Waste Management Inc
NYSE:WM
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Waste Management Inc
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Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the Waste Management Fourth Quarter and Full year 2017 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.
I would now like to turn the call over to Ed Egl, Senior Director of Investor Relations. Thank you, Mr. Egl. You may begin your conference, sir.
Thank you, Theresa. Good morning, everyone, and thank you for joining us for our fourth quarter 2017 earnings call.
With me this morning are Jim Fish, President and Chief Executive Officer; Jim Trevathan, Executive Vice President and Chief Operating Officer; and Devina Rankin, Senior Vice President and Chief Financial Officer.
You'll hear prepared comments from each of them today. Jim Fish will cover our high-level financials and provide a strategic update, Jim Trevathan will cover price and volume details and provide an operating overview and related 2018 guidance, and Devina will cover the details of the financials, including additional guidance for 2018.
Before we get started, please note that we have filed a Form 8-K this morning, that includes the earnings press release and it's available on our website at www.wm.com. The Form 8-K, the press release, and the schedule to 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-K.
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 Devina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and they'd also address operating EBITDA and operating EBITDA margin as define in footnote (b) to the earnings press release. Any comparisons, unless otherwise stated, will be with the fourth quarter of 2016.
Net income, EPS, income from operations, and operating EBITDA for the fourth quarter of 2017 and full year 2017 and 2016 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 footnote 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 1:00 PM Eastern Time today until 5:00 PM Eastern Time on March 1. 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 8488065.
Time-sensitive information provided during today's call, which is occurring on February 15, 2018, may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited.
Now, I'd turn the call over to Waste Management's President and CEO, Jim Fish.
Thanks, Ed. And thank you, all, for joining us this morning. 2017 was arguably the best year we've seen as we exceeded expectations on all of our operational and financial metrics. About one year ago, I mentioned that each of our operating income, operating EBITDA, and net cash provided by operating activities were at all-time highs. I'm very pleased to say that, in 2017, we exceeded those highs and set new records in each of those metrics. Our continued focus on improving core price, adding profitable volume in a disciplined manner, and controlling costs produced $3.22 of EPS, another year of double-digit improvements with EPS improving more than 10%.
In addition, operating income margin and operating EBITDA margin both achieved all-time highs. Our operating EBITDA exceeded $4 billion for the first time and we achieved free cash flow conversion close to 45%. During 2017, we generated strong free cash flow that allowed us to return $1.5 billion to shareholders in dividends and share repurchases.
We continue to see solid growth in the cash generation capability of our business. The success that we achieved in 2017 sets the foundation for continued growth into 2018 and beyond. For the full year, our strong growth in EPS, operating EBITDA and free cash flow is driven by solid growth in revenue.
Revenues increased $876 million, or 6.4%. This is the best revenue dollar increase that we've seen since 1998. And more importantly, the majority of the increase is organic price and volume. For the full year, our collection and disposal core price was 4.8% with yield of 2%. In 2017, total company volume for the year was 2.3%, marking the first time in this cycle that we've exceeded 2% volume for the full year.
In 2017, we continue to focus on improving price and growing high-margin volumes, all while delivering exceptional customer service. Our strong results reinforced our conviction that these are the right areas to focus on. And we look forward to continued progress into 2018.
For 2018, we expect EPS to be between $3.97 and $4.05 and free cash flow to be between $1.95 billion and $2.05 billion. Before turning the call over to Jim and Devina, I want to point out our recent 8-K filings for those of you who may have not seen it.
Jim Trevathan, our Executive Vice President and Chief Operating Officer, and Jeff Harris, our Senior Vice President of our Northern Tier Operations, both announced their plans to retire at the end of this year. Both Jim and Jeff have made tremendous contributions to the success of Waste Management throughout their distinguished careers and we have an excellent succession planning process which has produced a very solid group of internal succession candidates.
The strength of that group was demonstrated by our recent promotion of Tara Hemmer to Senior Vice President of Operations, Safety and Environmental Compliance. As we approach Jim and Jeff's retirement date, we will provide additional details on our succession plans. But suffice it to say, our operations are in excellent leadership hands today and will continue to be in the future.
I will now turn the call over to Jim and Devina to further discuss our fourth quarter results and our 2018 guidance in more detail. And I will conclude with a brief strategic commentary on 2018 and beyond following their comments.
Thanks, Jim, and good morning. In the fourth quarter, our business continued to drive income from operations and operating EBITDA growth. We saw both price and volume in our traditional solid waste business exceed 2% for the third consecutive quarter. As a result, total company income from operations grew $61 million, an increase of almost 10%. And income from operations margin expanded 80 basis points to 18.6% when compared to last year. Our operating EBITDA grew $90 million, an increase of 9.7% when compared to the fourth quarter of 2016. And our operating EBITDA margin expanded 100 basis points to 27.9% when compared to last year. Revenues in the fourth quarter were $3.65 billion, an increase of $192 million, or 5.5%, when compared to the fourth quarter of 2016.
The growth in revenues was predominantly driven by our collection and disposal business from the combined impact of price and volume of $172 million. Fourth quarter revenues were negatively impacted by lower recycling commodity prices and lower volumes, which drove a $25 million decline in recycling revenues.
In the fourth quarter, our collection and disposal core price was 4.8% and yield was 2.2%. On the volume front, total volume was 3.4% and traditional solid waste volume was up 5%. Volumes in the fourth quarter benefited by about 140 basis points from hurricane cleanup in Texas and Florida, and 60 basis points from increased volumes from the new Los Angeles franchise collection and the new New York City disposal contracts.
Looking at other revenue metrics, service increases exceeded service decreases for the 16th consecutive quarter, and new business continued to exceed lost business for the 11th consecutive quarter. Our churn increased in the recent quarter due to the transitioning of accounts related to the new City of Los Angeles franchise contract, but remember that the contract result in a net gain of customers with this new franchise.
Excluding the expected churn from these customers, our churn rate was 9.7% in the fourth quarter, a 30 basis point sequential improvement. For a density-based business like ours, we have historically measured churn based upon the number of customer locations, and we will continue to do so.
However, if you look at churn on a revenue basis, it was 7.7% excluding the churn from the City of Los Angeles contract. With strong improvements in our quality of service metrics and our focus on providing customers with a differentiated offering, we expect continued improvement in all these metrics.
Our collection lines of business continued to perform exceptionally well. In the fourth quarter, commercial core price was 6.5%, with volume up 2.5%. Industrial core price was 9.4%, with volume up 5.9% in the fourth quarter.
In the residential line of business, core price was 3.2%, while residential volume was down 2.1% in the fourth quarter similar to the third quarter. The combined price and volume increase in our collection line of business led to income from operations growing $39 million.
In the landfill line of business, total volume increased 18.7% aided by increased volumes from the hurricane cleanup in Florida and Texas. More specifically, MSW volume grew 12%, C&D volume grew 23.6%, and combined special waste and revenue generating cover volume grew 4.5%.
On the MSW front, we saw strong volumes in our base volumes, which were up 10.4%. We continued to benefit from an outage at our Virginia waste-to-energy plant, which added another 160 basis points to our MSW volumes. Our C&D volume increase included the impact of the California wildfire cleanup. Excluding that cleanup, our C&D volume was still a robust 10.7% in the fourth quarter.
Regarding pricing, we achieved core price of 2.5% in the landfill line of business and MSW yield was 2%. The combined positive price and volume led to total income from operations growing $49 million or more than 16%, and operating EBITDA growing $74 million or more than 18% when compared to the fourth quarter of 2016.
We also saw income from operations margin in the landfill line increase 110 basis points and operating EBITDA margin increased 230 basis points, including 100 basis points from hurricane cleanup. For the full year 2018, we expect to see the same strong price and volume results that we saw in 2017, with core price projected to be 4% or greater and yield of 2% or greater.
In addition, we expect total company volumes to grow in the range of between 2% and 2.2% for the full year in 2018, consistent with the volume results that we achieved in 2017.
Looking at our recycling business, in the fourth quarter, average recycling commodity prices declined 8.1% and volume declined 2.9%, as we saw the impact of China canceling import licenses or delaying the renewal of import licenses to their mills. As we anticipated in October, the decline in price and volume and the cost impact of meeting the new quality control standards impacted EPS by a negative $0.03 in the fourth quarter when compared to the fourth quarter of 2016.
When we gave preliminary guidance for the recycling business in October, we expected recycling to have a negative $0.04 per share impact in 2018. Since then, China did not grant any import licenses until the end of December and those they did grant were fewer in number with lower volumes than expected. The contamination limit that China proposed of 0.5% is now expected to be strictly enforced, which will result in continued increased costs. OCC remains under continued pricing pressure, as we currently see in the first quarter. Based upon these factors, we now expect our recycling operations to have a negative $0.08 to $0.10 per share impact on 2018 EPS, weighted to the first half of 2018.
Moving now to operating expenses. In the fourth quarter, total operating costs increased $116 million when compared with the fourth quarter of 2017. The cost increases were largely due to increased volumes leading to higher collection, repair and maintenance costs, and fuel expenses.
Our operating expenses, as a percentage of revenue, improved 10 basis points from 62.1% in the fourth quarter of 2016 to 62% in the fourth quarter of 2017. Efficiency gains and other cost control effort, particularly in the labor and transfer and disposal cost lines, more than offset increased costs at our recycling facilities and the higher fuel expenses of 75 basis points as a percent of revenue.
So, in summary, our traditional solid waste business improved operating expenses as a percent of revenue by 120 basis points during the quarter, thanks to the strong execution of our field and corporate team.
And finally, on a personal note, and as Jim mentioned, I am retiring at the end of 2018. I believe our company is in great hands moving forward. Our senior leaders, corporate and field, are as aligned on our strategy as we have ever been in my tenure with the company. I'm proud to say that we've worked diligently at developing and aligning our field and our corporate leadership teams, and I believe we have the best group of field leaders in our history.
As you all know, I've had the privilege of working with Jim Fish, both at corporate and in the field, and I know him well. When our board chose Jim as CEO over a year ago, from my perspective as a member of the senior team and as the largest internal shareholder in our company, I was very pleased. Jim and the board asked me to stay for a couple of years after that transition and I welcome that opportunity and I appreciated their confidence.
Jeff Harris and I have been a part of this business for a long time. He and I both believe that after we retire, the superb leadership here at corporate and in the field are more than ready to move Waste Management to the next level of success.
Along with the Jim's extensive experience in the field and in corporate, we have leaders like John Morris and Tara Hemmer with decades of operations experience. And, of course, with people like Devina and Chuck, who are here in the room today, my other colleagues on the senior leadership team, including our corporate department heads, the company is in excellent hands today and in the future.
My decision regarding the timing is based solely on two beliefs. First, the future leadership is in place and will succeed. Second, after 39 years with the company, it's time to move to spend more time with my wonderful wife of almost 46 years.
She deserves it and I desire it. And also, more time with our 10 grandkids. Well, I desire that and I trust they will as well. Rene (18:56) and I have many goals, otherwise, that we want to accomplish outside of family and our company as we transition to what's next for us.
But please remember, as I have reminded members of our WM family, I have 10.5 months remaining to create value for our customers, our people, and our shareholders, and I plan to sprint to the finish line. I'll now turn the call over to Devina to further discuss our financial results and guidance.
Thanks, Jim, and good morning, everyone. In 2017, our strong operating results helped us to achieve our financial priorities of converting more of each revenue dollar to cash from operations, growing free cash flow, and then allocating that cash flow to grow our business and provide value to our shareholders.
In the fourth quarter of 2017, we generated $790 million of cash from operations, that's an increase of almost 5% from the prior-year period. Full year cash from operations was $3.18 billion in 2017, an increase of over 8% if we adjust 2016 for the $67 million swap termination benefit. Our cash flow from operations as a percentage of revenue grew 40 basis points from the prior year to 22%. But more importantly, we demonstrated that the 350 basis point increase in this metric, when compared to our long-term average, is sustainable.
We are going to continue to focus on the operating efficiencies, cost control, and working capital management efforts to not just maintain but grow this metric in the years ahead. We generated $342 million of free cash flow in the fourth quarter of 2017, that's a $46 million decline from the fourth quarter of 2016. We, again, saw a strong growth in our operating EBITDA. And so, the year-over-year decrease was due entirely to a $151 million increase in our capital spending in the fourth quarter.
This increase was planned, allowing us to realize permanent tax benefits from asset placed in service in 2017, but more importantly, to support the business growth that we've been experiencing. For the full year, we generated $1.77 billion of free cash flow, an increase of $60 million from 2016 and above the high-end of our revised guidance for the year. The strong and consistent free cash flow we generate supports our focus on returning value to our shareholders through dividends and share repurchases, and also growing the business by funding acquisitions.
In the fourth quarter, we paid $184 million in dividends and spent $120 million on tuck-in acquisitions. As Jim mentioned, for the full year, we returned $1.5 billion to our shareholders, growing our dividend for the 14th consecutive year and spending the full $750 million of share repurchase authorization to buyback over 9.7 million shares of our stock. We also spent $200 million on acquisitions, which was at the high-end of our plan for the year.
Turning to SG&A. For the fourth quarter of 2017, SG&A was $369 million, a $9 million decrease from the prior-year period. As a percent of revenue, SG&A costs were 10.1% for both the fourth quarter of 2017 and the full year. When looking at the full year, this is the best SG&A margin we have seen since 2005 and a 30 basis point improvement from 2016. In 2018, we expect SG&A expenses to be approximately $1.5 billion and we continue to target SG&A as a percent of revenue of about 10%.
Before turning to our guidance for 2018, I want to spend some time talking about tax reform, which will certainly benefit our earnings and cash flows in future years but it also had about $530 million net positive impact on our 2017 earnings and balance sheet as we re-measured our deferred tax liabilities and estimated the costs of a one-time deemed repatriation of our stimulated Canadian earnings.
We excluded this net benefit of $1.21 per share from our as-adjusted earnings for the fourth quarter and full year. After this adjustment, our recurring effective tax rate for 2017 was about 36%, which was slightly below our expected rate. With tax reform, we expect our recurring effective rate to decline by 10 to 11 percentage points in the year ahead to about 26%, making this a clear benefit to the future earnings and cash flows of our business. The reduction in our effective rate is less than the 14% decrease in the corporate rate due primarily to a decrease in the benefit of the deduction of state taxes, a modest increase in state rates, and then the non-deductibility of certain costs.
We estimate that the lower rate will reduce our cash taxes by about $275 million from what we would have otherwise expected to pay in 2018. We see corporate tax reform as a positive step for the U.S. economy for the long term, and an opportunity to continue to invest in our employees and our operations.
The reduction in cash taxes will certainly bolster the company's free cash flow growth immediately, but we will also focus on investing a portion of these tax savings to grow our business in the long run as the economy continues to grow.
So, as we think about our guidance in 2018, we project that our operating EBITDA will increase to $4.2 billion to $4.25 billion. This guidance includes the impact of our previously announced plan to pay approximately $65 million in bonuses at the end of 2018 to our hardworking employees who do not get the opportunity to participate in our salaries incentive plan, as well as the $55 million to $65 million headwind we currently expect in the recycling line of business.
We expect that this strong operating EBITDA growth will in turn drive free cash flow of between $1.95 billion and $2.05 billion, that's an increase of about 10% to 15% compared with 2017. We expect our capital expenditures to increase by $100 million to $200 million in 2018, as we make incremental investments to support business growth and invest in our fleet. This will put us temporarily above our long-term stated range for capital expenditures of 9% to 10% of revenue. But as we demonstrated in 2017, we are making this incremental investment in a disciplined way to provide accretive returns and drive long-term EBITDA and cash flow growth.
With this strong growth in free cash flow, we expect to, again, increase the cash allocated to shareholders in 2018. Our board continues to demonstrate conviction in the cash generation of our business as evidenced by the intended 9.4% increase in our per share dividend for 2018 and then the authorization to repurchase up to $1.25 billion of our shares.
This is the largest increase in our per share dividend in a decade and a $500 million increase in the share repurchase authorization from the prior year. We remain committed to returning value directly to our shareholders through dividends and share repurchases, but we also see value in complementing our organic growth with tuck-in acquisitions.
We continue to have the strongest balance sheet in the industry, finishing 2017 with a debt-to-EBITDA ratio of 2.4 times, positioning us well to make strategic acquisitions at the right price.
I will now turn the call back over to Jim.
Thanks, Devina. Devina discussed the impact of corporate tax reform on our 2018 cash taxes and the use of a portion of those dollars for the $2,000 bonus to 34,000 of our employees, and some incremental capital spending on the fleet in 2018.
Long term, however, our strategic focus will include our people, our technology including our fleet, recycling for the future, and growth of the business both organically and through acquisition.
In a company where a large percentage of our 42,000 jobs are hourly, skilled positions with a manual component to them, our people must be given a lead position in our strategic objectives list for the long term.
It's no secret that the millennial generation is not gravitating towards the skilled trade careers the way the baby boomers and the Gen Xers did. With that in mind, a big part of our people strategy is to design a 21st century approach to hiring, training, leadership development, and retention.
An important component of our strategic approach to our people is to encourage our employees to stay and make a full career with Waste Management. Our $2,000 bonus was a first step in that process and we will continue to analyze the impact of turnover on our operations and our financials to be able to evaluate the merits of a retention program beyond 2018.
On the fleet and technology front, we're driving our strategic fleet replacement program more quickly as we standardized the fleet across the company to reduce maintenance and operating costs and improve our service offering to our customers.
In addition, our new digital team is hard at work, building a comprehensive digital strategy that includes projects that greatly improve our customers' digital experience.
The ultimate outcome of our fleet and our digital strategies is the creation and accommodation of top-line and bottom-line growth through continuous improvements within our fleet operations and differentiation of our overall customer experience through technology.
As a management team, we've been giving much thoughts to our recycling business in the future. Our customers expect us to provide recycling services to help them meet their sustainability goals, and we believe our management team, our network of recycling plants, and our valuable brokerage business distinguish Waste Management from all others. Over the last several years, we've proactively re-tooled our contracts by removing floor pricing, adding contamination and processing fees, and streamlining processing operations.
Now, with the recent steps taken by China to strictly enforce its new quality control standards for recycled commodities which, we believe, are here to stay, we have an opportunity to build a recycle plant of the future that will provide solid, less volatile returns for our shareholders, meet the quality control requirements of our mill customers and continue to provide a sustainable recycling outlet for our customers.
Building that plant of the future will involve, among many things, partnering with our OEMs to innovate on next-generation equipment that can improve processing times, throughput and, ultimately, produce a higher-quality product. We're currently piloting a fully robotic sort line. Depending upon the outcome of our pilots, our plan would be to move from test to production in the next few years.
And lastly, as part of our strategic growth plan, we will continue to invest in acquisition opportunities that surpass our return criteria and create value for our shareholders. With more companies now meeting our hurdle rate of return due to the lower corporate tax rate, the primary determining factor as to whether we add to our normal annual acquisition guidance of $100 million to $200 million will be the extent to which sellers' expectations may have changed. Rest assured, though, what won't change is our financial discipline with those acquisitions.
In summary, 2017 was a very successful year for Waste Management and we expect that 2018 will be just as successful as we stay focused on our strategy. Our employees are hard at work on executing our 2018 plans, which should position us to continue to grow our earnings and cash flow in 2018 and beyond. We have the best employees in the industry and I want to thank each member of the Waste Management team for our success.
And with that, Theresa, let's open the line for questions.
Your first question comes from Tyler Brown with Raymond James.
Hey, good morning, guys.
Good morning, Tyler.
Morning.
Hey, Jim. So, really strong on the guide on the volume side, but I think you mentioned LA and New York were additive in Q4, but can you talk about how much in the 2018 guide both of those contracts will add?
Yeah, Tyler, Jim Trevathan. They will add some volume. They obviously will roll forward. But it's, I don't know, 10 basis points or so basis points, in that vicinity 20 basis points.
Okay.
It's not huge. Our base core business is doing very well, Tyler, and we expect that to continue into 2018. But they're there and they're helping, but New York City, for example, will not be up full speed until the fourth quarter of 2018 as they continue to move volume from current locations through those MTSs. So, that won't hit until late in the year, the full...
Okay.
...strength of New York City volume.
Okay. Perfect. And then, how much do you expect Fairfax to be a drag as that plant comes back online?
About the same; about 10, 20 basis points. We'll get you more firm numbers, but it's in that vicinity.
Okay, okay. That's okay. And then, on the $200 million in tuck-ins, pretty strong this year, really strong number in Q4, but anyway you guys could talk about kind of what maybe the internal hurdle rates are, or maybe EBITDA multiple on the capital that was deployed this year?
Yeah. I mean, look, we don't normally talk about our hurdle rate. I mean, I think, though, as I said in my remarks, that we do think that more companies will now hit that hurdle rate because when you think about NOPAT, I mean, the key portion of that...
Right.
...has obviously changed. So, I think the big question in our mind as we think about our normal kind of $100 million to $200 million, Tyler, is what happens to seller expectations, because I think the pool is a bit broader now. We will have more candidates out there that meet our return requirements. And so, then the question becomes what happens to sellers' expectations with things like individual income tax reform.
But I think you can look – Tyler, I would just add that I think you can look at our return on invested capital as a good indication of how we think of hurdle rates. As we talked about for many years, we intend to invest the capital that we have available to us through our free cash flow in a way that's accretive. And so, our return on invested capital growth over the last few years, because we're acquiring business and investing capital in a way that will continue to create growth for the return on invested capital over the years ahead.
Right. Okay. And then to be clear, though, there's about $100 million to $200 million of M&A assumed in the guide, is that correct?
So, we've talked about $100 million to $200 million as our annual target. As Jim mentioned, we've got the balance sheet, we are well-positioned in order to allocate that and then some in the year ahead, but it's going to be largely dependent upon whether we can get transactions done in a disciplined way, and whether seller expectations will align with our own view of value in this new environment.
Okay. And this is my last one. Jim Trevathan, this is a question for you. It's on the transportation side. So, there's a lot of talk about rising truckload rates here in 2018. I'm just curious if you can talk about how subcontract or hauling contracts really are structured? Do you guys buy on the spot? Do you buy it annually, or is it usually under some sort of like multiyear contract? Just curious on how some of the subcontractor expenses were?
Yeah, Tyler. They're primarily at least annual, in most cases, multiple year contracts when we commit, for example, moving volume from transfer stations into our landfills. So, no immediate impact. There may be, in many cases, fuel surcharges like we charge our customers that are impacted as fuel rates change, but overall, it's not a huge impact on a one-year basis.
Over time, if we see the same trend happen, that'll occur, but we'll get that price back from our customers as we move – as our cost goes up for transportation, we're going to raise the pricing on disposal.
Okay. All right. Well, thanks, guys.
And your next question comes from the line of Hamzah Mazari with Macquarie Capital.
Good morning. The first question maybe for Jim Fish, if you could maybe – actually for Jim and Jim, maybe if you could just frame for us how much self-help is there in your portfolio? I know you mentioned churn and you can measure that at a few different ways, but how much room is there to improve churn going forward?
And then, specifically also on working capital, it feels like the industry turns cash a lot faster than you guys. Is there any self-help in the portfolio going forward?
Yeah, Hamzah, I'll start with your churn question. As we've said on almost every one of these calls, we don't see an end to improving churn. It's one of the reasons that, as Jim mentioned, we're looking from a digital standpoint at improving our offering to customers to create more stickiness.
It's the reason that we focused so heavily on a quality of service metric on the collection lines of business. We see opportunity in churn whether it's on a revenue basis, as I mentioned, or on a number of customer locations like we've historically measured churn, there's continued opportunity. We haven't put a number to it and it's not a guidance topic that we're going to give you a guidance number on, but we're going to seek improvement every year in that metric.
And then. Hamzah, I would say, the same is true on the working capital front. You speak to the cash churn rate for our business as it compares to the rest of the industry and that's certainly something that we pay attention to. And you'll see in our 2017 results that we made good strides with regard to working capital, and we expect that those strides will continue to bear fruit in the year ahead.
It's difficult to predict how quickly we can make changes. As an example, we got an additional day-and-a-half extension on our DPO in 2017. It'd be great to see that same results in the year ahead, but it's difficult to say that that's going to be what we target because, as you know, when you focus on continuous improvement, you tend to address the easier parts of change first and the parts that will provide the most value, the quickest first.
And that's certainly the approach that we've been using. We're going to continue to move the needle, both on our DSO and our DPO in the year ahead, and that continuous improvement mindset is something that applies to all parts of our business. So, I guess, that sums it up with regard to your view of self-help, it's in the guidance.
Sure. And then, just on the free cash flow guidance of $1.95 billion to $2.05 billion, how much of the tax reform savings is flowing through into that number on sort of a bottom-line basis? Any color there?
Sure. So, as I mentioned, we expect about $275 million of a reduction on a pre-tax reform basis versus tax reform basis. That $275 million is inclusive of both the reduction in the rate, the corporate rate, and then also moving from bonus depreciation to full expensing of capital. And so, that $275 million is offset then by $50 million to $75 million of an increase that we can expect as our pre-tax earnings growth.
And then, when we look at 2017, we did have some tax planning benefits that won't repeat. We talked about pulling forward some of our capital spend into the fourth quarter. We also accomplished a number of other tax planning initiatives in the fourth quarter that provided us some benefit. So, all in all, I think you focused on that $275 million and the $50 million to $75 million of increase and that says, what kind of flow-through that we would expect in free cash flow in the year ahead.
Got you. And just on capital allocation, Jim, how are you thinking about M&A? I know there's antitrust issues in the solid waste business, maybe there's some tuck-ins, seller expectations are higher, as we heard from one of your peers earlier. What's your priority in terms of M&A as you look at the business on a go-forward basis, whether it's industrial waste or other avenues, energy? I know you want to be investment grade, so that maybe you don't limit sort of the sizing of M&A, but just any color on capital allocation, specifically M&A?
Yes. Specific to M&A, Hamzah, I think we've said many times on calls that right down the middle of the fairway seems to be working pretty well for us. So, solid waste, if I had to kind of order these, I would say solid waste would be first, but there are some tangential businesses that may not be straight down the middle but are very good businesses that we like.
Certainly, energy services is a business that shown some real nice growth, particularly in the latter half of 2017, and we expect that going forward into 2018. So, that's a business that we like. The haz waste business we like as well and anything related to the industrial services business, because it does appear that the economy is growing and will grow in 2018 and 2019 in those areas. And then recycling, even though recycling is down, it's a business that we still are committed to. So, those are probably the key areas.
Great. Congratulations, Jim, on your retirement and the 10 grandkids. Thanks.
Thanks. I'm still here, Hamzah, and no more grandkids, I hope.
Good.
And your next question comes from the line of Michael Hoffman with Stifel.
Thank you very much for taking the questions. Devina, can we start – or Devina and Jims, can we start with the CapEx, the incremental $100 million, just to understand that. That's replacing vehicles faster, it's not necessarily adding trucks faster, it's the way to think about that. Plus growth would be – you had a really good volume here. So, you got some incremental sell development you need to deal with, that's the way to think about that?
So, I think with regards to the fleet part of the answer, Michael, I would actually revise that to say it is both. So, it's replacing some of our existing fleet faster and it's investing in trucks – incremental trucks as we see core commercial and industrial collection growth. And then you're right, we've seen accelerated landfill volume increases. And so, we'll build out more on the sell development side as well.
Okay. So, following through on the route additions, this is being driven by true underlying volume growth. I mean, in my 30 years of covering this, there was a time where a garbage company would add a truck at 45 hours' worth of utilization and hope it grew into 50 hours' worth of utilization. And now, my sense is that collection is fundamentally full and you're starting to find yourself at 55 hours on average, so, let's add the 11th truck when the 10th truck route to get back to 50 hours; that's the way to think about it?
Yeah. Michael, the way I look at it, we grew commercial and industrial volume, as I stated in the script, I mean, at very healthy numbers, yet our routes grew about 1%. So, we're at a local district level, we probably – we look at it your way, but across the company, we're looking at it on a gross metric standpoint and then seeing where the biggest growth opportunity is as we look forward. We look very closely at each fall when we do strategic planning with our areas at what MSAs are growing. What's our GDP? And what do we expect from them? And that also affects the truck side of the house.
Jim and Michael, I would say that speaks to the success, which we've talked about for a couple of years, the success of our service delivery optimization program. I mean, when you're only growing your routes by 1%, and you're growing your volume by 2.3%, that tells you that you're doing something right on the efficiency side through John and Jeff Harris.
Yeah. We, for example, Michael, owned the SDO, our efficiency and process that we rolled out several years ago. We've got 98% of our districts that are up about 98% of our routes are certified. So, we're really pushing to continue to get that efficiency. And your overall concept is right, but we may look at it metric-wise a little differently.
Okay. Fair enough. And if I follow-through then on the CapEx, is this an 2018 – I'm running at a higher rate of normalized pace and therefore, I can think of your free cash flow as actually having – there's another (46:41) $100 million of play there to the upside, that's the way to think of – because the other way to put it -look at this is and I would pursue it further with Devina, is if you finished the year at $1.77 billion, but you're going to a midpoint of $2 billion, and I got something in the $200 million as tax related, then it doesn't look like there's a lot of operating growth there when in reality there is.
We've got a great deal of operating growth in the free cash flow line. So, I would say, first, with regard to capital and how we think about it over the long term, we've talked for a long time about 9% to 10% being our target capital expenditures as a percentage of revenue. And certainly, our pricing focus in growing our revenue through price is one of the tools that helps for us to maintain that discipline in capital expenditures. But when you look over the long term, in years where volume growth is lower, we didn't just trend toward the bottom of that range, we often broke through and were in the 8% range.
So, when we're looking at capital expenditures as a percentage of revenue over the long term in the future, if we continue to see the level of volume growth that we saw in 2017 and expect in 2018, you can expect our capital expenditures to be above the high-end of that typical range, because we're going to be really focused on making sure that we deploy assets in a way to participate in growth.
And so, we finished 2017 at about 10.5% of revenue. And if you look at 2018 in the plan, it'll take us to about 10.7% to 11% of revenue in capital in the year ahead. And so, it's too early for us to start to give guidance on 2019 and 2020. But I can tell you that if we see the economy responds the way we expect it to with tax reform and potentially infrastructure spending ahead, then you can see us continue to spend a higher level of capital.
Michael, I would add one thing to what Devina said, and that is that, in my mind, the best indicator of how the business is doing is the single biggest component of free cash flow, which is EBITDA. And if you look at our EBITDA guidance that we gave and you factor in that we've got $65 million in there that was for the $2,000 bonus, you've got somewhere between $55 million and $65 million in headwind on recycling and still providing growth of kind of $200 million to $225 million, which is kind of 4.8% to 6%, something like that, in a 2.5% to 3.5% economy, whatever it is; that's pretty darn strong. I think it tells you that the core business is really performing well. We're pleased with the business, we're pleased with the economy that we're handed here.
And so, that free cash flow number, Devina went through it well, but I think the number – the underlying number that is most impressive is that EBITDA number.
Fair enough. And to that and Devina, in 3Q, you reset the baseline and free cash flow to $1.6 billion. What's that number look like now post tax reform?
So, I think at this point, with the higher CapEx we're seeing and somewhat of a position that the American economy is not really used to, the corporate America is not used to, which is lower corporate taxes and what to do with those. I mean that really, honestly, Michael, has been the central question around corporate tax reform is will companies return it directly to shareholders? Or will they inject it in the economy and see it come out the other side in the form of higher economic growth?
I think before we give a number that is a higher baseline – by the way, it is going to be higher. I mean just to be clear here, our free cash flow baseline is going up, but we need the next few months to figure out by how much. And some of that is because the way we handle taxes or this tax or these tax reform dollars is a little different than just simply tacking them on to free cash flow.
Okay. Fair enough. In your guidance, the 2% for price, if I look at your summary datasheet the way you disaggregated for collection, disposal, recycling, season, fuel, that 2% would imply about a $290 million growth in dollars. How do I break that up in – at least what's the recycling headwind of that in – when I think about that to get to the $290 million on the revenue line?
When we look at revenue, you're speaking about our 2018 guidance?
Yes. Yeah.
Yes.
Yes.
So when we look at the expected headwinds from recycling to revenue, we think it's about $100 million in the year ahead.
Okay. Okay. That's very helpful. And then, retention, where do you stand at this juncture in your retention within the 20,000 employees that are drivers and mechanics? And what is the opportunity there and at what pace do you think you can improve it?
Yeah. I mean, we're probably close to 20% when we think about turnover. And so, what's interesting about that, Michael, is that in our first two years, our turn – half of our turnover takes place with employees. I'm really talking about those two job groups that you mentioned. But half of that turnover takes place in the first two years.
So, if we can get them to that whatever the magic is to that date, if we can get them to year – the end of year two, then we hang onto them. They choose to really make a career with Waste Management. That was part of our objective with the $2,000 was, first of all, we buy ourselves a year and so somebody that is at currently at 14 months with the company, now we get them pass that to your point to the extent that there is some magic to that.
And then, we'll also have the next 11 months, 10 months to really analyze and see is there merit to some type of longer-term retention program?
And, Michael, we've spent a lot of time looking at this issue of driver and technician retention. And the other thing that I'd just add just a little bit of color to Jim's point, that was right on target, was that if you'd look at efficiency or our risk cost or our customer scores from drivers, those longer-tenured drivers just kill it compared to that first year or two new driver. So, not only do you get the value, the obvious value from retention, you get it on the true core business side as well that, we think, will add real value long-term as we get that number down as low as we can.
And by the way, we haven't baked any improvements in that number that I gave you, Michael, into any plan. And we've got some numbers that show that the cash cost of a turnover employee can be in the range of $12,000 to a higher number. I mean, I've seen some numbers that are higher than that, it's quite a bit higher than that and none of that's baked in. So, to the extent that we actually improve our turnover in 2018 with the $2,000, that ends up being just gravy for us.
Very good. And then, on the volume side, is Fairfax out now in 2018, it's out of the number?
Yes.
Okay.
Yeah. Yeah. It's back up.
Okay. It's back up. And then, on deals, I just want to make sure I get the $100 million to $200 million, but you're referring to what you're spending, not dollars or revenues, or is it dollar or revenues? I just want to make sure I was...
That's what we're spending, right.
You're spending, okay. And so, you're staying with the $100 million to $200 million for now, and we'll see what the pace of activity, and people (55:10)
Yeah. And, look, I mean, that number is kind of a squishy number because last year, it was $200 million and the year before, it was $100 million, but then there's been years where we've – all of a sudden a deal has come across the table that looked really good to us and we spent deaf and bar (55:25) and we spent $500 million or $450 million or whatever so. So, that number is kind of a guidance number but that number can change, and particularly, this year as we think about corporate and individual tax reform.
We've given a number of a $100 million to $200 million but that could very easily change.
Okay.
We didn't build anything about that $100 million to $200 million in our guidance.
Fair enough. And then lastly on the recycling, the 4 to – goes sense in 3Q, it goes to 8.2% some of that has to be taxes, but the rest of it is there's more expense, there was less lower price. And I was curious to mix and then the other is just you're pretty big exporter to China, I'm assuming you have found alternatives. And so you've found places for the volume to go now and we have to wait and see how the market pricing behaves once the Chinese New Year is over.
Yeah. I'll share this with Trevathan on the first part. Really it is low – this is the low, this is a slow time of the year for China. So, they're not buying a lot of cardboard at this point. So, this is the right time of year for them to do it, not coincidence that they did this with a Green Fence a few years ago during the same time a year. And how that's kind of plays out for us is that we're seeing because of the lower demand you're seeing prices drop off.
So, we've seen, I think Jim, a 24% decrease in price in the fourth quarter and we're projecting something in that neighborhood maybe even a little more in Q1. And then starting to normalize in terms of commodity prices in Q2, but particularly in Q3 and Q4. And then the other side is, is cost, and because of these contamination limits of 0.5%, we are seeing our processing cost to go up. And so we're – that's something that we have some control over and we're in the process of addressing that going forward.
Hey, Michael, to your first part, yeah, we have outlets for our materials. We talked about it quite a bit on the last couple of calls. We've spend a lot of time, our team at corporate, we think, are the best in the industry at finding outlets for materials. And we've done that aggressively. It doesn't affect cost, cost is still down, but we absolutely have outlets for our materials. But Jim mentioned contamination, I also want to mention, we're looking to reclaim part of that contamination cost over time. We did a lot of work as we've talked about the last three or four years, around the business model itself. And contracts are part of that and we've gotten real value, this is still a really valuable business to our shareholder, but to our customers.
And we've gotten value out of those contract changes that got rid of floor pricing. Most of them added contamination charges, we – for third-party volumes, we're charging contamination charges and it started to get more aggressive in that regard. For the public sector contracts, most of them have the clauses in place, but getting it from those residential customers is a little different task. And we're aggressively ramping-up that effort as well, to try to reclaim that cost. And again, improve the business model itself, so that long-term, these kinds of changes are managed properly.
But without a doubt, we're getting rid of our materials, have no issues there, but it is affecting price and cost because of the transportation.
I don't think it's overstating it, Michael, to say we're going to go to battle against contamination here. And I think that's better for us economically. It's also better for the environment. So, it's the right thing to do on all fronts, but we are definitely going to go to battle against contamination.
This is fascinating – I realized this is in the form to continue that part of the conversation, but it's the fascinating part of the conversation, because it means getting back to the municipality and everybody having an honest conversation about how this has been approached from the start, at the point of collection...
You're exactly right.
Yeah.
And it's about creating a sustainable business model, as well as sustainable benefit to the environment.
Yeah.
All right. We better let Corey talk or he's going to hang up.
Corey is next.
So, one last thing, Jim Trevathan, I've known you for most of that 39 years and I can say that you are leaving just better than you found it, both your business and the community you're serving. It's been a pleasure and thank you.
Thank you, Michael.
And your next question comes from the line of Corey Greendale with First Analysis.
Good morning. I love that previewing that I'm next. I can prepare; thank you.
I see it on the board, here.
Yeah. And Jim Trevathan, congratulations on sprinting into the sunset and hope it's a good final year. So, just a couple of questions. So, first of all, actually maybe hitting on a couple of things you've been talking about. On the cost side, so as you mentioned, Jim Fish, the EBITDA improvement includes that $65 million in bonuses. Can you just talk a little bit?
I'm looking for more about how you're thinking about this, not like a definitive answer, but it's kind of philosophy, why did you decide a one-time bonus was kind of the right thing to do? And how you're thinking about like for modeling out 2019, should we say that well that $65 million goes away, or you're thinking about ways you're going to reinvest, maybe now with another bonus, but other things you're going to do along similar lines for retention purposes?
Yeah, Corey. I mean, look, there were a couple of objectives and we've talked about them on the call and in other forms. But beyond just injecting dollars into the economy and giving something, as Devina mentioned, to those employees that don't participate in the salary and incentive plans, we've talked a lot today about the fact that we – that part of the objective was to encourage our folks to make careers at Waste Management.
Keep in mind, this is somewhat of kind of uncharted water for us, because we haven't – I would argue that nobody on the call or at this table has been through something where we've seen a big tax reduction like this and how that is best returned to shareholders. I mean, is it best returned to shareholders just through a straight share repurchase, or is it best returned to shareholders through injecting it back to the economy and then seeing that growth?
And so, as we've thought about what to do with some of those dollars as it relates to our employees, we felt we don't really know the answer. And so, a piece of that objective was to buy ourselves a little bit of time, hence the payout at the end of the year and help us by doing that in designing programs for the future, potentially that help us with retention. So, I don't know whether that answers your question, but that was really our thinking.
Yeah, that's fine.
I think one more – just one more piece of color there. I'd like to stress that that $2,000 per employee was not in place to combat wage inflation in any sense. We we've got a process in place. We work really closely with our HR teams. We look at the demand, the competitive wages by MSA, and we adjust accordingly. We've found a few that we think needed changes and then we changed them, and we'll continue to look at that. This has nothing to do with just normal wage inflation. It's to look strategically at our employees and how do we improve that retention issue.
That's absolutely right. It wasn't promised, by the way, either, Corey.
No, I appreciate that answer. And then on the volume front, maybe this is another slightly hard question to answer but, Jim Fish, in the past you've talked about focusing somewhat, I think, disproportionately on opportunities for growth in parts of either the economy or the country that are growing as opposed to looking for volume kind of everywhere. Is that still the case?
And part of what I'm looking for is kind of an adjustable market opportunity number like how much of the country do you put in that bucket now, and how much of the country would you say is not in that kind of growth, so we're not seeing – you're not going to go after volumes as much?
I think, the good news here, Corey, is – and you're right that's how we used to talk about it was that, hey, it looks pretty good in Texas but the rest of the country doesn't look very good. It looks good in Florida but not so good in the Northeast. I would tell you right now as we go through our monthly financial reviews and talk to our area vice presidents, boy, it's hard to find an area that doesn't have some strength. Now, there are some areas that are stronger than others. California for example is absolutely fantastic for us right now as is Florida. Texas has been, excluding the hurricane cleanup, has been a little slower because of the energy business but that's starting to come back.
But even places that historically have been slow for three decades that's kind of rust belt area, have started to show some real promise in terms of growth: Michigan and Ohio and Pennsylvania. New England's been good for us as well.
So, I've named just about every area for us. Canada is doing well for us as well. Western Canada is a little bit more like Texas because it's more energy-driven. But I would expect that Western Canada will start to pick up just like Texas is. So, hard to come up with one that's not doing pretty well right now.
Great. And just one last quick one. As we're modeling out the quarters of the year, is there anything you'd point out to us as far as like particularly difficult comps or event-driven work or I don't know if the hurricanes make a big difference, but where you see kind of meaningful changes in volume relative to the full year numbers as you look quarter-to-quarter?
I think, really, we've talked about this a lot as we prepared for this call. And the only business that gives us pause right now is recycling. We, obviously, increased from $0.04 to kind of an $0.08 to $0.10 so, basically a $0.09 number in terms of headwind for 2018. If something unexpected were to happen, if something crazy were to happen in China, if they just simply decided not to buy OCC, which I don't know how they could do that, as a huge exporter.
But if they decided they're going to stay at the same level of purchase for the remainder of the year that they are today, yeah, that would throw a wrench into our operation a bit. But keep in mind that that's still, on a revenue basis, recycling is still 10% or less of our overall revenue base. So, the only thing that causes me to say, okay, this one could impact us would be recycling. The rest of our guidance, including our traditional solid waste, looks very, very strong right now.
And Corey, the only other one is on the landfill side, all that storm debris happened in the second half of the year. So, just landfill comps will get more difficult in that regard. But the core MSW shouldn't be affected; it should be still strong, regardless of the quarter.
Got it. Thanks for the answers.
Yeah.
And your next question comes from Noah Kaye with Oppenheimer.
Thanks. And just to pick-up right there, amplifying Corey's question. It looks like the volume comps were actually stronger in the first half of the year, all-in, for 2017. So I mean, just picking a little bit more precisely about the cadence of volume for 2018, that 2%, I mean, should it be a little bit lower in the first half of the year and gathering strength maybe in the third quarter? Is that the right way to think about it?
Well actually, Noah, in 2017, those volume comps, the way they trended, had a lot to do with the anniversary of the National Account business. And so, that's what you saw impact 2017, particularly in the commercial line of business. So, we don't have that same, kind of, large contracts that we'll be anniversarying in the year ahead. So, other than what Jim mentioned with regard to the landfill volumes and the storm debris, there's not anything that would dramatically influence the quarter-by-quarter volume trends in 2018.
I will say, Noah, what is encouraging to us, as we look into 2018, is that we're through the month of January, obviously, and when we look at January's volume, with slow volume on recycling, we still had a very good month. So, we're encouraged with what we saw in the month of January; it's a small sample, it's 1 out of 12, but January looked encouraging.
Great. Thanks for that. And then I think, just thinking about price/volume mix, for many years, I think at least going back five years' average yields on collection and disposal was always higher than volume. I mean certainly, we're shedding some unwanted or low-margin business strategically. Now in 2017, we've seen volume actually outstrip yield and looks like they're kind of on par for 2018. So, can you just comment as to how the strategy is playing out? I mean, is this basically the result of many years of kind of leading with price, because now the way it looks, it looks like it's not necessarily price-like growth?
I think, no. We're – we have not changed our strategy regarding price at all. We will go get our core price guidance numbers and we'll execute that. Those processes are in place and we're pretty good at it at the area level with corporate leading the way. The volume change, the economy has helped some, obviously. We think we've gotten better. We know we have on the defection side. We've gotten some again, the storm debris kind of things that helped that volume to price relationship, improve the volume side of the house. The outage that we've talked about in Virginia did; special waste was strong last year especially in the second half of the year and should move forward.
But most of that has come from economic change from our focus on defection and from our attempt to go put the right resources in the right cities and MSAs to take advantage of the volume that's occurring per GDP. That's what Jim talked about. So, as the opportunity is there, we've gotten better at getting that volume.
One question, Noah, that hasn't been asked which has direct bearing on your question is CPI. I mean, we typically don't talk about CPI because for the last few years, it's worked against us and we've just said we'll get our price numbers irrespective of what CPI does. But CPI does impact about – and we have kind of indexed base pricing on about 35% of our total business. And we've always said that about a 10 basis point increase in CPI equates to a $0.01 per share. We've built in some increase, call it, 20 basis points into our pricing for 2018.
But we all saw the CPI numbers that came out yesterday, that we're higher than most people expected. So, there could be some upside there, albeit kind of on a half-year basis because we've already taken, we tend to take our index-type price increases in January and July with a few of them lingering into October.
But on a full year basis, once we get a full year of the CPI, I would expect that there will be some tailwind for us from CPI, but we won't get the full tailwind in 2018.
Thanks so much for answering the question and anticipating it, Jim. I'll jump back in the queue.
All right. Thanks, Noah.
And your next question comes from the line of Jeff Silber with BMO.
Hi, good morning. It's Henry Chien, and I'm calling for Jeff. Thanks for going into the pricing. I was going to ask of how much of that is embedded in the core price? But I was just curious to hear your thoughts on how sustainable achieving that kind of 4% core price growth? And are you seeing any competition in getting the new contracts?
And then, just trying to understand how much of this kind of seems like above market pricing growth that you're able to achieve over the next few years? Thanks.
Yeah, Henry. I don't see any different competitive landscape than we've had for the last couple of years. It is a very competitive business, and I think it always will be. It has been and will be. Volume obviously helps in that from – it comes from the economy. There are more start-ups that give all of us a better opportunity to get some volume growth, but our core price strategy isn't going to change for our core collection customers.
We're still – the marketplace allows it, we go get that core price increase and we will in 2018. And I think the teams are set up and ready to do again in 2019 and 2020 and on. I just don't see that changing, and I don't see a competitive difference today than two or five years ago.
Got it. Okay. Great. That's good to hear. And in terms of – I just wanted to switch back to M&A and your acquisition strategy. With growth kind of accelerating all throughout the U.S., do you imagine any shift or are you thinking of any shift in the types of acquisitions you're looking at, whether it's expanding your routes or putting more of a focus on that in the collection business, or I know you mentioned industrial is the kind of potential opportunity, but just curious in your thoughts there? Thank you.
The only thing, Henry, that could come to mind that might be a little different, and we certainly haven't identified anything down this path but would be something technology-related. I think other than that, you won't see us stray too far outside of kind of our norm in terms of M&A.
Got it. Okay. Thanks so much.
Yeah.
And your next question comes from the line of Michael Feniger with Bank of America.
Hey, guys. Thanks for taking my questions.
You bet.
I'm just curious, though, like what is your view on the optimal leverage ratio for this company? Clearly, free cash flow is going up. You have a higher baseline of free cash flow. I guess I'm just trying to think what should we be thinking about the leverage at this part of the waste cycle? I mean, surely we're below that right now.
So, are you speaking to debt to EBITDA?
Yeah.
Is that what you're asking with regard to leverage? Yeah. We're certainly below our long-term averages. We're at the best level, I think, that the company has ever been, certainly in my tenure. And we've talked for a long time about the fact that our goal is a solid investment-grade rating. And so, we'll continue to prioritize that when we think about leverage.
We don't chase leverage up as our business grows and as EBITDA grows by allocating more cash to things that aren't accretive to the business for the long term. That's our first priority, is ensuring that we continue to invest dollars to grow that return on invested capital and grow our business over the long term. So, we don't want to make short-term decisions that would affect the leverage.
We, certainly, are comfortable with where we are today and we're comfortable up to around 3.25 times because we think that is what – is needed to maintain our investment-grade rating.
Okay. That's helpful. And just lastly, you guys are clearly investing in the business, investing your fleet, and using tax reform as a benefit. You mentioned how routes, for you guys, are up 1%, is there any concern that you're seeing smaller players maybe adding routes or adding trucks ahead of the underlying volume growth? I know you guys are being disciplined. I'm just trying to get a sense of what you're seeing in the tightness of the market and out of the smaller players.
Yeah. Michael, I haven't seen any change in the 2016 or 2017 versus the historical view that all of our competitors whether they're small third parties or the majors. I think, in general, this is a disciplined business that rewards those who act in a disciplined manner and, I think, the industry is for the most part. I mean, there are always one-offs, but not that would affect any of us over the long haul.
Okay. And if I could just lastly, I mean, you mentioned recycling is part of core. You're exploring that that's part of the pillars of what you're looking at with M&A. Just to push you a little bit on that. Is that more looking at trying to have more scale or is it more looking at a certain technology? And what would you actually be kind of focusing on with M&A when it comes to recycling?
You're right. I answered it maybe at an earlier question about technology, and that might be a place where we would look at, at technology. As I mentioned in my prepared remarks, we're already looking at and testing, piloting some technology in the recycling line of business. We're always looking for where there's kind of innovation within our business. But recycling might be an area where we would find some. It would be nice to smooth out the volatility of that business.
Thanks, guys.
All right. Thank you.
And there are no further questions.
Okay. In closing, first and foremost, our sincere thoughts and prayers go out to the Community Park on Florida. Look, no one should have to go through what they faced yesterday. With such a horrific act and, I would tell you, this has become all too common in today's society. So, Parkland, you're in our prayers for sure.
Secondly, and on a far more positive notes. I'd like to say a few words about two really great friends and great executives Jeff Harris and Jim Trevathan. Their retirement date is still 11 months away but at that date, Jim and Jeff will have dedicated 59 years between the two of them to Waste Management. And really a lot of where we are today, the heights that we've achieved of late are due to those two guys, to Jeff Harris and Jim Trevathan. So, we'll, obviously, talk more about them as we get closer to their retirement dates.
But over the next 10 months, I plan to try and absorb a lot of the knowledge and wisdom and expertise that they have and that they've developed over those 59 years. And I'm sure that the rest of our senior leadership team will be doing the same thing.
Thanks for your time today and we'll talk to you next quarter.
Thank you for participating in today's Waste Management conference call. This call will be available for replay beginning at 1:30 PM Eastern Standard Time today through 11:59 PM Easter Standard Time on March 1, 2018. The conference ID number for the replay is 8488065. Again, the conference ID number for the replay is 8488065. The number to dial for the replay is 855-859-2056. This concludes today's Waste Management conference call. You may now disconnect.