Waste Management - Earnings Call - Q4 2011
February 16, 2012
Transcript
Speaker 6
At this time, I would like to welcome everyone to the fourth quarter and year-end 2011 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Mr. Ed Egl, Director of Investor Relations. Please go ahead, sir.
Speaker 4
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. Steve will cover our revenue growth, including price and volume trends, operating costs, and the financial statements. We will conclude with questions and answers. During our 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 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 to 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 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 % of revenues, and free cash flow. These measures of financial results have been adjusted to exclude the Oakleaf Global Holdings 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 reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day, beginning at approximately 1:00 P.M. Eastern Time today until 5:00 P.M. Eastern Time on March 1, 2012. 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 express written consent of Waste Management is prohibited.
Now I'll turn the call over to Waste Management CEO, David Steiner.
Speaker 0
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 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 will 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 three 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. Finally, we supplemented our national accounts approach through our strategic acquisition of Oakleaf Global Holdings. That will provide us a new platform to service national accounts while strengthening the Oakleaf Global Holdings 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 internal 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 three 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 return 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 repurchases. We also spent $867 million on acquisitions in 2011. About half of that was on our Oakleaf Global Holdings 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 will 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.
We expect yield to pick up in the back half of the year at many of the contract issues' anniversary, our second half municipal contract CPI adjustments take effect, and we maintain our focus on our core yield programs. 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 volumes 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 five-year average, and we will continue to invest in recycling assets to better meet our customers' increasing recycling needs. The 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, the lower 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 impacts 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 longstanding business model is to use yield and cost savings programs to offset inflation in our cost base in order to drive margin expansion. 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. In the second quarter, we'll see our seasonal uptick in volumes and earnings should improve.
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 Global Holdings 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 three 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 Recycle Bank. Another example of our customer focus is our Oakleaf Global Holdings 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 organics 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. 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 re-engineering 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. 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 in 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. I will now turn the call over to Steve to discuss our fourth quarter results and our 2012 outlook in more detail.
Speaker 5
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. Then I'll get into the drivers in some of the key expense and cash flow lines. Revenue for the fourth quarter, excluding Oakleaf Global Holdings, 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 yield 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. 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 the C&D segments. That improvement was, however, offset by lower yield in the 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-priced direct landfill jobs at our subtitle C landfills. 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 committed 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 would be comparable to the prior year, and we should begin to see CPI price increases in a large number of the residential franchises. 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 aforementioned. Income from operations in the collection line of business improved 3.5% in the fourth quarter when compared with 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. In both cases, these are the best operating margins we've seen in this business 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, when compared to the fourth quarter of 2010. 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 of debt was 5.4%, and our total debt-to-capital ratio for the quarter was 0.4%, which is consistent with our target ratio of about 60%. 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%. 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.
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 a litigation loss of $27 million. In the fourth quarter, we also paid $156 million in dividends, and we repurchased $46 million, $47 million of our common stock. For the full year 2011, we paid $637 million in 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. 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 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 two other initiatives we've discussed with you in the past. First, driving efficiencies through routing technologies and onboard computing, as well as streamlining our back office operations. The field efficiency programs are already in four areas. We'll continue to roll those out over the next two years, and the back office programs are in development, and they will begin to roll out in 2013. 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. With that, Regina, we'd like to open the line for questions.
Speaker 6
At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Scott Levine with JP Morgan.
Speaker 2
Hi. Good morning, guys.
Speaker 4
Morning, Scott.
Speaker 2
With regard to your comments on price, the guidance implies relative stability in 2012 versus what you report in the fourth quarter. I was wondering if you could comment on what kinds of trends you saw as the quarter played out. I think, David, you mentioned commercial in addition to the municipal business. I'm not sure whether there is any noteworthy development in that area, whether there is any additional color from a regional perspective, just looking for additional thoughts on price trends.
Speaker 4
Yeah. You know, Scott, it's interesting. When you look at 2012, and you're right, we mentioned both municipal and commercial. You know the commercial business has always been highly competitive. It always will be highly competitive, 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? Yeah. We're going to put those price increases out on the street. The issue that we had in 2011, and I expect to continue through 2012, is rollbacks on the commercial side of business. From a competitive point of view, what you're seeing is more and more pressure requiring rollbacks. You're also seeing a lot of companies that are offering new business without fees and surcharges. 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. On the municipal side, you are seeing a little bit different pricing environment. Those are big contracts, so it's certainly become more aggressive. You've got municipalities that are facing budget shortfalls, so they've become more aggressive.
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 on 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.
Speaker 2
Got it. Thanks. Maybe turning to Oakleaf Global Holdings, 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 Global Holdings because I know you excluded that from your operating number in 2011. Is that correct?
Speaker 4
Yeah. That's right. You know when you look at Oakleaf throughout the year, there are two 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 rapidly 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 those relationships longer term, both in terms of having a solid network in place and in terms of the financial benefit we get with those. Our teams are out there right now negotiating arrangements, which will begin kicking 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.
Speaker 2
Got it. One last one, if I may. You know it 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 could provide on EPS sensitivity to fluctuations in electricity prices? I know part of this is the Florida situation, but is there an EPS sensitivity that we can use for waste-to-energy like we have with recycling or like you've given? You know.
Speaker 4
I think when you look at the Wheelabrator impact, it deals more heavily with specific contract situations where we went from a fixed price arrangement to market price or a change in the tip 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. We actually would expect to see less downside volatility on the electricity prices. 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. 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.
Speaker 2
Got it. All right. Thanks, guys.
Speaker 4
Thank you.
Speaker 6
Your next question comes from the line of Bill Fisher with Raymond James.
Speaker 3
Hi. Good morning. I had just a couple of questions related to recycling on price and volume, really on the outlook for 2012. I think you mentioned you expected the commodity price to be down $15 to $20. What would that roughly be on a % basis? 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 2012? I just wanted to get some color on that.
Speaker 4
Yeah. 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 volume. Some of those acquisitions will layer in positively in 2012 as well.
Speaker 3
Could that be similar types of growth rates as you've seen in Q4, or does that kind of taper off?
Speaker 4
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. The interesting thing about those acquisitions is that the first probably three to six months, you don't get a lot of earnings out of those deals. We will see higher volumes throughout 2012. Obviously, we'll see the earnings impact in the back half of the year from the new plants.
Speaker 3
Okay. Great. Thank you.
Speaker 6
Your next question comes from the line of Michael Hoffman with Wunderlich Securities.
Speaker 3
very much for taking the time. One of the questions I have on volume in the guidance, container weights in the commercial business, are you seeing a trend where you're starting to approach a zero, which suggests that after three years of an economic recovery, the consumers kind of found their behavior? Container weight should stabilize, and therefore, third-party volume coming to you that's commercial, that's a positive.
Speaker 4
Yeah. You know it's interesting you asked that, Michael, because it's always one of the areas that I look at each quarter. Surprisingly to me this quarter, we saw container weights across the company actually positive. We saw them positive throughout each of the four geographic groups, save one small area in the South. Seeing the container weights come back certainly is good news. Like we said, you know 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 and MSW turn. Right now, a lot of our good volume numbers are being driven by special waste. As you know, those can be cyclical as far as being event work.
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.
Speaker 3
Okay. I get that. Segueing to the special waste, do you have a sense of a pipeline of activity coming into the year that you can sort of frame? You had double-digit volume changes in 2011. How do you think about those volume changes in light of your guidance in 2012? What are we thinking about there?
Speaker 4
Yeah. I think we'll continue to see strong volumes in special waste. As you know, the visibility on that is probably sort of the three to six-month time frame, so it's hard to say anything long term. 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.
Speaker 3
Okay. You produce about 8.5% of revenues free cash today. What's it take? One, can you be a 10% free cash generator? If so, when do we see that? What happens in the model if this is the economy you live in, by the way? The economy isn't any different than it is right now. How do you get to be a 10% free cash generator?
Speaker 4
Yeah. You know, Michael, if the economy stays the way it is right now, first off, obviously, we have to drive additional cash generation. That's why we're investing in our cost programs, right? We've also got to continue to get good yield, and that's going to drive cash generation. We've also got some fairly large numbers on CapEx. We'll 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. We've got a little bit of catch-up to do there. We've got investments that we need to make in the growth areas, particularly recycling and other diversion assets. While we're doing that, the CapEx is a little bit higher. We're not going to build out recycling assets forever. At some point in time, we're going to be done.
There may be some new other types of diversions that we invest in in the future, but we'll worry about those in the future. The three things that drive it are getting our cost programs and our yield to drive for cash generation and ultimately having a lower CapEx after we build up our fleet and spend the money for the diversion assets we need to spend.
Speaker 3
When would you think the CapEx slows?
Speaker 4
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 to $1.4 billion for the next two years.
Speaker 3
Okay. Thanks. 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%?
Speaker 4
No. If it goes back to $100, we'd cut that impact in half. We think the impact would be about $100 million rather than the $200 million.
Speaker 3
Okay. There's a swing of $100 million in your free cash potentially, or is that the $1.1 to $1.2?
Speaker 4
There is potential positive of $100 million over and above the guidance we gave if the 100% bonus depreciation passes.
Speaker 3
Perfect.
Speaker 4
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. For us, investing in the fleet right now is a great thing because we can buy CNG trucks, which, as you know, have a great return, great payback, and obviously are better for our customers.
Speaker 3
How big of a deal is that new engine that Cummins is coming out with in 2013?
Speaker 4
Michael, you're going to talk to us about engines. I'm not going 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.
Speaker 3
Okay. I was just curious if you thought it was a big, it's not a big enough deal to wait for it, is what I'm hearing. It's just keep buying, and when it comes, if that's the right engine, you'll buy that one too.
Speaker 4
We're certainly going to keep buying.
Speaker 3
All right. Great. Thank you very much for your time.
Speaker 4
Sure.
Speaker 6
Your next question comes from the line of Vance Edelson with Morgan Stanley.
Speaker 1
Hey, guys. Thanks for taking the questions. 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?
Speaker 4
Yeah, Vance. I'm glad you mentioned that because, as you all know, landfill pricing has sort of been my quest for the last three years. We actually just recently brought in—actually, we will bring in Monday, so we haven't brought in—we will bring in Monday a new gentleman to run our pricing department. It's going to be one of the first things that I sit down with them to discuss: 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.
I don't want to put a number around it quite yet because our new pricing director doesn't start till Monday. You can bet that's going to be one of the first things that I sit down and talk with him about.
Speaker 1
Okay. That's good to hear. 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?
Speaker 4
You mean JVs in terms of what?
Speaker 1
In other words, the Bagster and other stuff like that with Home Depot.
Speaker 4
Yeah, yeah, yeah, yeah. You know 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. You know it's right on course where we want it to be and you know is a great product addition. I will tell you the other initiatives, the primary one that we look at is healthcare services. 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 gains and traction. We're certainly going to be very aggressive in going out and attracting that healthcare business.
Speaker 1
Okay. Great. Just one last question from me. I think on pricing gates, you had some in place for 2011. Are those lifted for 2012?
Speaker 4
To the yield gate?
Speaker 1
Yeah.
Speaker 4
Yeah. We actually lifted the yield gate last year and had yield as part of our overall compensation program. 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.
Speaker 1
Got it. Okay, thanks for all the color. Appreciate it.
Speaker 4
Thank you.
Speaker 6
Your next question comes from the line of Corey Greendell with First Analysis.
Speaker 1
Hello. This is actually David Warner for Corey. 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.
Speaker 4
Yeah, I think we're going to see commodity prices for the first half of the year continue. 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 stayed up at that level and went up and down for a while. We're expecting a more traditional increase in prices this year. We think it's going to continue to be a headwind. We just think it's going to compress a little bit relative to the curve last year.
Speaker 1
Thank you. One more, just some of your thoughts on Veolia assets and what your acquisition outlook is for 2012.
Speaker 4
Yeah. You know when we look at acquisitions for 2012, as Steve said, we're looking at 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, we always have the ability to manage our ability to do that through share repurchases. 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. 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.
If we do get involved in any acquisitions, they will not be at numbers that would be above our own trading multiple.
Speaker 1
All right. Thank you.
Speaker 4
Thank you.
Speaker 6
Your next question comes from the line of Stuart Sharf with Standard and Poor's.
Speaker 3
Good morning.
Speaker 4
Morning.
Speaker 3
All right. Most of my questions have been answered. I was just wondering if you could talk a little about the churn rate and just how that's looking comparative to last year.
Speaker 4
Yeah. It's a great point because obviously, that has an effect not so much on yield but on overall profitability. Like I said before, we're seeing the rollbacks increase. We saw the churn rate increase a little bit. It was 10.9% in the quarter, but it's been running slightly above 10% for the year. It is another effect that we have going into 2012 from a yield perspective, if you want to look at it that way, that the churn rate is slightly up, but nothing that would deter us from continuing our focus on yield management.
Speaker 3
Okay, thank you.
Speaker 4
Thank you.
Speaker 6
Your next question comes from the line of Al Kashyuk with Wedbush.
Speaker 3
Good morning.
Speaker 4
Morning, Al.
Speaker 3
Just to the recycling question again, can you elaborate on how the mix of the material has changed or is changing or expected to change in 2012 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?
Speaker 4
Higher prices.
Speaker 3
A higher price mix toward aluminum and other materials? Are 60% or 70% of the material fiber-related, or is it less than 50%? What's the composition of the recycling material?
Speaker 4
For us, it's not the composition of the recycling. It's what you do with the composition of the recycling, right? Where we've been focused for the last year is when you get fiber tons in, they can be in a lot of different classes. They can range from very low-priced classes to very high-priced classes. 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? 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. When you look at that, you look at volumes year to year, they should get better from our new acquisitions, but those new acquisitions take about six months of startup mode before they turn profitable.
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.
Speaker 3
It seems like what you laid out in terms of headwinds for 2012, that we would be peaking in the headwind in the third quarter as opposed to the first quarter. I think there's something more there that we're not hearing.
Speaker 4
No. I think we peak in the first quarter on the headwinds. It is sort of flat in the second quarter, and then it turns better in the third quarter. It certainly peaks in the first quarter. It is about the same in the second quarter, but obviously, as I mentioned, you have got the seasonal uptick in volumes, which makes up for some of that. The headwinds are very slight in the third quarter, and then they actually turn slightly positive in the fourth quarter.
Speaker 3
You mean from a volume perspective, right, David?
Speaker 4
No. Just from an overall, the two big headwinds are recycling and our waste-to-energy operations. There's a number of issues that go in that. Obviously, commodity price is the biggest in recycling, and then there's a number of factors in waste-to-energy. Each of those factors either turn positive or they anniversary, for example, in our waste-to-energy plants where we have that South Florida contract, that anniversary is in August. 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 they actually turn above last year in the fourth quarter.
You've got a lot of headwinds in the first quarter, about the same amount 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. 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.
Speaker 3
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?
Speaker 4
Those are really incorporated in the guidance that we gave. We talked about the benefits being the back half of the year and really negligible in the front half of the year. The first quarter, we could see some pressure from that, but that's all integrated in there. Actually, as we begin taking some of those costs, we already begin recognizing some of the other benefits of the transaction. We'll probably have a little bit of pressure from it in the first quarter, and that'll probably go away in the second quarter. By the time we get to the back half, we'll begin seeing net-net bottom line benefits. You might see a small restructuring charge in the first half of the year. Obviously, we'd normally exclude money, but it won't be a significant amount of money.
Speaker 3
Okay. Finally, if I may, if I look back over a couple of years, right, we have relatively $3.3 billion of, I think, EBITDA, give or take a little bit. Debt's increased here quite a bit. You're comfortable, it sounds like, with a 60% debt-to-cap ratio, if I heard you right.
Speaker 4
Correct.
Speaker 3
EBITDA isn't really growing, and free cash flow has been relatively stable. There are a lot of moving parts in the economy, but what can help provide some visibility or guidance here to that EBITDA growing relative to where it has been staying flat over the last several years?
Speaker 4
Yeah. You know, first on 60% 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. That's why we're very comfortable having a little higher debt balance than maybe some other companies that you look at. 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. Then as volumes start to improve, we've got a very high fixed cost base. 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. 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 two of our highest margin, highest contribution lines of business. As you see the volumes start to improve there, that's when you start to see the leverage of this business take off.
Speaker 3
Thank you, David.
Speaker 4
Thank you.
Speaker 6
There are no further questions at this time. I will now turn the call over to David Steiner for any closing remarks.
Speaker 4
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 as we travel on the road during the year. Thank you.
Speaker 6
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. Again, the conference ID for the replay is 38143289. The number to dial for the replay is 855-859-2056 or 404-537-3406. Thank you. You may now disconnect.