Day, ladies and gentlemen, and welcome to the Waste Management First Quarter 2018 Earnings Release Conference Call. At this time, all participants are in a listen only mode.
As
a reminder, today's program is being recorded. I would now like to introduce your host for today's conference call, Mr. Ed Eggle, Director of Investor Relations. You may begin, sir.
Thank you, Kevin. Good morning, everyone, and thank you for joining us for our Q1 2018 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer Tim Trevathan, Executive Vice President and Chief Operating Officer and Devina Rankin, Senior Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim Fish will cover high level financials and provide a strategic update.
Jim Trevathan will cover price and volume details and provide an operating overview and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8 ks this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8 ks, the press release and the schedule for the press release include important information. During the call, you will hear forward looking statements, which are based on current expectations, projections or opinions about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially.
Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10 ks. Jim and Jim will discuss our results in the areas of yield and volume, which unless otherwise stated are more specifically references to internal revenue growth or IRG from yield or volume. All volume results discussed are on a workday adjusted basis. During the call, Jim, Jim and Divina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and they also address operating EBITDA, which is income from operations before depreciation and amortization and operating EBITDA margin. Any comparisons unless otherwise stated will be with the Q1 of 2017.
Net income and EPS for the Q1 of 2017 have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non GAAP measures. Please refer to the earnings press release notes and schedules, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non GAAP measures. This call is being recorded and will be available 24 hours a day, beginning approximately 1 p. M.
Eastern Time today until 5 p. M. Eastern Time on May 4. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial 855-859 2056 and enter reservation code 388,516.
Time sensitive information provided during today's call, which is occurring on April 20, 2018, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, Jim Fish.
Thanks, Ed, and thank you all for joining us this morning. The Q1 of 2018 was an excellent quarter to continue the strong growth we saw throughout 2017. Over the past year, our traditional solid waste business has proven to be as strong as we've ever seen at Waste Management, and the Q1 was a continuation of that trend. Much of the strength can be attributed to our focus on disciplined growth, our commitment to delivering exceptional customer service and our improving cost structure, aided by solid economic growth in the United States and Canada. In the Q1, we saw collection and disposal revenue grow by more than 6%, total company operating income grow by 9% and operating EBITDA grew by almost 8%.
Once again, our strong operating EBITDA performance translated into excellent free cash flow, which continues to demonstrate the cash generating strength of our strategy. The strong performance in our free cash flow allowed us to repurchase shares and spend $248,000,000 on acquisitions in addition to our previously announced 9.4% increase in our dividend. The acquisition pipeline remains robust, and we continue to look for opportunities that surpass our return criteria and create value for our shareholders. Our operations produced $0.91 of EPS in the quarter, and we've built a strong foundation for the remainder of 2018. Excluding the $0.12 EPS benefit from tax reform, our EPS grew close to 20% when compared to the Q1 of 2017.
In the Q1, revenues from our collection and disposal business grew by more than $183,000,000 with most of this increase being organically driven. A key driver of our revenue growth was the disciplined execution of our pricing programs. In the Q1, our collection and disposal core price was 4.9%, and our yield was 2.3%, in line with our full year goals. Looking at volumes, our traditional solid waste volumes were positive 3.4% in the 1st quarter, an increase of 200 basis points compared to the Q1 of 2017. The volume growth continues to be driven by our highest return and best margin businesses, commercial, landfill and industrial.
Our plan to focus on delivering excellent customer service and directing our sales efforts and growth capital to the portions of the U. S. And Canadian economies that are seeing the strongest economic development is generating the results that we expected. Our traditional solid waste performance is as good as we've seen it. On the other hand, the recycling business is in a state of transformation.
In the quarter, recycling commodities recycling commodity prices declined 36% and volumes declined 1% at our recycling facilities. And while recycling is only onetenth the size of our traditional solid waste business, it still impacted the Q1 EPS by $0.08 on a year over year basis. We've said for years that recycling is a business that Waste Management is committed to and we still are. But we simply can't continue with the model in its current state. The original concept of recycling was to reuse materials, either in their existing form or in some other form to minimize the consumption of natural resources.
Unfortunately, in North America today, the word recycling seems to have been replaced with a new word, diversion. When diversion away from your trash bin is your primary goal, then putting more material in the recycle bin does not necessarily mean that we're saving more natural resources. What it does mean is that the recycle bin almost inevitably has a higher percentage of trash in it or as the industry calls it contamination. Last year, the Chinese government decided that they were tired of importing increasingly contaminated recyclables. So they changed their policy to only accept recyclables with a 0.5% contamination content.
Some of our plants see material come in the front door that is 40% trash. So we have to try and pull out almost 99% of that trash from the recycle stream in order to sell it to China as recycled commodities. Even our best in class inbound streams, which have only 10% contamination, still have to pull out 95% of the trash before they can sell it. As diversion goals have increased, so too have our contamination percentages, which have increased from 10% to 15% 5 years ago to 20% to 25% today. In addition to that, China temporarily suspended import which caused global commodity prices to plummet last fall, and they have yet to recover.
Clearly, this is not a sustainable recycling business model. We must address higher operating costs in our recycling facilities and shrinking revenue from the sale of recycled products. As a result, we are continuing to educate our customers on how to lower contamination by recycling right and partnering with industry stakeholders on expanding these efforts. At the same time, we are auditing loads received at our MRFs, and we are rejecting and charging back for contamination where we can. These efforts should enable us to recoup part of our increased processing costs and residue disposal costs.
In our new contracts, we are looking to shift even more of the commodity price risk to our customers and more easily recapture our actual processing costs going forward. We started this shift several years ago by restructuring contracts, and this is the next evolution in that shift. Lastly, we are communicating with our customers on the extent of these global recycling market changes. Our customers appreciate the transparency waste management provides, and they seem willing to work with us to ensure the longevity of the recycling business. While these are difficult times in recycling, our goal in this transformation is to build a recycling program for both waste management and our customers that ensures environmental and economic sustainability for the long term.
Ultimately, we hope to see a shift in thinking away from the value being placed on how much gets put into the cart to how much truly gets recycled into new products. So while our recycling results in the Q1 were about what we expected, outlook for the remainder of 2018 has changed from our original guidance. We're already hard at work to combat contamination and control our costs, but the financial benefits of our actions will likely take time to materialize. And since our previous guidance, OCC prices have declined to 9 year lows and mixed paper has dropped 80% to prices at 0 or negative in some markets. So we now believe that the year over year decline in our recycling line of business will be between $0.12 $0.15 per share versus our original guidance of a negative $0.08 to $0.10 To come full circle, in spite of these significant challenges in the recycling line of business, the large majority of our business is hitting on all cylinders.
And therefore, we remain confident in our ability to deliver strong performance throughout the remainder of 2018. As a result, just to be clear, we are reaffirming all of our full year guidance, including operating EBITDA, EPS and free cash flow. I will now turn the call over to Jim to discuss the Q1 operating results in more detail. Thanks, Jim, and good morning. Our results in the Q1 continued the strong trend that we saw throughout all of 2017.
We saw both price and volume in our traditional solid waste business exceed 2% for the 4th consecutive quarter. As a result, total company income from operations grew $50,000,000 an increase of 9%, and income from operations margin expanded 110 basis points to 17.3% when compared to the Q1 of last year. Our operating EBITDA grew $69,000,000 an increase of nearly 8% when compared to the Q1 of 2017, and our operating EBITDA margin expanded 140 basis points to 27.2% when compared to last year. Revenues in the quarter were $3,510,000,000 1st quarter revenue growth in our collection and disposal business from the combined impact price and volume was $160,000,000 1st quarter revenues were negatively impacted by lower recycling commodity prices and lower volumes, which drove a $77,000,000 decline in recycling revenues. Looking at internal revenue growth in the Q1, our collection and disposal core price was 4.9% and yield was 2.3%.
Traditional solid waste volumes improved 3.4%, while total company volumes increased 3%. Volumes in the Q1 included about 40 basis points from natural disaster cleanups in Florida and California. Volumes in our transfer station line of business were 6.4% primarily due to the new New York City disposal contract. Looking at our other revenue metrics, service increases exceeded service decreases for the 17th consecutive quarter, and new business continued to exceed lost business for the 12th consecutive quarter. Our churn rate was 9.6% in the 1st quarter or 8.9%, excluding the expected churn from the implementation of the City of Los Angeles franchise contract, and our rollbacks were 18.8%.
Our collection lines of business continue to perform exceptionally well. In the Q1, commercial core price was 5.9% with volumes up 2.7%. Industrial core price was 9.9 percent with volumes up 3.9% in that first quarter. In the residential line of business, core price was 3.3%. Residential volumes were down 1% in the 1st quarter, but that is a 110 basis points sequential improvement from the Q4 of 2017.
The combined price and volume increases in our collection line of business led to income from operations growing $64,000,000 income from operations margin growing 130 basis points, operating EBITDA growing $68,000,000 and operating EBITDA margin growing 100 basis basis points. In the landfill line of business, total volumes increased 9.5%. MSW volumes grew 2.2%, C and D volume grew 28.1% and combined special waste and revenue generating cover volumes grew 4.5%. We achieved core price of 3.3 percent in the landfill line of business. For the Q1, our landfill line of business grew out of business grew income from operations by $30,000,000 and income from operations margin by 90 basis points, while operating EBITDA grew $42,000,000 and operating EBITDA margin rose by 100 basis points.
Moving now to operating expenses. In the Q1, total operating cost as a percent of revenue improved 80 basis points to 62.2%. On a dollar basis, cost increased $18,000,000 when compared with the Q1 of 20 17. Our cost of goods sold decreased year over year primarily due to the 36% reduction in recycled commodity prices. We also had lower fuel expenses in the quarter due to the 2017 fuel tax credits, which reduced our current quarter cost by about $28,000,000 The cost of goods sold and the fuel benefits were partially offset by an increase in labor costs due to the $2,000 employee bonus and volume increases in our commercial and industrial businesses.
When we isolate the impacts of these items to focus on the operating costs and margins of our traditional solid waste business, we are pleased that our cost control efforts are working in a growing volume environment. If we net the positive impact from the fuel tax credits with the negative impacts to margin from our recycling line of business and the employee bonus, operating expense margin for our traditional solid waste business improved over 50 basis points. Overall, we're very pleased with our operating performance in the Q1, and I know our employees are hard at work to make 2018 another successful year. I'll now turn the call over to Devina to discuss our financial results.
Thanks, Jim. Good morning, everyone. In the Q1, we continued to see our strong operating EBITDA translate into free cash flow growth. We generated $809,000,000 of cash from operations and that's an increase of 12% from the prior year period. Our cash flow from operations as a percentage of revenue grew more than 200 basis points from the prior year to 23%.
We continue to demonstrate the ability to convert more of our operating EBITDA into cash from operations, positioning us very well to continue our commitment of investing in growth and returning cash to our shareholders. During the Q1, we spent $400,000,000 on capital expenditures. Fleet capital early in the year to support our growth. As we have said before, we've seen significant organic growth in our business and we're investing in our fleet and our landfills to respond to the needs of our customers. We continue to expect that our capital expenditures will be between $1,600,000,000 $1,700,000,000 for 2018.
We generated $423,000,000 of free cash flow in the first quarter. That's an increase of $26,000,000 or more than 6% from the Q1 of 2017. In the quarter, we converted more than 44% of our operating EBITDA into free cash flow. This strong performance puts us well on our way to achieving our free cash flow guidance of between $1,950,000,000 $2,050,000,000 for 2018. In the Q1, we returned more than 100 percent of the free cash flow we generated to shareholders as we paid $206,000,000 in dividends and paid $250,000,000 to repurchase shares.
In addition, we spent $248,000,000 on traditional solid waste acquisitions, demonstrating our commitment to identifying accretive transactions in growth markets that will allow us to more effectively leverage our people and our assets to service our customers. Turning to SG and A. For the Q1, as a percent of revenue, SG and A costs were 10.6%, a 70 basis point improvement from the Q1 of 2017. On a dollar basis, SG and A costs were $373,000,000 in the 1st quarter or $17,000,000 lower than the prior year period. The reduction in SG and A costs is due to our continued focus on managing our discretionary spending as well as a decrease in our labor expenses that can largely be attributed to prior year executive severance costs.
Our effective tax rate for the Q1 of 2018 was approximately 23% and we now expect our full year 2018 tax rate to be between 24% 25%. Each of these rates is a little more than 1 percentage point less than we previously expected. This revised outlook is due to additional clarity we now have on the impacts of tax reform. The EPS benefit of this revised tax outlook was a0.01 per share for the Q1 of 2018 and is projected to be about $0.06 per share for the full year. Our key financial metrics remain strong as we continue to see the benefits of earnings growth and disciplined allocation of our free cash flow.
At the end of the Q1, our debt to EBITDA ratio measured based on our bank covenants was 2.4 times and our weighted average cost of debt for the quarter was about 4%. The floating rate portion of our debt was 17% at the end of the Q1. In summary, 2018 is off to a strong start with the Q1 reflecting the continued execution of our core operating objectives and focus on continuous improvement. Our strong traditional solid waste business performance overcame the headwinds from recycling to produce a healthy increase in both cash and earnings. We expect that trend to continue throughout 2018.
The Waste Management team has once again demonstrated that our disciplined focus on serving the customer while optimizing our business generates strong operating results, and we look forward to that continuing throughout the year. With that, Kevin, let's open the lines for questions.
Our first question comes from Brian Maguire with Goldman Sachs.
Hi, good morning everyone. Good morning, Brian. Jim, I appreciate your comments on the recycling markets these days and it sounds like you guys are taking a leadership position there as you should and trying to clean up the industry and change some of the habits and practices being employed, adjusting to the new environment, all seems very logical. Just some questions around the impact in 1Q from it, because I noticed you said there was an $0.08 hit to EPS on, I think it was about $77,000,000 of sales. I think last year's total benefit was around $0.085 on roughly 3 times the sales amount.
So just wondering if you could maybe dig into that a little bit more why the sensitivity in the margin is a little bit different on the way down than it was last year on the way up?
Yes. So the EBITDA impact was about 46,000,000 dollars for us for the quarter. And the that's driven by those things I mentioned my prepared remarks, the big decline in OCC, mixed paper down 85%. But what's maybe a little different from prior years is that we're seeing that big uptick in operating costs that's as a result of that 0.5% contamination limit that China has put on. And then in addition to that, think of it this way, we were shipping about 30% of our cardboard a year ago to China, and it's now about 2%.
Fortunately, we have markets that we can ship to. Not everybody is that fortunate, but there's a higher transportation cost that comes with that. Those markets are markets like India and Vietnam. And so the haul is longer to get to those countries versus China. So we've seen an increase in our transportation costs as well.
But I think, maybe more directly to your question, as we think about what this looks like going forward, there is a bear case to be made here about recycling, Well, there's a bull case. I've made the bear case, I think, but there's a bull case to be made about recycling. And that is that not only are we going through those steps to improve the business in the short term, but look, China needs cardboard. And there's probably 5% growth of cardboard in China expected for 2018, and they really have three sources of it. 1 is OCC, imported OCC, which I mentioned, we're really we're not sending ours and most are not either.
So they're not getting OCC from the import market. The domestic Chinese OCC market is drastically insufficient to satisfy their demand. So they've been they've resorted to pulp, which is just spiked as a result of the artificial shortfall in supply without OCCs. So I think there's a case to be made that there's a bold case to be made here. And then I think the other side of that is that we're looking for the medium and long term at changing some of our technology in our plants so that we can better handle contamination coming in the front door.
I don't know whether that answers your question, but that's kind of the bull and bear case for us. Jim, maybe I for Brian's benefit mentioned too that that aligns with your bull case. Right now that $0.12 to $0.15 revised guidance is based on about $80 a ton for our commodities. We're now at about $70 $72 $3 in that vicinity. So it's not a huge upside that's built into that guidance on the commodity side.
We have some upside expected, but we truly see that because of Jim's bull case. I fully expect that to happen. In addition, if you just look at the commodity trends, right now domestic OCC, we see it trending up from that April level that we saw that's exceptionally low, as Jim pointed out. The export OCC, we also see that trend up for Jim's bull case example. Export OMP we see moving up from the April level significantly and that's in our guidance number.
And the really downwind is that mixed paper. That we don't see moving forward as we move forward. But the point is that in that new revised guidance, we've got about $10 of commodity price that we've built in on the upside into that guidance. I think the wrench in the math there really is operating costs. That's kind of the short answer.
We gave a long answer to your short question, but that is if you're just looking at kind of commodity prices, you should be able to kind of do the math that you were doing. The wrench is operating cost, and then that's something we haven't necessarily seen. And seeing that big spike is what's caused the difference.
That's a great answer. Just, do you think, Ben, we need to maybe update the sensitivity that we've been using, the $0.04 per $10 move? And then just sort of to Jim's point on what's baked into the guidance, it looks like an incremental $0.04 to $0.07 hit for the rest of the year after the $0.08 this quarter. That seems awfully low considering I think the 2Q comp will be even tougher. I would think the 2Q number would be even bigger than the $0.07 high end of that range.
So are you sort of assuming that it's a year over year good guy for the second half of the year? Is that what I'm hearing?
So Brian, I would start by saying with regard to the guidance that we've always provided with respect to that $0.04 impact for the $10 shift in prices, what's important there to reiterate Jim's point is that is the commodity price piece only and so that speaks to revenue sensitivity. The operating expense sensitivity is the other piece of the equation. So we wouldn't break with that guidance, because they're not necessarily connected. But what we did see in the Q1 is that in addition to the EPS impacts, which were about 75% to 80 percent of the $0.08 of negative impact that we saw in the quarter, from commodity price changes, we also saw that OpEx be about 20% to 25% of an impact. With respect to the last part of your question, I think what's important to remember is Q1 was really the strongest quarter for recycling in the prior year and the comps and the decline in commodity prices, we really started to see in the fall of 2017.
And so the more positive outlook for the remainder of the year relative to what we saw in the Q1 really has to do with the impacts of those year over year comps. And then to some extent starting to see some benefits of the specific action that the company is taking.
Yes, Brian, we also on the operating cost side, we expect and it's built into that guidance, we expect to see operating cost improvement versus the Q1. We've got some strong actions underway. We look by MRF at where their commodities are being shipped and then address the contamination cleanup level to the end marketplace. And perhaps in the Q1, we weren't as good at that as we implemented that Chinese, the new standard. And you'll see operating cost on the recycling side get better that will help us meet that new guidance number that versus the trend for Q1.
I know we're spending a lot of time on this question here, but this is really the it's the major detractor. Everything else was really, really strong in this quarter. And yet when you look at recycling, there we knew there were going to be some questions on it. And we can go into the strength of solid waste. We talked a bit about it in our scripts.
But Brian, last thing I would say is about second quarter and guidance for the remainder of the year is, when you see China do these kind of take these types of steps, they always do it in the Q1, because that is that's the quarter where they can afford to have to see OCC drop from 30% to 2% from Waste Management or from anybody else for that matter. But they do have a need, as I said, for cardboard. And if it's 5%, there really is their options are pretty limited. I gave 3% and really that second option is not much of an option, domestic OCC. So it's going to have to be imported OCC or pulp.
And if OCC. So it's going to have to be imported OCC or pulp and pulp has doubled. So at some point, they have to come back to imported OCC, which is why we think the price, as Jim said, has some upside, much more upside potential than downside.
Okay. Appreciate the detailed answer. Sorry to lead off with the squeaky wheel, but appreciate the color.
It's all right.
Our next question comes from Hamzah Mazari with Macquarie Capital.
Hey, good morning. The first question is just around more what you plan to do with your cash. Leverage is at an all time low. Free cash flow is at an all time high. There's probably antitrust issues in growing in the core business.
So the question really is, do you return 100 percent of your free cash flow back like one of your competitors or are there better options for that cash?
So Hamzah, I would say the Q1 is a really good indicator of our confidence in the free cash flow generation and the balance sheet strength that you mentioned. And as I mentioned, we allocated more than 100% of free cash flow to a combination of share buyback and the dividend. And then on top of that, acquired $248,000,000 of solid waste businesses. And so I think that's a really good indication of how we think about capital allocation going forward. We're continuing to commit to growing the dividend over the long term as we did this year with a 9.4% increase on a year over year basis.
And then we're looking at $750,000,000 baseline of share buyback for the year. So committed to that strong allocation as we have been.
Hamzah, those $248,000,000 of acquisitions that Devina mentioned are 7 or 8 transactions in Q1, excellent tuck ins that are in really good markets for us where we're asset strong and can internalize and get some synergies out of that material. So we're excited about that revenue that was added. Early pipeline for 2018 is strong as well, and we'll still look for really good acquisitions at a fair price that are accretive to our business and expect to do more of them in 'eighteen.
Great. And then just second question, I know you gave a lot of detail on recycling, but my question is a little more specific around recycling is, over time you restructured some contracts, you've tried to derisk that business. But I guess the question is, is the real issue that you need to restructure contracts to get processing costs back or is it for protection of downside of pricing and is the issue it's more municipalities that you're dealing with? My question is more from a contract structure perspective, can you do anything?
Yes, Hamzah, we are doing something about that. This week, in fact, a few of us from the met with our public sector team that work from each of our 17 areas. We had already rolled out a 3 phase plan do just that and look at contracts in their existing form where we can make operating changes around contamination and then look for opportunities to renegotiate current agreements. Some will have to wait till the end of the term and take a hard look, but our customers fully understand the situation that we're in with contamination and we're taking strong, strong action in that regard. The last action, what, 3 or 4 years ago, was primarily around floor pricing and getting the price right.
What we're having to do now because of the reset button on recycling business is take a look at that contamination and make sure that we're getting that fair payment for processing. And as Jim mentioned, in his earlier statements, make sure that the customer is taking the risk on commodity price, not just us. Yes, really, Ham. So this is Jim. And I'm just going to reiterate this point that Jim just made.
Contamination is the root of this. It is and it goes back to that statement I made earlier, which is we've kind of gone away from recycling to diversion. So there's this lack of congruency here between recycling more, meaning putting it to an alternative use or turning it back into the same turning a plastic bottle back into another plastic bottle. And we've gone to diversion, which means I divert more away from my trash bin into my recycle bin. And inevitably, that ends up meaning that you're going to have more trash in your recycle bin.
And that is what we've seen. The numbers that I gave are actual numbers. 5 years ago, we're in the 10% to 15% contamination range at our single streams. And now we're 20% to 25%. And that I think is what caused China to ultimately say, we're tired of importing your trash.
So get your act together. So it may not be a message that's necessarily pleasing to hear for our customers, but it's not our trash that we're creating. This is coming in on the inbound side. And when you have some plants that are 40% contamination in the inbound stream, that simply can't continue.
And Hans, I would add that the contract renegotiations that we did over the last 3 to 5 years really did provide some real value to the company in 2018. We expect it to provide value over the course of the year. It could have been that much worse. If you think about where we resulted where our Q1 results reflect the recycling line of business to be, which as Jim said, was a $46,000,000 year over year decline in EBITDA, we actually estimate that the impact from recycling for 2018 could have been as much as $0.08 to $0.10 worse than what we're projecting, if not for the work already done by our teams.
Got it. Very helpful. Thank you very much.
Our next question comes from Michael Hoffman with Stifel.
Thank you very much for taking the questions. And if I can ask a different thread on the recycling, because I thought your explanation of the demand was good, but can you help us think about if they use 1Q to do whatever they want to do, what's the pattern look like typically April, May, June, July, August? What do you see? And one of your biggest customers is 9 Dragons and they're adding 2,000,000 tons of capacity in middle of the year. How does that layer into some of that thinking?
Can you get a little more color around that?
Yes. I mean, I think, Michael, first of all, the pattern tends to be as they prepare cardboard for shipping for the Christmas season, it tends to be kind of Q2 and Q3. It's not Q4. So we've typically seen pricing commodity pricing drop off in Q4. Couple of years ago, it did not and that was somewhat unusual.
But historically, you've seen kind of the low quarters be Q1 and Q4 and the stronger quarters be Q2 and Q3. Okay.
And so your anticipation is, given the fundamentals and all the little brown boxes that show up in all of our houses, that demand driver is going to be good in 23?
Well, look, it's not as if China is not going to ship cardboard boxes. So, if you believe that their growth year over year is going to be 5%, they've got to find a cardboard somewhere. But we don't take issue with their point on contamination. I mean, if what's coming into their to 9 dragons is heavily contaminated, it increases their costs. So I think they've taken a stance and it's hard to argue that stance.
But once we start cleaning out the stream and that's why we spent a fair amount doing that, then I think you'll see them start to import. We're seeing a bit of that already, and then I think the price will come along with that. We're not projecting prices up where they were in 2017, but certainly, as Jim said, we think prices will bounce off of where they were in March. Michael, we think we'll come out of this reset even stronger than before. Our brokerage business is a great example of that.
What we shipped to China in Q1, for example, 2 thirds of it came from our brokerage volumes, very clean materials and that we could combine with materials from our MRF that we had cleaned appropriately. So we think that we'll come through this fine and that demand has to be there. We expect it to grow. And as I mentioned earlier with Brian's question, that export OCC, we think has some real upside over the April numbers and we bake that in and we see signs of it.
And are you still approximately fifty-fifty brokerage versus your own MRF rev win the rev dollar?
Might be a little bit higher our own, but more like sixty-forty maybe, but yes, I mean in that neighborhood.
Okay. And then switching gears to the solid waste business, a year ago you had a 19% year over year growth in C and D and you've come back in 2018 and done 28% and we had a regular winner. Can you talk about what's going on across your 17 regions and what you're seeing because that's really good?
Yes. I think, Michael, you've talked about it a lot in some of your reporting. I mean, if you look at housing starts, housing starts have been on a really nice consistent upward trend with March, I think, being the highest number that we've seen over the last few years. And I think 1.3 or something like that. It's not up to where it was in 'six at 2.1 or a big number like that, but it's been a nice consistent upward trend.
And so hence, we're seeing that show up in our C and D business. And I might kind of answer a question for you that you in advance here, but because we've spent so much time on recycling, let me just give you, Michael, and everyone a number here that is really eye opening about the strength of the solid waste business and that is our EBITDA growth. When you think about EBITDA, and we showed a number of $69,000,000 in growth in EBITDA for the quarter. But what's included in that is the bonus, which the $2,000 bonus, which was $18,000,000 We already talked about the $46,000,000 headwind in recycling and then the fuel tax credit, which was $28,000,000 positive for us. If you said, all right, let's adjust for those and just see what the solid waste business is doing, the traditional solid waste, adjusting those three things out, you get $105,000,000 in growth, which is 11.9%, almost 12%, almost all organic growth in an EBITDA line in a 2.5% economy.
So and if you do that math on a free cash flow line, it's absolutely ridiculous. The number is so good. So I think, Michael, I've kind of answered a question that you didn't ask, maybe you're going to get to it or somebody else was. But I know we're going to spend a lot of time talking about recycling, but I want everybody to understand, first of all, recycling is oneten the size of the solid waste business, and the solid waste business is absolutely rocking and rolling right now. Hey, Michael, the 28% that you mentioned on C and D, you're right, that's a really strong number.
I don't see that moving forward at that level in future quarters. That's a lot of that volume were the natural disaster cleanups in Florida and in Northern California. Yet it will be positive. It was last year even before given the construction activity in North America. So it will be positive, but it's it ain't going to be at 28%.
In my estimation, I'd love for that to happen. The other point to mention is that C and D is about 10% of our total landfill volume. So although very positive, the rest of the lines of business in landfill were really strong as well.
And that was where I was going to go with this is, ultimately, this is a very consumer sensitive business because of what happens in commercial collection. And when you look at weights on a same store basis in commercial collection, how do you frame that trend?
Yes. Michael, I'll tell you, I don't see it up dramatically. It's in fact slightly down by container, which is unusual because our the total volume looked really healthy. You saw it for all of the lines of business, both price and volume were extremely healthy. So I'm not sure that's I know that's not what's driving it is the weight by container.
It's the total volume of our business.
Okay. And if weight is not rising there, but you're getting the level of pricing, what's so what's supporting that? Because you're a heavily urban model. So the level of pricing you're getting, given as urban as you are and as much competition as you have to deal with, is impressive.
Yes. You look, Michael, at the two lines of business that are driving that, the commercial and the industrial line of business, I think Jim nailed it in his opening comments and that's that we have excellent assets in those urban markets. We have moved some really strong process and people into those growth markets and are getting at least our fair share of the growth in those MSAs in commercial and in the industrial lines of business. It's helping the collection side, but it's also supporting the landfill line of business because we internalize that volume.
Okay. Devina, at a 21% tax rate, have you started a dialogue with the rating agencies that say, listen, you used to hold us to a standard of 3% to hold on to a BBB leverage, but now that's a $0.35 tax world. At 'twenty one, will they adjust your leverage up and allow you to be BBB still?
Yes, we're actively engaged in conversations with all of the rating agencies, Michael. And I would tell you, we have some positive outlook associated with where our ratings are today and are hopeful that, we'll see those come through in a short period of time.
So in a consolidating climate, what I'm hearing is that you could get levered and hold on to your rating because of the difference in the tax structure and that they're open to that dialogue.
We haven't specifically talked about a new kind of turn of leverage that would be acceptable in order to maintain investment grade. But we certainly are seeing that they see the fundamentals of the business have always been the cornerstone of what allows solid waste to be more heavily levered than other typical industrials that are more cyclical. And we expect that they'll continue to see that not just for us but across the companies that they rate with the lower tax environment. It's just difficult for us to say how high we would expect leverage to go. We've always talked about 3.25% kind of being, the max level of leverage for investment grade rating and what would be comfortable for us.
We don't know how much that will change with tax reform.
And then last question, this is a detail. You have foreign exchange and other line is negative at 1.6 percent, yet the Canadian dollar actually is up. So what's in the what's the what's causing it to be negative because that should have been positive?
Yes, it's a combination of 2 things. 1 is the change in accounting standards that you guys are aware of and then the other is a change in some of our pass through revenues.
So that's where the rev rec is being adjusted?
It is.
Okay. And am I supposed to assume there's $40,000,000 of that in or $40,000,000 or $50,000,000 for the next three quarters?
That's about right.
Okay.
Thanks. Thank you.
Our next question comes from Jeff Slover with BMO Capital Markets.
Thanks so much. I'm not going to ask about recycling. My first question, you mentioned the employee bonus. I know it's still very early, but I'm just wondering if you could talk about the impact either in terms of retention, morale, recruiting, what you've seen so far?
So retention, we haven't seen the 1st 2 months at least, January February, didn't see a big change in retention. March, we saw a bit of a change. I would guess that as we get later in the year that we'll see additional change in retention. We have not made any decisions on what we're going to do with respect to retention programs going forward. And as far as morale goes, I spent a lot of time out in the field as does the entire SLT.
And hopefully, the view that we get is an accurate view. But it seems to be reasonably good right now. Now I don't know how much of that is attributable to a $2,000 bonus and how much is attributable to just a strong performing business right now. But I'd like to think that morale is pretty decent right now.
And how about from a recruiting perspective? Is this something that you're using to recruit folks?
Well, for sure, the $2,000 bonus in 2018, because one of the things we said was that it's not just for people who were employed as of January 6 or whatever the day was we announced. If you start in 2018, and you're in one of those groups, it's largely hourly employees, then you qualify for this bonus. You have to wait a year to get it, and that was the retention aspect. But if I start on December 15, 2018, I qualify for the $2,000 bonus. I don't get it on December 31 like everybody else, but I have to wait a year.
But there is a value in it that if I start sometime in 2018, I qualify for the $2,000
Yes. I guess I understood that, but I'm just wondering, has it been easier to recruit folks using this? I know it's still difficult out there. I don't know that we've I don't know that we have enough data it's made
our job easier or not. Okay, fair enough. And then just shifting gears to the it's made our job easier or not.
Okay, fair enough. And then just shifting gears to the acquisitions, the amount you spent this past quarter, I think, was more than you spent last year. Was it just an issue of timing? Or are you becoming a little bit more aggressive on the acquisition side?
Yes. I think it was timing, Jeff, but plus one of them, probably a little higher average size than our typical tuck in that drove that dollar value up, but primarily collection business that tucked in really well. I think the opportunities are out there, and we're aggressively seeking them as the other industry participants are. And the climate is just good for those tuck in acquisitions at this point. Whether the number gets close to that, I can't say.
It takes 2 of us to agree on a fair price.
And Jeff, I would just add that it probably goes without saying, but I think it's worth saying anyway. With tax reform, more deals are going across our hurdle rates. And so we certainly are committed to continuing to invest in consolidation of the business where it makes sense and where we think that there's real value. And so I think the Q1 number is an indication of that.
And what do you think the impact on revenue growth from those acquisitions will be this year?
I don't have that number at my fingertips, but we'll get back with you.
Okay, great. Thanks so much.
Our next question comes from Tyler Brown with Raymond James.
Hey, good morning guys.
Good morning. Good morning, Tyler.
Hey, Devina, real quick. Was the CNG tax credit about $0.04 Was it an OpEx or the tax? And then to be clear, was it contemplated in the guidance from last quarter?
Yes. It was about $0.05 and it was in operating expense, a little bit in tax, though not much. And it was contemplated in our guide for the year.
Okay, perfect. Obviously, on the yes, sorry, go ahead.
Tyler, the one thing I would add though is that is not in our free cash flow for the quarter. We'll see it later in the year.
Okay, that's helpful. And then obviously 250,000,000 dollars in M and A in the quarter, obviously very strong. Maybe to the prior question, do you have an expected EBITDA contribution or maybe would it be safe to assume you allocated it, call it, mid single digit type multiples?
You're right there. That's a reasonable assumption. What I would say and we always talk about is where you do see our tuck in acquisition show up is on the EBITDA line. It's harder to see them on the EPS line because of some of the purchase price impacts to intangible amortization. So we do expect these transactions to be EBITDA positive and contributing, right away.
In our guidance for the year, we did expect about $200,000,000 of tuck in acquisitions. It's just more heavily weighted toward the Q1 than we anticipated.
Right. So should we assume that there's any more M and A included in the guide?
Not at this point.
Okay. Then quickly on recycling, did I hear you right, is the commodity basket today at about $72 a ton right now? Is that right, Jim Trevathan? And then for a quick clarification, is that just OCC or is that a broader basket?
No, that's a broader basket. And it is about 70 dollars And in the current guidance, the revised guidance, it's about $80 for the whole basket of materials.
Okay, perfect. Yes, I just wanted to be clear on that. And then Jim Fish, I hear you on the difference between diversion and recycling, I completely agree. Maybe you guys won't agree with me, maybe I'm being a bit too colorful. But am I crazy to think that this may be the best thing that ever happened to recycling?
Meaning, I assume this has got to materially change the conversations as you go back to those municipalities?
Yes. I don't know whether I'd characterize it as the best thing that ever happened to recycling after seeing the $46,000,000 decline for the quarter. But I do think you're right. It is something that needs to change. When we all think about recycling, recycling is a good thing.
But unfortunately, it has shifted away from this recycling for the saving of the world's natural resources to diversion, which just means how much less can I put in my trash bin and how much more can I put my recycle bin? And I think that has a kind of a bad unintended consequence. Tyler, I think somebody coined it aspirational recycling versus the real recycling that I think we all know is right. And our customers get it. They fully they understand it.
Some of them don't like it, but they truly understand it. And I think you'll see over time, we will make this business better in the long run. Maybe one last example here, Tyler, kind of a funny example. But maybe where the misunderstanding is, is that look, a lawnmower has a lot of recycle material on it. It doesn't mean that you can put it in your recycle bin and send it through our single stream because we don't have the equipment to break down the lawnmower.
I mean, yes, the blade is made out of steel, but we our single stream equipment cannot process a lawnmower or a baby stroller or name any other item like that. And so there is I think there is a misunderstanding about what our recycle facilities will actually process. They obviously do a good job of processing tin cans and aluminum cans and plastic bottles and cardboard and papers, but they can't take the rubber out of a hose and they can't take the metal out of a lawnmower. Right.
And we can't keep the economics working to where that would ever even be feasible.
So, okay. So this all comes back to the same kind of talking about the same thing here. If contamination really is the root of the problem, then why not abandon single stream and just go back to the simple basic, maybe call it dual stream or just simple commercial recycling?
Yes. Look, I mean, first of all, our customers want single stream recycling, and we're committed to single stream recycling. So, what we do want to do is make sure that we improve the process. Now some of this, as I said, it can be done through technology improvement. And we're looking at different technologies to improve the stream.
But I think we're too far down the path to do anything other than what we're doing today in terms of single stream. I think a lot of people reference Europe and what they do with their self source. But we have become a single stream society. And I think our best course of action is to improve the model, both on the financial side, but also on the materials side.
Okay.
And then, Jim Trevathan, I apologize for being uninformed here, but what is the rollbacks being I think you said 18%. What does that mean? Is that a spread between new and lost business? Or is that the percent of volume that saw a rollback? Or just frankly just don't know what that is.
Yes, Tyler. The easiest way I could tell you is as we roll out price increases, some customers question and challenge that number. And we to retain very profitable, accretive business, will roll back a portion of that to retain that customer. And that's
just simple as So, yes. No, sorry, I understand what a rollback is. I meant what does the 18% mean though? Is that how much you rolled back like in percentage wise? I'm just
Yes, 18% of the total price increase we rolled out in the marketplace.
Okay. Okay.
Thanks for the clarification. Thank you, guys.
Yes.
Our next question comes from Corey Greendale with First Analysis.
Hi, thanks. This is Ken Wang on for Corey. Pretty much all my questions have been asked at this point. So maybe I'll just ask any notable changes in competitor behavior seen during the quarter?
No.
I mean, I think everybody seems to like the current environment, that's for sure, with the economy doing as well as it is, and solid waste is a good business right now. Perfect. Well, thank you.
Our next question comes from Noah Kaye with Oppenheimer.
Hey, thanks for squeezing me in. So in this quarter, resi volumes still down though improving and really we're getting the growth, more growth both on price and volume is in the C and I, the higher margin part of the business. So obviously a very good trend for overall company financials. I want to ask, as you look out to the book for the rest of the year, how did those sort of underlying trends look to you? Will you expect resi volumes to maybe turn positive or get back a little closer to the C and I side of the business in terms of volume growth?
Or do you think C and I will kind of continue to really outpace on both metrics?
Yes. Noah, I think that the commercial and industrial volumes will always outpace the residential volume. We look at it differently in that return on capital is really the focus on that residential line of business. It requires generally when you add customers new capital, new trucks to service a new marketplace. And so we look at that differently than those volumes that can fit, if you will, on our current route structure.
So we're not hungry and aggressively seeking that residential growth. We like the fact that it is improving, but I'm not going to forecast that it gets positive or moves into that 2% or 3% range like the commercial and the industrial business are. Yet we're very pleased with what we're doing in that line of business. We've got real focus to move that margin up and to improve that return on invested capital. But the trend is good, but don't expect it to get to commercial industrial level.
The other thing that I'll mention on the commercial side, it's very positive the last few quarters. Remember that we added that LA business. And so we got a little headwind because we'll anniversary that in the second half of this year. It will stay positive and we'll beat our guidance number there, but it won't probably be at the same high levels unless the marketplace continues to improve.
Okay, great. Thanks so much. I'll take the rest of the questions offline.
Our next question comes from William Griffin with UBS.
Hey, good morning guys. So you may have already touched on this, but I just wanted to confirm quickly, was there a change in 2018 related to reclassing recycling rebates from expense to contra revenue?
There was.
Okay. And could you tell me the approximate dollar amount for the 1Q and the EBITDA margin impact from that change?
So as I mentioned earlier, it's in that foreign currency line item in the internal revenue growth table. And so in total, you saw a 1.6% change in revenue associated with that, but it's included with other things. With regard to margin impact, the margin impact was in total around 50 basis points on OpEx as a percentage of revenue.
Got you. And I guess can we expect sort of that relative amount to be consistent going forward over the course of this year?
Yes. What I would say generally though is that, the impact of Q1 is a little higher than the full year run rate because Q1 is a lighter revenue quarter than the other quarters.
All right, perfect. Thank you very much.
Our next question comes from Michael Feniger with Bank of America.
Just on the recycling, just curious, I mean, on the 40% that's brokerage, can you just walk us through how the economics for that portion of your business is perhaps different? And with the contamination issues, you mentioned how some merge will clearly just start turning away. I'm just curious, is that just all going to end up will some of that end up in landfills? Like is that what could play out? Hoping you could just address that.
I'll take the second question and I'll let Jim address the broker question. But yes, I mean, ultimately, what happens, and that's the irony of all of this, is that when this material comes in the front door, if you have a plant where the inbound stream is 40% contaminated materials, today, we send a piece of it out as commodities, but that 40%, as much of that as we can pull out, ultimately ends up in a landfill. And that is the irony of diversion is that while it may get diverted at the first step, which is at the curb, it doesn't get diverted overall. That's why we believe that recycling should be the goal, not diversion because diversion ultimately just means that it ends up getting processed through our plant but still ends up going to a landfill. So there's really no economic gain in pushing that through a plant.
But Jim,
the BroPro question. Yes. And maybe just
a comment too for Michael on that last point. And that's why we are working with our customers, our largest residential customers in cities and communities around education, that is the that can be a true mitigator of that factor is to not contaminate, if you will, some of the recyclables. But we're not going to wait for that to happen. We're going to execute as the contracts allow and as third parties bring us material contamination charges that are allowable and reject materials that can't be recycled because it can't be sold. On the brokerage business, so really they're large volume customers that we end up just marketing their product for them.
So we have a very low margin, low mid single digit kind of margin, but no capital involved. There are no trucks involved. We're not collecting the material. We're just helping them broker their material and combining it with our excellent team that has the outlets all over the world. So it's again low margin but really valuable for us and aligns us better with our customers as well.
That's helpful. And then also, I mean, obviously the CapEx was high this quarter. Like you said, you were making some investments in your fleet and your landfills. Does that mean you're actually adding are you adding routes? Are you also seeing some smaller players investing in their fleets and starting to add routes as well, maybe because they're seeing the higher growth in the market?
Yes. Michael, I can't speak to the competitors, but we have added routes, but at a lower percentage in the commercial, in residential and industrial, all three lines of business than our volume growth. Of course, resi is not growing, but so we're getting some efficiency there in routes versus the volume growth. But yes, we are adding routes in those two lines of business.
That's great. And then just on the margin performance, I mean, I guess big picture, if you're in an environment where volumes are 2%, your yields 2%, core prices like 4%, 5%, I mean, what can you now typically expand your margins on in the solid waste business on in that backdrop?
So aspirationally, we look to expand margins 50 to 100 basis points for the year. We certainly outperformed that in the Q1. Some of the outperformance came from the fuel tax credits. But even if you peel back the impact of the fuel tax credits, the traditional solid waste business did see that 50 basis point plus margin expansion for the year. And I mean you really are hitting on it.
If you look at price, we've always known that price is one of the levers that helps us to expand margin. But to Jim's point, when you're adding volume at a pace that outpaces meaningfully, the rate of route increases and labor costs, you're going to get leverage from that as well. And so we're certainly seeing that show up.
Michael, I think if you look at margins, I mean margin is maybe an underappreciated really good story. If you look back over the last 4 years, Q1 of 2014, our EBITDA margins were 23.1%. And then and you continue down the road, I mean, 24.5percent25.8percent. I mean, it's been on a continuing upward trend. So, does it continue in a straight line?
I don't know. But boy, it sure has been a good story that I think is a little bit underappreciated.
Yes. No, I would agree with that. I mean, I'm just I guess I'm curious, could you guys just remind us like what has changed to be able to get this type of this type of margin performance? Is it just better cost control? Is it removing cost during a low CPI environment?
Just curious if you could just touch on some buckets of how you guys have been doing that and why we could expect the 50 to 100 basis points, which we might not have been able to expect in the prior cycles, why we can expect that
going forward? Look, some of it is you've hit on the kind of the key items. I mean, we've as you know, I mean, we've kept control of SG and A since I was CFO. So SG and A has and that SG and A percentage, as Devina said in her prepared remarks, has come down. So SG and A, operating cost controls with SDO, which we've talked about for years.
And then when your top line growth is coming in C and I and landfill, that's going to be good for your margin. So we think we're doing some things with the customer in terms of customers improving customer experience. We're very, very focused on a best in class customer experience. And we think that is showing up in our growth numbers in the commercial and industrial lines of business. Michael, Jim called it in his early statements disciplined growth and our term for that what that includes is that point of where we grow and what at what price we grow our business.
We're very careful to make sure we're not just adding volume. We are adding it in the right places that add that margin expansion and with where we can internalize that volume. So it's not just the economic growth, it's the discipline to grow at the right price with the right customer base that adds to that margin
expansion. That's perfect guys. And I know and lastly, I know we talked we touched a little bit on April with recycling price. I'm just curious anything on the solid core waste? Is it the trends you kind of saw in February March continue in April?
And any impact from weather at all?
Were you asking about price for solid waste?
Yes, price and volume basically.
Yes. So I would say, well, look, through it's early in April, but our volumes still look good in April. Price continues price is something that we've been focused on for a decade and we're certainly not what helps us with price is taking this very strong stance on customer experience. I mean, the better our customer experience, the more differentiated we are and the easier it is to command a higher price. And then what was the last part of your question?
Weather. Weather, yes. So we didn't really use the W word because it happens every year. What I would say is that this is a little bit tougher winter than last year. Last 2 years actually were pretty mild.
We actually pulled the field and we had 30 more lost days to weather this year and that's area days. So the areas themselves had 30 more lost days this year than last year. So the weather did affect us, but look, we worked through that. It's winter.
Yes. All right. Thank you.
Thank you.
And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.
Okay. Well, thank you very much. In closing today, look, I'd just like to say, I know we talked a lot about recycling. I think it was the right thing to talk about. It's an important part of our business.
But as I said, it is a smaller part of our business compared to the solid waste. And with respect to solid waste, I would just say that maybe more than any other quarter in my career, waste management, this quarter highlights the strength of core the core of this business. So we look forward to the rest of the year, and we look forward to seeing many of you next week in Las Vegas at Waste Expo. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.