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Waste Connections (NYSE:WCN)

Q1 2012 Earnings Call

April 26, 2012 8:30 am ET

Executives

Ronald J. Mittelstaedt - Chairman, Chief Executive Officer, Chairman of Special Equity Award Committee and Chairman of Executive Committee

Worthing F. Jackman - Chief Financial Officer and Executive Vice President

Analysts

Rodney C. Clayton - JP Morgan Chase & Co, Research Division

William H. Fisher - Raymond James & Associates, Inc., Research Division

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Barbara Noverini - Morningstar Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2012 Waste Connections conference call. My name is Sonia, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Ron Mittelstaedt, Chairman and CEO. Please proceed.

Ronald J. Mittelstaedt

I'd like to welcome everyone to this conference call to discuss our first quarter 2012 results and provide a detailed outlook for the second quarter.

I'm joined this morning 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 to kick off our 15th anniversary with first quarter results that exceeded the upper end of our revenue and margin expectations.

Continuing pricing strength in increased special waste and construction-related disposal volumes offset the anticipated negative impact from lower recycled commodity values and higher fuel cost, as well as our decision to turn away lower-priced disposal volumes at our Chiquita Canyon landfill.

In the first quarter, adjusted net income increased. Free cash flow once again exceeded 20% of revenue and the Alaska Waste acquisition closed as scheduled on March 1. Put simply, we believe the year is playing out as expected from an operating perspective. The big unknown, given our recent equity offering, is how much capital gets deployed this year or next on acquisitions. As we often emphasize, we invest capital core returns, or we will return excess capital to shareholders.

But the timing and/or size of acquisitions or whether we resume our share repurchase program remains unclear at this point.

Before we get into much more detail, let me turn the call over to Worthing for our forward-looking disclaimer, as well as other housekeeping items.

Worthing F. Jackman

Thank you, Ron, and 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, recycled commodity prices, potential acquisition activity, share repurchases and our second quarter 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. Now I'll turn the call back over to Ron.

Ronald J. Mittelstaedt

Okay. Thank you, Worthing. As noted earlier, we are extremely pleased with our performance in the first quarter. Revenue was $376.4 million, up 13.6% over the prior-year period. Internal growth in the quarter was 2.9%, broken down as follows: Positive 3.2% from core price; positive 0.4% from surcharges; flat volume and negative 0.7% from recycling, intermodal and other services; net pricing or core price plus surcharges was 3.6%, which met our expectations for the quarter. With 80% of our price increases in place as of March 31, we still expect net pricing to average about 3% for the full year as core price should be at least 3%, with surcharges about flat at current fuel prices.

As we periodically note, our differentiated market model provides strong visibility and predictability on pricing. We have less exposure to the more punitive price volume trade-off that our more urban, market-oriented peers.

The exclusive nature of almost half of our business and high market shares in many of our competitive markets provide a path for sustainable value creation.

Volume growth in Q1 was flat, which was better than our negative 0.5% to negative 1% outlook for the quarter, due primarily to better-than-expected special waste and construction-related C&D volumes. That does not change our outlook on volume for the full year, however.

Given the potential headwinds that we had incorporated into our original full year outlook from both the strength and special waste volumes last year and our decision to turn away lower-priced disposal volumes at our Chiquita Canyon landfill this year, we continue to believe volume growth in the first and fourth quarters will be comparably better than Q2 and Q3.

For example, Q1 volume on a reported basis was flat and Q4 also could be flat. The second and third quarters could average about negative 2%, given the headwinds unless special waste and construction volume to continue on the trend we saw in Q1. We would rather remain conservative on our outlook at this point in case the first quarter's improvement was more attributable to milder weather than an improvement in the economy. We believe it was a little of both.

Disposal volumes in the first quarter, adjusted for the impact of acquisitions, were up about 2% year-over-year, primarily due to increases in special waste and construction-related volumes. Special waste volumes increased 10% year-over-year and the activity was very widespread, with 75% of our landfills reporting year-over-year increases in such volumes.

C&D volumes, which account for a little more than 10% of our landfill volumes, increased about 30% compared to the year-ago period, likely due to more mild weather in the quarter.

MSW disposal volumes were down 5%, consistent with our original outlook for down low-to-mid single-digit percentages during the year, primarily due to our loss of lower-priced disposal volumes at our Chiquita Canyon landfill.

As noted on our February call, rather than chase prices down and consume Chiquita Canyon's air space at lower prices, we've made the decision to hold the line on our prices in the short term, as we expected significant increase in market pricing in the L.A. basin once Puente Hills closes on October 31, 2013.

Roll-out pulls per day in the first quarter were up about 2% year-over-year on a same-store basis and revenue per pull increased 3%. Our central and eastern regions reported increases during the quarter, in both pulls per day and revenue per pull.

Our Western region showed mixed results. Pulls per day were down 4% year-over-year, but this was more than offset by a 6.5% increase in revenue per pull. The West Coast continues to lag the rest of the country in coming out of the great recession.

Internal growth in the quarter from recycling, intermodal and other services was a negative 0.7%, due to year-over-year decreases in recycled commodity values. Proceeds from the sale of recycled commodities in the first quarter were 5% of consolidated revenue, down sequentially from 5.5% in Q4 and 6.3% in the third quarter of 2011. Prices for OCC or Old Corrugated Containers averaged about $155 per ton during the first quarter, down about 14% from the year-ago period and 21% from Q3 2011's highs, but up 2% sequentially from Q4.

For our sensitivity analysis as we have highlighted on previous calls, we estimate that a 10% decrease in recycled commodity value from Q3 2011 level, could result in about a 50 to 60 basis point impact to margins and about a penny and a half at 3ps per quarter.

During 2011, OCC averaged $180 per ton in Q1, $185 per ton in Q2, $197 per ton in Q3 and $152 per ton in Q4. At current prices, the margin and EPS hit from the lower OCC prices will remain a comparative year-over-year headwind through the third quarter of 2012, consistent with our original outlook for 2012.

Looking at acquisition activity. We still believe the next 18 to 24 months should be a busy period 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 Veolia has announced intention to sell its U.S. solid waste business.

Alaska Waste closed as expected on March 1. And we've already completed a small tuck-in within that state. Our recent equity offering further strengthened our already industry-leading balance sheet, providing us with what we believe is more than $1.5 billion of debt capacity to fund potential transactions while still remaining investment grade rated.

Regarding Veolia's possible divestiture. I will repeat what we said on our February call, which is we would not normally expect to succeed in acquiring assets through a public auction process unless the circumstances were very unique.

Private equity buyers have a history of overpaying in an auction process within this sector for a number of reasons. Private equity gets compensated for holding onto and deploying investor money, not necessarily from returns on such money. They often naively accept banker fiction around the EBITDA and potential growth of the assets. They also tend to ignore the real challenges involved in converting EBITDA to free cash.

And finally, they ignore longer-term landfill closure, post-closure liability and underfunded multi-employer union pension plan since such liabilities normally don't hit during the rescind ownership period. In other words, strategic buyers know too much.

We continue to believe we are the only strategic buyer for Veolia's assets due to having no market overlap, no DOJ or lengthy state approval issues. We can move quickly, and given our knowledge of the operating performance and liabilities of these assets and without a financing contingency. However, that said, we are currently not a participant in Veolia's banker-led auction process. But we stand ready to engage at the right time if warranted. Apart from Veolia, our pipeline for potential transactions remains quite full.

So let me be clear, as we noted on earlier on this call, we will invest for returns or we will return excess capital to stockholders. We have a differentiated market approach and are returns focused. Overpaying for growth's sake is not in our DNA.

And now, I'd like to pass the call to Worthing to review more in depth the financial highlights for the first quarter and to provide a detailed outlook for Q2 of 2012.

Worthing F. Jackman

Thank you, Ron. In the first quarter, revenue increased 13.6% from the prior year period to $376.4 million, 10.7% of which from acquisitions and 2.9% from organic growth. Adjusted operating income for depreciation and amortization in the quarter is reconciled in our earnings release, increased 9% to $116.3 million.

As the percentage of revenue, this was 30.9%, or about 20 basis points above our outlook for the quarter and 130 basis points below the year-ago period. Year-over-year, we estimate that about 70 basis points of this 130 basis point margin decrease or more than 1/2 was attributable to lower recycled commodity values.

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:

Third-party disposal, transfer, taxes and pass-through expenses increased about 50 basis points in Q1, primarily as a result of County Waste acquisition which anniversaries itself in Q2. Fuel expenses increased 35 basis points to about 6.5% of revenue in Q1. We averaged approximately $3.62 per gallon for diesel during the quarter which was $0.30 a gallon, or 9% above the prior-year period.

Tires, repairs and maintenance increased 30 basis points. Leachate expense increased 20 basis points, and bad debt expense increased 20 basis points. Most of this bad debt increase is a timing issue and we expect majority of this provision to be recovered in future periods.

These increases, as a percentage of revenue, were slightly offset by a 40 basis point reduction in insurance expense, primarily related to property claims, but also workers comp in autumn, and a 15 basis point decrease in medical cost. From a safety standpoint, we had fewer incidents in 2011 than in 2003, when we were almost a third of our current size. This improving trend continued in Q1 of 2012 as incidents decreased another 5% year-over-year.

As a reminder, adjusted results for the current period primarily exclude acquisition-related expenses, cost associated with the relocation of our corporate office from California to Texas and one-time equity compensation expense incurred at the time our NEO's employment contracts were modified in February. These costs, which are all reflected in our SG&A and discussed in our prior earnings call, totaled $7.1 million in the current-year period.

Depreciation and amortization expenses for the first quarter increased $5.8 million year-over-year. As a percentage of revenue, DNA increased 20 basis points year-over-year, primarily due to an increase in amortization of intangibles associated with the County waste acquisition.

Net interest expense in the quarter was $12.2 million, or about $3.5 million above the prior-year period. This increase was primarily due to increased borrowings associated with the County waste acquisition and higher borrowing costs associated with the July 2011 refinancing of our credit facility.

Debt outstanding decreased $290 million during Q1 to $888 million and our leverage ratio, as defined in our credit facility, improved to about 1.7x debt-to-EBITDA.

We received almost $370 million of net proceeds from the offering of 12 million shares during the period and applied the majority of these proceeds to reduce borrowings under our credit facility.

Our effective tax rate for the quarter was 41.3%. But adjusting for the one-time NEO equity grant, our effective rate was 39.2%, consistent with our outlook.

Our fully diluted outstanding share count for Q1 was 115.9 million shares, an increase of about 1.5 million shares from the year-ago period due to the partial current period impact of the equity offering, somewhat offset by share repurchases completed last year. We have not repurchased any shares yet this year, as we are preserving capital for potential acquisitions. We view acquisition outlays as our best use of excess capital. We may resume our buyback program once we get more clarity on the status of the Veolia divestiture.

GAAP EPS in the first quarter was $0.27 and adjusted EPS was $0.32 or flat compared to the year-ago period despite the increased share count.

Free cash flow in the quarter was $76.6 million or 20.4% of revenue, up 8.2% over the prior-year period. This was a great start towards our $250 million to $260 million outlook for the full year.

I will now review our outlook for the second quarter of 2012. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and our various SEC filings. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic environment and excludes the impact of any additional acquisitions that may close during the period and expensing of acquisition-related transaction cost, as well as cost incurred in connection with the relocation of the company's corporate headquarters in California to Texas.

Revenue in the second quarter is estimated to be between $407 million and $410 million, up almost 5% over Q2 2011. Organic growth is estimated to range between flat and 0.5%, with the components as follows: Net price of about 3%; volume growth between negative 2% and negative 2.5%; and recycling intermodal and other around negative 0.5%.

As Ron had noted earlier, tougher year-over-year comps for special waste jobs and the loss of the lower price volumes at our Chiquita Canyon landfill are estimated to account for about negative 2% volume in the period or between 80% and 100% of the guided volume growth. We expect this comparison to continue in the third quarter then dissipate and get easier in Q4.

There is no negative change occurring to the business. This is just the math of year-over-year comps predominantly from volumes turned away at Chiquita and above average special waste activity for the last 2 years. This is consistent with our original volume outlook for the full year, and any improvement in the economy or increases in special waste activity or construction-related C&D volumes this year would improve these comparisons.

Operating income, before depreciation and amortization and accretion for Q2 is estimated to be between $131 million and $132 million, reflecting a margin of about 32.2%.

Depreciation and amortization for the second quarter is estimated to be about 11.2% of revenue. Operating income for the second quarter is estimated to be about 21% of revenue. Net interest expense in Q2 is estimated to be about $12.1 million. Our effective tax rate in Q2 is estimated to be about 39.2%.

Noncontrolling interest is expected to reduce net income by about $275,000 and our diluted share count in Q2 is assumed to be about 124 million shares, excluding the impact of any share repurchases that may occur during the quarter. This represents an 8.5% year-over-year increase in share count and will be a material headwind to EPS growth until the excess capital is deployed. Now, let me turn the call back over to Ron for some final remarks before Q&A.

Ronald J. Mittelstaedt

Okay, thank you, Worthing. Again, we are extremely pleased with our first quarter results, as revenue and margins exceeded the upper end of our outlook. We remain on track to deliver the full year outlook we've provided in February. And we are well-positioned for volume growth, given our market shares. But that will depend on the case and geographic breadth of an economic recovery.

We had strong visibility on core pricing growth and free cash flow margins for the year. No other company in our sector comes close to us in these 2 critical metrics. The biggest [indiscernible] is the potential timing and size of any acquisition outlays as acquisitions could provide a meaningful contribution over the next couple of years.

We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Scott Levine, JPMorgan.

Rodney C. Clayton - JP Morgan Chase & Co, Research Division

It's Rodney Clayton here for Scott. All right. So first, can you just speak a little bit to the pricing trends that you're seeing in the, in your competitive markets? I know you said you got 80% of your increases in thus far. But maybe a little bit more color on how things are looking in competitive markets and whether you're seeing increased competition? Or whether things are stable there?

Ronald J. Mittelstaedt

Yes, Rodney, as you've noted, we've already done 80%, 85% of our rate increases for the year. We are getting around 4% increases in our competitive markets, around 2% to 2.1% in our exclusive franchise markets. And I would tell you that for the most part, the pricing has gone very well. End markets where we have some overlap with Republic Services, we are attending to see Republic be, what I would consider more aggressive than normal on new customers and on municipal bids, but nothing material. Things have been pretty stable. And to achieve 4% net price in our competitive markets, that is a, I'd say a pretty good achievement in this environment.

Rodney C. Clayton - JP Morgan Chase & Co, Research Division

Okay, that's helpful. Secondly, the colony landfill, I know there was a, I think, a Supreme Court ruling that came out on that here in the last couple of weeks. Can you just talk to us about how that integration process is proceeding? And whether or not that ruling has any impact on how fast you're moving in that business or not?

Ronald J. Mittelstaedt

Yes, well it was a district court ruling, and all that ruling was a withdrawal of the lawsuit challenging the town authority to enter into a contract with us. And the court ruled that, that was not the case and dismissed the lawsuit, so which is a positive thing for us. It wasn't really -- it wasn't our fight. It was a fight between the town, colony and activists who did not want the landfill sold. So that's behind us, and it is upheld the contract that we entered into. As far as the integration of that, it's gone very well. We have ramped the full volumes that we can currently take there from our County Waste acquisition which only represents about 20% of our County Waste acquisition. We look to increase the permitted volumes at that landfill going forward. And as we are able and if we are able to, we have plenty of more waste that County Waste, to take in there over ensuing periods.

Worthing F. Jackman

Hey, Rodney, the lawsuit did not affect the integration process one bit.

Rodney C. Clayton - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And then finally, moving over to the M&A side, appreciate your comments there on Veolia. If we look beyond Veolia a little bit, just to some of your other prospects in the pipeline. Are there particular regions where you are seeing better prospects or maybe more aggressive sellers? Any type of additional color on the non-Veolia part of the pipeline will be helpful.

Ronald J. Mittelstaedt

Sure. Again typically, Rodney, our pipeline sort of runs in the $125 million to $150 million of revenue in what we call active discussion which means there is a confidentiality agreement signed. There is some form of, some material being exchanged on financial and other type of due diligence and we're in some phase of an offer. That right now is running about 2x to 2.5x normal and really did for most of 2011, so it remains fairly full. I would say that there are more competitive market deals in our pipeline than exclusive market deals in our pipeline. And I would say that the drivers I outlined such as segmenting the waste stream, concerns of capital gains tax increases, those tend to be less affected on the West Coast franchise sellers than they do on the competitive market sellers. So it would, it goes to reason that, that what we're seeing is most competitive market sellers in the market.

Operator

The next question comes from the line of Bill Fisher, Raymond James.

William H. Fisher - Raymond James & Associates, Inc., Research Division

Just a follow-up on the acquisitions. You mentioned on the capital gains on the competitive guidance. If they wanted a -- if they're concerned about that and wanted to close this year, what -- when would they need to kind of sign a deal with you to get that transaction done?

Ronald J. Mittelstaedt

Well depending on the size of it, Bill, and whether a Hart-Scott-Rodino filing is required, a Hart-Scott-Rodino filing is required on anything with, today with a purchase price of about $58 million or more. And that filing can take between 30 and 120 days. So if you look at the smaller transactions, they need to really be, we need to be signed in the late October, early November timeframe to make certain that they're close by year end. If you're, if it's a larger transaction, it needs a filing. Probably you're looking at August to September. So certainly by the start of the fourth quarter, we're going to know what this year will look like on an acquisition basis.

William H. Fisher - Raymond James & Associates, Inc., Research Division

And just one quick one on -- you mentioned the roll off and, I just on the commercial collection side, what kind of the things you need to see over time to get that back into positive territory, just as much stronger economy, or what kind of things to look at there?

Ronald J. Mittelstaedt

Yes I think the short version because I mean again remember, Bill, in 52% of our business, we get it all and we get it with no price discovery. So if it's out there, we get it. I mean, so we're a very good barometer of whether is the economy is truly improving or not. Because if you look at that $800 million plus piece of our business, there's no competition. So it's not a situation of market share churn. And in that sector, we're still negative on the commercial side, which means that business closures are still outpacing business starts, service decreases are still outpacing service increases and the West Coast is still stuck, particularly California in a recessionary environment with high unemployment. So what we need to see to answer to your question is we need new business starts to outpace closures. We need service increases to outpace service decreases and the equation turns quickly. Company-wide in the first quarter, increases did outpace decreases. It was and that was an improvement from last year where it was inversed, and new business exceeded lost businesses in the quarter. Again, that was a reversal. But we did see an uptick in closed businesses throughout our system. So it is sort of the things are stable, but muddling along, not a dramatic improvement.

Operator

The next question comes from the line of Michael Hoffman at Wunderlich.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

So following up on Bill's question, a nuance on that. If you, and again the logic of looking at the franchise business, but is California we're talking about. If you look at the competitive side on a same-store basis, is, are the container weights rising, falling or flat?

Ronald J. Mittelstaedt

I would say they're approaching being flat.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, so 3 years into recovery, would you start to characterize the consumer has found the level of behavior? It looks like we are where we are, or we're still finding that level?

Ronald J. Mittelstaedt

Michael, it's geographic. There are areas where the economy is very strong, led by local drivers such as oil and gas demand from Texas, all the way up through the Dakotas, where unemployment's 2.5% and we're getting new businesses and service increases and putting out rollout boxes at extraordinarily high levels. And then there is California, like you said. So it's a geographic issue. I would say everything is clearly more stable and more positive than it was 6 to 9 months ago.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay, and then back to the deal pipeline for a nuance there. The sense that we're getting through our channel checks is that in 2010, lawyers and accountants and advisors were telling private owners "Don't worry. This will probably get extended." But in 2012, and particularly in the fourth quarter, they clearly are saying, "Hey capital gains are going up. It's just a matter of how much and when. Therefore, you need to do this kind of analysis. Are you seeing that same kind of widespread, "I better start a conversation even if I don't get there?"

Ronald J. Mittelstaedt

Yes and what we're seeing, yes is the short answer. And what we're seeing is a lot of people saying I want to know what my value is and what a deal would look like and what timing it would take and what timing it would take to close and then I'm going to keep a watchful eye on sort of where I think the selection nationally is headed and where the discussion is headed about tax rates. And then I'll make a decision as we approach sort of later in the summer or early in the fall.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay and that being, there's a lot of private equity ownership that was placed in the sort of middle of the decade. Is that stuff coming back into the market as well or do you think those...

Ronald J. Mittelstaedt

I think it would like to. It's just tough when you pay 10x to 12x and then there's that EBITDA deterioration. The reality is the last 3 or 4 private equity deals that have tried to come to market, nobody showed up to buy because they can't get close to their end bases.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay fair enough. And then, within the context of a capital allocation model in 2012, in light of the possible change in dividend taxes, would you contemplate a special dividend?

Worthing F. Jackman

Yes, Mike, we'll just, we'll watch the tax. While again, what we're focused on near term is acquisition outlays.

Operator

The next question comes from line of Al Kaschalk, Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I just want to make sure, thank you for clarifying your view on Veolia, and that should help the market.

Ronald J. Mittelstaedt

Well it seems that no matter what we say there seems to be some confusion. So...

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Right. So my question is trying, I know you're not going to want to commit to a timeframe, Ron. But when you sit there with the overcapitalized balance sheet, you talk about the pipeline of, sort of other M&A opportunities, none on the massive size of a, or the size of a French company. How long do we need to hold back considering I guess you pulled the trigger or perhaps we have to evaluate then returning the capital to investors because you don't see the transactions hitting the paydirt here?

Ronald J. Mittelstaedt

I think Al, look, the reality is, is that certainly by the end of this year, I think, we're going to have political clarity at the federal level on the Congress, as well as the White House. And we are going to likely have tax policy clarity around capital gains, ordinary income, as well as, I think dividend, estate, etc. Whether that is a changed January 1 of '13 or is a change in December 31 of '13, it's likely a change sometime in '13. So what I would tell you is, is that we would hope to deploy and are looking to deploy, prudently, the capital over the next 6 to 18 months. If we haven't deployed and delevered through acquisitions fairly significantly by the middle to the third quarter of next year, then we're going to be looking at a substantial increase in the buyback from an accelerated standpoint and/or other means of capital return. So I can't -- you can't sit here and say, well look, if we don't do this by January 1, we're going to return all this capital. I mean, that would be crazy. Because we would either, it will force us to do something that we don't want to do, or remain undisciplined or miss an opportunity. Because again it is difficult with some of the lack of clarity on these issues. But I clearly think that over the next 12 to 16 months, we're going to know the answers to that question.

Worthing F. Jackman

But again, Al, as we said in the script, as we get more clarity on Veolia process, you may see us turn on the repurchase in Q2 or Q3.

Ronald J. Mittelstaedt

Yes.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

But I guess that clarification around Veolia is that there's certainty that there are buyers out there at a rate greater than you have demonstrated in the past?

Ronald J. Mittelstaedt

Who, the Veolia assets?

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Yes, because at the end of the day, I think we can take the Veolia assets out of the question from an M&A if the multiples that are out there are being discussed. Because you have demonstrated time and time again that you don't pay that level.

Ronald J. Mittelstaedt

Correct. I mean, number one, I cannot answer for you whom those buyers would be. I can tell you that I don't believe there are any strategic buyers in the U.S. that are more well-positioned than us or are interested in remotely paying the values that have been bantered around by the bankers shopping the Veolia deal. They claim that there's private equity out there willing to pay, 8X, 9X, 9.5X. If they are able to do that, that's a great deal for Veolia. They should take it, and hope that it's financed and hope that they or whoever runs it gets approved by those specific states. Well they have to transfer landfills. And they'll get it done sometime next April of '13. But I don't know who those people are. We are not going to pay that kind of multiple, especially for that, those assets. Those assets do not have long lives. They have significant union pension defined benefit plan liabilities. They have significant closure liabilities. They have well under our margin performance. They do not have our organic growth characteristics. So we're not going to pay north of 7x or 7, the low 7s. In fact, I think it's you struggle to get a double-digit IRR at 7.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Just a clarification and I appreciate the color on the, how volumes will fall for the balance of or expected to fall on '12. Are you seeing any uptick though, on special waste or what has been called special waste in the past and if not, what do you think is the, keeping that suppressed? Perhaps not necessarily just in your markets, but maybe in the market in general?

Worthing F. Jackman

Right, well in Q1, you did see an increase year-over-year because volumes were up in special waste. But again, it's hard to predict the timing of projects, when they're going to start, of the influence of weather on the start dates of those projects. So the more difficult thing is it's not a question of is there a lot of activity going on, because there is. The challenge is always how do you comp such above average performance in 2010 and '11. And our view in guidance is, as everyone knows, is to be cautious in the things we do not control. And if they materialize, let's enjoy the upside of that. I mean we try not to take bets on future performance on things we do not control. Some other companies may. That's not our MO.

Ronald J. Mittelstaedt

And, Al, I would say that the other thing, that is an encouraging thing, is that again we had very large special waste deal years in 2010 and 2011. But that was predominantly federal and state contract-driven for infrastructure development and roadway development, bridging, bridge development, river dredging. And it was TARP money and other stimulus money that was fed to local government through state and federal government. That ended at the end of 2011. So the good news is, is we are seeing broad-based special waste activity that is predominantly private jobs right now. And the good news about that is traditionally, that is, leaves recovery because this is speculative real estate development, and you're in ground cleanup for development. So it's a very different mix of what it was over the last 2 years.

Operator

The next question comes from the line of Corey Greendale, First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

So the first question I have was, is trying to pick through the pieces of underlying volume trends. When you said that you think volume will be about flat in Q4, based on where we are now, is there still a drag from Chiquita Canyon in there? Or, I'm trying to get a sense what the kind of underlying economic volume assumption is to get that 0?

Ronald J. Mittelstaedt

Yes there is a drag in Q4 by Chiquita Canyon, the, but there's not as much special waste drag in that quarter and that's why you get results. I mean, the short answer is the underlying volume improvement is 1.5% to 2%. And it's because Chiquita on its own is almost 1.5% to 2% drag, depending on the quarter.

Corey Greendale - First Analysis Securities Corporation, Research Division

Okay good, that's helpful. Secondly, Ron, I think there are some investors have the view that if 1 wants to own a waste stock to play a recovery in construction, that some of your larger peers are kind of better positioned for that than you are, could you just address that perspective?

Ronald J. Mittelstaedt

Well I can't address what an investor may think or not think. Here's what I will tell you. Number one, the construction and demolition portion of our industry, particularly on the collection side is the lowest margin business our industry has. So if you want to play a low margin business, have at it. Secondly, we get 100% of the construction and demolition comeback in our model, in that 52% of our business that's exclusive, and we did it at a guaranteed price. So in that 1/2 of our business, we're going to get 100% of the recovery, and it's going to be at a known price and the margins are much higher. So on a macro basis, by design, we have less C&D and construction work in our model than our peer group. That's by design. That's one of the reasons our margins are substantially higher than any of them. But what I would tell you is that we'll get less of the C&D total, but we'll get it at a much higher price than return than the others. So I would tend to say I think that's making a decision on a poor portion of this business. That's like investing in this business because you think commodity pricing will go up. That's really the wrong reason to own this business. I would say that's the same thesis on that.

Worthing F. Jackman

It is also a question of geography. Do you predict where you'll see those construction increases, and you can map the different company's assets.

Corey Greendale - First Analysis Securities Corporation, Research Division

Yes, sure, that's very helpful. And actually, really one quick question for you, just to set expectations. But with the moving pieces in CapEx and the timing of cash tax payments with traversal docks [ph] depreciation. Can you give a sense of what you think that relative seasonality is in cash flows through the quarters this year?

Worthing F. Jackman

Well, it'll be similar to the flow last year. For instance, Q1 is always our lowest cash tax payment quarter. Q2 will likely see that increase to about $20 million in cash taxes against those, that Q1 to Q2 step is no different this year than last year, as you'll see higher tax payments in Q3. Not as much because there's only one tax payment in Q3 and Q4. But I'd map it similar to last year, and assume an overall cash tax to GAAP rate of about 70%, relative to last year's number.

Operator

The next question comes from the line of Barbara Noverini, MorningStar.

Barbara Noverini - Morningstar Inc., Research Division

I just want to shift a little bit more towards the big picture question. Could you please comment on municipal interest in private hedging landfills, as the economy improves? Are those opportunities starting to fall off a little bit? Or are municipal budgets in your target market still feeling a little stretched such that privatizing continues to be an interesting proposition for them?

Ronald J. Mittelstaedt

Yes, for the most part, it is a -- privatizing continues to occur. It moves like the government, glacially. And so we're seeing it happen very slowly. We've done one this year, the Colony landfill. We are looking at another couple right now of privatizations within our 30-state footprint. That could happen by the end of '12. But it is not a material driver of our business or the industry at this point in time, because again it does move very slowly.

Operator

There are no new further questions in queue at this time. [Operator Instructions]

Ronald J. Mittelstaedt

Okay, well, if there are no further questions, on behalf of our entire management team, we appreciate you listening to and your interest in the call today. Worthing, Steve and I will be here today to answer any direct questions we did not cover that we're allowed to answer under Regulation FD, as well as Regulation G. Thank you, again. We look forward to speaking with you in Las Vegas at Waste Expo next week, or at an incoming investor conference or on our next earnings call. Thank you very much.

Operator

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

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