Stericycle Inc (SRCL) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Stericycle third 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 you to the host for today's conference, Ms. Liz Brandel, Vice President of Finance.

Thank you very much and welcome to Stericycle's third quarter conference call. On today's call 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-Q 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'll now pass the call to Frank.

Thanks, Liz. The results for the third quarter are as follows. Revenues grew $34.1 million to $237.3 million, up 16.8% from $203.3 million in Q3 of '06. Internal growth for the Company was $22.9 million or 11.6% which is adjusted for the divestiture of some assets of STG and foreign exchange. Domestic growth was 11.6% and international growth adjusted for exchange and divestiture was also 11.6%. Domestic growth consisted of SQ up over 10%, LQ up 6% and returns management growth of $5.6 million. Gross profit was $106.8 million or 45% of revenues and SG&A expense was $44.6 million or 18.8% of revenues. Operating income was $61.9 million or 26.1% of revenues. Net interest expense was $8.6 million versus $7.3 million in '06 due to increased borrowings related to acquisitions and repurchases of shares completed in the quarter. Net income was $32.9 million or $0.37 cents per share.

At the end of the quarter the revolver borrowings were approximately $456 million and the unused portion of our revolver is approximately $324 million. In August we increased our revolver facility from $650 million to $850 million and extended the maturity date to August, 2012. We purchased approximately 757,000 shares of common stock on the open market in an amount of approximately $36.5 million. Since the beginning of the repurchase program on a split adjusted basis we've purchased a total over 7.5 million shares. We still have authorization to purchase an additional 3.7 million shares. Our CapEx in the quarter was $14.5 million. The DSO in the quarter was 59 days and the cash provided from operations was $57.7 million.

Now a brief recap of the nine months numbers. For the nine months ended September 30th, '07 revenues increased to $681.2 million, an increase of 17.3% from the same period a year ago. Gross profit as a percent of revenue was 44.9% for the nine months ended '07 versus 44.2% for the same period the prior year. Earnings per share increased to $1.05 from $0.84 cents per diluted share in the same period a year ago and that's split adjusted and the cash flow from operations was $128.1 million for the first nine months of '07. 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 in the quarter. The SQG growth was primarily driven by SteriSafe with two-thirds of new SteriSafe customers choosing select and preferred. SteriSafe contributed approximately 53% of total small customer revenues. LQ sales growth was driven by the continued adoption of our Bio Systems offering and new LQG med waste contracts. In summary we ended Q3 with approximately 384,300 accounts, of which approximately 374,900 were small and the remainder 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 and provide our preliminary guidance for 2008. Please keep in mind that these are forward-looking statements. During the third quarter, we completed two domestic acquisitions and, in addition, in the early October we completed one international acquisition. The incremental revenue impact in 2007 for these latest acquisitions will be approximately $8.6 million of which $2.2 million was in the third quarter. The annualized revenues of these three acquisitions is approximately $26 million. Keeping these items in mind, we believe that analysts may fine tune their 2007 models to reflect revenues between $917 million and $923 million and estimates for EPS from $1.41 to $1.42.

Now I'd like to provide a preliminary outlook for 2008. Please keep in mind that a preliminary guidance does not include future acquisitions or divestitures. We believe that analysts EPS estimates will be in the range of $1.64 to $1.68, which we are comfortable with. We believe that analyst estimates of revenue for 2008 will be in the range of approximately $995 million to $1.015 billion depending upon assumptions of growth and foreign exchange rates. We believe analysts will have estimates for net income between $147 and $150 million, depending on their assumptions of margin improvement and interest expense. And analysts will have estimates for free cash flow between $140 and $145 million with our CapEx anticipated between $45 million and $55 million. In closing, we're very excited about the tremendous growth opportunities in 2008 and beyond. We thank you for your time. And operator, we will now switch over to Q&A.

(OPERATOR INSTRUCTIONS) One moment for our first question. Our first question comes form Scott Schneeberger from CIBC World Markets.

Hey, good afternoon, guys. How are you?

Good afternoon.

I guess, I was going to start off just talking about recalls. I missed I think, Frank, what you had said was it that the returns or recalls growth, I missed the number. Could you please share that again?

It was $5.6 million over last year from a growth point of view and in total it was $22.3 million.

Okay. Thank you. Staying on that topic, that's something that you had a lot of success with in the second quarter and obviously an exciting growth business for you. Could you just speak a little bit, I guess, to -- is that an industry that's in rapid growth? I mean we see headlines frequently about consumer products being recalled. Is it just what we're seeing in the news that leads us to believe that that's growing rapidly or are there true signs we're seeing that? If you'd just speak to that, I'd appreciate it.

Well, Scott, I think from my perspective not only have we had a very solid year from the big recall activity that we're seeing, but our sense of it is that there's a growing awareness of the core issue, because it's happening beyond just the classic space of pharmaceuticals and over-the-counter products. You see it happening in durable products. You see it happening in consumer products of a variety and so our sense is that there's growing awareness and pressure and that's really for us one of the keys is that we keep building the awareness of our capabilities and also expanding what we can offer to our customer, it's really helping our growth potential.

All right. Thanks. That's helpful. I guess shifting gears a little bit, actually let's stay on that. For recalls, obviously a lumpy business, and as that grows as one of your segments, do you envision breaking out returns in recalls going forward just so we're able to -- we appreciate the '08 guidance but just so we're able to break out our models and consider the lumpiness factor?

Yeah. I think for us it's tough to segment or separate, because often we may have an agreement with a customer that may include services that enhance and encompass the returns management. We've added now capabilities for coupon and rebate management, some new additional services of efficiency checks and effectivity checks and retrieval capability and it often gets wrapped together and it's very, very tough to distinguish it because it leverages same infrastructure, similar sales force, and execution and the like. So, at this point we don't have an easy way to break that out.

Okay. Understood. So we shouldn't anticipate that in any time too soon.

Uh-huh.

Okay. Now shifting gears, is Rich or in Bio Systems could you talk about how many markets that's rolled out to, what the plan is for further growth, just kind of speaking of the footprint?

Yeah. I mean we've been rolling it out pretty steadily now and I think where we're at in terms of penetration in the U.S. is probably 25%, possibly 30% of our target accounts. Although like a lot of our services, as the word gets out there, we get interest from labs and other people. So the market kind of continues to expand. I think the other thing to consider is we haven't begun to move it into the foreign markets. So we have basically all the international platform that this will be applicable to.

Great. Sounds good. One kind of more model housekeeping question, your tax rate was 38% in the quarter, a little bit lower than I had anticipated. Is that a result of maybe some acquisitions, maybe something international or something else?

No. It's really kind of a little bit of a year-to-date adjust down so that the year-to-date number, which right now is at 38.45 versus 38.5 before, and so I think overall we're going to be right into that bandwidth maybe for next year guidance, 38.5 is probably a good rate to use.

Fair enough and just as far as fourth quarter, something in the similar range, in the 38 to 38.5?

Yeah.

Okay. Fair enough. Thanks, I'll hop out there.

Thank you.

Our next question comes from David Manthey from Robert W. Baird.

Hi. Thank you very much. Could you discuss infection control and/or any new initiatives that might be out there for you? And as it relates to that specific initiative, is that primarily for hospitals or is there some service that you can offer to small customers as well?

Most of the activities that we've done in the infection control, research and pilot phase are targeted towards the large quantity customers at this point and they would have applicability in other segments, but right now they're -- most of our research is focused in the LQ space. Part of that is we think over the coming years the awareness factor of carcinomial infections will increase as hospitals have to do more reporting and there's more visibility as to what's happening in terms of hospital acquired infections.

Okay. Thank you. And should we be concerned at all about fuel costs or labor or any other costs that are impacting you at this time?

Well, you know fuel has been a challenge this year, but it's been a challenge in prior years. And although our guidance right now that we gave you assumes that we're sort of at a current fuel crisis and energy crisis, the good news is our team has been very good at eeking out efficiencies to offset costs and more importantly our contracts allow us to do fuel pass-throughs, so we've done that I think pretty effectively to counter the higher energy costs.

Okay. And finally maybe you could talk about pricing just in your core services. How does the competitive landscape look to you today? Are the pricing pressures getting greater or less or the same?

You know, I think more the same. It is a competitive business and there's many competitors out there that we compete with in all the markets that we're in and, I guess that being said, we've obviously competed effectively and we haven't seen any real change in pricing.

Thank you very much.

Our next question comes from Ryan Daniels from William Blair.

Yeah. Good afternoon, guys. A couple of quick housekeeping questions up front. Do you have on hand the number of new large quantity generator accounts and Bio Systems accounts during the quarter?

Yeah. For the new med waste contracts for large quantity was 57 and we captured 75 new Bio Systems accounts.

Okay. And then how about SteriSafe additions during the quarter, do you have that number?

SteriSafe right now stands at about 114,000 total accounts.

Okay. And what percentage of those, given the continued strength in signing up initially towards the more premium services, do you have of those 114 on premium?

Right now we have -- well, in the quarter we had over two thirds taking select and preferred and year-to-date we're over 21% on select and preferred. So it's a new high for us.

Okay. Great. And then Frank, in your guidance for 2008 or Mark, whoever wants to address, this can you give us a feel for what's implicit in there from the returns and recall business? I know this year you've got it up towards the $70 million number. Where do you see that going as part of your '08 guidance?

Well, I think from our perspective, when we gave the ranges on revenues, we think the underlying growth of that business is north of 10% per annum. It's hard to judge and peel out what the baseline is but in the ranges we gave you was a $70 million to $85 million number for 2008.

Okay.

And the thought processes there is that we've had some pretty big recalls which have been favorable effects in Q2 and Q3, not sure whether we'll capture those same levels next year. And if we get bigger recalls and the momentum continues, it could be better, but we wanted to build something in that we thought was, at least in our current knowledge and ability to look forward, something that was in a reasonable bandwidth.

Okay, great. That's helpful color. Two more quick ones and I'll hop off. Just another one back on the fuel costs. I know the costs have been elevated for a couple quarters now. I'm just curious how quickly you can pass those through. I know it's written into the contracts, but is that something where it's fairly immediate or are you going back one to two months in arrears or just any explanation on how that works.

We can react fairly quickly but I think, if you just think about it from the standpoint of the lag there will be some lag and that's why in the past we've said we're able to counter it but there could be, as these fuel surcharges build into the revenue, there could be some margin impact, minimal but you might see it.

Okay, great. And then the last one it looks like a decent CapEx quarter kind of at a run rate of $60 million, given that just under 15 you did this quarter. Is there anything significant there on the returns or recall business or anything international that drove that to a little bit of an uptick in the quarter.

I'm not sure about the comment of $60 million. That may be the run rate but you got to remember that CapEx is kind of lumpy. We're still holding to our guidance of around 5% of revenues based on the new revenues and mid-40s will be our spend this year. Because of the acquisitions and because of the strength of recall business, we made decisions to pull some projects forward because they had strong IRs.

Okay. Perfect. Thanks for the color. Thanks, guys.

Our next question comes from Jonathan Ellis from Merrill Lynch.

Thanks. Good evening, guys.

Good evening.

Wanted to -- just in terms of the '08 guidance, wanted to try to get some clarification what assumptions you're making in terms of SQ and LQ growth.

The SQ is about 8 to 10%. LQ internal growth about 5 to 7% and you're looking at international somewhere in the 7 to 9%.

Okay. And it seems like the LQ growth is down just modestly from the range you provided previously.

A little bit. I mean you also get with bio as a percent of the total, but overall I mean it's still good revenues coming in.

Okay. And then on the international business, wondering could you talk a little bit about the organic growth in that business this quarter versus international -- or versus acquired?

Well, in the quarter we had 11.6% in growth and that is adjusted for the divestiture that we did and for foreign exchange. Foreign exchange in the quarter aided, if you compare it to last year, about $3 million to the revenues.

And is that figure also adjusted though for acquisitions?

Yes, it is.

Okay. So that's in the organic number?

Yeah.

And then also in terms of the company that you bought, would you be able to tell us what country that was in?

That was in Canada. That's the one that again closed early October. It was kind of in the Canadian press, the one we acquired from Brampton Brick

Great. I appreciate that and then in terms of the STG integration, how far along are you at this point and when do you think you'll be done with the integration of that company?

Again, STG is because of the size of it, takes longer and as we said before, it will probably still run into the first half of next year, both from a waste flow point of view and just integration between the two.

Okay. And then just finally on the topic of the UK, can you talk about mix of SQ versus LQ right now?

I think if you look, it's about a little over 20% that right now is in SQ in Europe and then when we talk UK, we've always talked about Ireland and the UK together.

Yep. Okay. And then just one final question related to the share repurchase, looks like this year repurchase is up there quite a bit. Could you talk a little bit about what your assumptions are going into next year in terms of repurchases.

Again in our guidance we don't presume repurchases, so again from a guidance we don't make those predictions. Again we're opportunistic in our repurchases and we see opportunities, we'll take advantage of them.

Okay, great. Thanks guys.

Thank you.

Our next question comes from Leone Young from Citigroup.

Hi. It's actually Alina Cellura for Leone. Just getting back to the acquisitions, in the quarter the two domestic acquisitions you made were they in the med waste?

Yes, they were.

And how's the pipeline now? I mean has there been any change?

No. We're still despite doing all the deals we're still over $50 million in the North America marketplace.

Okay. And also margins, the gross margin in the quarter was a little bit shy versus what we had expected and also sort of versus what you guys have said in the past for 30 to 40 basis points of improvement quarter over quarter. Are you still expecting that kind of growth going forward?

Yeah. If you look in the quarter, there's really three factors. We obviously, from a revenue point of view, were ahead of the expectations and that was both due to acquisitions, international was ahead both in growth and a result of foreign exchange. Those are normally coming in at lower margins, returns was also ahead a little bit, a lot of the recall related, which is a little bit lower margin. So if you blend all that, you really are going to come again to around the 45% gross margin. And if you really look ahead, I mean anywhere, 15 to 20 basis points quarter-over-quarter from a next year point of view, but on a base if you take all the kind of mix factors out, we were probably about 35 basis point up versus the prior quarter.

Okay. Okay. Great. Thank you.

Our next question comes from Scott Levine from JPMorgan.

Afternoon.

Good afternoon.

Regarding the SG&A I know you don't give this fine of level of detail yet for 2008, but you guys have been stepping up the strategic spend this year. Any thought in terms of what the bias might be on the SG&A kind of going forward beyond this period of elevated strategic spend?

I think the current outlook in our preliminary guidance would be to keep our SG&A level is comparable to kind of where we're running right now throughout Q4 and 2008. There's still several programs that are under review that we think have great IRs that we may pull forward, but as we've seen in the past, those have paid off nicely for us where we accelerated sales and marketing efforts and gotten the returns for them. So -- but I think for most of the models, depending on how you treat amortization and acquisition related costs, you're going to come in in the mid to high 18s.

Got it. And then turning to acquisitions, one follow-up. Any change in the multiples you're seeing out there and/or do you see any limit potentially in the domestic marketplace and what you can do with traditional roll-up type opportunities?

No. Again on the deals that we closed and the one right after the quarter, multiples again in a six to seven on a synergized basis, so very much in the range and on deals that are in the pipeline, no, very -- again anticipating similar kind of picture.

Got it. One last one on recalls. Are you guys contemplating or thinking there's any real additional investment necessary for you guys to grow the business beyond the warehouses you have, the technology, the infrastructure, or are we pretty much done the heavy lifting there?

No. I think we'll continue to support the businesses with whatever CapEx needs they have. Again, that's not a huge CapEx, but I think for us really the drive on awareness and expansion and capabilities is where we're putting a lot of our SG&A efforts right now. So we're excited about the space. It continues to be one that we believe we can get, over time, to north of 20% EBIT margins and have a very unique set of tools for helping our customers help their customers.

Do you have a sense, one last follow-on, do you have a sense with regard to the mix? I know you don't break out returns versus recall, but do you have a rough sense in terms of the mix of return versus recall you ultimately expect to achieve or you're not thinking about it that way?

No. We don't really price it and think about the business in that regard.

Very good. Thanks.

Our next question comes from Greg Halter from Great Lake Review.

Hello. Thank you for taking the time to answer the questions. Relative to the share buyback with the shock price at $55 plus, just wondering your appetite, I presume, is still there to buy it given what else you see out there, but what is the highest price you have paid to date for stock?

We don't give that specific detail. If you really look and the recall off the last quarter, the average in the quarter at that point was about $48.22.

Okay. And fuel costs, fuel and energy costs I should say represented what percentage of your sales in the quarter?

Was about 5.7%.

So basically about the same as the last couple quarters.

Correct.

Okay. And any commentary that you could provide relative to the pending acquisition of Med Solutions would be helpful. I think their vote is November 7th, if I have that correct.

I think that's correct or I know that's correct, sorry. It's a tuck-in. It is a good transaction for us. It will have some, what we would consider public company add backs. We have good operating company savings because of the fact that it's a tuck in, in the range of a normal multiple again for a transaction that size and again, from that point of view, we anticipate it to close early November.

And do you envision taking any of their own proprietary businesses throughout your whole infrastructure? I think they have some sort of onsite device possibly.

Again, everything comes with the transaction. It will be evaluated if that can make money and, case by case basis, we'll look at it.

All right. And I didn't hear the debt to EBITDA. If you have that figure, I'd quite appreciate it.

It's 1.99.

And you're still comfortable going up to three times?

Yeah.

All right. Thank you very much.

Our next question comes from Robert Willoughby from Banc of America.

Hello, guys. This is Jason Freuchtel sitting in for Robert Willoughby. I notice your debt to total cap ticked up a bit. Should we expect that to continue to increase in the near term?

Again because of the repos you're going to get an environment where debt to cap is probably not as good an indicator. I mean the debt to EBITDA for us is a far better indicator for leverage ability and leverage, kind of are we too high or low. 2.0 for us to 1.99 we feel is still on the conservative side. We're going to keep managing that. Most likely we'll be anywhere between 1.5, 2.5 as kind of a normal bandwidth for us. Could we at times go a little over that? Yes, depending on the transaction and historic, if you look back our lowest has been about 1.2. So we feel comfortable with it. I think debt to cap is probably not as good an indicator to use.

Okay. And just a question on your water management services that you provide. Could you discuss how many customers you had in the quarter and if you target a specific type of healthcare facility, maybe profit versus nonprofit.

Yeah. The water treatment program is still in pilot phase. So there's no material impact to the quarter or no material numbers built into our remaining '07 or '08 guidance. So should we roll that out, that would be upside, but we're not anticipating it at this point in time and the target base for that type of service would be predominantly primary hospital marketplace or LQ marketplace, would be applicable to nursing homes, essentially any place where you're going to have patients that are potentially immune compromised that are going to be near water sources and water-borne organisms.

Okay, great. Thanks.

Our next question comes from Cliff Walsh from Julius Baer.

Good afternoon.

Good afternoon.

Frank, you gave us I think a $50 million pipeline for the North America. Is there an international number that you can share with us?

We don't disclose the international because, it would be maybe too obvious as to what kind of transactions we'd be looking at.

Okay. And in terms of recent acquisitions can you maybe comment on respective companies in terms of kind of where they fit in in terms of pricing in the market? Are we talking about some of the lower priced competitors maybe that we can see pricing improve over time in those markets?

Again I think the simple thing is if it's close multiples six to seven from a pricing point of view, it's very much in our bandwidth. They're tuck-in and so they're good transactions for us.

I wasn't referring to valuation. I was talking more specific pricing, customer pricing in the markets that -- where you are competed with these companies, where they 10% below you in terms of price or 20% or maybe you can just comment on the ability to maybe raise the pricing in those smaller markets.

No. This market is so close together, again, that you will not see those kind of differences.

Okay. Great. Thank you.

Our next question comes from Scott Schneeberger from CIBC World Markets.

Hey, guys, thanks for taking the follow-up, just a quick one. In this arbitration case going on in Australia and that has yet to be quantified as far as I'm familiar, can you provide an update, has that been quantified? Are you still waiting on that, any color on it?

No, hasn't been quantified yet. It's -- our anticipation that it will probably be a pending Q4 kind of outcome, probably in the latter part and -- no, no quantification yet.

Okay. Thanks so much. Appreciate it.

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

Well, we thank everybody for your time and attention. 2008's going to be a great year and we appreciate all your support. Have a great day.

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.