Stericycle Inc (SRCL) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Stericycle's fourth quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we'll 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, and welcome to Stericycle's quarterly 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 be reading 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 10K, 10Q, as well as with 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 committment 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 fourth quarter are as follows. Revenues grew $42.9 million to $251.6 million up 20.5% from $208.7 million in the quarter four of '06. Internal growth for the company was $24.8 million or over 12% which is adjusted for the divestiture of some assets of STG and foreign exchange. Domestic growth was 12.5% and international growth adjusted for exchange in divestiture was 11%. Domestic growth consisted of SQ up 12% and LQ up 7%, and returns management growth of $5.3 million. Gross profit was $112.4 million or 44.7%, and SG&A expense was $49.3 million or 19.6% of revenues.

Operating income was $47.2 million or 18.8% of revenues. Operating income in the quarter included $13.9 million charge for the Australia arbitration settlement, $2 million charge for the impairment of White Rose trade name in the U.K. Net interest expense was $8.8 million versus $7.1 million in '06 due to increased borrowings related to acquisitions and repurchases of shares. GAAP net income was $24.1 million or $0.27 per share. The impact of the arbitration settlement, investment and trade name write-downs, partially offset by insurance proceeds and the gain of sale of assets was a reduction of net income of $9.8 million or $0.11 per share. NonGAAP net income, excluding the items would have been $33.9 million or $0.38 per share. At the end of the quarter, the revolver borrowings were approximately $466 million. The unused portion of our revolver is approximately $245 million.

We repurchased 159,914 shares of common stock on the open market in an amount of approximately $8.5 million. Since the beginning, the repurchase program, on a split-adjusted basis, we've purchased a total over 8.5 million shares. We still have authorization to purchase an additional 3.6 million shares. Our capital spending was $10.8 million in the quarter, and our DSO was 58 days. The cash provided from operations was $45.9 million.

Now a brief recap of the full year. For the year-ended December 31, '07, revenues increased to $932.8 million an increase of 18.1% from a year ago. Gross profit as a percent of revenue was 44.8% for the year ended December '07 versus 44.3% for the year ended December '06. GAAP earnings per share increased to $1.32 from $1.16 per diluted share from a year ago, this is split adjusted. NonGAAP income per share increased 22% to $1.42 in '07 from $1.16 in '06. The cash flow from operations for the year was $174 million for the full year of '07. And that was it from a numbers point of view. Now I'll turn it over to Rich.

Thanks, Frank. We just want to thank each member of our worldwide team for another solid performance and for their continued commitment to our customers and shareholders. As we finish the year, we enjoyed strong sales growth in all of our business segments. The SQG growth with primarily driven by Steri-Safe with over 2/3 of new Steri-Safe customers choosing select or preferred. Steri-Safe contributed approximately 55% of total small customer revenues. LQ sales growth was driven by the continued option of our Bio Systems offering and new LQG med waste contracts. In summary, we ended Q4 with approximately 394,600 accounts, of which approximately 384,900 were small and the remainder were large. And I'll turn it over to Mark.

Thanks, Rich. I'd now like to provide insight on our current outlook for 2008. And please keep in mind that these are forward-looking statements. During the fourth quarter we completed three domestic and two international acquisitions. We also purchased the remainder of our joint venture in Mexico. And as previously mentioned on our last conference call, we closed on acquisition in Canada. Incremental revenue impact in the fourth quarter of 2007 was approximately $3 million and the annualized revenue of these acquisitions is approximately $20 million. Keep in mind the guidance doesn't include future acquisitions or divestitures. We believe that analyst EPS estimates will be in the range of $1.65 to $1.69, which we are comfortable with. We believe analyst estimates of revenue for 2008 will be approximately $1.02 billion to $1.04 billion, depending on assumptions of growth and foreign exchange rates. We believe analysts will have estimates for net income between $148 million and $152 million, depending upon assumptions from margin improvement and interest expense. And we analysts will have estimates for free cash flow between $140 million and $145 million, with 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 we'll now open the question and answer.

Thank you. (OPERATOR INSTRUCTIONS) First question comes from Ryan Daniels from William Blair.

Good evening, guys, sorry about that. Can you hear me now?

Yes. We can.

Sorry about that. Couple quick housekeeping questions up front, I wondered if you could give us locations of the international acquisitions?

There were five deals, there were three domestic and two international. They were in -- one in Mexico and one in Argentina.

Okay, great. And then do you have the number of new large quantity adds and new Bio Systems adds?

The new Bio Systems in the quarter was 73 accounts. And the other number you asked for?

The large quantity generator, new waste accounts?

About 56 new accounts in the quarter.

Okay, great. And a couple bigger ones, obviously one of the topics du jour has been potential economic slow down, and I'm curious if you guys are seeing any impact of that. I know your business is really noncyclical, but maybe any more push back from any of your customers that are seeing a slow down on pricing. Or how do you view that as you look forward through 2008?

On economic slow down, we haven't seen effects of it. It's one that, fortunately for us, the space that we're in tends to be pretty resistant to economic cycles, whether it be demand for Health Care services or the like. So we haven't seen any symptoms of it. Okay, great. And I know in the past you discussed some of the research you're doing on the infection control side, especially for large quantity generators and the water decontamination management.

Have you guys reached a point where you're ready to move that from pilot phase or research, more into production, especially given all the headlines we've seen lately about infection control, and reporting and kind of not paying for the never end bets?

We're still continuing to pilot it, we have got a couple different programs. But consistent with the way we have dealt with it in the past, we haven't included anything in our guidance.

Yes.

They are still being piloted in different areas. And similar to what we did with Bio Systems some years back, when we're are ready to actually roll out, then we'll provide guidance and we'll give you a little more color.

Okay, great, and last question and I'll hop off. It sounds like the integration over in the U.K. is going well, and I was curious, on the Bio Systems front, I know you guys have talked about it only being roughly 30 -- 25%, 30% penetrating the U.S., so plenty of growth left here. But is that something you're thinking about no, is that integration completes, rolling out Bio Systems overseas in some of your larger markets?

I think Bio Systems as a modality will be a future rollout for us. I think our first and foremost concentration is focusing on the integration and driving the small quantity space first. But Bio Systems would be a market by market activity and in other markets, but look at that as a Phase II type program.

Okay, great, thanks for the color guys

And our next question comes from Robert Willoughby from Banc of America Securities.

Thanks. Mark or Frank, just what percentage of the revenues of your business, I assume it's a majority here, would be considered recurring, or in other words, what piece of the target that you threw out there do you really feel is in the bag at in present for '08?

I think if you really look at the run rate out of the $251 million in Q4, obviously we were better than maybe expected. Of that, maybe growth was about little over $2 million higher. Foreign exchange aided it by about $1.8 million. The return services was maybe $3 million more. That was really more and better recalls. So I think that's something you shouldn't continue with. And then acquisitions contributed about $3 million. So overall, again, if you look in the market and you look at what we did last year in the RMS, the returns business, that one probably next year is for a total of about $70 million to $85 million. So in the total scheme of things, a little lower than what they almost did this year, and so that one you need to watch with a little bit, because there's some larger recalls in that.

Okay, and just a profitability trend here. Is this just business mix issues predominantly?

Yes, if you look, really, international was higher, the acquisitions had a mixed impact on the margin, and then, obviously, the pass through, we've had higher fuel in the quarter and that has been passed through. So I mean, those combined, you're talking at least 30 to 40 basis points impact on the gross margin.

Okay, and lastly, it sounds like you consolidated your Mexican joint venture. Any sense how big that was? I mean, was that a below the line investment and now you have the majority for you?

It always was majority, so it was fully consolidated. And so from that point we acquired the additional 36% from our partner, and it was obviously a good deal for both parties.

Okay, that's it. Thank you.

Thank you.

Our next question comes from Alina Cellura from Citigroup.

Hi. Good evening. Just a quick question again on the margins. Are you still anticipating margin -- sequential margin expansion of roughly 20 to 40 basis points, even given higher fuel costs and just acquisition mix there?

I think on the core business you continue to have that 20 to 40, and that obviously doesn't include any impact of acquisitions or foreign exchange or if we do more pass throughs. Those always make it a little bit more difficult and it probably will happen obviously next year. Even if you look, you have to kind of reset the clock a little bit based on Q4 with the pass throughs and the new acquisitions in the mix, and that probably is at least 40 to 50 basis points.

Okay. And also, SG&A was significantly higher than what I had anticipated. And I'm just wondering if this is sort of a good level to be at for '08?

I think for '08, you kind of are looking at high 18%s, close to 19%. Not way dissimilar, but it's obvious going to be on a higher revenue.

Okay, so was there anything different this quarter bumping it up to 19.6%?

I think in this quarter you had little bit higher investment spend. Obviously, you had the higher percentage still for acquisitions in the quarter, they kind of closing at a higher percent themselves. Internationally with the higher revenue. So there's some mix issues and there's higher percentages from acquisitions. We had slightly higher option expensing because of the higher share price overall, that increases a little bit.

Okay, so for the rest of '08, though, we're going to expect to be more towards the higher 18%?

High 18%, yes.

Okay. Okay, great, thank you.

Our next question comes from the Scott Schneeberger from Oppenheimer.

Hi, good afternoon guys. Just, I guess, starting off here, the U.S. acquisitions, you gave us a little more color about the international, could you take us deeper please on the three in the U.S.?

The three in the U.S., one was obviously a known, which was the MedSolutions transaction, that was the largest one and really from a materiality the one really to concentrate on. And there were two smaller ones. One on the east coast and the other one was, yes, also on the east coast.

And I guess, you'd answer a prior question saying about a 40 to 50% impact on gross margin in the quarter from acquisitions, for pass throughs, other, just to confirm that?

Yes.

Okay, could you speak just for a moment for returns recalls. I believe, Frank, you said incremental 5.3%. Could you give us the absolute number for the quarter in revenue?

I do know the 5.3%. Oh, you mean the growth, sorry, the growth number versus the prior year. So if you take the internal growth, without the total, they did about $21.1 million in total, and so the growth versus the prior year, there was a little bit of an acquisition in there, but 5.3% was the internal growth, and obviously they grew it from a percentage internally over 30% year-over-year.

And then the Mexican JV that's exclusive of the acquisitions in the quarter. How much of a revenue impact was that? Is that something you can share?

Mexico was already fully consolidated. So there's no impact on revenue point of view, there's a small impact on a minority interest that's not that material a number.

Okay, thanks, I'll hop out there. Thank you.

Okay.

Our next question comes from Jason Rodgers from Great Lakes Review.

Good afternoon. Looking at the Bio Systems, what was the revenue in total from Bio Systems in '07 and if you have a target for '08?

I think if you look, we don't break it out, but again, Bio grew north of 20% -- between 20% and 30% year-over-year. It's part of the LQ revenue, which obviously had a nice growth rate both in the quarter and for the year.

Okay. And what was the percent of revenue for fuel and energy costs in the quarter?

Fuel and energy was up pretty strong from Q3. It was 6.13% of revenue or 42 basis points higher than Q3. And I think we're all aware of the challenge that you face when the oil hits $100 a barrel. The good news again is that our contracts are flexible and we're able to pass those costs through. As Frank alluded to earlier though, because of the timing of the pass through and the fact that you're doing dollar for dollar to pass it onto the customers, there is some impact to margin.

And are you seeing any resistance from customers for that increase?

I think we all go to the same gas pump. We all understand that this is just a fact of life.

Okay. And finally in the Steri-Safe, what's the penetration rate now out of the eligible base there?

We're at about 39%, and we're looking at being north of 40% as our goal for the full year, '08 year.

Okay, thanks a lot.

Our next question comes from Scott Levine from JPMorgan.

Good afternoon. Regarding the U.K., did you guys give a number for the percentage total SQ customers or percentage total base there?

It's over 20%.

Over 20%, okay. And then with regard to the tax rate, a little lower than what we were looking for in the quarter. Is that a good number go-forward number or should we be so -- in 38% range?

I think 38.5% is a good rate for '08. We had a little bit of a year-to-date benefit there in the fourth quarter.

Okay, one last one. With regard to the acquisitions, particularly MedSolutions as well, is there a time table for integration? Should we be thinking about back ending the margin ramp in 2008 to reflect integration on some of these acquisitions?

Yes, that integration for the geography is a nice-sized one. Takes a little longer, probably a 6% to 9%, same with Canada, the one that concluded and we mentioned that in the last call, those are a little larger for respective geographies. So a little longer integration cycle.

Great, thank you.

Our next question comes from Jonathan Ellis from Merrill Lynch.

Thanks, good evening, guys.

Hello.

Wanted to just ask up front, what are the total number of Steri-Safe accounts as of the end of the quarter and in the percentage of accounts that are on the higher levels?

The total number of accounts were now north of 117,000 on the program. And the number that are on the higher levels is the about, yes --

23.3%.

Yes, about 23.3% is the percent that are in the higher level program.

Okay, great. And as you think about the mix for Steri-Safe in 2008, any specific targets you have in terms of percentage of total SQ revenues?

In terms of percent of total SQ, we're looking at something higher than 60%.

Okay. Okay, great. And talk a little bit about the guidance you gave here. Seems like, obviously revenues are above what you'd previously guide to for 2008. What's the primary source of that upside?

It was really the acquisitions. If you think about it, you have two things: $20 million roughly in acquisitions that weren't in the guidance before, and then growth anywhere between $5 million to $10 million.

Okay. And given that SQ grew at 12% in this quarter, I know in the past you've said normalized growth is 8% to 10%, any thoughts about the trajectory for SQ growth in 2008?

It includes the pass through which for probably is about a little over 1.5 percentage points off that. So overall it brings it kind of close to in line to the 10% that historically we've had.

Okay, great. And then just quickly on the international side, could you break out the acquired versus organic growth in the international business during the quarter?

The acquired growth in the quarter for international was about $5.8 million of their growth.

Okay.

You have to offset that with about $4.2 million of the divestiture, so you get offsets, but in total roughly, you're looking at -- excluding again the foreign exchange and the divestiture and the acquisitions about an 11% internal growth, which was about $4.8 million.

Okay, great. And then, just quickly in Argentina, you mentioned in your new press release, a legal restructuring of operations there, but you do, correct me if I'm wrong, you still do have a wholly-owned subsidiary in that country?

Yes. Yes, we do.

Okay. And then just finally, in terms of the surcharge you have in place, what portion of your incremental energy costs during the quarter were offset by that surcharge, recognizing that there is a lag?

Again there is a little bit of a lag, not that much, again our goal is again to pass it through and historically we've been able to do that.

Okay, thanks guys.

(OPERATOR INSTRUCTIONS) Our next question comes from David Manthey from Robert W. Baird.

Hi, good afternoon. Thank you. You mentioned fuel and energy as an area where you're seeing some inflation. Is there any other inflation impacting your business right now?

You get your normal, obviously labor factors and benefits. Those are the ones, benefits probably, like any company, always tries to look at that carefully. That's probably the one that I would say is pressuring the most. We try to obviously offset over time, that with productivity and improvements.

Okay. And normal-type wage inflation, we're talking low single digits there?

Correct, no extra things, there are no out of the ordinary, not that we couldn't offset with some productivity.

Okay, and then on the returns management business. I'm wondering, at what point does that business become large enough that you have enough customers that it smooths out some of the lumpiness there? And maybe if you could give an example or two of some nontraditional wins that you've had here in the last quarter or so?

I think the -- we're not sure at what point you get to where you have a total smoothing, because as long as you're managing the recall space, you're going to have lumpy activity. So it's not something, even if you had thousands of customers, they're all not going to have a uniform distribution of what they're recalling, what those revenues will look like. I think as we continue to grow our business and we build more and more in the returns management that tends to be more steady state, we'll probably add on as we've done more investigative and consultant type services to help people be prepared for activity. That'll help smooth it out, but I'm not sure you really ever get to a point where it's a pure, 95% predictability level.

And then any examples? I think you did an RV recall and there's been some other things. Could you give some examples of things you're doing now?

We've had a couple that have come in the nonfocus area where we've had -- outside of the health care space, but the bulk of our activities really revolve around the health care, Health care services type universe. We do get customers that come to us outside of that universe, and it's really driven by the reputation that we've been able to build for people that really want to focus, but the vast majority are in the health care.

Okay, and you mentioned an acquisition in that area. Was it adding capability or what was the acquisition related to?

No, that's an acquisition we had done already previously. There was none done in the quarter itself in the space.

Okay, then final question. Is there any change in the acquisition landscape due to the economy or the credit markets meaning are targets having a harder time accessing growth capital, or is there any other change that's impacting your targets?

I'd say to date we haven't seen meaningful change. I think there are probably going to be pressures in some of the super high leverage transactions. From time to time we've seen people that are in the private equity space trying to dabble in the area and going in at super high leverage multiples, but with what's happened in the borrowing field, I think that's going to be tougher for people to do and there's going to be more scrutiny. So I think it'll help normalize, but I don't think it's been a material change to what we've seen in purchase price multiples.

Thank you.

(OPERATOR INSTRUCTIONS) We have a question from Scott Schneeberger from Oppenheimer.

Guys, thanks for the follow-up. Just a couple quick ones. Frank, the Australian arbitration situation, is that completely done now as of fourth quarter?

We think it is.

Okay. Great. Including legal fees and such?

Correct.

Okay. Thanks. And just following up on discussion of returns recalls business, any change to your goal for EBIT margins? Just a little more color on that. Thanks.

No, I think, again, very similar. The goal is to get to the 15% and then grow from there percent on the EBIT side, guidance again for '08 between $70 million and $85 million in revenues. And that's kind of the base which they're starting from.

Okay, thanks very much.

I'm showing no further questions at this time, sir.

Well, we thank everybody for your time and attention. We're excited about a great year ahead. And we look forward to talking to you on our next call. Thanks so much.

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.