Waste Management, Inc. (WM) Q4 2011 Earnings Report, Transcript and Summary

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and year-end 2011 earnings release conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Ed Egl, Director, Investor Relations. Please go ahead, sir.

Thank you, Regina. Good morning, everyone, and thank you for joining us for our fourth quarter 2011 earnings conference call. With me this morning are David Steiner, Chief Executive Officer; and Steve Preston, Executive Vice President of Finance, Recycling and Energy Services. David will start things off with a summary of the financial results for the quarter and an overview of our plans for 2012. Dave will cover our revenue growth, including price and volume trends, operating costs and the financial statements. We will conclude with questions and answers. During their statements, any comparisons made by David and Steve, unless otherwise stated, will be with the fourth quarter of 2010. Before we get started, let me remind you that in addition to our earnings press release that was issued this morning, we have filed a Form 8-K that includes the earnings press release as Exhibit 99.1 and is available on our website at www.wm.com. The Form 8-K, the press release and the schedule for the release include important information that you should refer to. During the call, you will hear certain forward-looking statements based on current expectations, projections, estimates, opinions or beliefs about future periods. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of those risks and uncertainties are detailed in our earnings press release this morning and in our filings with the Securities and Exchange Commission, including our most recent Form 10-K. Additionally during the call, David and Steve will discuss our results on an as-adjusted basis including revenue; net income; earnings per fully diluted share, which they may refer to as EPS; operating expenses; SG&A expenses; expenses as a percent of revenue and free cash flow. These measures of financial results have been adjusted to exclude the Oakleaf operations acquired during 2011 and items management believes do not reflect our fundamental business performance or are not indicative of our results of operations. All of these measures are non-GAAP measures. The company's projected 2012 earnings per diluted share are also anticipated to be adjusted for items that are not currently determinable. Please refer to the Form 8-K and the earnings press release footnote and schedule attached thereto which can be found on the company's website at www.wm.com for reconciliation to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern Time today until 5 p.m. Eastern Time on 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 38143289. Time-sensitive information provided during today's call, which is occurring on February 16, 2012, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management CEO, David Steiner.

Thanks, Ed. Good morning from Houston. Looking back at the full year, 2011 was a year of continued investment in our future and a growing conviction that we're on the right track in transforming our company for continued leadership in an evolving industry. We produced strong free cash flow in 2011 despite volumes being below our original expectations, which enabled us to invest in our future and position the company to accelerate our earnings as volumes improve. 2011 had a number of other positives. We invested in programs to drive costs out of our system. Those programs took hold throughout 2011 and we'll supplement them with new programs in 2012. We saw volumes improve throughout the year, and we expect to see continued improvement in 2012. Recycling prices were strong through the first 3 quarters of 2011. We added a number of recycling assets during the year and expect to add more in 2012, which will contribute to our continued growth in this strategic area. And finally, we supplemented our national accounts approach through our strategic acquisition of Oakleaf. That will provide us a new platform to service national accounts while strengthening the Oakleaf vendor network. Now turning to the recent quarter, we had a very solid fourth quarter. We earned $0.63 per share, an increase of 5% compared to the $0.60 we earned in the prior year quarter. Our collection, landfill and transfer station businesses performed well during the quarter and had their best income from operations margin since 2006. In the fourth quarter, our total revenue growth from yield for our commercial and industrial lines of business recovered to the highs that we experienced in the first quarter of 2011. And our commercial new business pricing was at the highest level since 2010. Despite a very competitive market, our fourth quarter results reflect our continued commitment to yield management. On the volume side, we've seen positive signs as each of our collection and MSW landfill lines of business have improved sequentially for 3 consecutive quarters. We continue to benefit from strong growth in special waste and recycling commodity volumes. Finally, during 2011, we continued to produce strong cash flows and returned cash to our shareholders. For the full year, our net cash provided by operating activities was $2.5 billion. We had over $1.2 billion of free cash flow, and we returned $1.2 billion to our shareholders through dividends and share buybacks. We also spent $867 million on acquisitions in 2011, about half of that was on our Oakleaf acquisition and the remainder primarily on recycling assets and tuck-in collection operations. Turning to 2012. We continue to see competitive pricing on new residential municipal contracts and in the commercial line of business. Nevertheless, we'll continue our disciplined approach to yield management. In the first half of 2012, yield will be negatively affected by the effect of our waste-to-energy business on our yield and some rollbacks we implemented to extend municipal contracts. But we expect yield to pick up in the back half of the year as many of the contract issues anniversary, our second half municipal contracts CPI adjustments take effect and we maintain our focus on our core yields programs. So overall, we expect yield to average 1% to 1.5% for the year. We expect the full year 2012 internal revenue growth from volumes to be flat to slightly positive compared with 2011. In the first few weeks of 2012, we've seen a mild winter, but until we see the seasonal uptick in volumes and positive volumes in MSW and commercial yards, we're hesitant to say that margins will improve substantially in 2012. During the fourth quarter, recycling commodity prices declined approximately 8%. For 2012, we expect recycling commodity sales prices to be below the 2011 average by about $15 to $20 per ton. Even at these lower levels, prices are still above the 5-year average, and we will continue to invest in recycling assets to better meet our customers' increasing recycling needs. And lower recycling commodity prices should have a negative year-over-year impact on earnings per share of approximately $0.03 to $0.05, most of which will occur in the first half of the year. Also on the commodity front, electricity prices have remained stubbornly low. This will certainly have a negative impact on 2012 income from operations at our waste-to-energy plants. We also have substantial rollbacks on tip fees in our South Florida waste-to-energy business. At one of our plants, below our tip fee went into effect last August. And at the other plant, it starts early this year. In all, we expect the year-over-year impact on diluted earnings per share from our waste-to-energy operations to be negative $0.04 to negative $0.06 per share. Again, virtually all in the first half of the year. Our long-standing business model is to use yield and cost savings programs to offset inflation in our cost base in order to drive margin expansion. And when volumes turn positive, we get great leverage off of our high fixed cost base. In the first quarter of 2012, yield will be muted and we'll reinvest some of our cost savings into our routing and logistics initiatives. On top of that, the first quarter is our seasonally slowest volume quarter, so it will be very difficult for us to overcome the $0.05 to $0.06 of headwinds that we've mentioned for the first quarter. But in the second quarter, we'll see our seasonal uptick in volumes and earnings should improve. Then in the third and fourth quarters, we expect the headwinds to abate, yield to pick up, and we should get strong earnings benefits from our Oakleaf integration, our cost programs and improving volumes. The combination of all those positive trends in the second half of the year should drive substantial growth in earnings and margin expansion and allow us to achieve our 2012 targets. We expect to achieve our second half and full year earnings growth by remaining focused on our 3 key long-term strategies, namely, knowing our customers better, which will lead to higher sales and retention; investing in recycling and other diversion assets to extract more value from the waste stream; and investing in programs to increase our operational efficiency. On the customer front, we remain committed to increasing revenue by providing customized and unique solutions for our customers. For example with municipalities, we can offer a very impressive array of additional services. We can offer single-stream recycling, CNG trucks, Bagster, At Your Door household hazardous waste removal and recycling rewards through our new relationship with Recyclebank. Another example of our customer focus is our Oakleaf acquisition, which has accelerated our penetration into the retail and restaurant segments. With respect to diversion assets, in 2011 we increased our emphasis on recycling and also made some small investments in organic's processing assets. And we continue to make small investments in new technologies. We expect that some of these new technology companies will reach the public market in 2012 and 2013. And we will continue to look for ways to maximize our return on those investments. Finally, in 2011 we focused on reducing costs through better supply chain management. We achieved savings in our procurement of third-party transportation, travel expenses and telecommunication costs. In 2012, we expect these savings to accelerate, and we expect to generate additional cost reductions. For instance, we will continue to improve the delivery of our services in the field through more efficient routes, reduced unproductive time and better customer support with greater use of onboard computing technology and reengineering field processes. In summary, 2011 was a tough year, but we finished it on a positive note with strong fourth quarter results that we will build upon going into 2012. In 2012, the first half of the year will be harder than the second half of the year, but we expect the back half of the year to provide solid earnings growth that will position the company well for continued earnings growth. Our employees are focused on continuing the progress that we've made on our strategy, and in 2012 we expect once again to accomplish our goals of growing our revenue, increasing our return on invested capital and returning cash to our shareholders. And with that, I'll now turn the call over to Steve to discuss our fourth quarter results and our 2012 outlook in more detail.

Thank you, David. I'd like to review the contributions from yield and volume in the various lines of business to give you a better sense of trending going into this year, and then I'll get into the drivers in some of the key expense and cash flow lines. Revenue for the fourth quarter, excluding Oakleaf's, increased $94 million or 2.3% from the prior period. This is the eighth consecutive quarter of year-over-year revenue growth. Our revenue improvement was driven by year-over-year increases in both field and acquisitions, and we also began to see improving volume trends in many areas of business. Internal revenue growth from yield on our collection and disposal operations was 1.4% in the quarter and 1.8% for the full year. A change in pricing at one of our waste-to-energy plants in South Florida reduced fourth quarter yield by 30 basis points and the full year by 20 basis points. So without this adjustment in South Florida, the yield for the year would have actually been 2.0%. The combined internal revenue growth from yield in our collection business was 2.6% in the fourth quarter, with 4.1% growth in commercial, 2.8% growth in industrial and 0.5% growth in residential. In the landfill line of business, internal revenue growth from yield was positive in both the MSW and C&D segments. That improvement was, however, offset by lower yield in special waste business, which is highly variable based on the nature and the geography of the jobs. The biggest drivers of the special waste decline were increased volume for soil and sludge jobs and an increase in lower price direct landfill jobs at our subtitle sea landfills. But in total, special waste was actually a good story because the overall business grew nicely in the quarter. As in the past, we will remain our commitment to yield improvement in 2012. Our 2012 first half comparisons will be negatively affected by the rate reductions we accepted when we renewed our South Florida waste-to-energy contracts as well as major residential contracts. In the second half, pricing in most of these contracts will be comparable to the prior year, and we should begin to see CPI price increases in a large number of residential franchises. So our yield in the second half should benefit from more favorable comparisons. On the volume side of the business, internal revenue growth from volume declined 0.6% in the quarter, which is actually encouraging since it's the smallest decline we've seen since before 2008. In fact, internal growth in our landfill and transfer station businesses is the best result we've seen since before 2008. And in the collection line of business, it's the best result since the third quarter of 2010. More specifically, internal growth from collection volumes declined 3.8% in commercial, 2.2% in industrial and 1.3% in residential for the fourth quarter. These collection volume declines were nearly offset by the landfill side of the business where fourth quarter 2011 internal growth was positive 4.9%, which is the best quarterly performance we've seen in many years. While MSW internal growth from volume was negative 2.8%, it's a marked improvement from the negative 5.5% we saw in the third quarter of 2011 and the smallest decline since early 2010. C&D was slightly positive at 0.9%, and special waste was positive at 12.9%. In addition, recycling improved 2% internally in the quarter and 9.1%, including acquisitions. Income from operations in the collection line of business improved 3.5% in the fourth quarter when compared to the same quarter of last year, while operating margins increased 20 basis points. We again increased our income from operations despite lower volumes by flexing our costs and maintaining our yield discipline. The landfill business improved 4.6% when compared to the fourth quarter of 2010. And in both cases, these are the best operating margins we've seen in these business lines since 2006. Operating costs increased by $70 million in the fourth quarter to 62% of revenue compared to 61.2% in the fourth quarter of 2010. The increase primarily consists of direct fuel costs of $30 million, recycling rebates of $13 million and acquisitions at $26 million. As you know, all of these items have offsets in the revenue line as well. SG&A costs were $367 million in the fourth quarter, flat when compared to the fourth quarter of 2010. So as a percentage of revenue, SG&A costs improved 20 basis points to 11.3%. In the fourth quarter, higher wages and associated benefits were offset by savings related to lower professional fees and lower travel and entertainment costs. We expect full year 2012 SG&A costs to remain flat as a percentage of revenue. At year end, our weighted average cost to debt was 5.4%, and our total debt-to-capital ratio for the quarter was 60.4%, which is consistent with our target ratio of about 60%. And the floating rate portion of debt in our total debt portfolio was 18% at the end of the quarter. Our income tax rate as reported in the fourth quarter was 32.5%. That reduction in our fourth quarter rate is primarily due to audit settlements as well as tax credits. Turning now to cash flow. Fourth quarter 2011 net cash flow provided by operating activities was $732 million. This is an increase of $110 million from the fourth quarter of 2010 or 17.7%. And the increase is primarily related to improvements in working capital. Our capital expenditures in the fourth quarter were $415 million and our free cash flow for the quarter was $331 million. So for the full year of 2011, free cash flow was over $1.2 billion after capital expenditures of approximately $1.3 billion and excluding the impact of litigation loss of $27 million. In the fourth quarter, we also paid $156 million of dividends, and we repurchased $47 million of our common stock. So for the full year 2011, we paid $637 million of dividends, and we repurchased 575 million of our common stock, returning over $1.2 billion to shareholders. Our 2012 capital allocation plan allows us, again, to return up to $1.2 billion to our shareholders through a combination of dividends and share repurchases. Our Board has indicated an increase in our dividend of 4.4% to $1.42 per share on an annual basis, resulting in a dividend yield of approximately 4.1%. This is the ninth consecutive year of increasing dividends. The dividend has grown from $0.01 a share in 2003 to $1.42 in 2012. So for 2012, the anticipated dividend equates to $665 million being returned to shareholders. The Board has also authorized up to $500 million in share repurchases. As always, the amount of share repurchases will depend on a number of items including changes from expected levels of capital expenditures, business acquisitions and investments and debt repayments. We expect between $150 million and $200 million, $250 million in business acquisitions and investments, and we expect capital expenditures of approximately $1.4 billion. Free cash flow in 2002 (sic) [2012] is expected to be between $1.1 billion and $1.2 billion and that includes a negative impact from bonus depreciation of approximately $200 million as compared to the 2011 cash taxes. David also mentioned the impact in the first half of the year from commodity prices and from our waste-to-energy operations which should improve in the second half of 2012. At the same time, many of the drivers that will improve results in 2012 are more heavily weighted to the back half. The benefits from the Oakleaf integration will be negligible in the first half of the year, but are expected to accelerate in the second half as we complete the consolidation of our national account operations and we complete negotiations with our vendor hauler network to increase their use of our disposal facilities as well as our other services. In addition, the benefit from our operational improvement programs will increase throughout the year. We've already begun to see the savings from our procurement programs, which we will use in part to fund 2 other initiatives we've discussed with you in the past, first driving efficiencies through routing technologies and not anymore computers and as well as streamlining our back office operations. The field efficiency programs are already in 4 areas. We'll continue to roll those out over the next 2 years. And the back office programs are in development and they will begin to roll out in 2013. So when you put it all together, we expect 2012 will be a year of solid earnings growth and continuing strength in cash flows, and we estimate that our 2012 fully diluted earnings per share will be between $2.22 and $2.30 a share. So with that, Regina, we'd like to open the line for questions.

[Operator Instructions] Your first question comes from the line of Scott Levine with JPMorgan. Scott J. Levine - JP Morgan Chase & Co, Research Division: So with regard to your comments on price, the guidance implies relative stability in 2012 versus what you reported in the fourth quarter. I was wondering if you could comment on what kinds of trends you saw as the quarter played out. And then I think, David, you mentioned commercial in addition to the municipal business. I'm not sure whether there was any noteworthy development in that area, whether there was any additional color from a regional perspective, just looking for additional thoughts on price trend.

Yes, Scott, it's interesting when you look at 2012, and you're right, we mentioned both municipal and commercial, and the commercial business has always been highly competitive. It always will be highly competitive. And so you sort of see swings up and down. Would I expect 2012 to be a year where we get great price increases like we got in 2011? Yes, we're going to put those price increases out on the street. The issue that we had in 2011 I expect to continue through 2012 is rollbacks on the commercial side of business. And so from a competitive point of view, what you're seeing is more and more pressure requiring rollbacks and then you're also seeing a lot of companies that are offering new business without fees and surcharges. And so that's been the case forever. I'm sure it will be the case forever, and that's just what we have to deal with. We've got to do a better job of making sure that we don't roll back those price increases, because we'll continue to be aggressive, but we're just rolling them back too much. And then on the municipal side, you are seeing a little bit different pricing environment. It certainly -- those are big contracts, and so it's certainly become more aggressive. You've got municipalities that are facing budget shortfalls, so they've become more aggressive. And so when I look at 2012, the reason we will be, like you say, sort of flat to 2011 is that we've got to do a better job of the price rollbacks, and we're going to see deterioration in the municipal contracts not just because it's competitive but as you know, we've got that situation in South Florida with our Broward plant that all-in is going to have, as I recall, around a $20 million effect in 2012. Scott J. Levine - JP Morgan Chase & Co, Research Division: Got it. And maybe turning to Oakleaf. So if I interpreted Steven's comments correctly, net neutral to earnings year-over-year in the first half and then positive in the second half, I'm assuming your guidance includes Oakleaf, because I know you excluded that from your operating number in '11, is that correct?

Yes, that's right. When you look at Oakleaf throughout the year, there are 2 really primary pieces to that improvement. First of all, it's the consolidation of the operations for our national accounts. And that is happening really beginning in the first quarter coming in ratably through the year. The other piece really is important to the whole strategy that integration, which is making sure that we work with our vendors to optimize this relationships longer-term, both in terms of having a solid network in place and in terms of the financial benefit we get with those. So our teams are out there right night now negotiating arrangements which will begin ticking in really now through the second quarter going into the third quarter as we begin to drive more volumes to our disposal facilities and broaden our relationships with those vendors. Scott J. Levine - JP Morgan Chase & Co, Research Division: Got it. One last one, if I may. Looks like the earnings sensitivity on the waste-to-energy side is as large as it is on the recycling side. Do you have a rule of thumb you can provide on EPS sensitivity to fluctuations on electricity pricing? A part of this is the Florida situation. Is there an EPS sensitivity that we can use for waste-to-energy like we have with recycling or like you've given?

I think when you look at the Wheelabrator impact, it more -- it feels more heavily with specific contract situations where we went from a fixed price arrangement to market price or a change in the tipping fees. Whereas there is some sensitivity, obviously to electricity prices, we're already at a very low level for electricity prices. As you know, those are tied to natural gas. So we actually would expect to see less downside volatility on the electricity prices. And hopefully none of us are expecting upside, we're not projecting that, but we're expecting that really pretty much to be flat this year. So it's both a smaller item. It's a lesser driver of the impact that we saw in Wheelabrator this year and we think that they are at relatively sustainable low levels right now.

Your next question comes from the line of Bill Fisher with Raymond James. William H. Fisher - Raymond James & Associates, Inc., Research Division: I had just a couple of questions related to recycling on price environment, really on the outlook for '12. I think you mentioned you expected the commodity price to be down $15 to $20 and, Dave, what would that be roughly beyond a percentage basis? And then kind of related to that, you're obviously growing recycling volumes very strongly, I think up 9%. With the acquisitions you did, could that number be up double digits in '12? I'm just wanted to get some color on that.

Yes, I think the $15 to $20 equates more sort of like to the 10% to 15% range on the commodity side. We do expect to see continuing growth in volumes. Some of those acquisitions will layer in positively in 2012 as well. William H. Fisher - Raymond James & Associates, Inc., Research Division: Okay. I mean, could that be similar types of growth rates as you've seen in Q4? Does that kind of taper off?

I think we should see similar growth rates but we also did a few acquisitions in the fourth quarter, so you should see more volumes. Now the interesting thing about those acquisitions is that the first probably 3 to 6 months, you don't get a lot of earnings out of those deals. And so we'll see higher volumes throughout 2012. Obviously, we'll see the earnings impact in the back half of the year from the new plant.

Your next question comes from the line of Michael Hoffman with Wunderlich Securities.

One of the questions I have on volume in the guidance, container weights in the commercial business, are you seeing a trend where your starting approach is 0 which suggests that after 3 years of economic recovery, the consumers kind of found their behavior, and so container weights should stabilize and therefore, third-party volume come in hue [ph] with commercial, that's a positive?

Yes. It's interesting you asked that, Michael, because it's always one of the areas that I look each quarter. And surprisingly to me this quarter, we saw container weights across the company actually positive, and we saw them positive throughout each of the 4 geographic groups save one small area in the south. So seeing the container weights come back certainly is good news. But like we said, we've been saying now for a couple of years, we don't want to call a volume turn until we see sort of those core volumes, like you say commercial volumes in MSW turned. Right now a lot of our good volume numbers are being driven by special waste. And as you know, those can be cyclical as far as being event work. And so until we see that commercial business turn positive and we see the MSW turn positive, we don't want to call a turn in volumes, but it certainly was an encouraging sign to see container weights up in the quarter.

Okay, and I get that. So segueing into the special waste, do you have a sense of a pipeline of activity coming into that year that you can sort of frame -- you had some double-digit volume changes in '11. How do you think about those volume changes in light of your guidance in '12? What are we thinking about there?

Yes, I think we'll continue see strong volumes in special waste. As you know, the visibility on that is probably sort of the 3- to 6-month time frame, so it is hard to say anything long-term. But the jobs that we see coming into the first quarter, particularly because we've had good weather so far for most of the first quarter, the special waste continues to be strong.

Okay. And then you produced about 8.5% of revenues and free cash today. What's its take, one, can you be a 10% free cash generator and if so, when do we see that? What happens in the model if this is the economy to live in by way, the economy isn't any different than it is right now, how do you get to be a 10% free cash generator?

Yes, Michael, if the economy stays the way it is right now, first off, obviously, we have to drive additional cash generation. And that's why we're investing in our cost programs, right? We're also got to continue to get good yield and that's going to drive cash generation. But then we've also got some fairly large numbers on CapEx. It will be at $1.4 billion again this year. And that's driven by the investment in fleet which, as you know, we underinvested in fleet with the regulatory changes for engines in 2007 and 2009, so we've got a little bit of catch-up to do there. And then we've got investments that we need to make in the growth areas, particularly recycling and other diversion assets. And so while we're doing that, the CapEx is a little bit higher. Now we're not going to build out recycling assets forever. At some point in time, we're going to be done. We're not going to be -- there may be some new other types of diversions that we invest in the future, but we'll worry about those in the future. And so the 3 things that drive it are getting our cost programs in our yield to drive more cash generation and then ultimately having a lower CapEx after we've built up our fleet and spend the money for the diversion assets we need to spend.

And when would you think the CapEx slows?

Well, we were roughly $1.3 billion last year. We're saying $1.4 billion this year. I certainly would expect that type of run rate, sort of $1.3 billion to $1.4 billion for the next 2 years.

Okay. And then lastly on your guidance, the bonus depreciation impact is assuming 50% or are you assuming that the President gets what he wants and it goes back to $100 million?

No. If goes back to $100 million, we'd cut that impact in half. So we think the impact will be about $100 million rather than the $200 million.

Okay. So there's a swing of $100 million in your free cash potential or is that 1 1 to 1 2?

If there is a potential positive of $100 million over and above the guidance we gave, if the 100% bonus depreciation passes.

Frankly, Michael, if we get that additional $100 million in cash, we will likely invest it into the fleet to the last question to get there a little bit faster. And for us, investing in the fleet right now is a great thing because we can buy C&G trucks which, as you know, have a great return, great payback and obviously, are better for our customers.

How big of a deal is that new engine that Cummins is coming out with in '13?

Boy, Michael, you're going to talk to us about engines? I'm not going to -- I don't want to comment on any particular company's technology. Obviously, we're working with all of our vendors to make sure that we can get not only a more environmentally friendly truck, but a more efficient truck from a weight point of view, from a productivity point of view.

Okay. I was just curious if you thought it was a big -- it sounded big enough to wait for it, is what I'm hearing. Is it just keep buying and when it comes, if that's the right engine, you'll buy that one too.

We're certainly going to keep buying.

Your next question comes from line of Vance Edelson with Morgan Stanley.

Could you comment specifically on the outlook for landfill pricing which is, perhaps, where you have the most control? Is this still one area where you can really put a stake in the ground and provide a target for the year in terms of pricing?

Yes. Vance, I'm glad you mentioned that because as you all know, landfill pricing has sort of been my quest for the last 3 years. And we actually just recently brought in -- actually, we will bring in Monday, so we haven't brought in, will bring in Monday a new gentlemen to run our pricing department, and it's going to be one of the first things that I sit down with him to discuss is how do we get more traction at the landfill? In the fourth quarter, when you look at it from a per unit basis, our MSW was up about 3.2% in yield. I think everybody's heard me say over the last few years that with the huge amount of capital that we have to put into landfills, we've got to get better pricing. And so I don't want to put a number around it quite yet because our new pricing director doesn't start until Monday, but you can bet that's going to be one of the first things that I sit down and talk with him about.

Okay. That's good to hear. And could you also provide an update on some of the JVs, whichever ones are worth mentioning, if it's Home Depot or Whole Foods, how are the initiatives coming along? Are they profitable? Will they be soon?

You mean JVs in terms of what?

So in other words, the Bagster and other stuff like that with Home Depot to get...

Yes, yes, yes. Bagster, we continue to see good growth in bags. I mean, obviously, this is the seasonal downturn for that because folks aren't doing a lot of home improvement projects during the winter months. But it's right on course where we wanted to be and it's a great product addition. I will tell you the other initiatives, the primary one they will look at is healthcare services and that's not going as fast as we'd like it to go, but I think 2012 is going to be a year where we really start to see the offering gain some traction, and we're certainly going to be very aggressive in going out and attracting that healthcare business.

Okay, great. Just one last question for me. I think on pricing gates, you had some in place for 2011. Are those lifted for 2012?

To the yield gate?

Yes.

Yes. Yes, we actually lifted the yield gate last year and had yield as part of our overall compensation program. And this year, we've actually moved yield out of our compensation program. So we're going to get it through good old-fashioned elbow grease.

Your next question comes from the line of Corey Greendale with First Analysis.

This is actually David Warner for Cory. I have a question, just to go back to commodity prices really quick. It looks like you're seeing or you're assuming the largest impact in commodity prices in Q1. I just wanted to get your thinking as to why you wouldn't see similar impacts in Q2 and Q3?

Yes, I think we're going to see commodity prices for the first half of the year continue. So you're right, we see the impact in Q1 more clearly because we're in the middle of it and we feel it's easier to estimate. We're hoping that we'll see that curve increase seasonally as we get into the year. If you look at the curve last year, prices kind of peaked in March and sort of stayed up at that level and kind of went up and down for a while. And we're expecting a more traditional increase in prices this year. So we think it's going to continue be a headwind. We just think it's going to compress a little bit relative to the curve last year.

Okay. And one more. Just some of your thoughts on Veolia assets and what your acquisition outlook is for 2012.

Yes, when you look at acquisitions for 2012, as Steve said, we're looking sort of $150 million to $250 million in tuck-in acquisitions, recycling assets. That's sort of our typical run rate. We've said before that if we see opportunities, whether it's investment or acquisitions, that we always have the ability to manage our ability to do that through share repurchases, but we don't see any big acquisitions in the pipeline. Obviously there are a few, Veolia being the big one that folks are talking about. I think if there's one thing that our shareholders know about us is that we're going to be disciplined buyers. And I wouldn't see any reason to buy any solid waste company at a higher multiple than where we trade, because there's one company I know we can buy at a good multiple and that's our own. And so if we do get involved in any acquisitions, they will not be at numbers that would be above our own trading multiple.

Your next question comes from the line of Stewart Scharf with Standard & Poor's. Stewart Scharf - S&P Equity Research: Most of my questions have been answered. I was just wondering if you could talk a little bit about the trend rate and just how that's looking relative to last year.

It's a great point, because obviously, that has an effect on not so much on yield, but on overall profitability. And like I said before, we're seeing the rollbacks increase. We saw the churn rate increase a little bit. It was about 10.9% in the quarter, but it's been running slightly above 10% for the year. And so it is another effect that we have going into 2012 from a yield perspective, if you want to look at it that way. But the churn rate is slightly up, but nothing that will deter us from continuing our focus on yield management.

Your next question comes from the line of Al Kaschalk with Wedbush.

Just to the recycling question again, I want to -- can you elaborate on what the mix of the material has changed or is changing or expected to change in '12, given the strong volume, which appears to be more than compensating for some of that price decline that's expected? In other words, are you seeing...

Higher price? The higher price mixed toward aluminum and other materials?

Well, I mean is 60%, 70% of the material fiber-related or is it less than 50%? What's the composition of the recycling material?

For us, it's not the composition of the recycling; it's what you do with the composition of the recycling, right? And so where we've been focused for the last year is when you get 5 returns in, they can be in a lot of different classes. They can range from very low price classes to very high price classes. And so where we've been focused is to sort of, if you will, tweak those recycling assets to move the lower-priced tons into higher-priced tons, right? And that has a marginal impact. I would tell you that in my mind, the mix issue in 2012 won't have a substantial impact. The big impact is going to be driven by volumes and commodity prices. And when you look at that, so you look at volumes year-to-year, they should get better from our new acquisitions but those new acquisitions take about 6 months of start-up mode before they turn profitable. And so you're not getting a lot of first half benefit from the new volumes. You start to get that benefit in the back half of the year both from volume and from price.

It seems like the -- what you laid out in terms of headwinds for '12 that we would be peaking in the headwind in the third quarter as opposed to the first quarter. So I think there's something more there that we're not hearing, but...

No. I think we peaked in the first quarter on the headwinds. It's sort of flat in the second quarter and then it turns better in the third quarter. So it certainly peaks in the first quarter. It's about the same in the second quarter, but obviously, as I mentioned, you've got the seasonal uptick in volumes, which makes up for some of that. And then the headwinds are very slight in the third quarter and then they actually turn slightly positive in the fourth quarter.

You mean from a volume respective right, David, because...

Now, from a -- just from an overall -- the 2 big headwinds are recycling and our waste-to-energy operations. And there's a number of issues that go in that. Obviously, commodity price is the biggest, new recycling, and then there's a number of factors in waste-to-energy. And so each of those factors turn either turn positive or they anniversary. For example, on our waste-to-energy plants where we have that South Florida contract, that anniversaries in August. And so they either become flat in the back half of the year or they turn positive. What we look at on commodity pricing is that they're going to continue to be a little bit below last year in the third quarter, but then they actually turn above last year in the fourth quarter. So again, you got a lot of headwinds in the first quarter, about the same a lot of headwinds in the second quarter, just a slight amount of headwinds in the third quarter and then flat to positive in the fourth quarter. And then combine that with the positive effects of yield in the back half of the year, obviously the uptick in volumes in the back half of the year and the uptick in yield in the back half of the year, and that's where you get the earnings growth in the back half of the year.

Okay. On Oakleaf, prior to your acquisition, you had a pretty big national accounts business. If I was thinking about the integration, it would seem that there would be some charges coming from that business. Is that something we should be anticipating coming down the road here?

Those are really incorporated in the guidance that we gave. So we talked about benefits being the back half of the year and really negligible in the front half of the year. First quarter, we could see some pressure from that, but that's all integrated in there. And actually as we begin taking some of those costs, we already begin recognizing some of the other benefits of the transaction. So we'll probably have a little bit of pressure from it in the first quarter and that will probably go away in the second quarter by the time we get to the back half when we get to seeing net-net bottom line benefits.

So you might see a small restructuring charge in the first half of the year, obviously that we normally exclude from earnings, but it won't be a significant amount of money.

Okay. And then finally, if I may. If I look back over couple of years, right, we have relatively $3.3 billion of, I think, EBITDA give or take a little bit. And debts increased here quite a bit and you're comfortable, it sounds like, with a 60% debt-to-cap ratio, if I heard you right. But yet, EBITDA isn't really growing and free cash flow has been relatively stable. So there's a lot of moving parts in the economy, but what can help to provide some visibility or guidance here to that EBITDA growing relative to where it has been staying flat over the last several years?

Yes, I mean, first on 50% debt to cap, when you talk about stability, there's obviously a lot of positives to that stability even through the economic downturn, we continue to generate that $1.2 billion-plus of free cash. And so that's why we're very comfortable having a little higher debt balances than maybe some other companies that you look at. But as far as the EBITDA goes, it comes back to what I talked about earlier, which is we've absolutely got to drive EBITDA through continued focus on our cost programs and managing yield. And then as volumes start to improve, we've got a very high fixed cost base. So as the volumes start to improve, obviously, you've got great incremental margins at the landfill and you've got very good incremental margins on the collection line of business. So we've got to -- we want to see that growth, it's why I keep talking about the commercial line of business and the MSW volumes at the landfill, because those are 2 of our highest margin, highest contribution lines of business. And as you see the volumes start to improve there, that's when you start to see the leverage of this business take off.

There are no further questions at this time. I will now turn the call over to David Steiner for any closing remarks.

Well thank you, all. We certainly think that we had a very solid fourth quarter and finished off a very good 2011. We look forward to continued growth in 2012 and we look forward to seeing all of you all as we travel on the road during the year, so thank you.

Thank you for participating in today's fourth quarter and year-end 2011 earnings release conference call. This call will be available for replay beginning today, February 16, 2012 at 1:00 p.m. Eastern Standard Time through 11:59 p.m. Eastern Standard Time on Thursday, March 1, 2012. The conference ID for the replay is 38143289. [Operator Instructions] The number to dial for the replay is (855) 859-2056 or (404) 537-3406. Thank you. You may now disconnect.