Advanced Disposal Services' (ADSW) CEO Richard Burke on Q1 2018 Results - Earnings Call Transcript

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About: Advanced Disposal Services, Inc. (ADSW)
by: SA Transcripts

Advanced Disposal Services (NYSE:ADSW) Q1 2018 Earnings Conference Call May 3, 2018 10:00 AM ET

Executives

Matthew Nelson - VP, Finance & IR

Richard Burke - CEO

Steve Carn - CFO

Analysts

Corey Greendale - First Analysis

Noah Kaye - Oppenheimer

Michael Hoffman - Stifel, Nicolaus

Hamzah Mazari - Macquarie Research

Kyle White - Deutsche Bank

Michael Feniger - Bank of America Merrill Lynch

Operator

Good morning. My name is Dapin and I would be your conference operator today. At this time, I would like to welcome everyone welcome to the Advanced Disposal Q1, 2018 Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I will now turn the call over to Matthew Nelson, Vice President of Finance and Investor Relations. Mr. Nelson, you may begin your conference.

Matthew Nelson

Thank you, Deb. Good morning, everyone. We would like to welcome you to the Advanced Disposal Q1, 2018 earnings call. With me today is Richard Burke, our CEO; Steve Carn, our CFO, and other members of senior management.

We issued our press release with our results and trust that you've had the chance to review it. If you need a copy of the release, you may find it on our website or at www.sec.gov. In today's earnings release and during the conference call, we are providing adjusted financial information, including adjusted EBITDA, adjusted free cash flow and adjusted net income, all of which are defined in our press release and excludes certain items that management believes are not indicative of our results of operations. This information is provided to enable you to make meaningful comparisons of the company's operating performance between years and to view the company's business from the same perspective as management. The earnings release contains exhibits that reconcile the differences between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.

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

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

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

Richard Burke

Thanks Matt. Good morning. And I want to thank everyone for joining us today. First quarter 2018 yielded strong bottom-line results highlighted by nearly $9 million improvement in operating income, an 8% increase in adjusted EBITDA and a 22% gain in adjusted free cash versus first quarter 2017. Leverage also improved 20 basis points versus Q4, 2017 to 4.5x. These results were achieved through a continued commitment to executing on our operating strategy and supportive waste fundamentals including solid GDP growth, historically strong consumer sentiment, a healthy CPI environment, favorable housing start trends and a low unemployment.

Starting with the top line, revenue grew 5%. As we stated in our Q4 earnings call, we expected to see sequential improvements in average yield in the first quarter, and that has what materialized with a yield of 80 basis points versus Q4 to 1.9%. Our team remains committed to discipline pricing and we expect to achieve further improvements in pricing as the year progresses, while we were to achieve our 2.1% to 2.8% pricing target for the year. Volume continues to be a tailwind for us and added 2.4% to total revenue growth. Our residential business was the biggest contributor as we have fully cycled our non-regrettable losses and benefited year-over-year from a large municipal contract that began October 1, 2017. That being said, all our major collection and disposal lines of business were either flat or up versus Q1, 2017.

Acquisitions net of divestitures yielded 3% revenue growth as we continue to benefit from the carryover of acquisitions completed during 2017. We also closed five small tuck-in acquisitions in Q1, 2018 and we will continue to be active in this space. Our acquisition pipeline remain healthy and is heavily weighted towards tuck-in opportunities in existing markets that improve route density and drive new volume into our disposal facilities.

Fuel surcharge fees added 70 basis points to overall revenue growth led by higher diesel prices with average diesel cost per gallon increasing from $2.32 in Q1, 2017 to $2.80 in Q1, 2018. Our revenue from the sale of commodities, however, declined 70 basis points due to well publicized declines in fiber prices. For us this included the price we received for our OCC, Old Corrugated Containers falling from an average of a $110 per ton in Q1, 2017 to $78 per ton in Q1, 2018. Fortunately for us, the sale of recyclables only makes up about 2% of our total revenue. So year-over-year EBITDA declined for the quarter was $2 million.

Ultimately, we are continuing our efforts to reduce volatility for this line of business by executing on a couple of key initiatives. First, we are customer focused and environmentally conscious, and will continue to deliver services that customers and communities deem valuable. Second, we want to cover operating contract cost through contracts that result in us getting paid for the collection and processing of recycled materials, and we're willing to share more of the change in commodity prices with our customers to achieve this outcome. And third, we want to help educate customers around the difference between diversion and recycling. Ultimately, our goal is to help customers increase the percentage of items that have a secondary market such as cardboard, while at the same time reducing waste or what we call contamination in recycling bins.

This includes having honest conversations around commodities like glass that in many instances don't have a viable secondary market, are harmful to our equipment and our employees and can contaminate fibers that would otherwise be recycled. Changes in this line of business will not happen overnight. But as we continue to work on these objectives we believe we will help create a more sustainable, recycling model for our customers and our shareholders.

Turning to bottom-line results, adjusted EBITDA increased $6.9 million, or 8% to $94.1 million. Our core business led the way driven by improved pricing, strong volume and managing controllable costs, which more than offset any ancillary headwinds related to commodity prices. We would also note that the plan changes we discussed last quarter to incent employees to be better consumers of their healthcare needs are working as intended so far. These EBITDA gains of $6.9 million were also the main driver behind an $8.8 million, or a 22% increase in adjusted free cash flow. While the timing of capital expenditures and working capital payment can impact free cash flow in the short run, over the long run we view generating ever-improving free cash flow as our most important financial metric, since this is highly correlated to shareholder value creation.

Lower average debt balances due to free cash flow generation, coupled with higher EBITDA resulted in a 20 basis point improvement in leverage versus fourth quarter 2017. We also received a rating upgrade from Moody's during the first quarter, which further demonstrates the continued strengthening of our balance sheet. Based on our Q1 results and expectations for the remainder of the year, we are reaffirming our adjusted EBITDA and adjusted free cash flow guidance. We're also our reaffirming revenue guidance with the exception of our estimate related to the adoption of the new revenue recognition standard, which we now estimate to reduce revenue by $34 million in 2018, compared to our prior estimate of $9 million. Steve will cover that change in more detail, but again, this change has no impact on adjusted EBITDA or adjusted free cash flow.

Finally, before turning the call over to Steve, I would like to mention a couple of important changes to our Board of Directors. Recently we added Ernest Mrozek to our board who served in a number of senior leadership positions in finance and operations with the Service Master Company including Vice Chairman and CFO. At the same time Bret Budenbender and Jared Parker the remaining two Highstar capital directors have resigned their roles as members of the board as their ownership percentage in the company has declined. We thank Bret and Jared for their long-term partnership, leadership and commitment to Advanced Disposal. Based on these changes our board is now comprised of six independent members in May.

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

Steve Carn

Thanks, Richard and good morning. Revenue for the first quarter of 2018 increased $17.3 million or 5% to $364.7 million from $347.4 million for the first quarter of 2017. Adjusted EBITDA for the first quarter increased $6.9 million, or 7.9% to $94.1 million achieving margins of 25.8%. We also reduced leverages defined in our credit agreement by 20 basis points versus Q4, 2017 to 4.5x.

A reconciliation of non-GAAP measures to the comparable GAAP measures can be found in our earnings release. We achieved average price yield of 1.9%, organic volume growth of 2.4%, and net acquisition revenue growth of 3% for the quarter. Recycling revenue was negative 70 basis points were offset by 70 basis points increase in fuel fee revenue. In addition, revenue declined 2.3% due to the adoption of the new revenue recognition standard, which requires recycling rebates, certain franchisee fees and state landfill taxes to be netted against revenue. Average price yield of 1.9% for the quarter was up 80 basis points sequentially from Q4 and continues to benefit from the disciplined pricing and higher CPI. Production price yield of 1.8% was driven by strong roll up price yield up 3.8% benefiting from high rollout demand.

Commercial price yield was 1.2% which improved to 130 basis points sequentially from Q4 and residential price yield of 1.7% which continues to benefit from higher CPI resets. Both collection disposal price yields was 2.5% which improved 260 basis points sequentially from Q4 recycling volume mix that was weighted more to lower-priced special waste and C&D volumes.

Organic volume remained strong achieving revenue growth of 2.4% for the quarter, collection revenue growth was 2.2%, driven by a 130 basis point increase in residential revenue, benefiting from several new municipal contract wins, 60 basis point increase in roll off revenue, where roll off up 2% and a 30 basis points increase in commercial revenue and service level increases continue to outpace decreases. Disposal revenue increased 20 basis points with MSW revenue up 50 basis points, or 4% on a tons basis, this revenue increase was offset by lower special waste revenue and flat C&D revenue which was moderated somewhat by late season's severe weather in the Midwest and East.

Based on our Q1 results and expectations for the remainder of the year, we are reaffirming our adjusted EBITDA and adjusted free cash flow guidance. We're all reaffirming our revenue guidance with the exception of our adoption of the new revenue recognition standard. When we gave guidance during our Q4, 2017 earnings call, we included the impact of franchise fees and recycling rebate payments, which we estimated to be $9 million or a 60 basis point reduction to revenue in 2018. Since that time we have made a positive election as part of our adoption of the revenue recognition standards to treat state landfill tax payments as a reduction of revenue as well. This is estimated to result in an additional $25 million reduction for revenue and operating expenses bringing the total impact for 2018 to $34 million, or 230 basis points.

Based on this change, we are lowering our revenue guidance by $25 million and now estimate full year 2018 revenue to be between $1.52 billion and $1.54 billion. Again, this change has no impact to adjusted EBITDA or adjusted free cash flow as it is simply a reclassification between revenue and operating expenses.

Turning to our bottom-line results for the quarter, adjusted EBITDA increased $6.9 million to $94.1 million from $87.2 million in prior year. Adjusted EBITDA margin for the quarter was 25.8%, compared to 25.1% in the prior year, reflecting a 70 basis point increase in margin year-over-year. The 70 basis point margin improvement breaks down as follows. 40 basis point margin improvement from pricing and productivity gains, 50 basis points benefit from the reinstatement of 2017 CNG tax credits of $1.8 million which were included in our Q4, 2017 annual guidance provided, and 60 basis points pick up from revenue recognition standard. These EBITDA margin gains were offset by negative 40 basis points impact from net fuel resulting from increased diesel costs of around 21% from the prior year, and negative 40 basis points or $2 million net impact from lower recycling revenue net of the rebates.

Looking at our expenses in more detail, our cost of operations excluding accretion in Greentree expenses as a percentage of revenue was 62.7%, compared to 63.3% per year quarter. The adoption of the Rev Rec standard added in an 80 basis point positive impact to cost of operations as a percentage of revenues. The $8 million reduction in revenue and operating expenses impacted were transfer station and disposal cost by $1.2 million and franchise fees and taxes by $6.8 million normalizing for the Rev Rec impact, our cost of operations increased 20 basis points as a percentage of revenue. Fuel led the way with 30 basis point impact after normalizing for new revenue recognition standard due to higher fuel costs.

SG&A expenses as a percentage of revenue was 12.5%, compared to 13% in the prior year quarter. Salary expense decreased 50 basis points as a percentage of revenue due to lower stock compensation severance expense, but was slightly offset by increased bonus attainment along with legal and professional fees primarily related to the SOX implementation testing. We have provided detailed schedule of our cost of operations and SG&A expenses in our 8-K filings. Depreciation, depletion, amortization for the quarter was 17.7% of revenue consistent with the prior-year quarter.

As a reminder, our DNA is approximately 6% higher due to Legacy acquisition and the related impact of GAAP purchase accounting; however, it has no impact on free cash flow generation.

We generated cash flows from operation for the quarter of $78.5 million, or 21.5% of revenue, compared to the prior year quarter of $17.8 million, which excludes the prior year one-time benefit of $24 million cash received with the assumption of long-term care obligations of one of our landfills. Adjusted free cash flow for the quarter increased $8.8 million, or 22% to $49.3 million, compared to Q1, 2017 of $40.5 million. The increase was driven by increased EBITDA and net working capital improvements. We continue to deliver strong free cash flow improvement with adjusted free cash flow for the quarter as a percentage of revenue of 13.5%.

The company had adjusted CapEx spend of $34.8 million for the first quarter, or 9.5% as a percentage of revenue. For the quarter, replacement and maintenance CapEx was $24.5 million, or 6.7% of revenue, growth and acquisition CapEx spend of $4.7 million, or 1.3% of revenue and infrastructure CapEx of $5.8 million or 1.6% of revenue primarily related to landfill gas and leachate treatment infrastructure spend.

Total funded debt net of cash at March 31, 2018 was $1.95 billion with approximately $252 million of revolver availability. For the quarter, interest expense was $23 million compared to $22.5 million in the prior quarter. Cash paid interest for the quarter was $15.2. Covenant leverage defined as total funded debt net of cash to pro forma adjusted EBITDA at March 31, 2000 was 4.5x, down from leverage of 4.7x at year end. Adjusted TTM March 2018 pro forma EBITDA was $430.1 million including $5.1 million of pro forma credit for full-year impact of acquisition, net of divestitures in new municipal contracts.

We will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Corey Greendale with First Analysis. Please go ahead. Your line is open.

Corey Greendale

Thanks. Good morning. So, nice job in the quarter. First question I had a nice sequential improvement in yield, if you can just give us sort of the state of unit in terms of what the reaction was to those price increases? Any push-backs, any increase in churn?

Richard Burke

Corey, good morning. Thanks for the question. Look, price rollout has gone quite well as in the lot of pushback. I mean make it streets to the state of the economy, housing starts up, consumerism high, unemployment low. I think it's more of the macro that it's a good time to be in the garbage business. So our ability to push prices - it's working.

Steve Carn

And we have seen that churning that normal about 8% or 11% depending on the marketplace. And we continue to see service increases OPEX decreases. So we see good strong fundamental waste kind of volumes across all streams, residential, commercial and roll off.

Corey Greendale

It's good news. And in terms of how should we think about the rest of the year with the timing of contractual increases when contracts come up for renewal, should we expect sort of a kind of pro rata step-up in price growth each quarter of the year is another step-up probably more like could happen in the back half of the year?

Steve Carn

So, Corey, I think what you will see is our pricing continues to come up are 80 basis sequentially up from Q4. As we said the front half of 2018 will be a little more pressure on price around comps. We will see more of that in the back half of the year. Again, 24% of our revenue, 62% of those contracts reset on an annual CPI in the back half of the year. So we have got that kind of tailwind in the back half for the year. And then we also said volume is going to be little better in the front half of the year, 2.4% organic growth of volume. We will have tough comps in Q3 around special waste. So depending on the seasonal uptick in these special wastes, would depend where we are ultimately on our land on the disposal, but you will see good disposal kind of volumes in the front half of the year a little more pressure in the back half because of those tough comps.

Corey Greendale

Got it. Very helpful. And then just one last quick one from me on the recycling, as far as I know it's a small percentage of your revenue but, Richard, it seems like the industry is speaking similarly kind of with one voice about what needs to change, in your markets are there what you in terms sort of the outliers on that, are there privates with significant recycling capacity that you think are not fit to go along with that could be bad actors in terms of making the necessary changes?

Richard Burke

Yes. You are going to make me name them?

Corey Greendale

Well, it's up to you - don't need on my end.

Richard Burke

I won't, but yes there is always a bad actor here there, but I think in general the majors are in lockstep around this and again, I mean about recycling in commercial sign, industrial sign single source in a container where we paid a - which are to pick the container, rent the container, single source material, we dump it on the floor, we bail it, we share a rebate and that works, right. I mean where the recycling model needs help is around the residential. It's around the single stream particularly. It's around the amount of contamination of the container which is driving up our cost to process. And then on the other side the tightening of the demands around what we can sell the contamination levels acceptable to the end market. So you have a container that looks a lot like garbage, but you got to drive to a very clean spec in order to market that and sell that. That's where the challenge is and I think the majors all get that and everybody is speaking with a single voice on that topic. But there's always going to be the outliner.

Operator

Your next question comes from the line of Noah Kaye with Oppenheimer. Please go ahead. Your line is open.

Noah Kaye

Pricing, cadence, question it seems like at some point over the course of the year just doing simple math, you may be getting to that 2.5% close to 3% range, and at that level presumably and specially if you lapse some of your one-time cost from last year, there may be potential for better than that 40 bps of margin expansion on sort of pricing productivity that you saw in Q1. So my question is just how much and what do you think you can be doing to push pricing even stronger to help get that operating leverage on an ongoing basis?

Steve Carn

I think we still are comfortable with our guidance in that price range of 21 to 28. I think what will help us potentially get to the upper end of that range is to continue increase in CPI as we are weighted for the back half of the year on those recess, on those municipal contracts. And then the other thing is just how much seasonal uptick we kind of get in Q2 and Q3 which will help demand, which will help to be able to leverage pricing. But we will continue to be disciplined and we will continue to look at the middle also to have incremental leverage around.

Noah Kaye

Yes. To that point, I think peers have commented as you have on a little bit tougher whether this year and so there may be more a kind of seasonal snap back, so just to clarify here, you think there may be an opportunity to push open market pricing a little bit stronger as well, correct?

Richard Burke

I mean I believe we still stand in the band of 21 to 28, Noah, I mean I think the difference between the 21 and 28 is what you said, what second half CPI look back and what's the seasonality spring back.

Noah Kaye

Yes. That makes sense. And then on the M&A you think very consistent here around your expectations for how do you sort of tuck-in activity, I think the question has been asked on other call whether there is more competitors in this market place, but it seems to me like you are primarily looking at acquisitions that are going to maybe make sense for you, you are not going to auction, is that a fair characterization of the pipeline here?

Richard Burke

Our pipelines are definitely heavily weighted towards tuck-ins in the existing markets where we can gain --gain additional volume into our landfill, but I don't want to say that that's the only thing we are looking at. I mean we are not afraid of an auction. It's really more about our model secondary vertically integrated, primary vertically integrated where we can compete supposedly so does that enhance our market selection, so we will look at opportunities, but we will be little disciplined around on what we do and what we add. We have a fairly substantial pipeline of tuck-ins and that will be our bread and butter. But we will look at chunkier deals too and be opportunistic as they come up.

Operator

Your next question comes from the line of Michael Hoffman with Stifel. Please go ahead. Your line is open.

Michael Hoffman

Thank you for taking my questions this morning. Richard, Steve, can you help us understand what your internal costs of the inflation is relative to what you are doing in price? And I want to sort of tie that back to-- I would have felt the front end loader of the small container business would have produced a better yield than 1.2. So what's-- what we are dealing with on a year-over-year comparison basis or sort of how you think about that trend?

Steve Carn

Yes, Michael, good point. I think a little bit of the depression there in moderation on that commercial prices, continue little bit of defending some business in certain competitive marketplaces. But we continue to see in others customers as we are disciplined around pricing, been able to get those price increases in the capture rate and in managing those rollback and certainly our customer care centers that we have do a good job in that process. So, again, I think we will be disciplined around pricing, around all lines of business on pricing.

Michael Hoffman

So that defense issue kind of was sort of started in earnest in the middle of last year so we anniversary that - that helps the back half comparison till then?

Steve Carn

Yes, I mean if we look at commercial pricing from Q4 were up a 130 basis points sequentially from Q4 on the commercial pricing. So we're getting cycling some of that, Michael. There is a little bit yet remaining in Q1 but 130 basis points sequential increase is pretty good from where we were in Q4, and we will continue to be disciplined end markets where we think we can push open market pricing.

Richard Burke

And Michael, on to the small container, let's not lose sight of the fact that second pick up or that third pick up as service increases continue to outpace decreases. I mean that shows up in volume right. So that's a-- but that's incremental volume. I already have the container. I already have the customer I'm billing. Already have it routed so in order to when times are good like they are now with low unemployment and people eating in restaurants, and filling hotels that second, third and fourth collection a week is incremental and can help draw profit to the same point as price. So we want to get both. So I want to be clear. We want to get both on the commercial small container.

Michael Hoffman

Fair enough. So maybe the better way to think about it is the aggregate organic growth in front ends loader, and then looking through the operating leverage.

Richard Burke

Yes sir. That's the way we look. I mean small container, this business well, small containers about density, it's about route density. I mean if we get behind the shopping center and we're picking up seven out of ten that are back there. I mean that's where you get your incremental pop. So when we look at small container we look at price certainly first, but then we also look at yards. Are we picking up more yards month-over- month or quarter-over- quarter last on same routes. I mean its logistics; it's how can I run less miles and pick up more yards.

Steve Carn

Yes. So Michael it's not just defending for defending, but it's defending where that density is meaningful to operating leverage on that truck.

Michael Hoffman

Right, okay. From a modeling standpoint can you help us with two numbers the Rev Rec when if it's 60 basis points in 1Q what's the quarterly progression of that for the year? So I understand what I'm up against and given where current recycling is what's that basis point margin compression I'm dealing with 2Q, 3Q, 4Q based on what today?

Steve Carn

Yes. So Michael, good question. It is going to be similar to what we've laid out outside of the additional $25 million around the landfill taxes, which is really just the netting of a pass through revenue or doesn't impact margin or EBITDA. But again the Rev Rec is 60 basis points impact to the margin. It's 230 basis points to the top line and the recycling as we provided our original guidance and talked about on the Q4 call is 80 basis points top-line, and it's about 40 basis points negative to the margin. So because of the incremental Rev Rec, we're now 20 basis points kind of impact the recycle Rev Rec on margin positive on a year-over-year basis.

Michael Hoffman

Right and but if that's the same for 2Q, 3Q and4Q?

Steve Carn

It is because those were passing through revenues; they're going to be fairly consistent from quarter-to-quarter. There might be a little bit of variance heavier in Q2 and Q3 related to the landfill taxes because that's based on volume.

Michael Hoffman

Okay, I don't know if I thought 60 goes to 70 goes , 70 comes back down to 60 sort of the way to think about it on Rev Rec on margin.

Steve Carn

Yes. Well, I can tell you I don't have that correlate kind of fluctuation but annually you're right, it's going to average the 60 basis points. And yes it's going to be heavily - more weighted to Q2, Q3 because it's based on landfill state taxes, which is based on tonnage coming into the landfill. And so our landfills increased Q2, Q3 and so Q1 is going to be the lowest, Q4 is going to kind of in between.

Michael Hoffman

Okay and 40s for the full year on the recycling based on what about price today is on the margin?

Steve Carn

That's correct, yes. That ton is that we do have reprocessing the recycling is pretty even from quarter-to- quarter. So you don't have the seasonality or the uptick in Q2, Q3 on those -

Michael Hoffman

Okay and then Richard I know safety is something that's at the top of your list every day. Can you talk about what --where you are and improving that and how that is tying back to some of the challenges the industry is having in labor and where are you on your own efforts to improve your retention in labor?

Richard Burke

Yes I mean our tagline forever then service first, safety always. We say its safety as always because it's too important to be ranked. So it's the first and foremost thing on our mind as we lead the company as our local people lead. I mean to that end we're looking at not just training up front, getting people through the door, getting them trained up in order to drive the truck, but then what technology can we use in the cab. We were an early adopter of Drive cam 2007. We began putting them in the truck so we've had the camera systems in the truck to monitor behavior and see if we can change habits before they become accidents and injuries. We've been upgrading that technology over time. We'll continue to drive that through the organization where we can take more proactive steps. I mean TRIR and dot rates are fine, but they're lagging indicators that mean you could hit something or somebody's hurt. So we look more at leading indicators we call it snapshot scores where we can do an audit of a site, and audit of a driver and get a score and then that's before an incident occurs. So more on the behavior side. How do we change behaviors? How do we set our shops up using lean principles, where there are less trips, slips trips and falls? So there's no one magic bullet about safety. It really drives from culture of the organization, what leadership makes a priority and we drive it through. It's certainly code to the business but it's also one of our passions, and yes we as an industry and we as a company certainly need to get better. I mean one of our goals here is everybody goes home safe every day. So that's what we're driving, Michael.

Michael Hoffman

And can you frame that trend? What's with - so how do you measure progress here? I mean where are we today versus a year ago or sequentially?

Richard Burke

So our year-over-year improvement on or some of our measure - measurements that we use internally averaged about a 10% improvement. So that's good, that's good. We were pleased but not satisfied with 10 %. So we'll continue to look at things like TRIR dot in our internal. We measure something called the coaching effectiveness, so on our drive cam if we see a driver have a bad behavior then that triggers down to the supervisors cell phone or iPad a video of that event right. So then that supervisor coaches that driver, meets with the driver and says, hey, we got to you better here, boom, boom, what can we do to help you? If that driver does not have that same event for six months then that would be a 100% score. If they have it once then they'd be a 75% and on down from there. So we measure coaching effectiveness by each of our work-- by each of our locations on our existing drivers. Again try to change behaviors right, and we've seen year-over-year somewhere between a 5% to 10% improvement on that. To me that's one of the big indicators I look at because as I said it's a leading indicator, and we like those a lot more than a lag.

Michael Hoffman

Okay. And then in the context of labor retention and I think there was a correlation between safety behavior and labor retention, and it's a challenge in the industry, it's having an impact on your internal costs of inflation. How's that trend tracking for you?

Richard Burke

So as labor is difficult I mean the beauty of 4% unemployment is it really helps on the revenue side and on the volume side, but down - the downside of 4% unemployment is I would venture to say that drivers and mechanics are less than four especially the really good ones. So we're doing everything we can think of in order to recruit, hire and retain our existing drivers, referral bonuses what-have-you that were out there working towards in order to keep all of the seats filled with safe conscientious drivers. We're seeing some progress but it's slow and we'd like to see it go faster. We still average turnover in the 20s. We'd like to get that to the teens. If we keep somebody past three years then turnover becomes a very, very small number. It's really the first six months and then the period between six months and three years where we have to really focus our efforts.

Michael Hoffman

And then lastly, Steve, you mentioned churn one would be at 11% I would be curious how that compares but Richard you often talk about defection, so I'd like to sort of balance the two of those together and sort of what's the underlying churn versus defection within the customer base?

Steve Carn

Yes. So churn is revenue gained versus revenue loss and a lot of it has to do at what entry point are you selling it versus what you're losing it after customers been price increased five eight years. So you're always going to have some of that natural churn in that area. It's come down for us but I was just giving it a range of where we've seen it historically in a normal period in that 8% to 11%. What we did see in is 2017 actually adding more customers than we're losing. So defection for us when we're talking about number of customers on a year-over-year basis. And so we've seen finally that start to turn positive kind of metric for us.

Operator

Your next question comes from the line of Hamzah Mazari with Macquarie Capital. Please go ahead. Your line is open.

Hamzah Mazari

Good morning, thank you. The first question is just on how you're thinking about M&A as well as in conjunction with that balancing your leverage? And what I mean by that is last year you spent and correct me if I'm wrong, $112 million on deals. There were some chunky deals, at the same time the entire sectors doing record M&A but you guys are sort of guiding down M&A relative to last year. You did five tuck-in deals which are small. How should we think about the disconnect there? Is it just timing? Is it you're more concerned about keeping leverage where it is? Or just any thoughts on that/

Richard Burke

Yes. It's a good question, Hamzah. So look our bread-and-butter is always going to be the tuck-in acquisition secondary market where we get the raw density, where we pick up, where we also are able to internalize the disposal. So the first quarter that's what you saw. You saw five small M&A that enhanced us in existing markets. And we have a good pipeline of those and we think we'll run them up. We guided to the street earlier this year that we would spend $30 million to $50 million in acquisitions. I think that's what we'll spend $30 million to $50 million in acquisitions. But we'll be opportunistic around the bigger deals. We will also be disciplined around pricing of some of these bigger deals. At the end of the day for us when we have our free cash flow, we look at it and say, do we have a deal that's accretive to leverage? If we don't have a deal that's an accretive to leverage or we believe can get there over a relatively short period of time, then we're going to pay down turn B right. We're going to drive, we're going to drive --we're going to drive leverage down. But I don't think you can look at them independent. I think you have to look at them together and say, is this deal going to be accretive in the near term or in the long term? What's the evaluation play on that? And then how does that fit in the leverage calculation? So I don't think you can look at them independent. I think you have to look at it together.

Hamzah Mazari

Got it, that's helpful. And then just on free cash flow conversion. We realize CapEx is high because of where you are in your evolution on the landfill build-out, but and so just any color as to when that CapEx falls. Is it 2020? And then in relation to that free cash flow conversion is there any room on working capital as well going forward to become sort of a source of cash? I know in Q1 it was okay.

Steve Carn

Yes, Hamzah on the CapEx I think we provided a range in that 10 to 12. I think in the near term 18 -24 months maybe a little bit beyond that will be in that 11 to 12. So we'll be on the upper end just based on the lifecycle where we have some of our landfills and putting that infrastructure into place. And that 1% or 2% infrastructure where we're spending probably more compared to our peers just because of our young life landfills. And then with regards to networking capital will continue to make improvements. We actually had some improvement in Q1 year-over-year. We added increased DPO about three days. We had a slight headwind on DSO and it was around some enhancements we made to our invoice. And so our billing for advanced billing got out a little bit later in the quarter, but we'll catch that up in Q2. So we think there's a little bit more that will drive from networking capital this year, continued increase in DPO, and continuing to drive down DSO.

Hamzah Mazari

Great and just last question and I'll turn it over. How you can think about your regi, muni contract pipeline? I know you mentioned a large contract last year just what does the bidding pipeline look like there? Thank you.

Richard Burke

Yes. Hamzah, good question. A strong - everybody tries to retain what they have by and large, but we have a good pipeline of opportunities second half of the year, and will continue to be opportunistic and somewhat aggressive on those where we see them as a disposal neutral opportunity to have a new platform to grow from, like we did last year with pulp. We'll look at that and then also we'll prioritize the municipal contracts that are within a certain radius around an existing landfill that we don't have. That we might be able to drive that volume into our existing into sites. So municipal contract pipeline is strong, it should be a good year on that front great.

Operator

Your next question comes from the line of Debbie Jones with Deutsche Bank. Please go ahead. Your line is now open.

Kyle White

Hi, it's actually Kyle White filling in for Debbie. Good morning, Richard, Steve, Matt and congrats on the start of the year. My first question is kind of broad I appreciate you don't guide quarterly but I'm kind of curious how you perform relative to your internal expectations this quarter? Maybe what was better than you thought sounds like maybe residential volumes is one or maybe as broad-based. And then are you seeing this momentum carry into Q2 in April and May here?

Steve Carn

I think we settled in right where we thought we were going to be. For us looking at the quarter from a guidance both around price, volume and margin and EBITDA achievement. So it's really difficult to predict kind of the ramp on seasonality in Q2, Q3 and then the more wild part will be how much of that tough comp in Q3 of 2017 where we saw 29% increase in special ways. What that pipeline looks like? And we won't know till we get closer and further into Q2 and Q3.

Richard Burke

But the micro fundamentals of the --business are strong. Let me go back and look at GDP rising, go back and look at housing starts, look like they're running to 13 from 12 and medians 1,4,5, 50 so we're still not at median over the last 10 years. It feels like there's still plenty of room here, Kyle, for the industry as a whole to run.

Steve Carn

So if you think about what we talked about long term on price, so we've got an average yield of 19 with line of 24. When we talk about organic price we talk about that 2% to 3% than where CPI is. Volume in that 1% to 2% and then deals 1% to 2%. So we feel good about the underlying waste fundamentals that we've seen, in the volumes that we saw in Q1 on a year-over-year basis. It remembering that we saw a little bit of pull forward in 2017 of volumes from Q2 and Q1 but we're still show up increase volumes on a year-over-year basis.

Kyle White

That's helpful. And then I know you maintain the average yield target for the year. I may have missed this but was there any change to the organic volume growth target of 40 basis to 100 basis point improvement for the year?

Steve Carn

No because I think with - we have pretty tough comps in that Q2, Q3. It's going to be pretty tough to overcome that Q3 volume that we saw.

Kyle White

Okay and then just a quick modeling, on the new revenue recognition standard in terms of the land sale tax. Does that mean we have to take out some transfer and disposal as well as franchise fee operating cost there that comes out of?

Steve Carn

Yes. It comes out of $1.2 million we gave out of the transference disposal when landfill taxes, the additional piece that we gave, today on the 25 that's going to come out of the franchise fees and tax line on it. And it really is - you think about it like a sales tax. You don't include that in revenue, shows up on your balance sheet, all we do is go - all we do is bill collect and remit to the state, it's faster.

Operator

And your last question comes from the line of Michael Feniger with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Michael Feniger

Hey, guys. Thanks for squeezing me and I appreciate it. Good morning. So you might have already addressed this but can you remind me what the Moody upgrade actually means? Are we waiting for other rating industries to upgrade as well? Are there further catalysts or future catalyst we should be on the lookout for regarding that your debt structure and leverage?

Steve Carn

I think there's certainly we believe there's room in our ratings for improvement. And I think as we continue to de-lever the company and we continue to provide that and we achieve that quarterly. I think eventually there'll be room for us to push the agencies that were well within the rating, and we're actually better than the rating we have. And we will continue to drive that through improving the balance sheet through de-leveraging, and increasing EBITDA.

Michael Feniger

Okay, yes, that makes sense. And then on I mean you guys are talking about how - obviously you're talking about fundamentals are good. We saw it with the organic growth in Q1. Did trends actually accelerate in April to give you guys more confidence? And then in the back half, obviously, special waste you have some tough comps that - you guys have any idea now of the pipeline or is it just too early to say?

Steve Carn

It's too early probably to think about the pipeline in Q3. Sometimes it's is within that 60-90 days. We have more visibility to that special waste pipeline. So where it looks now we feel good about that pipeline, but we have two significant jobs in Q3. One the O'Hara runway project and some additional dredging on the Fox River. They were unique to the Midwest.

Michael Feniger

Okay in April have you guys seen any type of a change in trend at all?

Richard Burke

April, I think you had one more nor'easter in April right. So a little early, stay tuned, see you in August. I'll talk about April, call again, sorry Michael.

Michael Feniger

It's okay. I totally understand. Just one last question obviously it feels that we are going into more inflationary environment that's you guys address how it's positive for the CPI contracts. Can you tack on - can you address what higher rates do on your debt structure just like help us frame the puts and takes there?

Steve Carn

Yes, well, we did a refinance so we saved another 50 basis points also. We're in LIBOR 225 as far as our floating rate debt. How we manage that Michael is through some derivatives and caps. So we have $800 million of caps that run through September of 2019. And then in late December of 2017 we put on another $600 million of caps that run through October of 2021. And so that helps us mitigate the risk of rising rates. And then if you look at the quarter, we were $22.5 million of cash interest expense in 2017, we were $23 million in 2018. So we'll continue to try to get efficient. Two ways of doing it. We've added derivatives and then de-leveraging the business we also offset the headwinds around rising interest rates. So we're focused and committed and getting to our range of 3.25 to 4.25 with that sweet spot up 3.5 kind of time levered.

Operator

And there are no further questions. I would now like to turn it back to Richard Burke, CEO for closing remarks.

Richard Burke

Thank you. We're making great progress as an organization. And we're optimistic about what the future holds as we work to deliver on the promises we've made to our shareholders. By focusing on market selection, profitable organic growth, accretive acquisitions, pricing discipline, managing controllable costs and being disciplined with our capital investments, we expect to continue to drive ever improving free cash flow. I'd like to thank the Advance Disposal team for their hard work and dedication as we all strive to lead but live out our mission of everyday driven to deliver service for safety always. Everybody be safe. Thanks for joining us on the call.

Operator

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