Stericycle Inc (SRCL) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require any assistance during today's conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Ms. Liz Brandel. Ms. Brandel, you may begin.

Thank you. I will be reading the Safe Harbor Statement. Statements by Stericycle in this conference call which are not strictly historical are forward looking. Forward-looking statements involve known and unknown risks and should be viewed with caution. Factors described in the Company's Form 10-K, 10-Qs, as well as other filings with the SEC, could affect the Company's actual results and could cause the Company's actual results to differ materially from the expected results. The Company makes no commitment to disclose any revisions to the forward-looking statements or any facts, events or circumstances after this date that may bear upon forward-looking statements. During the conference call, we may refer to our total debt to capitalization percentage. This was calculated by using a total debt in the numerator and the total debt plus shareholder equity in the denominator. We consider this ratio to be a good indicator of the strength of a company's balance sheet. It is not a measure in accordance with GAAP accounting principles and is not a measure of net income, cash flow or liquidity. And with that, I'll pass the call to Mark Miller.

Thanks, Liz. Good afternoon, and welcome to our third quarter 2005 conference call. With me today are Frank ten Brink, our Chief Financial Officer, Rich Kogler, our Chief Operating Officer, and you heard from Liz, our Vice President of Finance. Once again, we are pleased with the results achieved by our team in the third quarter. Our net income in the third quarter was $23.4 million and EPS was $0.52. Without the impairment charge by 3CI, EPS would have been $0.53 per share. For 37 consecutive quarters since our IPO in '96, we've either met or exceeded expectations for our Company's performance. That brief overview, I'll turn the call over to Frank.

Thanks, Mark. Revenues grew 17.2 million in the quarter to 153.2 million, up 12.6% from 136 million in Q3 of '04. Of the 17.2 million growth, SQ, our most profitable sector, was up approximately 6.1 million or 9% and LQ revenues were up approximately 2.3 million or 6%. International equipment sales were down by approximately 1.6 million in the quarter. Acquisitions less than 12-months-old contributed approximately 7.4 million for the quarter.

Customer revenue mix was approximately 63% in small and 37% in large customers. As in the past, this mix is calculated excluding international operations, 3CI and acquisitions. Year over year gross profit as a percent of revenue was 44.1% in the quarter versus 43.5% last year, up 60 basis points. Gross margins were sequentially up by 35 basis points as a result of continued improvement in our base business, both domestically and internationally, partially offset by continued operating costs headwinds. SG&A, excluding amortization, was 15.7% of revenues, or 24.1 million in the quarter due to increased investment spending. Income from operations in the quarter was 42 million, or 27.4% of revenues which includes the 3CI one-time, pretax, non-cash charge of 0.9 million.

Net interest expense in the third quarter was 3 million versus 3.1 million in the prior year. Other expense was 0.5 million versus 0.3 million in the prior year due to non-cash, currency translation charges. Net income from the third quarter was 23.4 million, and EPS was $0.52 for the quarter versus $0.46 last year. There was .006 of a one-time write off in and incineration of .872 million pretax or approximately $0.01 EPS impact. At the end of the third quarter, the revolver borrowings were 182 million. The unused portions of our revolver is now approximately 171 million.

During the quarter, we repurchased 146,600 shares of common stock on the open market in the amount of approximately 8.1 million. We have bought back 2,144,230 shares at this point. In the quarter, our CapEx was 6.2 million. The DSO in the quarter was 53 days versus 52 days a year ago.

And now some balance sheet numbers. Cash and equivalents, 4.1 million. Accounts receivable, 90 million. Current assets, 135.3 million. Total assets, 934.8 million. Short-term debt, 12 million. Long-term debt, 235.3 million for a total debt of 247.3 million. The net worth of the Company was 532 million. Depreciation in the quarter was 4.9 million and amortization was a half a million. Our DSO in the quarter was 53 days.

Now for the nine months. For the nine months ended September 30, '05, revenues increased to 442.9 million, an increase of 17.4% from the same period a year ago. Gross profit as a percent of revenue was 43.8% for the nine months ended September 30, '05 versus 44.4% for the nine months ended September 30, '04. Earnings per share increased 17.2% to $1.50 from $1.28 per diluted share in the same period a year ago. Cash provided from operations was 91.2 million for the first nine months of '05. That concludes the financial picture. I will now pass it back to Rich.

Thanks, Frank. We want to begin by thanking the operating team for all their hard work and effort in what proved to be a very challenging quarter. In the face of continued operating costs headwinds, they once again delivered sequential gross margin improvement. Throughout the quarter, all operating locations stayed focused on improving productivity and efficiency to help offset rapidly rising energy costs. Special recognition goes out to our operating sales team members who live and work in the areas affected by the hurricanes. Despite the incredible operational challenges posed by the hurricane damage, they did whatever it took to make sure our customers' needs were met. Whether it involved working around the clock to restart our plants or driving long days and long distances to reach customers or helping to reestablish communication links with our many affected customers, all of our team members did their part and gave their all. We salute them and we thank them for their dedication and extraordinary efforts during this particularly difficult time.

Turning now to sales. We enjoyed strong growth in all areas of our business. The sales team focused their energies on our key growth drivers, including SteriSafe and Bio Systems and once again turned in a solid performance in the quarter. The SQG sales team continued to emphasize a strategy of upselling new and existing accounts into the higher level SteriSafe programs. In Q3, over a third of the new SteriSafe customers opted for the selected preferred program. The percentage of total SteriSafe accounts on premium levels rose to 12.5%. Since the higher level programs offer significant benefits to us and our customers, we have committed additional investment spend in this area of our sales program. Because of the sales team's continued success, SteriSafe contributed approximately 42% of total SG revenues in the quarter, achieving now the low end of our 2005 goal of 42 to 43% of revenues. During the quarter, our large accounts team secured 51 new LQG medwaste contracts and they also signed 65 new Bio Systems accounts. And in summary, we ended Q3 with 331,300 accounts of which 323,600 were small and 7,700 were large accounts, and I'll turn it back to Mark.

Thanks, Rich. Well, clearly we had another solid quarter and I'd now like to provide insight on our current outlook for the remainder of 2005 and provide our preliminary guidance for fiscal 2006. Please keep in mind that these are forward-looking statements.

During the third quarter, we completed five acquisitions, two domestic and three in Mexico which were tuck-in acquisitions. The incremental revenue impact in 2005 for these latest acquisitions will be approximately $2.6 million. Our Q4 guidance assumes current international exchange rates and interest expense will be slightly higher as a result of these acquisitions and higher interest rates. Keeping these items in mind, we believe that analysts may fine tune their fourth quarter 2005 models to reflect revenues between 156 and 158 million and estimates for EPS of $0.55 to $0.56 per share.

I'd now like to provide our preliminary outlook for 2006. In order to facilitate comparison to 2005 and analyst estimates for 2006, this preliminary guidance does not include the affect of FASB 123R, the expensing of stock options. We believe that analysts' EPS estimates will be in the range of $2.39 to $2.45 per share which we are comfortable with. We believe that revenue estimates for 2006 will be in the range of 651 to 664 million depending on assumptions of growth and foreign exchange rates. These estimates would include growth rates on small accounts of approximately 8 to 10% and 4 to 6% on large accounts. For the preliminary guidance, we have assumed a slight strengthening of the dollar in 2006. Consistent with our past practice, the guidance does not include any new proposed acquisitions that may occur in the future. We believe analysts will have estimates for net income between 109 and 112 million depending on their assumptions for margin improvement, interest expenses and strategic spending, and that analysts will have estimates for pre-cash flow between 110 and 118 million depending upon their assumptions for working capital, CapEx and tax rates.

In closing, we are very excited about the tremendous opportunities in 2006 and beyond. We continue to grow our business on multiple fronts with SteriSafe, Bio Systems, International and Pharma returns, and collectively they'll drive revenues, margins, cash flow and create significant shareholder value. We thank you for your time today and now we'll switch to question and answer mode.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Lorraine Maikis. Your line is open.

Thank you, good afternoon.

Hi.

Just wanted to talk a little bit about the incremental SG&A spend. Just wondering, was that all on the upselling of SteriSafe and if so, could you just describe what types of costs you incurred in that upselling. Was it training? Was it new materials? Just a little bit more detail on that.

The investment spending was actually bumped up about, roughly 40, 50 basis points and we'll continue that investment profile throughout the remainder of this year and in our guidance of '06. Our focus on areas, as you said SteriSafe, we've added more resource into our sales effort, we're adding more into market research and market development in that area. As well as our Bio Systems program of expanding more resource on that and on the Pharma returns. So across the areas of high growth, we're putting more resource against them. That's really consistent with what we've done in the past where we see opportunities to get great returns, we release the spend as they achieve results.

Okay, and then the acquisitions that were completed. You said 2.6 million of revenues this year. Is that one quarter or did we have some in, during the third quarter as well?

There was a little bit in the third quarter. About 7 hundred thousand in revenues. And it's 2.6 million and the total of impact of '05.

Okay. Thanks. Finally, can you just update on us Bio Systems' new signups, initial expectations for 2006, just an overview of how that program has been going.

I think we're very pleased with our success. We've had sort of continual escalation of account closings and we're obviously now in the major market areas that we talked about a year ago that we wanted to market the program in. I think in terms of guidance for '06, what we're looking at is growing Bio Systems revenue in the neighborhood of around 30% or so. We're talking about it in that sense because obviously as we move into different markets, we're dealing with different customer bases.

Thank you.

Thank you. Our next question comes from Jason Roberts from Great Lakes Review. Your line is open.

Hi. I had a question on White Rose. Just wondering how the acquisition is going and the success you're having with selling to more smaller accounts and if you have an estimate of what percent small accounts are the total for White Rose?

Yes. White Rose did perform well in the quarter. Again, good growth from a revenue point of view. The approximate split right now in revenues is 86-87% in large quantity and 13 to 14% in the small quantity.They keep growing, the small quantity faster than the large. Margins improved slightly. So they're on track.

Okay. Thanks.

Thank you. Our next question comes from Robert Willoughby of Banc of America. Your line is open.

Close enough. Frank, a question in terms of, did I hear, you generated cash of 34 million. I'm just trying to figure out exactly where it went. I don't think you paid down debt, you bought some stock, the deal spending, could that have been a big number? I'm trying to figure out exactly where the cash from operations flowed.

Of the $34 million, about 13.8 million went for acquisitions, about 6.3 million went for capital expenditures, and then we had about 8 million for share repurchase and the rest related to debt.

Okay. You did take down debt during the quarter? It didn't appear to me that you did.

Yes. Slightly down.

Okay. Thank you.

Thank you. Our next question comes from Alina Cellura from Citigroup. Your line is open.

Hi. Just one more quick question on the SG&A. Do you expect SG&A to continue to trend at the third quarter levels or do you think it will come down slightly?

I think for -- as you're modeling for the rest of this year and our preliminary guidance for '06, I'd model around a 16% SG&A ratio. We see a number of opportunities presenting themselves and have authorized investment spend. I think 16% is a good target.

All right. Thank you.

Thank you. Our next question comes from Matt Litfin from William Blair Incorporated. Your line is open.

I've got a couple. Actually, let me start, Rich, with you. I need to clarify. What was the 2005 base of revenue on which that 30% Bio Systems growth expectation was based?

The 2005 Bio Systems total revenue is going to be in the neighborhood of about 30 million.

Okay. Thanks. Frank, do you -- I know that the guidance does not include the stock base comp that will be expensed in '06, but do you have, if not a single point estimate, just a rough range there?

It is early on, but if you look historically, it's been about 7 to 8% of our before kind of impact of EPS as reported, and we have estimated that that range is where we're probably going to stay next year.

Okay, and then Mark, on the guidance that you've given. Are you including revenue from the Pharma returns area and what is the revenue contribution that's contemplated from that in the new guidance there?

In the Pharma returns area, that business we're targeting to also grow about 30% year to year on top of obviously a small base where we have expected this year to do about 4 to 5 million and expect next year to be in excess of 6.

Okay, one last one, if I might. You've obviously expanded in the U.K. well here over the last couple of years. Mexico, you stepped it up in the third quarter. Are there other major country markets that you're considering moving into in a more meaningful way? I know you have a presence in Japan. But do you see opportunities outside of those three non-U.S. countries?

Actually, we're constantly looking at countries. It's probably inappropriate on a call for us to lay out which geographic areas but I think for a prioritization of resource, clearly if there's an opportunity that presents itself in an existing geography whether it be Canada, U.S., Mexico, U.K., etcetera, that would get a higher prioritization than a brand entering new geography, but there's a number that we're in review on.

Okay. Thanks, Mark.

Thank you. Once again ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. I'm currently showing no further questions. Actually, I take that back. We have a follow-up question from Ms. Maikis from Merrill Lynch. Your line is open.

Thank you. Can you talk a little bit about the impact that fuel had on your margins this quarter?

Fuel in the quarter and energy in total was about 5.6% of revenues. And so we're about 30 basis points up, in that we tried to get back on that, definitely.

You try to collect that through a surcharge?

Yes. That was kind of the headwind we had from it. And so from that point, that's the one that we tried to recoup from a point of view.

Okay. And then in terms of additional costs related to the hurricane, can you talk a little bit about how you -- what they were and how you offset them?

Sure, I'll address that. First, kind of looking at the revenue side of it. Probably 150,000 to 200,000 of revenue impact. Costwise, probably in the neighborhood of $100,000 of additional operating cost expense, long haul, overtime, the cost of shutting the plants down, bringing them back on, generators, things like that. We expect there to be a little bit of flow through, carryover in Q4 and obviously we're just coming out of Wilma, too, which caused our Miami plant to shut down. It seems like it's hurricane season, which I think we all know.

Okay. Thank you.

Thank you. Our next question comes from Matt Litfin from William Blair. Your line is open, sir.

Yes, I wondered, Rich, if you could characterize the LQG culling process? Where are we in that? Are we completely done? Do we still have a little more to go?

I think we're pretty much through the initial process that we laid out quite a few quarters ago. As we said at the time, we're always looking at the accounts and we obviously acquire new accounts. There's some culling that goes on, but I think you're seeing more now a picture of the normalized business as we move the growth rates forward.

Great, thanks.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. I'm currently showing no further questions, sir.

Well, thanks everybody for your attention. It's been a solid year. We're excited about the opportunities for 2006. We look forward to updating you on our next conference call. Everybody be safe. Take care.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all now disconnect.