Stericycle Inc (SRCL) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your first-quarter 2006 earnings release conference for Stericycle. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. And now, I'd like to turn the conference over to your host, Ms. Liz Brandel, Vice President of Finance.

Thank you very much. Welcome to Stericycle's first-quarter conference call. On today's call joining me will be Frank Ten Brink, Chief Financial Officer; Rich Kogler, Chief Operating Officer; and Mark Miller, Chief Executive Officer.

I will now read the Safe Harbor Statement. Statements by Stericycle on this conference call that 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-Qs, 10-K, 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 expected results. The Company makes no commitment to disclose any revisions to 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 is calculated by using the total debt as 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 the Company's balance sheet. It is not a measure in accordance with generally accepted accounting principles, and is not a measure of net income cash flow or liquidity.

I will now pass the call to Frank.

Thanks. Once again, we are pleased with the results achieved by our team in the first quarter, and pleased to note that our first-quarter results now include the impact of FASB 123(R), the expensing of stock compensation.

Revenues in the quarter grew $38.7 million to $179.2 million, up 27.5% from $140.6 million in Q1 '05. The internal growth for the Company was $13.6 million or 9.7%. Acquisitions less than 12 months old contributed approximately 25 million.

Domestic SQG revenues grew $7.4 million, or approximately 10%, and domestic LQ revenues grew $3.6 million, or approximately 8%. International revenues grew $2.5 million, or approximately 11%.

Gross profit was $78.8 million, or 43.9% of revenues. Total SG&A with acquisition-related expenses was $34 million, or 19% of revenues. Income from operations in the quarter was $44.7 million, or 25% of revenues, and net interest expense in the first quarter was $5.7 million versus $2.3 million in 2005 due to increased borrowings related to the acquisitions and stock repurchases and higher interest rates.

Net income for the first quarter was $23.5 million or $0.52 per share. At the end of the first quarter, the revolver borrowings were $402 million, and the unused portion of our revolver is approximately$ 86 million.

During the quarter, we repurchased 193,100 shares of common stock in the open market in an amount of approximately $11.2 million. Now since the beginning -- the repurchase program, we have repurchased a total of[ 2,575,030 shares. We still have authorization to purchase an additional $1.9 million shares.

In the quarter, our capital spending was $7.5 million, and the DSO was 56 days.

Now some other additional numbers. Current assets at the end of the quarter were $171.4 million. Total assets was $1.2 billion. Total debt was $488.6 million. Depreciation in the quarter was $5.8 million. Amortization was $0.5 million. And the total debt to capitalization was 47.3%.

This concludes the financial picture for the first quarter. And I'll now turn it over to Rich.

Thanks, Frank. We want to begin by recognizing our worldwide operating team for their hard work and commitment to operational excellence, productivity improvement, and cost containment during the quarter. Despite continued pressure from operating cost headwinds, they delivered another solid performance. We're very pleased with their efforts, and we thank them for their focus and dedication to our customers and our shareholders.

In the quarter, we enjoyed strong sales growth. The sales team stayed focused on our main growth drivers, SteriSafe and Bio Systems, and delivered a solid start to the new year.

The SQG sales team continued to focus on up-selling customers into the higher levels of SteriSafe. In Q1, approximately 40% of the new SteriSafe customers chose select and preferred, and the percentage of total accounts on the premium levels rose to a new high of 14.5%. Thanks to the hard work and determination of our SQG sales teams, SteriSafe contributed over 44% of total SQ revenues in the quarter.

In Q1, our large account sales team secured 55 new LQG medwaste contracts. And they also signed 72 new Bio Systems accounts. We're very pleased by the performance of the LQG sales team, and we thank them for delivering strong sales growth during the quarter.

In summary, we ended the quarter with over 339,000 accounts, of which approximately 331,000 were small and the remainder were large. And I will just turn it over to Mark.

Thanks, Rich. I would now like to provide fine-tuning to our 2006 guidance. Please keep in mind that these are forward-looking statements.

In the first quarter, we completed two international medical waste acquisitions in addition to the previously announced Sterile Technologies Group acquisition. The incremental revenue impact in the quarter of these two new acquisitions was approximately $800,000, and the 2006 revenue contribution will be $4 million. Our guidance for 2006 now includes the effect of FASB 123(R), the expensing of stock compensation, so care should be taken when comparing 2006 to 2005.

Keeping these items in mind, we believe that analysts may adjust their estimates for EPS to a range of $2.25 to $2.31. We believe analyst estimates for revenues for 2006 will be in the range of approximately $751 to $768 million, depending on their assumptions of growth and foreign exchange rates.

Given the rise of interest rates and our borrowings under our loan facility, we anticipate interest expense for 2006 to be in the range of $26 to $27 million. We believe analyst estimates for net income will be in the range of $102 to $104 million, depending on assumptions for margin improvement, interest expense, and strategic spending. We believe analysts will have estimates for free cash flow between $105 and $112 million, depending upon assumptions for working capital, CapEx and tax.

Anticipating transitional and integration expenses for the new acquisitions and the timing of the 3CI integration, we believe analysts will model Q2 of 2006 earnings per share of approximately $0.54 to $0.55, with earnings per share increasing throughout the remainder of 2006 as we begin to realize the anticipated synergies from the various transactions.

In closing, we're very excited about the tremendous growth opportunities in 2006 and beyond. And that's all of our prepared comments. We thank you for your time today, and we will now turn over to question and answer.

(OPERATOR INSTRUCTIONS) Amanda Tepper, JPMorgan.

Looking at the large quantity generator growth, which was higher than we had be looking for in the 55 new contracts you talked about -- where is this coming from? Do you think you're gaining share? Is something happening on the competitive landscape? And can you give us a little more color on the Bio Systems sellthrough?

Well, several elements -- obviously, Bio Systems continues to grow nicely with the account adds. As you may recall, we're set to grow that business by over 30% this year. That's tracking nicely.

And then also, within the large account space, we continue to add accounts. We continue to see growth within the accounts that we have. And obviously, we have had a little bit better comparables versus Q1 of last year. But overall, strong all the way across.

Okay, and can you give us a sense of what you're looking at from here on the acquisition front -- you still have some -- obviously, plenty of borrowing capacity if you want. Are you looking more on the international front? Is there more domestically?

We have acquisition opportunities in all spaces, both domestic, international, pharma services. We have a very target-rich environment right now.

Great. And then just a housekeeping issue in terms of your new guidance, which has the new options accounting in it. Is it going to be roughly a rate of $0.04 a quarter all year then?

I think for the year, you're looking probably at a range of anywhere from $0.16 to $0.19. And that depends again -- we have Q1 option grants that are going to have an effect on rest of the year. With STG, the acquisition, there were some options granted which, really, from an expense are going to show the rest of the year. So that's why that range.

Matt Litfin, William Blair & Co.

I wanted to ask about Pharma services. I know you made a couple of larger acquisitions in the December quarter. Can give us the update on how those are going, your views on that space? And then I also was interested whether the two acquisitions during the March quarter were in that area, or if you could give us a little description of what those were?

The Pharma services business -- as you know, we set a goal to hit $50 million in revenues this year. We're well on track towards that goal, and gross margins are coming in solid. So far, so good -- we're tracking as we had expected and anticipated. And on the two acquisitions, those are medwaste acquisitions. And Frank, do you want to cover those?

Sure, the two acquisitions were international. And annualized revenue is about $4.7 million, of which we think about $4 million in '06. And so the overall picture there is EBITDA somewhere between the 1.1, 1.3, depending on when the synergies hit on those -- and strong businesses.

Good. Let me ask another question, if I could -- it has to do with fuel prices. Obviously, those are up at the pump recently. And I wondered in the new guidance what you have factored in, and how that is or is not different than your assumptions in the previous guidance that you've offered out?

This is Rich. I think what we previously said is we didn't expect when we set guidance for the year that we would get any moderation in fuel, and obviously, we're all seeing it spike up again. So we will manage through it as we have traditionally. Our contracts have a lot of flexibility. And that's generally how we work with the fuel increases.

So the guidance right now kind of says that we're -- looking at the current picture, we can work through it. It's anybody's guess if it goes to 100 a barrel. But again, we have been able to manage through it and our operating team is very creative when it comes to these sort of things.

Thanks, and congratulations on the quarter.

Lorraine Maikis, Merrill Lynch.

Can you talk to us a little bit about gross margins and how they performed versus your expectation?

I think if you look overall versus prior year and prior quarter, obviously, you have the FASB impact now, which is probably a little bit over 10 basis points impact on gross margins. You have the international mix with STG coming into play. That overall in foreign exchange and everything relating is probably about 80 basis points. And then domestically, we were up 20 basis points.

And how much did fuel hurt your margins in the quarter?

Fuel in total kind of evened out with other commodities. So I think in total it was really a zero impact.

Okay. And can you just talk about the progression that you expect as you gain some synergies in your acquisition for the gross margin line?

I think the average gross margins for the rest of the year for the three quarters is probably on average still going to be about 30 to 50 basis points quarter over quarter. But it's going to be an average -- it depends on the timing of those synergies, and it's going to be more in the back end with Q3 and Q4 when the synergies are coming in on these latest acquisitions.

Okay. And then the companies that you acquired overseas -- what was the business mix between small and large customers?

It was predominantly still kind of -- a little bit of a 70% large, 30% small.

And do have any plans for how you expect to increase your penetration of small accounts over in the UK?

That's a business that keeps doing it. Obviously, they started that process. They have started it already before. We're making good progress. We have started last year at about 11%. We have now increased that to about 16%. And so it made nice progress, and continued to do well on that. It's just going after it, and they're learning obviously from how we have done it in the U.S.

Alina Cellura, Smith Barney Citigroup.

Actually, most of my questions have been answered. But just a couple of housekeeping questions. Just curious -- what was the share count at the end of the quarter?

The share count at the end of the quarter was 45 –.126.

Great. And I'm just curious -- I know I always ask this question. But have you seen any changes, or any change in the environment regarding Waste Management? Have they made any moves that you can see in any of your market areas?

No, we haven't really -- in terms of the competitive front, we haven't seen any meaningful change in competition. It's still a very competitive market, but no big moves. We continue to believe that we can be extremely competitive. We've got a low cost structure. We have great service offerings. And then also in the future, if other companies wanted to look at acquisitions, we also have the ability to achieve more synergies, and hence have the ability to pay more value to a potential seller.

Alina, the number, by the way -- sorry. It was 45.155.

Kevin Monroe, Thomas Weisel Partners.

I was wondering if you could give us an update on the regulatory front, particularly whether there has been any decision or pending decisions on whether autoclaves are effective in treating certain types of waste, and if they're not, what will be done about that?

No, there's really been no imminent change. There's been discussion in terms of process and standardization of how to look at testing protocols through state standards. And there's been activity working on the [STAT3] group on that, which we view as very favorable. So if we could get harmonization of processes across various state regulatory bodies, I think it's good. I think it will take time to get there, but there is nothing that has been finalized at this point.

Great, and the second question on -- what was the equipment revenue in the quarter?

It was really immaterial -- less than $100,000.

Robert Willoughby, Bank of America.

Thank you. Frank or Mark, have you ever provided kind of what you think the peak margin opportunity might be for the sharps container business, as well as pharmaceutical returns operations?

In terms of peak margins, I don't think we're far enough along in either one of them to know where they might peak. I think we feel both businesses can have margins over time that can be well into the 40s. And I think the real key is the way that we offer new services, the way that they're combined, and what innovations we can bring to the businesses.

Obviously, with each of those businesses, there's different things that drive those margin expansions. With any type of business that's oriented around routes -- route density is very key, ability to leverage plants and infrastructure, turns on equipment, and the like. But I think both of them we view as being solid margin businesses.

Now the pharma services business probably can get there quicker, faster because of the huge value added of the services, where Bio Systems is one that has to get the route density together and get leverage at the local basis.

So would you characterize pharma returns as maybe in the third or fourth inning, and sharps containers still earlier than that, or --?

I guess I would call the pharma services business still in early innings, but the key is really size and scale. We're only a few months into it. We see signs that we can obtain reasonable gross margins. Obviously, we have heavy SG&A against it right now. So I think the real potential as we go through time is continuing to grow and offer the services, gain the synergies, and also through size and scale we will create leverage and flowthrough as well. So I think we're still probably early innings.

And where would we stand in terms of international profitability versus U.S.? Is it a third as profitable or are we further along there in terms of boosting profit levels overseas?

Well, it varies quite a bit by country. But if you look at -- obviously, in all of them right now we have lower EBIT and EBITDA margins than we do in our domestic business. And that's really driven by several things. One is they're kind of where we were years ago of being predominantly large quantity in their revenue mix. But we see the hard evidence as each of these businesses locally expands their small quantity mix, offers new additional SteriSafe and the likeservices that they have the same types of trajectories that we have in terms of margin expansion. So that's part of the reason we're excited about that is it's not only a growth opportunity in diversification, but also an ability to generate better returns and margin expansion.

(OPERATOR INSTRUCTIONS) Lorraine Maikis, Merrill Lynch.

Just in terms of your capital structure, you had mentioned it was a very target-rich environment. And we noticed that your debt to cap has started to creep up a little bit. Is there a target level that you're comfortable with on the debt to cap, or where are you willing to let that go up to?

As we have historically said, I mean our business can sustain still a lot more with the strong free cash flow. And so the 47% is still at a very comfortable level for the Company. Historically, we have said that that could easily go into the high 50s, even low 60s. I think if you do that, your debt to EBITDA is probably going to approach 3 to maybe over that. And so it's a balancing.

We do get credit in our covenants for 12 months historic on acquisitions that we do, so I mean that obviously helps in the picture. Banks have been always very comfortable with where we are, would like to support us more. We have an accordion feature in our revolver for an additional $100 million, should we need it. And we've always been oversubscribed in the past on that.

And then the last guidance that you gave when you made the Sterile acquisition was 2.43 to 2.49. Can you just tell us what the expected option cost that was included in that would have been so we can put these numbers on a like-for-like basis?

The 2.43, 2.49 did not include any 123 option expensing cost. That was done before -- that was -- that guidance was still given before that.

Right. And then so would we take $0.16, $0.17, $0.18 out of that?

That is correct. And I think you're talking -- $0.16 to $0.19 is kind of the range that we are seeing.

[Marco Mareno], Neuberger Berman.

Just had a couple of housekeeping questions, actually; I apologize if I missed this earlier. But in terms of the guidance range that still exists for you guys right now, is it the $2.42 to $2.49 still, with $0.16 to $0.19 of options expense?

Yes.

Did you provide on the revenue side any -- I guess your estimated in terms of the revenue guidance, did you provide any sort of figures related to acquisition contribution for the year?

Of the guidance we provided, the $751 to $768 million revenue guidance was assuming no new additional acquisitions.

Soeverything up to date.

Yes.

And the last question I have is just on those international acquisitions that you guys closed recently. Were those in the UK and Ireland also, or were they in other areas?

No. They were in Mexico and Argentina.

Thank you. I'm showing no further questions at this time.

We thank everybody for your time. It's been a solid start to the year, and we are excited about the opportunities ahead. We look forward to speaking to you on the next call. Take care.

Ladies and gentlemen, this does conclude your presentation for today. Everyone have a great day. You may now disconnect.