Stericycle Inc (SRCL) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stericycle second quarter earnings release 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 be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder this conference call is being accorded. I would now like to introduce your host for today's conference, Ms. Liz Brandel, VP of Finance. Ma'am, you may begin.

Thank you very much and welcome to Stericycle's second quarter conference call. On today's call joining me will be Frank ten Brink, CFO, Rich Kogler, Chief Operating Officer and Mark Miller, Chief Executive Officer. I will now read the Safe Harbor statement.

Statements by Stericycle in 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-Ks, 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 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 up on 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 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 Liz.

Once again, we are very pleased with the results achieved by our team in the second quarter. Please note that our second quarter results include the impact of FASB 123R, the expensing of stock compensation.

Revenues in the quarter grew $49.3 million to $198.4 million, up 33% from $149.1 million in the second quarter of '05. Internal growth for the Company was $17.8 million or 12%. Growth from acquisitions less than 12 months old contributed approximately $31 million. Domestic SQ revenues grew $9.2 million or approximately 12%. And domestic LQG revenues grew $4.7 million or approximately 10%.

International revenues grew approximately $2.1 million or 8%. Gross profit was $87.6 million or 44.1% of revenues and SG&A expenses were $36.6 million or 18.5% of revenues. Income from operations in the quarter were $50 million or 25.2% of revenues.

Net interest expense in the second quarter was $7 million versus $3.1 million in 2005 due to increased borrowings related to acquisitions, stock repurchases and higher interest rates. During the quarter we wrote off a $1 million investment we had made in a small product company. Net income from the second quarter was $25.2 million or $0.56 per share.

Now, the balance sheet. At the end of the second quarter, the revolver borrowings were $379.5 million and the unused portion of our revolver is approximately $111 million.

During the quarter, we repurchased 62,600 shares of common stock in the open market in an amount of approximately $3.9 million, of which $1.2 million will be settled in Q3 from a cash point of view.

Since the beginning the repurchase program we have purchased now a total of 2,637,630 shares and we still have authorization to purchase an additional $1.8 million shares. In the quarter, our capital spending was $8.2 million and the DSO was 57 days.

Now some additional numbers. Current assets, $174.1 million; total assets, $1.2 billion; total debt, $470.8 million; depreciation, $5.9 million; amortization in the quarter was 800,000; total debt to capitalization was 45%.

Now a brief recap of the first six months.

For the first six months ended June 30, 2006 revenues increased to $377.7 million, an increase of 30% from the same period a year ago. Gross profit as a percent of revenue was 44% for the six months ended June 30, 2006 versus 43.6% for the six months ended June 30, '05. Earnings per share including the FASB 123 impact increased to $1.08 from $0.99 per diluted share in the same period a year ago.

Cash provided from operations was $64.3 million for the first six months of 2006. And that concludes the financial picture and I will pass it over to Rich.

Thanks Frank. Once again, we want to start by recognizing our worldwide operating team for all of their hard work and commitment to operational excellence, productivity improvement and cost containment during the quarter. Despite pressure from operating cost headwinds and the challenges created by multiple acquisition integrations, they delivered as promised.

We are very pleased with their performance and thank them for their focus and dedication to our customers and our shareholders.

In the quarter we enjoyed very strong sales growth. The sales teams remained focused on our main growth drivers - SteriSafe and Bio Systems - and delivered a solid performance on all fronts. The SQG sales team continued to emphasize their strategy of migrating customers into the higher levels of SteriSafe. In Q2, approximately 45% of the new SteriSafe customers chose select and preferred and a percentage of total accounts on the premium levels rose to a new high of 15.2%.

Thanks to the hard work and efforts of the SQG sales team, SteriSafe contributed over 45% of total SQ revenues in the quarter.

Our large accounts sales team secured 56 new LQG medwaste contracts and they also signed 73 new Bio Systems accounts. Year-to-date, we are very pleased by the performance in the large accounts sales team. We thank them for delivering solid sales growth during the quarter.

In summary we ended the quarter with over 341,000 accounts of which approximately 333,000 were small and the remainder were large. I will 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 second quarter we completed two international medical waste acquisitions. The incremental revenue impact in the quarter was approximately $400,000 and the 2006 revenue contribution will be approximately $1.2 million.

Our guidance for 2006 includes the effect of FASB 123R, 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 $2.27 to $2.32. We believe that analysts' estimates for revenues for 2006 will be in the range of approximately $770 million up to $780 million, depending on assumptions of growth, recall-related revenues and foreign exchange rates.

Given the rise of interest rates in our borrowings under our loan facility, we anticipate interest expense for 2006 to be in the range of $26 to $27 million. We believe analysts' estimates for net income will be in a range of $103 to $105 million, depending upon assumptions from margin improvement, interest expense and strategic spending. We believe that analysts will have estimates for free cash flow between $107 and $112 million, depending upon assumptions for working capital, CapEx and tax.

In closing, we're very excited about the tremendous growth opportunities in 2006 and beyond and we would like to thank you for your time and we will now switch to the Q&A session. Operator.

(OPERATOR INSTRUCTIONS) Alina Cellura from Citigroup.

Good afternoon. I was just curious. The SQG and LQG and even international growth was much better than I had originally expected. I was just wondering, do you think that was solely due to sales or just sales force out there? Or do you think there was any kind of change in the market environment?

We had very strong growth in both sectors. Obviously we continue to see in the strong small quantity generator space continued capture of new accounts. Very, very pleased with what we see on the select and deferred capture. If you will recall, last quarter we had about 40% signing up for select and preferred. And we are now up to about 45%. That program and the execution is doing very well.

Obviously we are favorably impacted by energy pass-throughs in that space and we also have the volumes have been favorable for us as we move forward. So as we look into the future part of our guidance assumes also that we will be putting additional investment in strategic spend to take advantage of this sector and its strong growth.

Also the two international medwaste acquisitions you closed on. Were those in the UK or -- ?

No. One was in Canada and one was in Mexico.

Lastly I just wanted to see if you had any update in the UK as far as the Office of Fair Trading and regarding the Stericycle -- sorry, the Sterile Technologies acquisition.

Yes. The update business is tracking well and on plan. We are in the process with the competition review which we anticipated to be completed in December. We believe that there will be no material effect on our business as we go through this process.

Thank you.

Matt Litfin from William Blair & Co.

Good afternoon and congratulations on a real solid quarter.

Obviously the internal growth rate and revenue was the highest it has been in five years. So, Mark, you mentioned a number of growth rates in your prepared comments that were north of what you've seen historically at least the last few years.

So I was hoping maybe you could kind of rank order what drove maybe the upside relative to the last time you were giving guidance and updating us. Specifically, I was interested in -- after you do that I was interested in also the pharmaceutical services area, whether there was any onetime revenue from a recall or something that drove up or if this is kind of a sustainable level here for at least the near-term?

Several questions. Let me take the recall one first. We did have a very solid quarter in recalls that came in about 2 million more than we did in Q1. So we did have some one-time pickup. Then our remaining forecast for the rest of the year were, assuming our goal of 50 million will be achieved. Obviously the recall portion is lumpy and hard to predict, but we are off to a very good start this year.

As far as the overall growth rates, I think it's several factors. Let's talk about each one. As I mentioned earlier the small quantity team has -- continues to learn at a very fast rate of how to capture new customers, how to market our programs in SteriSafe which have phenomenal power.

If you think about the economic implications for us, if we can have a customer elect to upgrade from a standard level program to a preferred level program, we more than double our revenue stream per count and expand our margin by 10 full percentage points on revenue.

So it is an incredibly powerful and very important strategic program for us and we are going to be making a lot of investments this year to accelerate that penetration as we go into the years to come.

The large quantity space, as you know we've historically been in the mid single digits. We did about 10% this quarter. And the key element there has been continued execution of the Bio Systems program. But we did see pickup in our large quantity space as well. We're ahead about 5% growth in that sector as compared to where we were about one percentile of last year. And that is just strong execution and really capturing new accounts and billing and adding our service space. And international growth is really driven by volume and increased focus on small quantities.

So I think across the board all the business units are hitting on all cylinders and we will continue to release strategic investment funds to them as they perform.

Thanks. I have one follow-up for Rich. Rich, maybe I missed it but I didn't hear the domestic SQG growth customer adds that I think we usually get. So I was wondering what that was in the quarter not counting SteriSafe?

I think in the quantity of customers was about 4,000.

Thanks so much.

Lorraine Maikis from Merrill Lynch.

This is John Ellis for Lorraine. I'm wondering just on the gross margin, could you talk a little bit about the impact of mix between international and domestic revenues?

I think if you look overall on the international since both of them have a slightly higher growth on the domestic but in total for the year we are still looking for about a good 550 million plus on the domestic side. Like we said last call, somewhere around 155-165 million on the international side.

Again the international margins is obviously a little bit less so if you look at it from a margin point of view, you've got in the Q2, the international mix effect with STG being out two months more in the quarter was more than offset by the domestic performance which was up and that gave us about a 20 basis point positive take, quarter to quarter.

Great. You mentioned some of the energy pass-through. Can you quantify the impact of fuel on gross margins this quarter?

I think if you look overall at the energy which we normally talk about, we are a little bit close to even to the last quarter and so we're at about 5.8% of revenue between fuel and energy. A little bit better on energy, a little bit worse on the fuel. But really no growth margin impact since we are passing that through. From a dollar point of view.

On the Sharps business can you just talk about what progression you have made in terms of route density?

You mean on the Bio Systems?

Correct.

We originally had a goal, first, of rolling it out to all the major market areas which we have done. I think as you see the kind of rate that we are adding now, you know which is approximately 70+ per quarter, we are achieving density in those markets. And we are seeing it because the margins of the business are moving up.

As we said early on when you start out in any given area, obviously, you don't have the margins you want because you don't have the density. Then as you sell and do the fill-in you start to get to where you want to be.

Just one last question on the regulatory side. Is there any update on discussions of standardizing the testing protocols at the state level?

Staff work is still under development but no real change from where we were last quarter.

Scott Levine from J.P. Morgan.

Good afternoon. Hoping you will be able to talk about the LQ business. Obviously the growth is picking up there significantly. Was wondering where the gross margins are now and where you see them potentially trending over time. And what the impact of Bio Systems and increased sell through Bio Systems is on the margin potential on that side of the business?

The margins were in the high 20s. Obviously Bio Systems as a block is a little bit below that and the rest of the LQ medwaste slightly about that. But the average is kind of in the high 20s. Really long-term, clearly, as we said for Bio Systems that should be able to get into mid to high 30s. Maybe low 40s. And for the total business we're talking mid 30s.

So we are still on -- I'm looking at a margin progression as well throughout the year. Still talking about the same 30 to 50 basis point progression or so on a quarter-to-quarter basis?

That is correct. And that's for the total business. Yes.

Then on the acquisition side. You know, see most of the activity being international now. Wondering where you are seeing the most opportunity on a global basis this point of view, whether any markets are looking particularly attractive, either the ones you're in now or potential new ones?

We have a very rich pool of candidates. We continue to see opportunities in U.S., Canada, Mexico, and Europe and in other markets. And clearly the priorities go to those ones where we think we get the best returns and there are good strategic fits for us but really a pleasure right now because we have opportunities on all fronts and all businesses.

One last one. With regard to what you're seeing on the UK business, still LQ, SQ or LQ-heavy, I should say. Was wondering what the sell-through on the small quantities side is looking like over there and how things are proceeding on that front?

Small quantity continues to grow. It is obviously a much lower mix than we have in North America but if you look at a combined basis, we are running roughly mid to low teens as percents SQs and our goal is to continue to move that through time, more towards our model domestically where the majority of our revenues come from small quantity.

And the split on margins for the SQ and LQ in the UK are roughly similar to what you're saying in the States?

Yes. Very similar.

Great. Thanks.

Robert Willoughby from Banc of America Securities.

This is Eric (Fague). I'm sitting in for Robert Willoughby. Is there an update on that antitrust review UK operation?

We talked about earlier the Competition Commission review. We are in that process and that should be completed by year end. Our business is tracking well. We are pleased with the performance of the team and we believe there'll be no material effect on our business after we go through the process.

(OPERATOR INSTRUCTIONS). I show no questions at this time, Sir.

We thank everyone for their time. We had a very solid quarter and continue to see robust opportunities in the quarters and years to come and we look forward to talking to you next quarter. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Have a wonderful day.