Stericycle Inc (SRCL) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Stericycle's first-quarter 2007 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. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Liz Brandel, Vice President of Finance. Ma'am, you may begin.

Thank you very much. Welcome to Stericycle's first-quarter conference call. On today's call will be Frank ten Brink, Chief Finance 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 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.

I will now pass the call over to Frank.

Thanks, Liz.

The results for the first quarter are as follows. Revenues grew $31.8 million to $211 million, up 17.7% from $179.2 million in the first quarter of '06. Internal growth for the Company was $17.9 million, or 10.3%, and growth from acquisitions less than 12 months old contributed approximately $13.9 million to the growth.

Domestic SQ revenues grew $7.8 million or approximately 10%, and domestic LQ revenues grew $3 million, or approximately 6%. International revenues grew 18%, and adjusted for exchange grew over 11.8%.

Gross profit was $94.2 million or 44.7% of revenues. SG&A expense was $38.6 million or 18.3% of revenues. Operating income was $55.4 million or 26.4% of revenues, which included the one-time gain on the sale of the UK plants and the non-cash write-up of some fixed assets.

Net interest expense was $7.3 million, versus $5.7 million in 2006, due to increased borrowings related to stock repurchases and higher interest rates. We had $0.5 million of other income related to insurance proceeds. Net income was $29.4 million or $0.65 per share.

Now to balance sheet, at the end of the first quarter, the revolver borrowings were 398.1 million and the unused portion of our revolver is approximately 192 million. We repurchased 589,786 shares of common stock on the open market in an amount of approximately $46.1 million. Since beginning the repurchase program, we have purchased a total of 3,639,256 million shares, and we still have authorization to purchase an additional 2.4 million shares. Our CapEx was $10.3 million, and our DSO was 54 days. Our cash provided from operations was $52.9 million.

I will now turn it over to Rich.

Thanks, Frank. We want to thank each member of our worldwide team for their solid performance and continued commitment to our customers and shareholders.

We enjoyed strong sales growth in all of our business segments. The SQG sales team continued to execute and approximately two out of every three new Steri-Safe customers chose select and preferred. Steri-Safe contributed over half of total small customer revenues. Our LQG sales team captured 54 new Med Waste contracts and 75 new Bio Systems accounts. In summary, we ended the quarter with approximately 355,200 accounts, of which approximately 346,000 were small; the remainder were large.

Now, I will turn it back over to Mark.

Thanks, Rich.

I would know like to provide insight on our current outlook for the remainder of 2007. Please keep in mind that these are forward-looking statements.

During the first quarter, we completed five tuck-in acquisitions with incremental revenue impact in the first quarter of approximately $1 million. We closed an additional acquisition that becomes effective in the second quarter. The annualized revenues of these six acquisitions is approximately $12.5 million. But keep in mind the guidance includes these six acquisitions and the impact of our divestiture in the United Kingdom but does not include any future acquisitions.

We believe that analyst EPS estimates for the year will be in the range of $2.70 to $2.73, which we are comfortable with. Since synergies on the new acquisitions will occur in the second half of 2007 and the second quarter will be the first full quarter of the UK divestiture, analysts may want to fine-tune their models for a Q2 EPS to be in the range of $0.66 to $0.67 per share. We believe that analysts' estimates of revenue for 2007 will be in the range of approximately $862 million to $870 million, depending on their assumptions of growth and foreign exchange rates. Consistent with our prior guidance, these estimates include domestic growth rates on small accounts of 8 to 10%, 6 to 8% on large accounts, international growth of 7 to 9%, and margin expansion of 20 to 40 basis points per quarter. We believe analysts will have estimates for net income between $122 million and $124 million, depending upon their assumptions for margin improvement and interest expense. But we believe that analysts will have estimates for free cash flow between $131 million and $137 million, with CapEx anticipated between $38 million and $40 million.

In closing, we are very excited about the tremendous growth opportunities in 2007 and beyond. We thank you for your time. Now, we will switch over to the question-and-answer session.

Thank you, sir. (OPERATOR INSTRUCTIONS). Scott Levine, JPMorgan.

Good afternoon. I was hoping you would be able to elaborate a little bit more on the acquisition activity during the quarter, where that occurred, what multiples are looking like and what your outlook is and whether it's any different than what you've been talking about in the past.

Yes, there were six acquisitions. Four were domestic; two were international. The overall multiple was about a 6 to 7 times EBITDA.

Okay. The pipeline in the U.S. still looking pretty good there, no change to the outlook?

Continued to very robust pipeline, yes.

Okay. I'm hoping we might be able to talk a little bit about pharmaceutical services and what you are seeing during the quarter on both the recall and the return side of things.

Well, the [retail] and [recurring] business is tracking very nicely; we are on track to hit our goal of greater than greater than $60 million in revenues, and we feel it's really moving together nicely.

Is the mix of recall versus return kind of playing out the way you expected it to, or is one side performing differently than the other?

I think the mix is tracking very close. Obviously, the recall segment of it is hard to predict and can be lumpy, but we really like what's coming together. We are capturing lots of new customer accounts and just pleased with the traction we are getting in this early development.

Okay, and then one last one. With regard to margins, up 10 basis points quarter on quarter. Is there anything going on on the call side or the revenue side, or are margins still tracking pretty much in line with expectations or is there any cost that is diverging from what your expectations are?

No. Overall, it's kind of impacted by exchange and mix, so I mean, here you have pharma, fuel that kind of had some pressure on it and overall the growth we are tracking on the margin expansion.

Alina Cellura, Citigroup.

Good evening. I just had a quick question. I think, previously, you've said that you expect margin expansion sequentially of 20 to 40 basis points roughly. Are you still expecting that?

Yes, I think the growth for that one we are tracking on that. In the quarter, you'll always have impacts like foreign exchange and mix factors. That really could move that, but then also, that's the margin percent. I mean from a point of view, to us also key is to hit the margin dollars from that point of view.

Okay. Also, I'm not sure if you mentioned this but could you just mention what the percent of the small customers were on Steri-Safe in the quarter?

We are -- right now percent on Steri-Safe is about half.

Over half.

Over half.

It's over half, okay. All right, great. Thank you.

Just to clarify, you are talking about percent of penetration of small accounts? Is that the question?

I guess total customer revenue, like small customer revenues, what percent --?

Yes, over half.

Over half.

Over half of it is Steri-Safe.

Jonathan Ellis, Merrill Lynch.

Good evening, guys. First off, just on Steri-Safe, could you tell me how many total accounts you had, Steri-Safe accounts, as of the end of the quarter?

End of the quarter, about 107,000.

107,000, okay. Maybe we could just talk a little bit about SG&A. It seemed like, in the first quarter, it was slightly below what I have been expecting and then more importantly, what that may mean for your full-year outlook, which I think you had given back on the fourth-quarter call of about 19% all-in. Is that something you are still comfortable with?

Yes, that's where we're still targeting, and obviously as we've wrapped up the additional resources and had some of the impact, for example, with exchange, it changes those percentages but we are still tracking that we should be in the high 18s to 19 for the year.

Okay, great. Then just on the share repurchase, it seems like that was fairly high in the quarter. How are you thinking about share repurchase for the remainder of the year, and what caused the increase during 1Q?

Well, we continue to repurchase in an opportunistic way when we see opportunities. Obviously in the quarter, good quantity, it was a good repurchase for us and we will continue to look for opportunities.

Okay. Then just on the two international acquisitions, would you be able to tell us which countries they were in?

One is in Europe and one is in Latin America.

Okay. Just finally, on Bio Systems, can you talk about how many accounts you are targeting this year? I know obviously 300 was the goal last year.

Yes, I think we are in about the same range.

Okay, so about 300 again in '07?

Yes.

Great. Thanks, guys.

Scott Schneeberger, CIBC World Markets.

Nice work on the quarter, guys. Following up on Bio Systems, could you talk about perhaps what inning of the game you are in there where I think your buildout plan is to go to large metropolitan areas, built density and then move onto the next one. How I guess geographically penetrated are you along that plan? I guess, Rich, a little more color there?

Yes, I think, if you think back, what we did is a sort of a studied rollout from our original legacy area in the Northeast. In the Northeast, because we acquired the Scherer company, we've continued to build on that, we have quite a bit of density in our penetration. Other markets really vary, and we don't necessarily have a target other than we know that when we get to the kind of penetration we have in the Northeast, we certainly can see density improvements that then drive margin improvements. But I would say, right now, we are less than 25%. If you are trying to kind of average it, probably less than 25% of the way where we would want to be.

Great, thanks. I guess, on the incinerator sale in the UK, those were completed in the first quarter, that's done, or is there anything else left to think about?

No, that is completed.

Okay, thanks. Then could you give us the currency impact on revenue in the quarter?

The currency impact was about $1.7 million in the quarter, on the foreign exchange.

Okay, thanks. Finally, just wrapping up, debt-to-EBITDA, the goals there -- you guys still under 2, I think. Are you trying to move the leverage up? Just thoughts on that?

No, we are right now, even though our debt is staying about at the same level, we are a little bit lower begin. We are now in the 1.7s, so again, that creates an opportunity for us. We certainly have the room under our credit line and we keep looking for investments, acquisitions, and obviously take advantage of the Repo at times.

All right, great. Thanks very much.

Eric Feig, Banc of America.

This is Eric sitting in for Robert Willoughby. Just a quick question -- what percentage did the small customers account for, the revenues in the UK business?

It roughly is about 82% large, 18% small.

Okay, thank you. I'm sorry, one more question -- the drug recalls, do you break out how much it contributed to the quarter?

We don't break recalls from returns in the detail.

Thank you.

Matt Litfin, William Blair.

Yes, good afternoon and congratulations. My question has to do with fuel. Can you give us an update as to, as a percent of revenue, what you're spending there and what trends you are seeing and expecting going forward?

Well, we look at fuel and energy combined really, Matt. Right now, as for the quarter, it was about 5.65%. The trend is up, obviously, a little bit from the prior quarter.

And going forward, Rich?

Our guidance assumes right now these current levels. I mean, as you know, we tend to look at the current fuel picture when we set guidance each quarter. Our thought is that, frankly, we will continue to try to do the fuel surcharges, which we have been relatively successful in, and that's how we will cover any increases. When you do the fuel surcharges, as you know, it can put a little pressure on your margins because it's sort of a one-for-one pass-through, and it can also have some bearing on year-to-year growth rate comparisons, too.

I have a second question and it's completely unrelated; it has to do with the tightening labor market. I know that you are continuing to expand in a number of different businesses in North America and with the unemployment rate continuing to decline, I wondered. Are you seeing any pressure in terms of finding quality people or particular wage pressure that maybe you haven't seen over the last five or six years?

No, we really haven't seen that. You know, we offer a pretty good opportunity to people; we have good benefits. We've been able to hire for all of the new businesses as well as existing businesses.

Okay, thank you.

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

Good afternoon, guys. I had to jump off briefly but I hope you don't mind. Did you run through the total account relationships, and then the small and the large?

We did; I can give you the numbers even off-line. We did mention them in the call.

Sure, that would be fine if you want to do that. Also, on the Bio Systems, the number of new accounts added in the quarter?

It was 75.

75, okay. On the STG sale, what type of revenue detraction will that be on an approximate basis for the full year '07?

I think, if you look for '07, that's about $15 million.

Okay. All right, thank you.

(OPERATOR INSTRUCTIONS). I'm showing no further questions at this time, sir.

Well, thank you, everyone. I appreciate all your support. Drive safe. Take care. We will talk to your next quarter. Bye-bye.

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