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Executives

Ron Mittelstaedt – Chairman and Chief Executive Officer

Steve Bouck – President

Darrell Chambliss – Chief Operating Officer

Worthing Jackman – Chief Financial Officer

Analysts

Hamzah Mazari – Credit Suisse

Scott Levine – J. P. Morgan

Bill Fisher – Raymond James

Al Kaschalk – Wedbush

Michael Hoffman – Wunderlich

Tony Bancroft – Gabelli

Waste Connections, Inc. (WCN) Q4 2011 Earnings Call February 8, 2012 8:30 AM ET

Operator

Good morning. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Ron Mittelstaedt, Chairman and CEO. Please proceed.

Ron Mittelstaedt

Thank you, operator, and good morning. I’d like to welcome everyone to this conference call to discuss our fourth quarter 2011 results and provide a detailed outlook for the first quarter and full year 2012. I’m joined this morning in our new corporate office in The Woodlands, Texas by Steve Bouck, our President, Worthing Jackman, our CFO, and several other members of our senior management team.

We are extremely pleased with the results in the fourth quarter as stronger than expected pricing and special waste volumes, together with continuing tight cost controls, enable us to offset most of the revenue, margins and EPS impact from higher than expected declines in recycled commodity values.

We are also extremely pleased with our full year results in 2011. On a 14% increase in revenue, adjusted operating income before depreciation and amortization grew 15%. Adjusted EPS increased almost 20% and free cash flow per share increased more than 20%. Free cash flow as a percentage of revenue was almost 17% for the year. This strengthened free cash flow enabled us to deploy almost $500 million in acquisitions, share repurchases and dividends during 2011 while maintaining low two times leverage and plenty of capacity for additional growth opportunities.

Looking at 2012, we are pleased to affirm again today what we have said since our call in October. That is a combination of at least $80 million of acquisition rollover growth, expected core pricing growth at least equal to what we achieved in 2011, and relative stability in municipal solid waste volumes should position us well in the new year.

We’re also pleased that OCC prices are up about 10% from their November lows. Finally, we also believe the acquisition activity across the sector could remain strong over the next few years, potentially eclipsing the record levels we have experienced in three of the last four years. Before we get into much more detail, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.

Worthing Jackman

Good morning. We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995, including statements related to expected volume and pricing trends, including recycled commodity prices, contributions from closed acquisitions, potential acquisition activity, share repurchases, dividends, available borrowing capacity and anticipated capital expenditures, as well as our first quarter and full year 2011 outlook for financial results.

Such forward-looking statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. These risks and uncertainties are set forth in the company's periodic filings with the Securities and Exchange Commission.

Stockholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

On the call, we will discuss non-GAAP measures such as adjusted operating income before depreciation and amortization, adjusted earnings per share, and free cash flow. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure.

Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations; other companies may calculate these non-GAAP measures differently.

I will now turn the call back over to Ron.

Ron Mittelstaedt

Thank you, Worthing. As noted earlier, we are extremely pleased with our performance in the fourth quarter. Revenue was $379.8 million, up 13% over the prior year period. Internal growth in the quarter was 3% broken down as follows: positive 3% from core price, positive 0.8% from surcharges, negative 0.8% from volume and 0% from recycling, intermodal and other services.

Net pricing, or core price plus surcharges exceeded expectations in the quarter, increasing sequentially to 3.8% from 3.5% in the prior quarter due to both higher core prices and surcharges.

Looking at 2012, we expect net pricing in the first quarter to be a little more than 3.5% and average about 3% for the full year, consistent with the outlook we provided on our October call. Core pricing will increase a bit sequentially in Q1, but surcharges are expected to contribute less to net pricing growth as we start to anniversary surcharges implemented last year.

As in prior years, we believe we have strong visibility on pricing for the full year and are not sitting here today having to place a bet on changes in CPI, economic trends or competitor behavior to deliver on our commitments. This visibility and predictability, along with comparatively higher core pricing, continue to be key differentiators of our strategy.

Volume growth in Q4 was negative 0.8%, slightly better than our negative 1% outlook for the quarter, due primarily to better than expected special waste volumes. As noted on our October call, we believe it is prudent to expect reported volume growth in 2012 to remain between zero and negative 1% while we see flow-through from a sustainable recovery.

We remain confident that if a broad based improvement in the economy generates volume growth, we will see it in our numbers given both the exclusive nature of almost half our business and the high market shares in many of our competitive markets.

Disposal volumes in the fourth quarter, adjusted for the impact of acquisitions, were up about 7% year over year, primarily due to increases in special waste volumes. Special waste jobs again are widespread as 80% of our landfills reported year over year increases in such volumes. To be conservative in our 2012 outlook, we have assumed the strength in special waste during 2011 could become a headwind to reported volume growth in 2012 given the speculative nature of this waste stream.

MSW disposal volumes were down 1%, a sequential improvement from down 3% in the prior quarter. We believe MSW disposal volumes will remain down low- to mid-single digits during 2012 due primarily to short term influences in the Los Angeles market.

Puente Hills, the municipal landfill closing in October of 2013, is getting more aggressive to attract additional tons ahead of its closing and some private holders are seeking to try and lock in current or lower prices over longer periods of time to avoid future rate hikes. Rather than chase prices down and eat up our landfill space at lower prices, we have made the decision to hold the line on our prices in the short term as we expect a significant increase in market pricing once Puente Hills closes.

For example, the LA County Sanitation District recently stated that once Puente Hills closes, they estimate the all-in cost for them to rail haul out to the Mesquite regional landfill would be about $80 per ton, more than twice the current cost, and as such, may look to use privately owned sites such as Chiquita Canyon rather than their rail haul alternative. While we don’t know how much landfill prices will increase over the next few years, we do know it’s prudent to pursue higher cash flows and returns at our Chiquita Canyon landfill over the longer term rather than chase near-term revenue.

Roll off pulls per day in the fourth quarter were up about 2% year over year on a same-store basis and revenue per pull also increased 2%. For the full year, pulls per day were up 3% with every region positive and revenue per pull increased about 2%.

Internal growth in the quarter from recycling, intermodal and other services was flat. Year over year decreases in recycled commodity values were essentially offset by increased recycled commodity volumes.

Proceeds from the sale of recycled commodities in the fourth quarter were 5.5% of consolidated revenue, down sequentially from 6.3% in the third quarter. On a dollar basis, recycling revenue decreased about $5 million or 20% sequentially from the third quarter due to declines in fiber prices. Prices for OCC, or old corrugated containers, averaged about $152 per ton during the fourth quarter, down about 14% from the year ago period and down 23% sequentially from Q3.

We have baked into our Q4 outlook a 10% sequential decline in commodity prices, given estimated prices at the time of our October call, and provided a sensitivity analysis on that call for the impact of each additional 10% decline in commodity values from the Q3 levels.

As a reminder, we estimated that a 10% decrease in recycled commodity values from Q3 levels could result in about a 50 to 60 basis point impact to margins and about a penny and a half hit to EPS per quarter.

This high margin impact further reinforces why we are pleased with our financial results in Q4. We were able to offset most of the impact of an additional 13% sequential drop in OCC prices compared to our outlook with stronger pricing growth, increased special waste volumes and tight cost controls.

OCC prices averaged $195 in September of 2011 and declined as much as 30% to their lows in November before recovering a bit in late December to the current average of about $150 a ton. As a reminder, in 2011, OCC averaged $180 per ton in Q1, $185 per ton in Q2, $197 per ton in Q3, and it dropped to $152 in Q4. At current prices, the margin and EPS hit from lower OCC prices will remain a comparative year-over-year headwind through the third quarter of 2012.

Adjusted operating income before depreciation and amortization, as reconciled in our earnings release, was $119.7 million in Q4 or 31.5% of revenue, down only 20 basis points year over year despite a 70 basis point increase in fuel as a percentage of revenue and the previously discussed high margin impact from the drop in recycled commodity prices.

I would also note that our fourth quarter results included an almost 30 basis point hit to bad debt expense associated with the November bankruptcy filing of SP Newsprint, a buyer of recycled newsprint. All things considered, we view our fourth quarter results as not only exceptional, but also a good springboard into 2012.

Regarding acquisition activity, the update here is also quite positive. In January we received final state regulatory approval to complete the Alaska Waste acquisition. We now expect that transaction to close March 1st. We also recently completed a handful of tuck ins in New York’s Hudson Valley, Tennessee, South Dakota and west Texas. In total, we signed or completed approximately $200 million of acquired annualized revenue in 2011, about $85 million of which is already in place for growth in 2012.

As noted in our press release, we believe acquisition activity could remain strong over the next few years due to increase in capital requirements in many markets to further segment the waste stream. Seller concerns regarding wealth preservation and potential tax rate increases and recently announced divestiture intentions regarding Veolia’s US Solid Waste business. Our focus on exclusive and secondary markets and our disciplined deployment of capital will continue to guide us in navigating through these potential opportunities.

Let me set the record straight about our view of Veolia’s assets. A majority of their assets fit with our competitive market model. That is a market-leading integrated asset position within a non-urban setting, but some of their markets, regardless of their asset positioning, are in geographies where we have no interest.

While we believe we are a potential strategic buyer with the ability to fund such a transaction without DOJ issues, given our lack of market overlap, let me reinforce to listeners that our approach to valuation will be no different in this case than it has been in the past 14-plus years. We will employ the same discipline to evaluate this or any other opportunity and we will stay true to our commitment to avoid growth simply for growth’s sake.

All EBITDA is not created equally in this sector given each company’s different capex needs to generate such EBITDA. Lower margin, high capex companies should have comparatively lower valuation multiples given the profiles of their cash flows. Unlike private equity buyers, we understand that you can’t recover from overpaying. It’s why we wouldn’t normally expect to succeed in a public auction process unless the circumstances were unique. We have plenty of acquisition opportunities ahead of us and we recognize that we can only deploy capital once.

Before I hand the call over to Worthing, I’d like to note again that this is our first earnings call from our new corporate headquarters in The Woodlands, Texas. We are all excited about this move, since this centrally located business- and tax-friendly environment should ideally position us for our next growth base as we expect to more than double the size of the company over the next decade.

California was a good location for the earlier stages of our company, but The Woodlands, Texas provides better accessibility to our operations across some 30 states and improved ability to attract and retain personnel. We expect the vast majority of our employees, almost 85% of the total group at corporate, to complete the relocation by September.

Now, I’d like to pass the call over to Worthing to review more in-depth financial highlights of the fourth quarter as well as to provide a detailed outlook for Q1 as well as the full year 2012.

Worthing Jackman

Thank you, Ron. In the fourth quarter, revenue increased 13% from the prior year period to $379.8 million, 10% from acquisitions and 3% from organic growth. Adjusted operating income before depreciation, amortization in the quarter increased 12.5% from Q4 2010 to $119.7 million. As a percentage of revenue, this was 31.5% in Q4 or a 20 basis point decrease from the year ago period.

On a reported basis, the following are certain line items that moved a notable amount from the year ago period as a percentage of revenue. SGNA, net of acquisition cost, decreased 80 basis points due primarily to the impact of both the County Waste acquisition, with its lower SGNA percentage, that reduces many line items as a percentage of revenue, and a reduction in the amount of incentive-based compensation costs in the period, and direct labor supervisor maintenance cost decreased a combined 70 basis points.

These improvements as a percentage of revenue were more than offset by the following: A 70 basis point increase in fuel expense, a 65 basis point increase in third-party disposal and transfer expenses in Q4 related to the County Waste acquisition, given the size of its collection operations, use of third-party sites for volume not directed into our colony landfill. Note that most of this impact will anniversary itself beginning in Q2. Finally, a 25 basis point increase in recycled materials expense.

Fuel expense was about 6.5% of revenue in Q4. We averaged approximately $3.49 per gallon for diesel during the quarter, which was $0.38 a gallon, or 12% above the prior year period. Depreciation amortization expenses for the fourth quarter increased $6.2 million year over year. As a percentage of revenue, DNA rose almost 35 basis points year over year, primarily due to an increase in amortization of intangibles associated with the County Waste acquisition.

At 11.4% of revenue in the fourth quarter, DNA was slightly higher than our expectations due to higher depletion expense associated with increased special waste volumes and due to increased appreciation expense resulting from our acceleration earlier than expected in the period of about $15 million of capex out of 2012 into Q4 ’11 to take advantage of bonus appreciation.

Net interest expense in the quarter was $12.4 million or about $3.3 million above the prior year period. This increase was primarily due to increased borrowing associated with the County Waste acquisition and higher borrowing spreads associated with the recent financing of our credit facility.

We ended the fourth quarter similar to Q3 with about $1.18 billion of outstanding debt, and our leverage ratio, as defined in our credit facility, also remained unchanged around 2.3 times debt to EBITDA. We have about $600 million of available capacity under our credit facility.

Our effective tax rate for the quarter was 39.1%. Our fully diluted outstanding share count for Q4 was 112.4 million shares, a decrease of about 2.9 million shares from the year ago period due to share repurchase competed since then. We repurchased almost 1 million shares during the fourth quarter and, as previously announced, increased our regular quarter cash dividend by 20% to $0.09 per common share.

GAAP EPS in the fourth quarter was $0.34 and adjusted EPS was $0.35, up 9.4% over adjusted EPS in the prior year period. Free cash flow for 2011 was $254.5 million, or 16.9% of revenue, up 17.7% over the prior year on a dollar basis and exceeding the upper end of our $240 million to $250 million outlook for the year. On a diluted share basis year over year, free cash flow increased 21.1% in 2011 compared to a 19.4% increase in adjusted EPS.

I will now review our outlook for the first quarter in full year 2012. Before I do, I would like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement in our various SEC filings. We encourage investors to review these factors carefully.

Our outlook assumes no change in the current economic environment and a March 1st closing of our Alaska Waste acquisition. Our outlook excludes the impact of any additional acquisitions that may close during the year and expensing of acquisition-related transaction costs, as well as costs incurred in connection with the relocation of the company’s corporate headquarters, and equity compensation expense expected to be incurred in connection with the anticipated amendment of certain executive employment contracts.

Looking first at full year 2012, revenue in 2012 was estimated to be approximately $1.615 billion, up about 7% over 2011. Net pricing is expected to be around 3% for the year. Volume, as Ron had previously discussed, is forecasted between flat and negative 1% and recycling, intermodal and other is expected to be between negative 0.5% to a negative 1%.

Operating income before depreciation, amortization and accretion in 2012 is estimated to be about 32% of revenue, a decrease of about 50 basis points over 2011 as a 40 to 50 basis point margin expansion resulting from pricing growth and operating improvements is estimated to be more than offset by a 100 basis point hit, primarily from an expected almost 20% reduction in average commodity prices, and, to a lesser extent, the consolidating impact of the Alaska Waste acquisition given its lower margin collection-only service profile.

Depreciation and amortization in 2012 is estimated to be about 10.9% of revenue, down almost 20 basis points over 2011. Closure and post closure accretion expense as a percentage of revenue is estimated to be about 15 basis points. Operating income for the year is estimated to be about 21% of revenue. Net interest expense in 2012 is estimated to be approximately $52 million. Our effective tax rate for the year is estimated to be about 39.2%.

Non-controlling interests is expected to reduce net income by about $1.2 million in 2012 and the two principal components of 2012 free cash flow are expected to be as follows: Net cash provided by operating activities for the full year is estimated between 24.5% and 25% of revenue. Capital expenditures are estimated to be about $145 million. This puts estimated free cash flow between $250 million and $260 million for the year.

Turning now to our outlook for Q1 2012, revenue in the first quarter is estimated to be between $374 million and $376 million, up almost 13% over Q1 ’11. Organic growth is estimated to be between 2% and 2.5% with the components as follows: Net price a little over 3.5%, volume growth between a negative 0.5% and negative 1%, and recycling, intermodal and other also between a negative 0.5% and negative 1%.

Operating income before depreciation and amortization and accretion for Q1 is estimated to be between $114.5 million and $115.5 million, reflecting a margin of almost 30.7%. Depreciation and amortization for the first quarter is estimated to be about 11.4% of revenue. Operating income for the first quarter is estimated to be about 19.2% of revenue.

Net interest expense in Q1 is estimated to be about $12.7 million. Our effective tax rate is estimated to be about 39.2%. Non-controlling interest is expected to reduce that income by about $225,000. Our diluted share count in Q1 is assumed to be about 112.1 million shares, excluding the impact of any share repurchases that we might complete during the quarter.

As noted earlier, our outlook excludes the impact of cost associated in connection with the relocation of our corporate headquarters and equity compensation expense expected to be incurred in connection with the anticipated amendment of certain executive employment contracts.

Relocation costs will be expensed as incurred during 2012 and, as announced in December, estimated at $15 million with the bulk of this expected to hit in Q2 and Q3. In addition, and as also previously announced, we may incur a loss on lease related to our prior corporate office that could range between $4 million and $6 million.

The equity compensation expense expected to be incurred in connection with the anticipated amendment of certain executive employment contracts relates to the renegotiation of legacy employment contracts with our named executive officers as summarized in our proxy statement filings with the SEC in April 2010.

In 2010, ISS had stated it would withhold recommendation of certain director nominees unless employment contracts with our NEOs were modified prior to our upcoming 2012 annual meeting to remove certain single trigger payments under change and control. Again, this was not an issue that management had initiated. In response to ISS’s actions, the compensation committee of our board, at great time and expense during 2011, and with the assistance of an outside compensation consultant and legal counsel, negotiated amendments to our NEOs’ employment agreements and new separation benefit plans.

As a result of that process, the NEOs have agreed to double trigger change and control severance benefits as well as non-compete provisions governed by a federal law, rather than California law, and the elimination of change and control excise tax gross uprights. The compensation committee of the board expects to make one-time equity grants to the NEOs expensed at the time the parties enter into the amended agreements and plans. We will call out and exclude this estimated $3.6 million non-cash expense in non-GAAP adjusted results in the period incurred, which is expected to be in Q1.

Now let me turn the call back over to Ron for some final remarks before Q&A.

Ron Mittelstaedt

Thank you, Worthing. We have much to be proud of in 2011. Further improvement in our safety statistics, record financial performance and acquisition activity, continuing return of capital to stockholders via share repurchases, and an increased quarterly dividend, an upgrade of our credit rating to Triple B, which is now among the highest in our sector, and a strong balance sheet with tremendous access to capital.

Adjusted EPS grew almost 20% in 2011. Free cash flow per share increased over 20% and 2011 marked our eighth consecutive year of positive stock price performance for stockholders. We believe these successes are a direct result of our disciplined execution of a differentiated strategy, attention to the details, and a unique corporate culture that embraces servant leadership, having fun, as well as accountability.

There is no doubt that 2012 will be a challenging year given comparisons to such a successful 2011, but we enter 2012, our 15th anniversary, with strong visibility on pricing, high single-digit top line growth already in place, and increased free cash flow. Additional acquisitions, volumes from an improving economy, or a continuing increase in recycle commodity values could provide further upside and more favorable comparisons to 2011.

We appreciate your time today. I will now turn the call over to the operator to open the lines for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from the line of Scott Levine with J. P. Morgan. Please proceed.

Scott Levine – J. P. Morgan

Hi. Good morning. You guys have previously guided to volumes for 2012 and have been since late last year at flat to down one. We’ve seen a lot of data signaling improvement in the US economy, and I’m wondering what you’re seeing within the business and whether that would lead one to maybe favor the higher end of that range, or whether you’re encouraged by what you’ve seen in recent months, or whether you haven’t seen much change at all system-wide.

Ron Mittelstaedt

I think, Scott, that the reality is we just haven’t seen much change. I think to get into a place where we are seeing consistently positive volumes as a sector, we’re going to need to see a rebound in the construction industry, both residentially and commercially.

Now, one could argue you’re starting to see the beginning of that, because special waste has been improving for a few quarters and that tends to lead a recovery because it’s generally speculative for real estate development of one type or another, but overall, we’re just seeing what I’d say a non-construction recovery, and that’s, I think, what’s needed to boost us to a positive volume environment.

Scott Levine – J. P. Morgan

Does your guidance, given the strength in special waste, is that a notable headwind to volumes as your guidance currently lays out right now? Notable being maybe 100 basis points or more?

Worthing Jackman

I wouldn’t say it’s 100 basis points or more. We baked in probably closer to half a point. Again, speculative waste is just that. We don’t control the outcome there, so we’re somewhat cautious in how we incorporate that into our outlook.

Scott Levine – J. P. Morgan

Got it, and then maybe turning to fuel, you noted commodities as a headwind to margins in recycling. What is embedded within guidance for diesel and cure, minus what your hedge position currently is?

Worthing Jackman

We’ve assumed current pricing for fuel throughout the year. Our financial hedge is about 5 million gallons. We also have some additional fuel that’s contracted with purchase agreements in the field. That puts our all-in hedge closer to the 7 million or 8 million gallon level, which is almost 30% of our fuel needs. Right now we’re using about 24 million gallons per year for fuel.

Scott Levine – J. P. Morgan

What price, roughly, is that hedge at?

Worthing Jackman

It’s slightly higher, about $0.03 higher than what we incurred in 2011.

Scott Levine – J. P. Morgan

Got it. One last one on the acquisition pipeline. Ron, you obviously are clear with regard to your thoughts on Veolia, but leaving Veolia aside, would your expectation be that you guys would be looking at a typical year at minimum, or maybe better or less than average? What would your thoughts be on a general acquisition landscape and maybe comments on valuation as well?

Ron Mittelstaedt

To the latter part, I don’t think valuation has -- at least valuation for us, as we look at things, has changed. You’ll continue to see deals in that 5.5 to 6.5 times EBITDA for the vast majority of the transactions that we do.

I would say that, again, a typical year, as you described, has been in that $40 million to $60 million level of acquired annual revenue. I would be confident that that level is achievable, and hopefully somewhat conservative if a couple things fall our way.

Scott Levine – J. P. Morgan

Got it. Thanks. Good luck in The Woodlands.

Ron Mittelstaedt

Thank you.

Operator

Our next question will come from the line of Hamzah Mazari with Credit Suisse. Please proceed.

Hamzah Mazari – Credit Suisse

Good morning. The first question is on the Veolia deal. I think you were pretty clear, Ron, but maybe if you could just highlight in which unique circumstances do you think you’ll get your hands on the Veolia business, and if you would care to comment on what your view is of valuation on that asset.

Ron Mittelstaedt

As far as under what scenario we might be able to be successful in some of the assets, obviously, we don’t know that yet. We have yet to see any book or any outline of a process yet on Veolia, so I think it would be too early for us to say what would happen or what wouldn’t.

A number of their markets, the old Superior Services, a number of the original BFI assets that were divested in the Allied/BFI merger, a number of those fit our profile very, very well, more suburban type markets with strong market share. We know their assets fairly well, but we do not yet know what process they’re going to go through, so it would be too early to speculate on that.

Again, as far as valuation, Hamzah, and from our view, somewhere probably in that 6 to 6.5, maybe a little north of that, their EBITDA, I think when you start to get north of that too much, it’s certainly outside our appetite.

Hamzah Mazari – Credit Suisse

That’s helpful, and then maybe if you could comment, I know you spoke about the dynamics in the LA marketplace for you guys with the muni landfill closing. Could you maybe frame for us the upside there on either EBITDA or how you see that playing out and the timing of that?

Ron Mittelstaedt

Sure, Hamzah. We currently handle roughly 4,000 to 4,500 tons a day in the LA market, and that today is a market that’s about a $25 to $30 a ton market. Our permit allows us to handle 6,000 tons a day of municipal solid waste plus unlimited amounts of C&D and special waste.

Our hope would be that as you come out of ’13 and go into ’14, that we would be able to ramp our site comfortably up to the 6,000 tons a day, which is an additional 1,500 tons a day, and I think it’s reasonable to expect that pricing is going to go up in the roughly $10 to $15 a ton range across the spectrums.

You look at about 4,500 tons a day moving up, let’s say, maybe up to $10 a ton and you look at an incremental 1,500 tons a day coming in at around $40 a ton, it’s a pretty substantial upside if it flows through in that manner.

Hamzah Mazari – Credit Suisse

That’s helpful, and just a last question on pricing. What are you guys assuming for a competitive versus franchise in your guidance?

Ron Mittelstaedt

We’re assuming about 2.2% on the franchise side, up a little bit year over year, which was about 1.9% to 2% in ’11 and it’s moving up to about 2.2%, 2.3% in ’12, and the competitive is running between roughly 3.5% and 4%.

Hamzah Mazari – Credit Suisse

Okay, great. Thank you very much.

Operator

Our next question will come from the line of Bill Fisher with Raymond James. Please proceed.

Bill Fisher – Raymond James

Good morning. Is it nice to get another extra couple hours of sleep before this call?

Worthing Jackman

Yes.

Ron Mittelstaedt

Now we know why everybody was always in these time zones.

Bill Fisher – Raymond James

That’s good. Just a couple things. Ron, you did give a lot of color on acquisitions and whatnot, but you mentioned capital gains taxes. Is that under discussions with acquisition candidates? Is that coming up more than it has in prior years, or is that just about the same?

Ron Mittelstaedt

I think it has clearly of late come up more because there’s been more rhetoric about it, obviously since the President’s recent speech, and also certain states increasing their capital gains, such as the state of California. So, it is certainly coming up more.

The offset to that, the dampening, if you will, to that is that it still remains a very low, obviously, interest rate environment and sellers who look to redeploy their after-tax proceeds, it’s hard for them to get the type of cash flow that they were getting out of their business, so it remains a balancing act between those two.

Bill Fisher – Raymond James

Okay, and, totally separately, you mentioned the competitive market pricing. It sounds pretty good, the 3.5%, 4%, and I know it’s small for you guys, but bigger markets, say a Denver or Charlotte or something, is there any difference in behavior in those markets or is it pretty similar?

Ron Mittelstaedt

Yes, clearly the urban markets, a Denver, you used, a Houston, as an example, they are much larger markets, multiple public companies, a lot of private companies, a lot of disposal capacity, limited organic growth, so that is just a road map for greater churn in the business, new customers coming on at lower pricing than customers are losing, and the need to rotate customers in faster than you’re rotating them out.

All that leads to the lower pricing in those type markets, which is why you’ve seen Waste and Republic as an example, the two large urban companies, continually lag us by 100 to 200 basis points in pricing for the last several years.

Bill Fisher – Raymond James

Okay, great, and then just one quick one for Worthing, on the capex. I know you’re just starting ’12, but given the accelerated truck spending this year on Alaska Waste, do you see – would ’13 be kind of exiting your acquisitions? Would that be a downdraft a bit, or any impact on the truck spending?

Worthing Jackman

I think you would see increased truck spending in ’13 just based on current commitments. We have a couple of markets where we have a high CNG rollout next year. We’ll watch the bonus depreciation developments, and what you could see us do is if Congress moves to pass 100% bonus depreciation this year, versus keeping it at 50%, we will look to pull a bulk of those trucks into the latter part of this year.

Bill Fisher – Raymond James

Okay, perfect. Thank you.

Operator

Our next question will come from the line of Al Kaschalk with Wedbush Securities. Please proceed.

Al Kaschalk – Wedbush

Good morning, guys. I look forward to you hearing next time, when you get on the call, say, “Good morning from Houston.” Anyway, to follow up on the last question there, what percentage of the new capex is CNG vehicles, or where are you at on that strategy in terms of converting?

Ron Mittelstaedt

Al, first off, it’s a small percentage. It probably, for this year, for 2012, will represent approximately 20% of our truck fleet replacements, or one-fifth will be CNG. We are converting two types of markets. We are converting exclusive markets, franchise markets in the western US where we are either being asked or there is an economic incentive for us to make that conversion in terms of both contract extension and pricing improvements that justify that, and we have three markets we are rolling that out in in ’12, ’13 and ’14.

Then, we are also converting certain competitive markets where there are states that have tax incentives to effectively fund the construction of the fueling infrastructure, which remains the biggest item in converting to CNG, particularly in our model where you get into a more rural or suburban setting. You’ve got to make sure the infrastructure is there, and in many of those markets, it is not yet there.

If we look out five years from now, you would see probably about a fifth of our fleet would be converted to CNG, and that would be more heavily weighted to our west coast model where it would be much higher than that and then lower in our competitive market footprint that’s more rural.

Al Kaschalk – Wedbush

Thank you, and just on the M&A side, this segment of the waste stream, are you referring there towards recycling increased interest in your part? Again, I know it’s a smaller part of the business, but just in terms of the M&A given the backdrop in the economy.

Ron Mittelstaedt

Yeah, what we’re really referring to is that there are, at both the federal level and at the state level, and at the municipal level, all three levels, depending on the geography, there are different regulatory and political and consumer drivers that are segmenting the waste stream towards various types of diversion and recycling.

That is a capital call, if you will, on private companies that many times, that is sort of a fulcrum for them to take a view of looking to do something with their company versus doubling down and reinvesting and diversifying their infrastructure and their fleet, so that’s what we’re referring to, that segmenting of the waste stream can be a driver to M&A activity over the coming years.

Al Kaschalk – Wedbush

Are you feeling like those entities are being more aggressive for that capital call, or given their state, they’re maybe sitting a little bit on their hands near term?

Ron Mittelstaedt

I think that it’s different by geography, and obviously, size of the company. Al, I think it’s hard to make a generalization. Your more moderate- to decent-sized private companies, they have the access to the capital, so for them, it’s making sure that they’re getting the contracts and the deployment that they think.

I think as the company gets a little smaller, that gets a lot tougher because they just don’t have the economy as a scale or the market position to really drive the capital, and in many cases, it’s being forced upon them by the municipality who is mandating, for example, a single stream recycling program, so they’ve got to go out and buy all new parts for every customer that they have. They’ve got to have a place to process that material, et cetera. That’s very hard on a small operator.

Al Kaschalk – Wedbush

Okay, and finally, if I may, just on the color you provided in recycling and intermodal for the quarter, I was wondering from a volume perspective if you could shed some light on your expectations for ’12 versus ’11 on where you think the volume number would be up just on recycling.

Worthing Jackman

Our expectations are low single digits right now. We saw a nice increase in volume last year that helped offset some of the decrease in prices that we saw, but this year we’re not anticipating a large increase or sizable increase with regards to volume on recycling.

Al Kaschalk – Wedbush

Great operating in a tough economy.

Ron Mittelstaedt

Thanks, Al.

Operator

Our next question will come from the line of Mike Hoffman with Waste Connections. Please proceed.

Ron Mittelstaedt

Welcome aboard, Michael.

Michael Hoffman – Wunderlich

Yeah, thanks for the job, guys. Where am I supposed to look for a house in The Woodlands?

Ron Mittelstaedt

I was going to say you’re fired. You’re not here on time.

Michael Hoffman – Wunderlich

A couple questions with regards to paper. Is there anything that you’re seeing that would suggest to you that we won’t have a normal seasonal pattern, so this dip that happens in the fourth quarter settles in the first, and then you see this list kind of happening April, October, and then you repeat it all over again? Is there anything to suggest that doesn’t happen?

Ron Mittelstaedt

There’s nothing that we are seeing that would imply to us that there would not be a normal seasonal pattern.

Michael Hoffman – Wunderlich

Okay, so that’s an opportunity for upside based on the way you’re giving guidance?

Ron Mittelstaedt

That’s correct.

Michael Hoffman – Wunderlich

I think you may have answered this, but I’ve got to ask you just to be clear. Is there anything from -- I think it’s Credit Suisse is a banker that’s hired by Veolia. Is there anything coming from them that says they’re going to do anything like prequalify bidders and then narrow the list, things like that versus just let everybody ride all the way to the end of the process?

Ron Mittelstaedt

We have not heard anything regarding that out of any bankers that are going to be managing the process. It is Credit Suisse and we have not heard anything regarding that.

Michael Hoffman – Wunderlich

Okay, and then if capital gains is a driver of behavior on the deal side, when would somebody have to say, “I’m done. I’m selling,” in the context of a regulatory process and things of that nature in your mind? When would we see the wave of this, if this is an issue, in order to get something closed by year end, and then therefore not get negatively impacted?

Ron Mittelstaedt

Certainly by the beginning to the middle of the third quarter, almost at the latest, Michael. You get beyond that and, depending on the size of the transaction, you’re running the risk of it getting done, if you will, in 2012.

Michael Hoffman – Wunderlich

And then are your Washington sources telling you anything about what might happen? This is a presidential year, right? So, you’ve got to figure that Congress starts playing with this as a subject before the summer recess, and therefore, this becomes a topic of conversation politically as early as the summer?

Ron Mittelstaedt

I think that’s right. It obviously is becoming a, I’ll call it a divisive, but a differentiating political topic between the parties now, and I think it will depend on what the polls say as to how close the race is or isn’t as to how blaring a topic it’ll become.

Michael Hoffman – Wunderlich

Okay, and then how would you handicap the probability that bonus depreciation goes back to 100% for 2012?

Worthing Jackman

As far as the handicap, I think we’ll get better clarity by the end of this month when they go to re-up the current tax program.

Michael Hoffman – Wunderlich

Okay, and then do you have a bias to slow fill versus fast fill on the refueling?

Worthing Jackman

We’ve generally gone toward slow fill, Michael.

Michael Hoffman – Wunderlich

Okay, and lastly, on the dividends, worked out over a five-year period, how would you want to characterize the dividend as a percentage of your free cash flow trend over that five years?

Worthing Jackman

It depends on the slope of the growth of the company, but right now, at approximately $40 million payout on $250 million, $260 million of free cash flow, call it one-sixth or so of the free cash flow. I think over time you would see that increase to perhaps one-fourth of the free cash flow over the next three to five years.

Michael Hoffman – Wunderlich

Okay, and based on Ron’s statement, “I’ll double the company in ten years,” that’s kind of a 7.5% growth rate. That’s sort of consistent with that, then, in your mind?

Worthing Jackman

Yes.

Michael Hoffman – Wunderlich

Okay. Great. Nice quarter, again, managing expectations. Thanks.

Ron Mittelstaedt

Thank you, Michael.

Operator

Our next question will come from the line of Tony Bancroft with Gabelli. Please proceed.

Tony Bancroft – Gabelli

Yes, good morning, gentlemen. Just to piggyback on Bill’s question regarding acquisitions, you mentioned in the press release about some of the drivers, i.e. sellers’ wealth preservation, capital costs, recycling, increased competition, municipality, maybe privatization. Could you rank the drivers for me and what’s the, for last year, the $200 million in revenue, and maybe how you perceive the future?

How would you rank those drivers, and on the flipside, for you, what kind of seller do you want? What gives you the best prospect as far as margins and regard to that? Thank you.

Ron Mittelstaedt

Okay, there were a number of questions there. Obviously, I’ll try to answer as many as I can and can remember. As far as for us, I’m not going to say there’s any type of number one best seller. Every deal is unique, but obviously, legacy transition issues, lineage transition issues, tend to be good times where a company is in a good position to transition ownership. It’s somewhat expected by both employees as well as customers as well as the community, and that positions the company pretty well for new potential ownership in a lot of ways. Those tend to be the better transactions that we do.

When a company is broken, when it’s a fire sale, when it’s an auction, when it’s a distressed asset, those are not the type of deals we tend to do. We find that poor companies in this business are poor for a reason, and it’s usually some sort of broken market or their asset positioning within the market, and we cannot fix all of those two things. There are companies out there that buy those and they believe they can and many of you have seen the results of that. But, that’s not what we do.

As far as the ranking of what drives, again, obviously, different things drive sellers. We would always tell you, and we have said for years, that it’s really not valuation, it’s really not tax increases, segmentation of the waste stream. Those are all secondary items. The number one issue that drives deals in our model in our business is what we call lineage transition issues—estate planning, death, disability, disease, divorce—those are the kinds of things where there is something going on within the ownership, and that’s why most deals that we close, we’ve been talking to for four, five, six, seven years of relationship building and know what is transpiring within the ownership of that company.

That’s a long-winded soapbox answer to your question, Tony, but that’s sort of how it works for us.

Tony Bancroft – Gabelli

That’s great. Thank you so much.

Operator

(Operator instructions) At this time, I show that we have no further questions in queue. I would like to turn the call back over to Mr. Ron Mittelstaedt for any closing remarks.

Ron Mittelstaedt

Thank you, operator. If there are no further questions, on behalf of our entire management team, we appreciate your listening to and your interest in our call today. Worthing, Steve, and I will be here today to answer any direct questions we did not cover that we are allowed to answer under Regulation FD and Regulation G.

Thank you, again, and we look forward to speaking with you on our next earnings call or at an earlier upcoming investor conference.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day, everyone.

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