Where Waste Connections was running about 1.3%.
So you see there is an improvement in the P and L you'll see, but again, this is a march over time.
Yes. Okay. Shifting gears to the incentive plan, Understand everything you explained before, the timing of the payout would be in 1Q 'seventeen. Is that accurate?
Yes. The projected would be on or around March 1, 'seventeen when our annual incentive comp pays out, generally the 3rd week of February following the announcement of the earnings.
So when you talk about 15% or better of revs for free cash on 4.1 to 4.2, that's not including carrying the burden of an incremental incentive payout as successful?
Yes, we'll make sure we highlight in any adjustments any payments related to the combination and I'd put this one time incentive payout in that same category.
Yes. But I just
want to make sure everybody understands we got to think about that.
Yes. That's correct. But I would point out, Michael, that let's say it's at the midpoint of that band, that's an incremental $10,000,000
Free tax and what's after tax.
Free tax. So that's right. So the impact on cash flow, while every dollar is significant, it's going to be approximately 1% on the run rate free cash flow.
Okay. And then you haven't defined operating gains, the leverage very specifically other than the $25,000,000 approximate potential savings and safety. 2 months into this, do you have a little better lens on what that looks like even if you define it more of what's the type of operating profit gains you can make, margin gains?
Yes. Well, there are 2 buckets of what I call operational cost savings that we talked about originally and that was and then by the way the 2 added up to $50,000,000 $25,000,000 was the safety that you talked about and $25,000,000 were other operational improvements. And again, the operating improvement plans that have already been put in place and that they're executing on is a number that's higher than the 25,000,000 that's not related to safety. Obviously, we like to handicap these because not everything you model and you expect to play out plays out the way you think. But no, they're already well underway in striving for a target that's well in excess of that 25 that's not related to safety.
Yes. And Michael, I mean to your question was around some I think also around some specifics. Look, we've got targets for the improvement of labor as a percentage of revenue, truck variables as a percentage of revenue, other operating supervisory costs as a percentage of revenue. And you achieve those targets by 2 things. You achieve those targets by greater efficiencies in those areas, But the greater way you achieve it is by improving the quality of revenue.
And that comes through both improvement in price increases and what you sell at higher. So if you're doing the if you're focusing on foliar revenue and everything stays the same, you're just getting an increase you're getting a reduction in those cost items as a percentage of revenue.
Fair enough. And we should still think about this as multiyear. It doesn't happen in the 1st 18 months. This is ratably over a 2 to 3 year period.
Yes. I think we would get the majority of it over a 1.5 to 2 year period in fairness. But clearly, it would be people shouldn't expect this all to occur by any means in 'seventeen. We're going to be a lot better coming out of 'seventeen than we are coming out of 'sixteen, but there is going to continue to be improvements through the platform for multi years.
Yes. That said, there's already over $40,000,000 of the SG and A synergies already achieved on a run rate basis as we look at just the month of June.
That's right.
Okay.
And then lastly, the New York City contract that Progressive walked away from, there is 1200 tons a day of volume in Seneca related to one of the old 3 year rolling contracts. And if the current G2 is true, Waste Management is going to win that contract, that volume goes to Pennsylvania and Virginia. So what do you do to replace that 1200 tons?
Well, number 1, Michael, again, I'm not sure where the city will decide to direct that volume. Let me just say this, that will take some time. There is still work to be done on the MTS transfer stations and the connectivity between them. So this isn't something the city can make a decision on tomorrow and affect the volume flow in 'seventeen even or certainly early in 'seventeen. So we're talking about something that's if it is an impact, it's an impact out.
It's not an immediate impact, number 1. Number 2, let me say this, Progressive in its own fleet, prior fleet, our fleet today, has almost 1200 tons that is going to waste management that won't continue to go to waste management, okay, due to the way Progressive was operating its fleet and its transfers. So I'm not overly worried about 1200 tons a day.
You also have to realize Michael that there are some capacity constraints at some landfills in and around the Hudson Valley that is pushing waste further out. In fact, we have tons also that we send to third parties because our landfills in Hudson Valley have annual limits on them. And after you take that into account and what we recycle, there's still almost 100,000 tons a year of waste that we push out of that market. And again with some of the municipal landfills in that area also experiencing constraints as they kind of meter out their remaining available capacity. There is enough waste shed up there to find its way into Seneca.
I'll also tell you Seneca is going to be a better landfill with less volume at higher prices.
Yes. Michael, in the city, as you may or may not know, we currently, we meaning the legacy Progressive Waste Connections Now, we have 2 transfer stations that we operate in Brooklyn and 1 in the Bronx and another one mothballed currently. And the city gets first claim of that space on a daily basis. That is causing us to direct haul at times 500 to 1000 tons a day to closer in third party landfills that when the city opens its MTS transfer station and whoever operates it, they will pull some of that volume back to there, which therefore goes on to the recipient of that contract. And we certainly have 1,000 tons a day that we're direct hauling that we can use our own transfer stations on.
Perfect. And then you made an interesting statement. Progressive ran Seneca at its cap at the detriment of incremental dollar per ton. So you're clearly not operating on that mine site. You'd rather have less tons with better price and not very fast
to that.
That's our mantra throughout the whole platform.
And Michael, that's already started.
Yes, and
that's started. We implemented price increases at Seneca on June 1.
Perfect. Thank you very much.
Our next question comes from the line of Kevin Chiang with CIBC. Please proceed with your question.
Hi. Thanks for taking my question and thanks for all the detail on the call here. Just wondering, it sounds like the BIN integration is obviously going maybe better than expected. Any areas of concern though, anything that's come in maybe as a negative surprise that as you've digested over the past couple of months here that maybe has you scratching your head?
Kevin, look, anytime you do a public to public transaction, you do not get nearly the level of due diligence that you're able to do on a private company or a small transaction because of the fact that they're public companies and you're dealing with disclosure and time deadline. So with that as a back up, there's always things you don't know fully. And we have experienced those as we expected to. So some operations are performing as well as we'd hoped, others are performing better. Some problems, there is greater depth to, and it's going to take a little longer to fix.
But there are things that are in our wheelhouse. Turnover is higher than we even projected. So we knew turnover was running in the mid- to high-30s. It's running in the low-40s. That's a need for 300 plus employees in that platform per month.
And with our safety standards, that's going to get worse before it gets better. And we know that we're okay with that. So we've had to gear up our recruiting efforts, probably 50% more than we had expected to. That's an illustration of something that is more difficult than we had hoped, but achievable. That's in the numbers.
We're not worried about that. And we can impact that. But so yes, it would be misleading to tell you everything's rosy and everything's going better than planned. There's always pushes and pulls. We would say on balance, it's going at or above plan.
We believe on balance, the opportunity is greater than we originally thought. Thus, we've communicated that, but we are not without our struggle.
That's very helpful. And maybe to that point, given it seems as though there's greater opportunities than you had initially expected, you did announce a 5% buyback with yesterday's results. While tuck in acquisitions are obviously a part of your growth strategy, does that push it further down the line a little bit, maybe focus more on the buyback, focus more on trying to integrate BIN and harvest some of these benefits sooner? Or does it have no impact on how you look at tuck in acquisitions?
No, I'll tell you the acquisition pipeline is as robust as ever as we mentioned on the call. But again, large deal in our models, a $10,000,000 to $20,000,000 revenue type company and the average is probably $4,000,000 to $5,000,000 That said, there are a few transactions that are north of that $20,000,000 of revenue number. So that look, acquisitions that fit our strategic and market criteria priced right are high for best use of capital. We just can't tell you the timing of when these opportunities will close because we don't control the timing of that. And in some cases, they're subject to lengthy regulatory approvals to the extent they're a franchise company.
And so obviously the 5% buyback, that's a normal course approval up in Canada with regards to the TSX. That's something you'll see once a year. We'll go in and submit that request to renew that and there'll be kind of a perpetual 5% approval that the Board does every year. And we'll optimistically take advantage of buying stock during the year. As we've always said, if we just do our normal amount of M and A activity that consumes about 30% of free cash flow.
Our dividend is less than 20% of free cash flow. That still leaves half of our free cash flow available for either outsized M and A opportunities or to buy back on average about 2% to 3% of our stock every year. If the market gives us better opportunities to buy it back, we'll step on it even harder.
Yes. And Kevin, again, many people that have followed us for a long time are well aware of this. I mean, this is consistent with what we've always done. We bought back between 2% 4% of our stock per year while executing our growth plan. And as Worthing just said, if we didn't do that and over 50% of the free cash flow per year would either be used to debt reduction if we were not doing buyback in this interest rate environment and debt environment, that is not the next most attractive beyond dividend and M and A.
And we would just be delevering. Thus, we've got because along with what comes along with M and A is EBITDA. So you would be delevering very quickly. And so we really need to it's a great problem to have. We really need to buy back somewhere in that 2% to 5% range a year or we'll just continually delever.
That's helpful. And just last one for me. It looks like your E and P business has found some level of stabilization. Just wondering, when you look at the Alberta market and noting some of the comments you made earlier on the Canadian market, are you seeing that market also stabilizing as you lap some of this lower oil price environment or is there still some weakness in that local economy?
Yes, that economy is definitely well, number 1, we think it is stabilized and we're near the bottom of it. If you look at Progressive's performance in that market area, they have had an impact of up to 15% in their business this year over the prior 2 years. So it has been coming down in that specific area. We hope that it's near the bottom there. But again, let's put in perspective that Alberta is one area in their entire footprint.
And within our company, the combined company now would represent less than 1.5% of revenue. So your exposure is only so great there.
And as a reminder, when we talk about Alberta, we're talking about the solid waste business in Alberta. We're not in E and P waste business.
That's right.
But you're right. Again, similar struggles we've seen in places like Oklahoma and the U. S. Are no different than what we're seeing in Alberta.
That's right.
That's very helpful. That's it for me. Thank you very much.
Our next question comes from the line of Chris Murray with AltaCorp. Please proceed.
Thanks guys. Good morning. Just turning back to safety performance, I know there are some interesting metrics you guys quoted. I think part of the progressive safety performance, though, was concentrated in a number of their regions. Any commentary on how the, call it, the bigger problem areas have been able to move?
And anything that you've seen in terms of resistance in terms of change there?
Number 1, let's go to the last part of that. We have not seen any resistance. In fact, we've seen a tremendous embracing by not only supervision, but most importantly, frontline employees who affect things. Number 1, you have to not look frontline employees as the problem, but rather the solution and you got to give them part of the upside. They don't they react just like management does.
So we've seen a tremendous response. And by the way, employees know who is unsafe, and they don't like them being on the team either. So give you some many people would think of New York City. I mean, look, New York City is the most congested, difficult market to operate in arguably in the United States. Progressive is the largest player within the boroughs, the largest commercial player within the boroughs.
And it was rare, very rare to go a day without an incident. Now when you're running 80 to 100 vehicles a day in a market like that, remember an incident can be a truck opening the door into the side of a car that's parked.
Or someone hitting us.
Or someone hitting us, okay, was where to go a day. Progressive had done times when they've gone a day. In the month of July, we had 6 consecutive days without an incident in New York City. The incidents in New York City are down over 35% within the 1st 60 days. So my only point is, is that scenario you get perhaps the most resistance potentially because of the nature and we're seeing great impact.
That would be what you would have labeled a historical or progressive, a difficult area.
Yes, I just moved to Canada and look at that. There's no change with regards to the look of the region, the assets, etcetera. But if you look at Canada, Canada in the month of July was down over 40% from where they were running on a rolling 12 month average before the transaction closed. So there's tremendous strides and that's because the people are embracing it and they understand the benefits of that number one value.
And to give you further, I mean Canada, July over June came down to Worthing said over a third on an exit speed basis of the last 2 weeks of July, if they stayed that, they would be down over 50% in August to where they were in June.
Okay, that's great. And then, Worthing, one of the things and I guess, we've always concerned us with Progressive was their ability to when they would give us guidance, we went into a few quarters with just not being able to get some clarity on what was going on. What have you guys done differently to ensure that the legacy progressive operations, particularly where you're maybe a little more isolated in Canada, that you're going to have that kind of, call it, outlook that you can have the confidence in with your guidance?
Yes. Well, number 1, Derek, this will take a little time. But let me explain the Grand Canyon of a difference. Progressive did all of its financial reporting looking back. So in August, they could tell you what they did in June and likely what they did in July, okay?
Their focus was always backward reviews. We don't do any backward reviews because it's already happened and you can't change it. We spend very little time looking backwards. All our time is forward. So we have changed all of Progressive's to looking forward projecting the current month and 2 months out and managing to those.
So the difference is, is we forecast forward and ask our people to proactively manage to forecast. They didn't forecast forward and looked back to reactively try to change the future. That's why there was no clarity. That's why there was no they were clearly driving through the fog with no lights on, okay? We're going to we want so we're going to get much tighter.
And as we look at look, if we look at our $2,000,000,000 of revenue, using that the historical Waste Connections, we forecast that very tight because there's a history of forward looking forecasting built in. We give a lot more latitude right now to the legacy Progressive because they haven't had to do that. We will get them as tight as we can, but that will take the course of the balance of 'sixteen and into 'seventeen. They are already getting better into the 3rd month than they were in the month of June. That will change and that sounds difficult, but it's huge because it changes what your internal processes are and what you're measuring and capturing daily to manage the business.
Okay. And then It's like looking at how your portfolio did in Q1 without thinking about the right spots to own looking ahead.
Yes, sure. So if you think about the original forecast that you saw for June July and I guess even what you're seeing kind of run rate, like how accurate were those numbers that they were able to provide for you?
I think on an annual basis, overall, very good. I mean, look, Progressive believed they were doing about 490,000,000 using that approximately of EBITDA on a standalone basis coming out of 2015 going into 2016. We think on an annual basis, that was a very accurate number. They were within 1% or so. So that's damn good.
But of how that laid out, the reality is, is they really had a hard time telling you what the next quarter has looked like. They really used annual metrics. And on an annual basis, I think that was very good. The reality is that's hard way to run a public company and that led to what you're talking about at the beginning of your question.
Okay. Thanks guys.
Our next question comes from the line of Noah Kaye with Oppenheimer and Company. Please go ahead.
Thanks for the detail on
the call. Just a couple of quick ones from me. First, kind of given your comments earlier on the progressive fleet and historical investment levels, what is the right kind of steady state run rate for CapEx in that legacy business? And what's the cadence of that in your view?
Well, I think you have to look at it on an integrated basis, combined companies, and that's where we've been leading people to a 10.5% assumption. Sometimes you might get based on some new facilities, you might be able to open up a permit, etcetera, you might see a pop up or for new contract, you see a pop up to 11%. Some periods you might see a drop to 10%. But I look at it on aggregate between landfills, equipment, fleet, etcetera, at about 10.5%. Because without a doubt, critical thing to always keep in mind is you need a 3 year rolling outlook for your major investments around construction, landfill, airspace, etcetera.
And you always want to be managing everything else around that versus just piling on and waking up and looking in the rearview mirror as Ron said and find that you paid you spend 14% or 15% of revenue on CapEx.
Got it. And then just turning to a subject that we haven't touched on recycling, nice 40 bps improvement year over year in terms of the hit volume growth. But it would be helpful to understand how much of that was the commodity impact versus any kind of contract restructuring that a number of your peers have talked about widely to improve the economics in the face of lower commodities and how much more benefit you think could get from restructuring those contracts, both for yourselves and for legacy Progressive? Thanks.
Yes. Thank you. Well, first off, 0 of it was from restructuring of contracts at this point. So if you look at on a legacy Waste Connections, 90% of our recycling that we do in the Waste Connections footprint comes off of our West Coast, where it is part of our franchise model and it is amalgamated within our return on capital and return on margin profile business there. And so and it's a profitable business due to the legislative requirements of the West Coast.
So there's really no contract restructuring necessary on legacy Waste Connections. On the legacy Progressive side, there is some contract restructuring necessary in certain parts of their U. S. Footprint, not their Canadian footprint, but their U. S.
Footprint. And those negotiations are underway. And they were underway by Progressive well before the transaction. They take time, but we have not yet seen the benefits of that. We hope to get some of that done over the balance of 'sixteen and others into 'seventeen.
But that is upside relative to what we've talked about because none of that has yet been completed.
Right. And kind of given the length of some of those muni contracts, I mean, this could be a multiyear benefit as you're able to go through that. All right. Thank you very much.
Yes, it is. But I would caution everybody, that is not a needle mover for us in this transaction whatsoever, because it is a small percentage of revenue overall, whether you look at legacy Wizz Connections or Progressive.
Right. Thank you.
Before we proceed with our next question. Our next question comes from the line of Bert Powell with BMO. Please proceed.
Thanks. A lot of ground
has been tilt here, so I have a couple of quick questions. With respect to acquisition pipeline, I know Canada was kind of atrophied on that front. Do your comments extend to Canada as well in terms of the opportunity set or is that something that you've kind of pushed off and that's think about Canada a little bit further down the road?
No, but I think as we tried to say, look, just by the size of the opportunity basket, Canada isn't as large as the opportunities in our 40 state network for varying reasons, Progressive has not yet looked at going into in certain provinces. We have cast our Canadian region, which is led by Dan Pio, who knows Canada as well as anyone in that country and what those opportunities are. We have tasked them with going and bringing incremental growth opportunities up there from both acquisitions and new contracts. And we fully expect that to be occurring throughout the balance of 'sixteen and into 'seventeen more heavily.
Okay, Great. Thanks, Ron. I just want
to go back to the reversal of the progressive model in terms of price versus volume. As you start to focus on price on their operations, Are you finding that the churn is going up? Or are you actually finding that, you know what, they weren't getting what they could have got? And by increasing price, it's actually not creating the churn that you would have expected? Or do you fully volumes falling off as you focus on price as expected?
Just curious as to how that is going so far.
Yes. Well, it's going the way you outlined at the beginning of your question, Bert. And that is that so far, we are not seeing a trade off between price and volume because they just weren't getting what they could get to your point. Now I do expect that that will change over time, okay? I do expect there will be a trade off.
We will see more of that in 2017. As we change incentive alignment, we'll see more of that. So I don't want to say that there won't be any. Most of the increased churn and negative, I'm going to use that, impact to volume that we're seeing right now is due to conscious decisions by us and local management of dropping unsafe stops, brokered stops where there was no money being made on collection, there was no internalization, a third party was just getting the benefit of that. And we've just given the field the flexibility to just stop doing that.
And so we're and it takes time to stop doing that. You got to make sure the customer has another option, etcetera. We're not leaving customers in a lurch. So it takes time, but we're starting to see that. So I wouldn't expect in 'seventeen more than now, we will see an impact, a dampening of volume somewhat as we ramp price, and we're fine with that.
Again, I want to go through the metrics. If let's say you had 5 points of volume coming on at their incremental margin of 20% to 25% EBITDA. That tells you it takes one point of price to contribute the same amount of all that incremental volume to EBITDA, owing the volume comes with capital and people.
Okay. Appreciate that. Just lastly,
the divestitures, the 150 $1,000,000 to $200,000,000 as you look through that and no decision till 2017, the absolute dollar amount hasn't changed, but the mix has changed. When you and maybe it's too early to think about this, but when you think about what the margin upside is that you initially thought from just maybe purely doing swaps or worst case divestiture, like how much better can it be working these assets and reconfiguring that mix, given how you're thinking about maybe some of the opportunities to go in and change the dynamics in a market?
Yes. Well, I mean, I think, again, Bert, in fairness, I think it is too early to try and crystallize what that could be because the answer depends on what percentage is swapped versus divested, okay? And it's too early to break that all down because as I said, there we haven't defined fully what we will do and whom we will do it with. And each of those comes with varying amounts of divestitures versus swap. So it would be very crystal ballast.
But look, I think if you think about it in a minute, let's pick $150,000,000 because that was the low point of what you said. And let's assume that, that had 10% EBITDA, that's $15,000,000 on that $150,000,000 If you swap that straight across, I would expect that you would improve that to by 50% to 100% on that 150. So you would take it to a 10,000,000 of EBITDA to 15,000,000 to 20 the day you got it done, if you will, okay? So then the question become and then improvements from there, because we wouldn't just be swapping a 10% EBITDA for a 15% or a 20%. We don't keep markets that are 15% to 20%, okay?
So that 15% to 20% has to be what we get back and then we got to have an ability to internalize or make that a 25% plus market or we might as well just divest it. So it depends on the percentage of what we can get from a divestiture versus I mean, the swap versus divestiture. And it's too early to say that. But it's a long way of saying, I would hope to improve what we swap 50% to 100% over time.
Okay, perfect. Thank you, guys.
Our next question comes from the line of Andrew Buscaglia with Credit Suisse. Please proceed.
Hey, guys. Just one quick one for me on starting your capital allocation. So you're a much bigger company now, bigger market cap.
You have a bigger you're
up into much bigger investor base. You're trading on a couple of exchanges. Is there any consideration longer term on a focus more towards the dividend?
Well, I think if you first off, we put our dividend in place in 20 10 and you've seen the Board increase at double digits every October and the Board will once again review it this coming October. If you just play the long game here, Andrew, what you see is that the dividend over time even with double digit increases will continue to be at or less than 20% of free cash flow. Obviously, if you look at it on an absolute dollar outflow to the extent we're also retiring 2% to 3% of our stock every year, you're really just looking at about a 7% to 8% increase in absolute outlays on a dollar basis. That's almost keeping up with pace with the growth of the business with regards to organic improvement and cash flow and you add acquisitions on top of that. Long way of saying we have a long runway.
We've got a tremendous amount of growth opportunities in front of us. So what we don't want to do obviously is completely shift our model and start tying up 50%, 60% or 80% of our free cash flow for dividends at the risk of not being able to fund growth. The flexibility we have in our balance sheet and our cash flow is almost second to none. And so we're pleased to be able to pursue all growth opportunities as well as return the capital the way we do it.
All right. Makes sense. Thanks, guys.
There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.
Okay. Thank you, operator. 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 Whitney are available today to answer any direct questions that we did not cover that we are allowed to answer under Regulation FD and Regulation G. We 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.