Stericycle Inc (SRCL) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stericycle fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Liz Brandel, Vice President of Finance. Ma'am, you may begin.

Welcome to Stericycle's fourth quarter and full year 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 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-K, 10-Qs, as well as its 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 commitments to disclose any revisions to forward-looking statements, or any facts, events or circumstances after this date that may bear upon forward-looking statements.

I will now pass the call to Frank.

Once again we are pleased with the results achieved by our team in the fourth quarter. Please note that our fourth quarter results include the impact of FASB 123R, the expensing of stock options. Revenues grew $42.1 million in the quarter to $208.7 million, up 25.3% from $166.6 million in the fourth quarter of '05.

Internal growth for the Company was $18.6 million, or 11.6%. Growth from acquisitions less than 12 months old contributed approximately $23.4 million. Domestic SQ revenues grew $8 million, or over 10%. And domestic LQ revenues grew $3.8 million, or approximately 8%. International revenues grew 16%, and adjusted for exchange, grew over 9%.

Gross profit was $93 million, or 44.6% of revenues. SG&A expense, including acquisition-related costs, was $39 million, or 18.7% of revenues. Acquisition-related cost was $1.6 million, which included $1.1 million for expenses related to closure of two facilities.

Income from operations in the quarter was $54 million, or 25.9% of revenues. Net interest expense in the fourth quarter was $7.1 million versus $3.8 million in '05 due to increased borrowings related to acquisitions, stock repurchases, and higher interest rates. We had $1 million of other income related to a reimbursement of fees related to the 3CI class action litigation that was recorded in 2005. Net income for the fourth quarter was $29 million, or $0.64 per share.

Now the balance sheet. At the end of the fourth quarter the revolver borrowings were $387.3 million. The unused portion of our revolver is approximately $215 million. During the quarter we repurchased 236,982 shares of common stock on the open market in an amount of approximately $16.7 million. Now since the beginning the repurchase program we have purchased a total of 3,049,470 shares, and we still have authorization to purchase an additional 1,428,960 shares. In the quarter our CapEx was $10.9 million. And the DSO in the quarter was 59 days.

Now some additional numbers on the balance sheet. Current assets, $188.3 million. Total assets, $1,305,000,000. Total debt, $465.8 million. And depreciation in the quarter was $6.4 million.

Now a brief recap of the full year numbers. For the year ended December 31, '06 revenues increased to $789 million, and an increase of 29.6% from the same period a year ago. Gross profit as a percent of revenue, was 44.3% for the year ended December 31, '06 versus 44% for the year ended '05.

Earnings per diluted share, including the FASB 123 impact, in '06 was $2.33. Now cash provided from operations was $160 million for the full year of '06. This concludes the financial picture. I will now turn it over to Rich Kogler.

I want to begin by thanking the Stericycle worldwide operating team for helping us finish 2006 with a strong performance in the fourth quarter. As a result of their hard work and dedication, we enjoyed sequential margin expansion throughout the entire year. Despite many challenges, they delivered as promised. We are all very proud of the team. We thank them for their focus on operational excellence and their continued commitment to our customers and shareholders.

In the fourth quarter we continued to see very strong sales growth in all of our business segments. Our SQG and LQG sales teams remain focused on their respective growth drivers, SteriSafe and Bio Systems. And the whole team delivered another solid quarter.

The SQG sales team continued to execute on its proven strategy of migrating new and existing customers into the higher levels of SteriSafe. In Q4 over 55% of new SteriSafe customers chose select and preferred, and the percentage of total accounts on the premium levels increased to a new high of 17%. Because of the efforts of the SQG sales team, our SteriSafe program revenue made up over 48% of total small customer revenues in the third quarter.

In the fourth quarter our LQG sales team signed 56 new MedWaste contracts and 76 new Bio Systems accounts. As we look back over the entire year, we are extremely pleased by the sales teams' performance. And we thank each team member for contributing to our strong sales growth in 2006.

In summary, we ended the year with approximately 351,700 accounts, of which approximately 343,100 were small, and the remainder were large. I now I will turn it over to Mark.

I would now like to provide insight on our current outlook for 2007. Please keep in mind that these are forward-looking statements. During the fourth quarter we completed three domestic and two international tuck-in acquisitions. The incremental revenue impact in the fourth quarter for these acquisitions was approximately $1 million. And the annualized revenue of these five acquisitions is approximately $6.8 million.

Now I will provide our current outlook for 2007. Keep in mind the guidance includes the five acquisitions closed in Q4, but does not include future acquisitions or divestitures. We believe that analysts EPS estimates will be in the range of $2.69 to $2.73, which we are comfortable with. We believe analysts estimates of revenues for 2007 will be in the range of approximately $861 million to $870 million, depending upon their assumptions of growth and foreign exchange rates.

Consistent with our prior guidance these estimates include domestic growth rates of small accounts of 8 to 10%, 6 to 8% on large accounts, international growth of 7 to 8%, margin expansion of 20 to 40 basis points per quarter. And the additional strategic investment of $6 million to $7 million in sales, marketing and R&D.

We believe analysts will have estimates for net income between $122 million and $124 million, depending on assumptions for margin improvement and interest expense. We believe analysts will have estimates for free cash flow between $131 million and $137 million, with CapEx anticipated between $36 million to $40 million.

In closing, we are very excited about the tremendous growth opportunities in 2007 and beyond. We thank you for your time. And we would now like to switch to Q&A.

(OPERATOR INSTRUCTIONS). William Blair.

This is Matt Litfin. My question is on currency, what effect that had in the quarter?

Currency was about $1.3 million increase in revenue as a result of the better exchange rates.

Can you give us the recent trends in fuel prices, and how that has affected the guidance versus the preliminary guidance you gave last quarter?

I think fuel overall was slightly better. But overall, it kind of -- if you look at all the commodities, it kind of stabilized the quarter versus prior quarters. So those were up, offsetting some of that better fuel. But in total it was kind of the first quarter in which all these costs were kind of stabilizing in total. So that was good.

My last question is on the pharma business. Can you give us an update of the Q4 experience there?

I think overall we really are meeting the original goals of over $50 million. We had a strong fourth quarter on recall. It was about $1.8 to $2 million over the expectations. And so I think, again, strong quarter for them versus what they were anticipating.

Great. Congratulations on a great quarter and year.

Scott Levine, JP Morgan.

Following up on the recall, do you see that positive trend -- that upside continuing over the next few quarters, or were there some things that occurred in Q4 there were kind of unique and one off in nature?

I think that the positive upside was above our expectations due to some stronger recalls in the quarter. So I don't think at this point we would anticipate modeling it in. Our guidance assumes a more normalized number, and consistent with what we have had on last call, up about 10% anticipated in '07 versus '06.

Can you give us some additional color on the five acquisitions that you made? Maybe talk a little bit about the multiples paid and the nature of the businesses you bought.

Again, five acquisitions. They were predominately SQ kind of oriented. There were two international and three domestic. Again, there came some treatments with it and some permits and some working capital. The overall multiple was in the mid 6's multiple of EBITDA.

Mid 6's. Okay. One last one regarding debt levels. If you could just remind us, in terms of where you see debt trending up if you continue to be inquisitive, what levels you're comfortable with?

Again, from a comfort level we are right now -- we lowered again the debt to EBITDA. We are now strongly about at a 1.8, 1.9 is where we're at. Rangewise, debt to EBITDA we still feel is the best indicator. That range can easily be anywhere from 2 to 3.5 from that range. So there's ample capacity.

Scott Schneeberger, CIBC World Markets.

Can you guys speak a little bit more about the $6 million to $7 million of strategic investment in R&D and other SG&A areas for the upcoming year?

What we are spending on is is expansion of our sales coverage, particularly in the small quantity space. We continue to see great traction in our penetration of the higher level programs and select and preferred, so we have made some big investments in that space. We're also doing some of the trial programs. And also investing in sales and marketing efforts in the recalls and return space. Those are the main focus areas domestically.

Now you mentioned the -- I'm not sure I have the numbers right here -- but the impact of $1.1 million for closure of two facilities. I assume those were incinerators in the UK. And then there was another $0.5 million. Can you speak a little bit more on that? And was it in the UK? How far along are you in the sale of incinerators there?

I think overall there was one location, in fact, in the pharmaceuticals returns business domestically, and one internationally in the UK. It was not an incinerator. So overall our business normally has, because of the acquisitions, anywhere from $0.4 million to $0.5 million in kind of acquisition-related. That can fluctuate, but that is not an uncommon number for us. So the unusual is kind of the $1 million, $1.2 million kind of number in the quarter.

On the second part of your question on where are we at with the competition commission process, the process is moving along as we had anticipated, going very quickly. So we are pleased with the pace and the high level of interest. So we feel we're still on track there.

Just one final follow-up on that. How does the environment look for doing further tuck-ins in the UK? And then a follow up there would be, how is your basic strategic outlook for acquisitions shaping up for '07? Thanks.

In terms of the pool throughout Europe, we continue to look at multiple opportunities, so we have a number of companies that we're evaluating and we will continue to focus on. And the second part, can you repeat?

Sure. It was just the greater strategic outlook for acquisitions domestically, internationally what you're looking at for '07.

Yes, I think from our standpoint we see, again, a very target rich environment in both domestic and international markets. There's several tuck-ins in each of our business spaces. And we have got quite a bit of activity ongoing. But again our guidance that we gave you does not assume further acquisitions. And as we do acquisitions and divestitures we will update our numbers.

Alina Cellura, Citigroup.

It is actually Alina Cellura for Leone. Just sort of to follow-up again with a SG&A question. If you can give us an idea just more on a percentage of revenue basis, are you looking to keep the percent similar to '06 and just increase it by the $6 million to $7 million?

I think we may have touched on the last call, but what our thinking is in '07 is from a modeling standpoint, all-in about 19% as a percent of revenue. And that would include SG&A, amortization and acquisition -- a normal level of acquisition-related expense.

And this is including this $6 million to $7 million.

Yes.

Also can you just remind us on a revenue basis what you're pharma return goal is for '07?

Yes. From our standpoint we had a goal of this year to be a little over $50 million. We achieved that goal and grow about 10%, so it will be over 60.

Kevin Monroe, Thomas Weisel Partners.

Mark, I just want a little clarity on the guidance. Is that inclusive -- the EPS guidance, is that inclusive of the STG divestiture?

No, it is not. We don't know what that is going to be at this point in time. I think you and other analysts had done some analysis on that. But the guidance that we gave is not including new acquisitions or divestitures. And at this point we don't anticipate any material changes to our full year guidance.

Another question on the margin line. The gross margins were flat year-over-year, which is kind of off the pace from the more recent quarter where you have been putting up some improvement there. Any particular reason why for the flat gross margins year-over-year in the fourth quarter?

No, in fact that is pretty good, because you have to now incorporate STG, which was not yet in last quarter's. And that is a fairly important impact. I don't have specifically, but I think from prior quarters that was at least 30, 40 basis points just for that. And then you have the foreign exchange impact because international has a higher factor in the total. So that brings your margins down a little bit.

Lastly, this year obviously because of the higher fuel cost we have had more surcharges which are one-on-one with respect to -- and that obviously has at least 10 to 20 basis points impact, if you look at it from a year too.

Robert Willoughby, Banc of America Securities.

Frank, it looks like amortization was down fairly sharply on a sequential basis, unless I am modeling wrong. Was there a reason why that would fall off?

I think the prior quarter was a little higher than normal. The normal level is somewhere around the $800,000 to $900,000 per quarter. We're about $0.4 million less than that. It was a year-to-date adjust. It kind of evened out a little bit, with the prior quarter being a little bit higher. But so compared to the normal level it is about $0.3 million I would like off versus the normal trend.

The Bio Systems penetration looked pretty good, 76 accounts, if I caught the number correctly. Are we seeing that accelerate with greater familiarity with the business, or what is the dynamic there that that number has picked up?

I think we set a goal originally to be between 250 and 300 accounts for the year, and we have really hit the high end of that goal coming out of '06. The process of Bio Systems sales really is -- become pretty rhythmic for us. But it is still a committee sell. It is a process sell, where you have to incorporate everybody in the hospital system in the decision.

And so what we're really seeing is we're able now to kind of get penetration and density in our original rollout markets. The speed of the sale is still sort of limited by how quickly you can get everybody in the hospital onboard. Fortunately, obviously, because we did almost 300 accounts this year, I think the salesforce has figured out the recipe.

Frank, a tax rate for '07, did you throw that out there?

We didn't, but it is about 39%.

(OPERATOR INSTRUCTIONS). Greg Halter, Great Lakes Review.

Congratulations on the very fine results. Getting back on the fuel side, I don't know if you mentioned it, but I was looking to see if you have a figure for fuel costs as a percentage of your revenues in the quarter?

I think if you look total fuel and energy combined was about 5.4%.

Also, in the U.S., I am just wondering if there has been any changes in the competitive environment. We have heard about Enserv or MedServe, or whatever they are merging together and getting bigger and wanting to be number two. But haven't seen much from them in the last several months. I am just wondering if you can give us update on what you see on the competitive front in the domestic market?

I would say on the competitive front domestically we really haven't seen any meaningful change throughout the year. There is several players out there. It is a highly competitive market, but we really don't see any meaningful changes in anything that would affect our fundamental strategy.

Jonathan Ellis, Merrill Lynch.

First of all, could you just give us the total number of SteriSafe customers as of the end of the quarter?

Total number of accounts as of the end of the quarter.

104,000.

104,000. Great. The pharma recall business, I know obviously there were a couple of projects this past quarter that benefited the topline. Is there any carryover from any of these into the first quarter of '07?

Not big numbers. There's always a trickle effect, but they tend to spike pretty rapidly and then taper off.

Just going back to the Sterile Technologies Group for a second, I know when you first made the acquisition you thought that the full year benefit would be about $0.07 on the bottom line. I am just wondering what are you factoring in for EPS right now into your 2007 forecast for Sterile Technologies?

I think they really performed -- so after the synergies. Synergies obviously were slower, so you have to take that into account. And so that has still some effect that we see in the future that we could benefit from. But in '07 it is probably somewhere not dissimilar from slightly up from '06, because you also have the annual impact on it.

Then finally, maybe just talk a little bit about pricing in the domestic medical waste business. Any trend you're seeing there in terms of pricing on new business from last quarter versus this quarter?

I really haven't seen much change quarter-over-quarter, year-over-year. Basically the guidance and description we have given you before, which is CPI plus a little bit. Obviously we pass-through the fuel and energy, but pricing pretty much remains the same for us.

At this time I'm showing no further questions.

We thank everybody for your time and attention. And we have got a great outlook for '07 in exciting times, and we look forward to seeing it soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.