Stericycle Inc (SRCL) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Stericycle second-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 be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, 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. I will be reading the Safe Harbor statement. Statements by Stericycle in this conference call that are 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.

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, CEO.

I will now pass the call to Frank.

Thanks, Liz. The results for the second quarter are as follows. Revenues grew $34.4 million to $232.8 million, up 17.3% from $198.4 million in the second quarter of 2006. Internal growth for the Company was $25 million or 12.9%, which is adjusted for the divestiture of STG and foreign exchange. Domestic growth was 14% and international growth, adjusted for exchange and divestiture, was 8.7%. Domestic growth consisted of SQ, up 10%; LQ, up 6%; and returns management growth of $9.3 million.

Gross profit was $104.5 million or 44.9% of revenues. SG&A expense was $44.1 million or 19% of revenues. Operating income was $60 million or 25.8% of revenues, which includes a net gain of $0.2 million in one-time items.

Net interest expense was $7.7 million versus $7 million in 2006, due to increased borrowings related to acquisitions and repurchases of shares completed in the quarter. Net income was $32 million or $0.36 per share, and during the quarter, we completed a two-for-one stock split.

At the end of the second quarter, the revolver borrowings were $434 million. The unused portion of our revolver is approximately $152 million. We repurchased 292,566 shares of common stock on the open market in an amount of approximately $12.9 million. Since the beginning of the repurchase program, on a split-adjusted basis, we have purchased a total of over 7.5 million shares. We still have authorization to purchase an additional 4.5 million shares.

Our CapEx in the quarter was $12.7 million, and the DSO was 57 days. The cash provided from operations was $17.6 million.

Now, a brief recap of the six-month numbers. For the six months ended June 30, 2007, revenues increased to $443.9 million, an increase of 17.5% from the same period a year ago. Gross profit as a percent of revenue was 44.8% for the six months ended June 2007 versus 44% for the prior year. Earnings per share increased to $0.68 from $0.54 per diluted share in the same period a year ago, and this is split-adjusted. Cash provided from operations was $70.5 million for the first six months of 2007.

Now, I will 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.

During the quarter, we enjoyed strong sales growth in all of our business segments. The SQG sales team continues to execute, and over two-thirds of new Steri.Safe customers chose select or preferred. Steri.Safe contributed over 51% of total small customer revenues.

Our LQG sales team captured 56 new med waste contracts and 77 new Bio Systems accounts. In summary, we ended the quarter with approximately 375,000 accounts, of which approximately 366,000 were small and the remainder were large.

I'll turn it over to Mark.

Thanks, Rich. I'd now 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 second quarter, we completed five tuck-in acquisitions, with incremental revenue impact in the second quarter of 2007 of approximately $4 million. Keep in mind that guidance includes these five acquisitions but does not include future acquisitions.

We believe that analyst EPS estimates for the year will be in the range of $1.39 to $1.41, which we are comfortable with. We believe that analyst estimates for revenue for 2007 will be in the range of approximately $898 million to $905 million, depending on assumptions of growth and foreign exchange rates. These estimates assume domestic internal growth rates of 8% to 10% for the year, consisting of 8% to 10% for small quantity, 6% to 8% for large quantity and returns management services in excess of $70 million; international growth of 7% to 9%; and margin expansion of 20 to 40 basis points sequentially per quarter.

We believe analysts will have estimates for net income between $125 million and $127 million, depending upon assumptions for margin improvement and interest expense. We believe analysts will have estimates for free cash flows between $130 million and $138 million, with CapEx anticipated between 4% to 5% of revenues.

In closing, we're very excited about the tremendous growth opportunities in 2007 and beyond. Thank you for your time, and we will now switch to the question-and-answer session.

(OPERATOR INSTRUCTIONS). Jason Rodgers, Great Lakes Review.

A couple questions. For Steri.Safe, what was the number of accounts on the program?

We currently have about 110,000 accounts.

What were fuel and energy costs in the quarter?

We look at them on a blended basis. They were about 5.66% of revenue.

I wonder if you could comment on the acquisition environment, if there's anything new happening there?

No. The acquisition environment remains very robust. We definitely have north of $50 million in our pool, and it's busy.

Finally, I know you have some new programs you're exploring, like the water treatment service and possibly helping hospitals with their pharmaceutical waste. I wonder if you could comment on the progress of those new programs?

Both of those programs are still in the pilot phase and are not material to the 2007 guidance we have given. We do see good results in the early stages, and there will be more commentary as we expand those programs.

Ryan Daniels, William Blair & Company.

Congratulations on a strong quarter. A couple of quick follow-up questions. First off, Frank, did you say that the returns business generated about $9 million in revenues during the quarter?

It contributed $9.3 million to the growth in the quarter.

Can you give us the total dollar amount for the quarter? It sounds like you took your guidance up for the year by about $10 million?

Yes. In the quarter, it was about $24.7 million in revenues.

So a strong quarter there. I guess a related question -- some of our channel checks indicate you're moving a little bit outside of the medical field, some of the over-counter products like the contact lens solution, et cetera. Can you talk a little bit about the strategy there, and what is driving the strong growth in that area, specifically?

I think, for us, the expansion is really being driven by referrals. Probably the most exciting part about it is I think the combined service offering that we have is the broadest that we have seen in the industry. As we are targeting the pharmaceutical industry, we're finding that they may have over-the-counter products as well, but wouldn't be in the classic prescription channel. That has also led to references in durable goods and medical devices as well.

So I think, for us, we're probably -- if we were to go out there, probably less than 1 out of 10 potential customers really have a strong awareness of us and our capabilities. So I think there's a huge potential long-term for us.

That's really helpful. Then just in regards to the acquisitions during the quarter, I think you mentioned it contributed about $4 million in Q2 for companies acquired during the quarter. Can you talk a little bit about what the run rate revenue for those five acquisitions in the quarter would be, if we look on an annualized basis?

Annualized, it's about $22.7 million. For 2007, you're probably looking at a little over $15 million.

Then multiples on all those and locations? Were any of those international, or were those all domestic deals?

There were two domestic and three international, and that excludes the one that we announced at the last quarter that had kind of closed right after the quarter, but that already was announced last quarter. The multiples, again, are in our normal range from 5 to 6 on a synergized EBITDA basis.

Last one here, and I'll pop off the call. Obviously, you divested some of the assets in the UK during the first quarter. Has that allowed you to more aggressively go forward on the integration efforts in capturing synergies in that market, now that the entire committee review and disposition of assets has taken place?

Yes. The focus clearly in the UK is on the integration, and that's progressing. It's a little bit of a longer process than you would have with a smaller tuck-in like in the US, just for size. But it's a process that clearly has started and progressing as planned.

Scott Schneeberger, CIBC World Markets.

Good afternoon and nice work. I guess, first question -- the CapEx was a little higher than I expected in the quarter. It sounds -- I think you gave guidance of a little bit up of 4% to 5% for the year. I was at the low end of that. Is there any change there, or are we on place? What, if there is changes, is occurring?

I think we're on pace. CapEx can be a little lumpy. Our overall guidance is still in the range of, say, $37 million, $38 million to just a little over $40 million, for the year.

Obviously, with CapEx, we look will get a couple of things. One is the investment spend. We had some opportunities come up in the quarter where we were able to get some new business, and in return we have to put the CapEx to it. We will always do that.

Okay, but that was unique to this quarter. Is there anything going to spill into 3Q?

No. We're still comfortable with our overall guidance, and we'll be on track for the full year to hit the numbers that I told you there.

Fair enough. On the MedSolutions acquisition, could you give us a breakdown of small versus large quantity there and what you're expecting from that?

I think, again, the MedSolutions -- there's several steps that still have to be completed. It needs shareholder approval. We anticipate that it to be something later in the year because of that, just from a timing point of view. It's not in our guidance, and the information that right now is in the public domain is all that we can say right now.

Scott Levine, JPMorgan.

I was hoping -- did you mention the impact of currency on the quarter results?

If you look in the quarter compared to the prior year, it was about $2.5 million. If you compare it to the first quarter, it was approximately $1.2 million.

$1.2 million in Q1?

Versus Q1 of 2007.

Could you share the mix of SQ/LQ in the UK?

The mix is right now about 81% large and 19% small.

On Steri.Safe, 51% of SQ revenues -- do you have any thoughts about how penetrated you can ultimately get on that program, or is there another way we should kind of be thinking about that?

I think we have yet to see a geographic area where we've hit a ceiling. Our goal for 2007 was to achieve a 52% to 55% mix by year end. But I think, honestly, it's a little bit of a moving target because, as we continue to grow and we do tuck-in acquisitions and we assimilate those acquisitions in the future, the opportunity continues to expand.

But I think the most important part is the fact that we're starting to see several quarters in a row where we are having a meaningful number of people take Select and Preferred, the higher-level programs. If you just were to take and implement people going to the higher-level programs across our existing customer base, it has potential to significantly expand our revenues and margins.

Is is it still too early to think about extending that program to overseas, or are you still focused on mix there?

First of all, the Steri.Safe program will have to be adapted to each country for language and the various regs. But it's actually probably early to do so where we have low SQG share. Much more important to focus the energy on building out the synergies, building the infrastructure to capture accounts, look for tuck-in acquisition opportunities, so that when you are really putting a strong marketing effort against launching the training/compliance aspect of those small accounts, you have a big enough customer base that you can leverage the investment on.

Jonathan Ellis, Merrill Lynch.

A quick question on SG&A. It looks like it ticked up as a percentage of total revenues this quarter. Wondering what that is attributed to, and then also hoping you could talk about how the SG&A should track for the remainder of this year?

Let me start with the overall year. I believe, on this last call, we had indicated that we thought we would be in the mid 18's to 19% range. We still think that's the case. As you know, I think, some of the folks had asked last call -- we were slightly below what they had anticipated, and we've moved up a little bit. The causes for this quarter -- continued investment spend and also some of the acquisitions that came in had higher SG&A ratios. So you will see, as you go into the latter part of the year, that start to taper down.

Just on the tax rate, it seemed to be a little bit below, I think, what you previously targeted, which was around 39%. I'm wondering what that's attributed to and also how that should trend for the rest of the year.

I think it's impacted by the mix, international/domestic, and tax planning. I think a year-to-date of 38.7%, somewhere in that range, is probably not a bad one to use for the remainder.

If we could just turn our attention quickly to acquisitions, Frank, I think you mentioned that the pipeline is greater than $50 million in total. I'm just hoping for some clarification, because I know previously you had talked about a pipeline domestically of $50 million. So I'm just hoping you could give me a sense for whether the pipeline domestically is still $50 million or that has changed at all?

No, that number is kind of, as we said before, a North America pipeline.

On the international acquisitions, would you be able to tell us which countries those were in?

They were predominantly in Latin America.

Last question I have, just on the pipeline internationally -- I know you don't give specific numbers on the total size. But wondering if you could talk at all about whether the pipeline is tilted more towards Europe versus Latin America?

Really, we don't go in details. We look where the opportunities are, and then when they come, you will hear about them.

Greg Halter, Great Lakes Review.

Thank you for taking the (technical difficulty). Can you hear me?

No.

(inaudible).

You are coming in and out on your phone.

Okay, try again?

No, or if you have questions, if it's easier for you on a land line, don't hesitate to call me later.

Okay, thank you.

Ryan Daniels, William Blair & Company.

Just one quick follow-up on the Steri.Safe programs. Can you give us the percentage of customers on the premium service now, given the strength in the quarter of signing up new [participants] at that level directly?

Yes, it's actually about 19.9%, almost 20% now.

Debra Wing, American Insurance.

I was wondering if you'd give me more of a picture of the structure of the returns business. Does it vary by individual products? I guess I'm thinking it should.

Then, is there a difference in the margin structure between cross products? What do you think is like the highest margin you could get?

Well, several things. First of all, the margins, we believe, in the business, our objective is to be able to build out our profile and get to where we have well north of 20% EBIT margins. Based on the evidence that we've seen, I think that's very achievable. The margins are really driven a lot by what type of services are in the offering.

So it isn't something where you'd say, okay, a product that is an OTC that has the following characteristics is going to be a margin of X and a medical device is going to be a margin of Y or the like. It's going to be driven by what is the full complement of activities that we do. Typically, we think we can get to corporate margin levels and above, over time.

(OPERATOR INSTRUCTIONS). I am showing no questions at this time. I'd like to hand the conference back over to the panel for any closing remarks.

We thank everybody for your attention and participation. It has really been an exciting quarter and a lot of great things to come. So I look forward to speaking to you soon. Take care.

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.